Amending SEC 14a-8 and its Impact on Citizens United

Posted on by Andrew Dziedzic

In September 2020, the Securities and Exchange Commission (“SEC”) amended the procedural requirements of Exchange Act Rule 14a-8 (“Rule 14a-8”), the shareholder-proposal rule.1  Rule 14a-8 outlines the substantive and procedural requirements “for a shareholder to have its proposal included in a company’s proxy statement for consideration by all of the company’s shareholders.”2  The Rule establishes requirements for the inclusion of a proposal and for the resubmission of a proposal.3  Under the amended Rule 14a-8, a shareholder could submit a proposal if the shareholder has held at least: $2,000 of the company’s securities for at least three years, $15,000 of the company’s securities for at least two years, or $25,000 of the company’s securities for at least one year.4  This tiered standard replaced a lower threshold, requiring a shareholder to only hold at least $2,000 or one percent of a company’s securities for at least one year, which was adopted in 1998.5  The SEC also increased the levels of shareholder support needed to resubmit a proposal if the matter had been voted on previously.6  The increased levels would allow a company to exclude a previously submitted proposal if the previous vote received less than the needed percentages.7  Finally, shareholders would be prohibited from “aggregat[ing] their securities with other shareholders to meet the applicable minimum ownership thresholds” to submit a proposal, and shareholders would be limited to submitting one proposal and could not represent another shareholder’s proposal at the same meeting.8 The SEC reasoned that these procedural amendments would “modernize and enhance the efficiency and integrity of the shareholder-proposal process for the benefit of all shareholders,” curtailing any inappropriate uses of the company’s and shareholders’ resources and time.9

While these amendments have stimulated a great deal of controversy within the investor community, the wider effects of these changes in relation to the First Amendment and political speech remains under-examined. Corporate political speech cannot be limited in order to protect shareholders from funding disagreeable political speech.10  Instead, shareholders could protect their First Amendment interests “through the procedures of corporate democracy.”11 Though the Court did not provide a succinct definition, the procedures of corporate democracy are believed to allow shareholders to “hold[] corporate managers accountable for their political spending.”12 Consequently, the procedures of corporate democracy include “the rights of shareholders to vote”, “to bring derivative suits for breach of fiduciary duty”, and the voluntary nature of investing and divesting.13

  A valid question is whether the Rule 14a-8 amendments are lawful given Citizens United or whether they erode the protections of dissenting shareholders. Some have alleged the changes alter the procedures of corporate democracy so fundamentally that the amendments undermine shareholders’ abilities to protect their own First Amendment interests.14 Some commentators have argued that the amendments would make it more difficult, if not completely impossible, for shareholders to “ask for accountability from publicly traded companies” because less shareholders could offer proposals.15  A study analyzing the effects of the 14a-8 Rule amendments found that approximately twenty-five percent of shareholder proposals asking for disclosure of corporate political spending would have been disallowed under the higher resubmission thresholds.16 Furthermore, commentators have argued these amendments unconstitutionally limit a dissenting shareholder’s speech based on the shareholder’s wealth and based on the shareholder’s opposition.17

Two dissenting SEC Commissioners relied on First Amendment implications when opposing the amendments.18  Commissioner Crenshaw noted the amendments prevent “a broad array of investors to ‘speak’ with a company and its shareholders.”19 Commissioner Lee asserted the amendments stifle political spending proposals and “narrow access to [an] important mechanism for shareholder oversight.”20 Overall, there was concern that smaller investors would be restricted from the proposal process, while wealthier investors would not suffer from those restrictions.21

Though Rule 14a-8 amendments may increase the burden on those submitting a shareholder proposal, the changes are unlikely to significantly erode the protections of dissenting shareholders and are likely lawful under the Citizens United regime. As the SEC noted in its final rule, the procedural limitations of Rule 14a-8 have been in place for decades.22 While the amendments increase the levels required for submission and resubmission, “the amendments do not disturb the basic functioning of this longstanding mechanism.”23 The submission and resubmission requirements were in place long before the Citizens United holding.24  The submission threshold, established in 1998, would be equal to $3,183 in 2019 dollars if adjusted for inflation.25  Furthermore, using an index tied specifically to the market capitalization of the companies that receive a disproportionate number of shareholder proposals, a $2,000 investment in a company in 1998 would be worth $5,280 today.26 The limitations imposed in 2020 remain, in real dollars, less stringent than the requirements established in 1998.27 With $2,000, a shareholder could submit a proposal while owning only 0.0000002 percent of the market value of a company.28 By no means are the procedures of corporate democracy closed to shareholders.

