Shareholder Proposals - the SEC Giveth and the SEC Taketh Away

Shareholder proposals continue to rise even as companies’ ability to prevent them from appearing on the proxy ballot is whittled away, according to data from the 2023 proxy season.

Shareholders have three basic rights that come with owning shares: (1) the right to sell, (2) the right to vote, and (3) the right to sue.  As to voting, while there are standard management proposals offered for shareholder vote - electing directors, say on pay, approval of auditors - shareholders can also submit proposals to be included in the proxy statement.  Historically, a very small ownership position ($2,000 held for one year) was enough to qualify for submitting a proposal.  In 2020 the SEC revised the share ownership and holding requirement to greater than $25,000 for one year, $15,000 for two years or $2,000 for three or more years.  Companies viewed this change as a positive development to help thwart the efforts of a small group of shareholders with relatively small holdings that tend to submit multiple proposals to a variety of companies advocating their pet issues (for example, “governance warrior” John Chevedden has personally filed more than 1,000 proposals).  

While the change in ownership requirements was helpful, in 2021 the SEC announced a heightened standard for companies filing no-action letters seeking to exclude shareholder proposals based on micromanagement of the “ordinary business” of the company. As a result, Deal Point Data reported that far fewer companies even bothered to file no-action requests this year – down 26% from 2022 and 36% from 2021. Success rates with no-action requests are also low – only 41% last year and 52% this year, meaning that the majority of the shareholder proposals are allowed to go forward to a vote.

Meanwhile, a recent report by ISS indicates that the number of shareholder proposals for annual meetings held between January 1 and May 31 increased 14% from 2020 to 2023, with large cap S&P 500 companies accounting for 90% of shareholder proposals. In view of the more challenging SEC position on approving no-action letters, combined with the increase in the number of shareholder proposals, companies should place greater emphasis on outreach with shareholders to better understand their motivation for submitting proposals and negotiating the withdrawal of proposals.