New SEC Rulemakings on Proxy Advisors and Shareholder Proposals

At an open meeting held on July 13, 2022, the Securities and Exchange Commission (SEC), voting 3-2, adopted new rules impacting proxy advisory firms and proposed to narrow three of the 13 grounds for excluding shareholder proposals under Rule 14a-8. We summarize each rulemaking below.

Proxy Advisors

In late 2020, the SEC adopted rules and issued interpretive advice around the operations of proxy advisory firms. Due to litigation and other factors, these 2020 amendments never took full legal effect, and reversing the 2020 initiatives become an early priority of SEC Chair Gary Gensler with the change in presidential administrations in 2021. The July 2022 amendments rescind key parts of the 2020 rulemaking, but leave other elements in place.

In brief, the 2022 amendments retain elements of the 2020 rules that require proxy advisers to disclose certain conflicts of interest, and proxy voting advice remains subject to liability under Rule 14a-9, the antifraud provision under the federal proxy rules. The 2022 amendments, however, rescind portions of the 2020 rules that would have required proxy advisory firms to make proxy voting advice available to public companies at or before distribution to their clients. The 2022 amendments also rescind elements of the 2020 rules that would have compelled proxy advisory firms to make available to their clients any written statements from public companies in response to the proxy voting advice. Further, the 2022 amendments remove an explanatory note to Rule 14a-9 that had been drafted with proxy advisors in mind, though the 2022 amendments state that the deletion of the explanatory note is not intended to alter the scope of proxy advisor liability or its application to proxy advice. Finally, the 2022 amendments rescind the 2020 interpretive advice, which would have provided further guidance regarding the use of electronic voting platforms by proxy advisors.

The surviving elements of the 2020 amendments remain subject to a judicial challenge initiated by a prominent proxy advisory firm, and at least one trade association has made public statements about challenging the SEC’s 2022 amendments. Perhaps anticipating future litigation, the SEC’s 2022 adopting release takes the unusual step of including a severability provision expressing the SEC’s view that if a court were to strike down any element of the 2022 amendments, the rest should survive. The SEC’s 2022 amendments and rescission of interpretive guidance are effective September 19, 2022, but we anticipate that further judicial challenges may impact this timing.

Shareholder Proposals

In addition to taking action to relax the obligations of proxy advisors, at the open meeting the SEC also proposed amendments to SEC Rule 14a-8 governing shareholder proposals. The SEC most recently amended Rule 14a-8 in 2020, and like the 2022 amendments to the proxy advisory rules, it appears that the SEC has shifted course with the change in administrations. Under the proposed amendments to Rule 14a-8, the SEC seeks to narrow the grounds by which a public company can exclude a shareholder proposal on the basis of substantial implementation, duplication, or resubmission of a prior proposal.

More specifically, the proposed amendments to the substantial implementation exclusion would be narrowed to only those proposals for which the company has implemented the “essential elements” of the proposal. The proposed amendments regarding duplication would specify that a proposal “substantially duplicates” another proposal previously submitted for the same shareholder meeting only if it address the same subject matter and seeks the same objective by the same means. Likewise, in an effort to ensure uniformity between the “substantially duplicates” and resubmission exclusions, the proposed amendments regarding resubmission would make clear that to constitute a resubmission a proposal must substantially duplicate a prior proposal by addressing the same subject matter and seeking the same objective by the same means.

The SEC’s proposing release includes several illustrative examples of how the proposed rules would be applied in practice, which in their totality suggest that the SEC would significantly raise the bar for companies seeking to exclude proposals on any of those grounds. In particular, without explicitly rescinding elements of the 2020 amendments regarding resubmission of shareholder proposals, the 2022 proposal seeks to scale back the 2020 amendments by changing the standard for resubmission. The comment period on the proposed rules will run until the later of 30 days after publication in the Federal Register and September 12, 2022.