The SEC Wants to Delete the Rule That Puts Shareholder Proposals on the Proxy. It Says the Rule Was Never Its to Write.

Rule 14a-8 is the mechanism by which a shareholder who meets certain ownership and holding thresholds can require a company to print their resolution in the proxy statement and put it to a vote. On September 16 the Securities and Exchange Commission proposed to remove it.

The argument

The Commission's case is jurisdictional rather than practical. It argues that Rule 14a-8 "exceeds the scope of the SEC's statutory authority and improperly intrudes into state corporate law without express Congressional authorization," and that decades of staff no-action decisions under the rule have accumulated into something resembling federal common law on what shareholders may put to a vote.

Today's proposals demonstrate my focus on ensuring that the Commission's rules are within the agency's statutory authority and reflect policy positions grounded in current and anticipated market practice.

Corporations in the United States are chartered by states, and the internal affairs of a corporation - who may propose what to whom - is traditionally state law territory. The proposal's position is that federal proxy rules may govern disclosure in a solicitation without also dictating what must be solicited.

What would replace it

Nothing federal. Under the proposal, whether a shareholder proposal has to appear on the proxy would be settled by the law of the state of incorporation or, where that law allows, by the company's own charter and bylaws. Delaware law and a company's bylaws would do the work Rule 14a-8 does now.

The discretionary voting change

A second proposal amends Rule 14a-4(c), which governs when management may vote proxies at its own discretion. It would let a company exercise discretionary authority over a shareholder proposal it had omitted from the proxy materials, provided it supplies three things: a brief description of the proposal and how management intends to vote, cross-references on the proxy card, and a checkbox by which a shareholder can withhold that discretion. Only one such checkbox would be required per card, though companies could add more.

The housekeeping items

• Eliminating the requirement to deliver an annual report with the proxy statement.
• Removing the 20-business-day delivery deadline for proxy statements that incorporate information by reference.
• Rescinding the Notice of Exempt Solicitation requirement.
• Cutting the broker search period from 20 business days to 5.
• Requiring contact information on the cover page of the proxy statement.

The broker search period is the interval in which a company asks brokers how many beneficial owners hold its shares, so it knows how many sets of materials to send. Shortening it from four weeks to one compresses the calendar between setting a record date and mailing.

The other side

Shareholder advocacy organisations have opposed the proposal. As You Sow, which files proposals under the rule, said on September 16 that the proposals would undermine property rights and trust in public markets. The comment file is where that argument will be made at length.