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Sep 26, 2022

Nasdaq queries SEC plan on shareholder proposal exclusions

Exchange concerned move is ‘part of a broader trend to narrow the bases for excluding shareholder proposals’

Nasdaq has raised concerns about – and suggested changes to – the SEC’s plan to update the grounds on which companies may be allowed to exclude shareholder proposals.

The commission in July proposed amendments to Rule 14a-8, which provides several bases on which companies can apply for no-action relief if they omit a proposal from their proxy statement. The proposed amendments would revise three of these bases for exclusion.

SEC chair Gary Gensler said in a statement at the time: ‘I believe these proposed amendments would provide a clearer framework for the application of this rule, which market participants have sought. They would also help shareholders exercise their right to submit proposals for consideration by their fellow shareholders.’

Specifically, the proposed changes would revise the following grounds for exclusion:

  • Substantial implementation – if approved, the changes would specify that a proposal may be excluded if the company has already implemented the ‘essential elements’ of the proposal
  • Duplication – the amendments would specify that a proposal ‘substantially duplicates’ another proposal previously submitted for the same AGM if it addresses the same subject matter and seeks the same objective by the same means
  • Resubmission – the amendments would provide that a proposal constitutes a resubmission if it substantially duplicates another proposal that was previously submitted for the same company’s previous shareholder meetings.

The proposals follow on from the SEC’s division of corporation finance last fall updating guidance on its process for deciding whether to give no-action relief for excluding proposals. The division rescinded three staff legal bulletins introduced during the Trump administration. This was seen as making it less likely that it would grant such relief and, in turn, mean that a wider array of ESG proposals would get onto proxy statements.

Industry professionals say that expectation has come true. According to Proxy Impact, As You Sow and the Sustainable Investments Institute, in the six months to the end of June a record-breaking 282 votes were taken on ESG shareholder proposals.


John Zecca, executive vice president and global chief legal, risk and regulatory officer with Nasdaq, in a recent comment letter notes that the SEC in 2020 adopted amendments to Rule 14a-8 to change the resubmission and ownership thresholds required for a shareholder to be eligible to submit a proposal. Zecca describes these amendments as ‘an important step forward’ and says that ‘[a]lthough some commenters expressed concern that the 2020 amendments could stifle communication between companies and their shareholders, the rules have in fact had the opposite effect.’

He writes that Nasdaq supported the 2020 amendments, believing they reached the right balance between helping shareholders include proposals in a company’s proxy statement and reducing the need to devote company resources to including proposals that are not likely to win majority support.

‘Unfortunately, we believe the changes contemplated by the [new SEC proposal] could be a step backwards in the commission’s efforts to modernize the shareholder proposal process, and appears to be part of a broader trend to narrow the bases for excluding shareholder proposals,’ Zecca writes. ‘The proposal also follows recent efforts to reverse significant amendments to the proxy plumbing process, with the commission rescinding new requirements related to proxy advisers in July 2022 that were only finalized in July 2020.’

He adds: ‘Nasdaq discourages the commission from adopting the proposed amendments, and instead recommends that [it] continue to evaluate the impact of the 2020 amendments, which have been effective for less than a year, before proposing further rulemaking.’

Zecca also writes that should the SEC adopt the planned changes, Nasdaq requests that it consider making adjustments to:

  • Clarify what agency officials will consider to be the essential elements of a proposal, require shareholder proponents to clearly identify the objectives or elements of their proposal or require that a proponent explain how these elements differ from the company’s existing program, plan or initiative
  • Adopt a numerical limit on the number of substantially duplicate proposals that can be submitted for the same meeting
  • Adopt a ‘momentum requirement’ to the resubmission thresholds to enable a company to exclude a proposal that shareholders have voted on three or more times in the past five years – but would not otherwise be excludable under the 25 percent threshold – if the proposal did not receive a majority of votes and support dropped by 10 percent or more from the preceding shareholder vote.

Unsurprisingly, groups that file ESG-related shareholder proposals are broadly supportive of the planned changes. Sanford Lewis, director of the Shareholder Rights Group, in a comment letter welcomes the agency’s action as including ‘overdue changes that would reduce costs and uncertainties to proponents and issuers alike.’

The Shareholder Rights Group is an association of proponents of shareholder proposals that includes Arjuna Capital, As You Sow, Boston Trust Walden, Mercy Investment Services and Trillium Asset Management.

In a separate letter, Trillium’s chief advocacy officer Jonas Kron echoes the point that the planned changes are likely to reduce no-action letter costs for companies and proponents: ‘We believe the current rule incentivizes issuers to make increasingly baroque arguments in their no-action requests. Similarly, we believe the current rule incentivizes proponents to rush to file proposals and to devote resources to responding to the gaming of the system led by other proponents. The proposed amendments to the rule appear well designed to address these problems.’

Trillium supports revising the substantial implementation basis, arguing that it makes the rule less vague and will ‘promote efficiency and clarity by focusing issuers and proponents on the ‘essential elements’ of the shareholder proposal.’

Kron also backs the planned change to the substantial duplication basis. The existing standard allows companies to use its vagueness to try to redefine the proposal in a no-action request, forcing SEC officials to try to figure out additional meaning beyond the text of the proposal, he says. Similarly, he welcomes changing the resubmission standard as a means to tackle what he sees as the vagueness and subjectivity of the rule as it stands.