End of Shareholder Proposal Process as We Know It?
Part of the Financial CHOICE Act 2.0 would change the shareholder submission process significantly.
In February, Jeb Hensarling, Chair of the House Financial Services Committee, submitted a memo to the Committee’s Leadership Team outlining proposed changes from the original Financial CHOICE Act. One of the provisions sought to dramatically change the shareholder proposal and resubmission process. Few details were provided at the time. We now have clarity.
CHOICE 2.0 would require the SEC to revise the eligibility requirements for shareholder proposals to eliminate the dollar threshold and provide eligibility only when a shareholder holds at least 1% of a company’s voting shares (or a higher threshold at the SEC’s determination). The draft also seeks to increase the required eligibility holding period for shares from one year to three years.
The revised Act would also require the SEC to raise the resubmission thresholds:
- if proposed once in the last five years, the proposal could be excluded if the vote in favor was less than 6%;
- if proposed twice and the vote in favor on the last submission was less than 15%; and
- if proposed three times or more and the vote in favor on the last submission was less than 30%.
In a third major provision, which would appear to target frequent submitters such as John Chevedden, the Act would prohibit an issuer from including in its proxy materials a proposal submitted by an individual acting on behalf of another shareholder(s).
Here is where we have to factor in the law of unintended consequences.
Be careful what you wish for!
This draft would dramatically reduce the number of shareholder proposals, as the higher thresholds would block the majority of proponents – corporate gadflies, faith-based investors, SRI investors, many public pension funds – since, in many cases, even 1 percent of stock could equate to billions of dollars. This would mean that only the likes of BlackRock, Vanguard, SSgA, etc. would meet the criteria. Although these larger funds traditionally have not shown a tremendous appetite for submitting (or even supporting) a vast number of these proposals, we have seen attitudes change over the past few years. Recently, we have seen public statements from investors regarding emerging trends such as CSR, diversity, cybersecurity, board evaluations and director elections. As a result, there has been a need for greater engagement, action and disclosure on these issues from companies, especially those at risk of losing support on the ballot. Would these dramatic legislative changes finally motivate larger investors to start submitting proposals and forcing the issues? The pressure has been steadily mounting for years, so it is conceivable that this revision could be the catalyst to provoke one of these funds to take direct action, and one may prompt the whole group.
Be careful what you wish for. Dealing with the gadflies and smaller investors is a manageable process for most companies. Dealing with a larger investor, especially a top-10 holder, is an entirely different proposition.
Stay tuned as this develops over the coming months, as there are sure to be plenty of heated conversations on this topic.