Indications that the Securities and Exchange Commission may consider giving the power to determine requirements for filing shareholder proposals to the states should move corporate board members to consider the potential ramifications that could come from such an action.
For years, boards have expressed annoyance with investors filing multiple shareholder proposals regarding all types of issues. The current SEC Rule 14a-8 gives shareholders with as few as $2,000 worth of shares the right to file proposals that public companies must address. SEC chairman Paul Atkins is reportedly considering doing away with Rule 14a-8.
According to a report from Reuters, an SEC spokesperson communicated in an email that Atkins is concerned that “the SEC’s Rule 14a-8 on shareholder proposals exceeds the Commission’s authority and infringes upon state laws. To that end, the Commission is expected to consider a proposal to rescind the rule and return the role of regulating shareholder proposals to the states.”
The Reuters article included comments from Tim Smith, senior policy adviser at the Interfaith Center on Corporate Responsibility, who suggested allowing each state to determine its own rules for submitting shareholder proposals would cause mass confusion; and Cooley law firm strategist Broc Romanek, who warned limiting the shareholder proposal process could lead to a more aggressive use of votes against directors by shareholder activists.
While the elimination of Rule 14a-8 is not assured, it appears that at least some changes to the rule may be on the way. Directors should begin discussing where they stand on this issue and how they might deal with shareholder interactions going forward. Would your board want Rule 14a-8 rescinded?
There are other possible implications that could extend from what the SEC might do, including:
Public companies should prepare to expand their legal teams and legal budgets. Can boards really be expected to navigate and comply with each state’s rules regarding filing shareholder resolutions? The potential conflicts could be maddening and would likely generate multiple shareholder lawsuits. A board could be sued for simply trying to comply with a certain state’s mandate regarding filing shareholder resolutions.
Board members should meet with shareholders to determine how best to move forward. Understanding how your most trusted shareholders feel about the potential change or elimination of Rule 14a-8 can be helpful in developing a strategy to deal with shareholder resolutions in the future. If states impose a high shareholder dollar limit like Texas (shareholders must have $1 million worth of shares to file a resolution), it might lead to only larger, more influential shareholders filing resolutions, which may not always work in the board’s favor. It may also encourage more groups of shareholders to get together and file a resolution against the board. Shareholder engagement may play a much more significant role if certain changes take effect.
Boards may gain more discretion to ignore shareholder proposals but may also be held directly liable for more of their decisions. The good news may be that the board will likely deal with fewer shareholder proposals that it feels are a nuisance and infringe on the board’s authority. The bad news is that if shareholders bring up issues that the board publicly ignores and the company suffers, the board will bear greater personal responsibility for any losses.
