Corporate Governance

RULE 14A-8 REFORM: IMPLICATIONS FOR SHAREHOLDER PROPOSALS INSIGHTS By Lona Nallengara On June 8, 2017, the U.S. House of Representatives passed the Financial CHOICE Act of 2017, which proposed to scale back or eliminate many of the post-crisis financial reforms that were promulgated by the Dodd-Frank Wall Street Reform and Consumer Protection Act. The CHOICE Act also proposed a number of reforms directed at public companies and corporate governance practices, including proposals for significant reforms of the shareholder proposal process under Exchange Act Rule 14a-8. WHAT DOES THIS MEAN FOR RULE 14A-8 REFORM? Although the fate of the CHOICE Act in the U.S. Senate is uncertain and it is unlikely to become law in its current form, its passage by the House represents a significant step towards the regulatory reform that the Republican leadership has been calling for since the passage of the Dodd-Frank Act. Importantly, for those who are critical of the current shareholder proposal process and for those seeking to protect it, the CHOICE Act is an initial salvo in what is likely to be a vigorous debate on the future of the 14a-8 shareholder proposal regime. MORE STRINGENT THRESHOLDS The proposal to increase the ownership and holding period eligibility requirements coupled with the prohibition on submitting proposals by proxy could all but eliminate shareholder proposals from individual investors. Very few of the individuals and groups who regularly participate in the Rule 14a-8 process own 1% of the voting stock of the companies for which they submit shareholder proposals. Consider that a shareholder of one of the Top 100 Companies that has voting stock with an aggregate market value of $100 billion who wants to submit a shareholder proposal would have to individually own $1 billion of the stock of that company for three years. THE CHOICE ACT PROPOSED THE FOLLOWING CHANGES TO THE SHAREHOLDER PROPOSAL PROCESS: TIGHTENING THE ELIGIBILITY REQUIREMENTS TO SUBMIT A PROPOSAL The CHOICE Act proposes to increase the minimum ownership requirements for shareholders to submit a shareholder proposal for inclusion in a company's proxy statement to 1% ownership of the company's voting securities held for 3 years. This represents a significant increase over the current requirement which requires shareholder hold only $2,000 of the company's voting securities for one year. 1 PROHIBITING THE SUBMISSION OF PROPOSALS BY PROXY The CHOICE Act also proposes to permit a company to exclude a shareholder proposal submitted by a person as a proxy, representative, agent or on behalf of a shareholder. RESTRICTING THE ABILITY TO RESUBMIT A PROPOSAL The CHOICE Act proposes to allow a company to exclude previously submitted shareholder proposals from its proxy materials where the shareholder proposal received • less than 6% of the vote if proposed once within last five calendar years, • less than 15% of the vote on its last submission if proposed twice within the last five calendar years, • or less than 30% of the vote on its last submission if proposed three times within the preceding five calendar years. Note: The proposed changes would increase these restrictions from 3%, 6%, and 10%, respectively. 3 2 These proposed changes are significant. Rule 14a-8 Reform | 25 Shearman & Sterling

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