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 the proposed changes from the original Financial CHOICE Act.  One of the provisions sought to dramatically change the shareholder proposal and resubmission process.  Little details were provided at the time.  We now have clarity.

2.0 would require the SEC to revise the eligibility requirements for shareholder proposals to eliminate the dollar threshold and provide eligibility only where the shareholder holds 1% of 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.

CHOICE 2.0 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, that 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 pentino funds – as even 1 percent of stock would 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 have traditionally not shown a tremendous appetite for submitting, or even supporting, a vast number fo these proposals, we have seen attitudes change over the past few years.  Recently we have seen public statements regarding emerging trends (such as CSR, diversity, cyber security, board evaluations, director elections) and the need for greater engagement, action and disclosure from companies on these issues at the risk of loosing support on the ballot.  Would these dramatic changes finally motive thsee larger players to start submitting proposals and forcing the issue?  The prssure has been steadily mounting for years, it is conceivable that this would be the catalyst to force just one of these funds to take direct action and it will take just one to start to move the 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, often in the top-10, 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.