The Rule 14a-8 amendments are also likely to be lawful because corporations operate in a technologically connected world. The procedures of corporate democracy were held to be more effective in the modern era because “modern technology makes disclosures rapid and informative.”29 Advances in the Internet and technology have enhanced the shareholders’ abilities to more effectively engage with the corporation.30  Even opponents of the Rule 14a-8 amendments note that shareholder proposals are typically non-binding and instead serve as a forum between company leadership and shareholders.31  If Rule 14a-8 is viewed as a forum for debate, any decrease in access to the shareholder proposal is more than compensated by alternative access points.32  Today’s investors are able to engage with companies and other investors in a variety of ways, including via email, video conference calls, one-on-one in-person meetings, shareholder surveys, and e-forums.33

Furthermore, the Rule 14a-8 amendments are valid under the Citizens United regime because the shareholder proposals are not considered normal political speech. Shareholder proposals are a distinct type of speech, as Rule 14a-8 has been legally viewed as governing internal corporate communication.34  Additionally, even if shareholder proposals were considered normal political speech, the Rule 14a-8 amendments still remain valid.  Shareholder proposals under Rule 14a-8 “shift[] the cost of communicating the proposal from the shareholder proponent to the company.”35 Therefore, Rule 14a-8 “levels the playing field between management and shareholders by compelling a corporation to carry at its own cost certain messages of [dissenting] shareholders.”36  The Rule 14a-8 amendments do not prevent dissenting shareholders from using procedures beyond shareholder proposals to influence the corporation, which some commentators assert aligns Rule 14a-8 more closely with the Citizens United regime.37

Though these specific Rule 14a-8 amendments are likely valid, the Rule and the SEC’s potential ability to protect dissenting shareholders will continue to be at the forefront of many who desire campaign finance reforms.38

  1. SEC Adopts Amendments to Modernize Shareholder Proposal Rule, Sec. and Exch. Comm’n (Sept. 23, 2020), https://www.sec.gov/news/press-release/2020-220#:~:text=The%20amendments%20to%20Rule%2014a,paid%20for%20by%20all%20shareholders.%E2%80%9D. ↩

  2. Id. ↩

  3. Id. ↩

  4. Procedural Requirements and Resubmission Thresholds Under Exchange Act Rule 14a–8, 84 Fed. Reg. 66458, 66463 (Dec. 4, 2019) (to be codified at 17 C.F.R. pt. 240). ↩

  5. Id.; see also id. at 66464(proposing to eliminate the one percent threshold due to lack of usage). ↩

  6. Id. at 66468-71 (proposing to replace the three percent, six percent, and ten percent thresholds established in 1954 with new thresholds of five, fifteen and twenty-five percent). ↩

  7. Id. ↩

  8. Id. at 66464, 66468. ↩

  9. Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8, 34 Fed. Reg. 89964 (Sept. 23, 2020) [hereinafter Final Rule] (to be codified at 17 C.F.R. § 240), https://www.sec.gov/rules/final/2020/34-89964.pdf; see also Public Statement, Elad L. Roisman, Commissioner, Statement on Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8 (Sept. 23, 2020), https://www.sec.gov/news/public-statement/roisman-14a8-2020-09-23. ↩

  10. See Citizens United v. FEC, 558 U.S. 310, 362 (2010) (holding that corporations could use general treasury funds to advocate for the election or defeat of candidates). ↩

  11. Id. (quoting First Nat’l Bank v. Bellotti, 435 U.S. 765, 794 (1978). ↩

  12. See Ciara Torres-Spelliscy, Corporate Democracy from Say on Pay to Say on Politics, 30 Const. Comment. 431, 433 (2015) [hereinafter Torres-Spelliscy, Say on Politics]. ↩

  13. Citizens United, 558 U.S. at 477 (Stevens, J., concurring in part and dissenting in part); Bellotti, 435 U.S. at 795 n. 34; see also Torres-Spelliscy, Say on Politics, supra, at 433. ↩

  14. See Ellen L. Weintraub, Fed. Election Comm’n, Comment Letter on Procedural Requirements and Resubmission Thresholds Under Exchange Act Rule 14a–8, at 1 (Feb. 3, 2020), https://www.sec.gov/comments/s7-23-19/s72319-6741110-207737.pdf [hereinafter Weintraub Comment Letter]; Sarah C. Haan, Comment Letter on Procedural Requirements and Resubmission Thresholds Under Exchange Act Rule 14a–8, at 3 (Feb. 3, 2020), https://www.sec.gov/comments/s7-23-19/s72319-6742490-207775.pdf [hereinafter Haan Comment Letter]. ↩

  15. Ciara Torres-Spelliscy, Comment Letter on Procedural Requirements and Resubmission Thresholds Under Exchange Act Rule 14a–8, at 2 (Jan 16, 2020), https://www.sec.gov/comments/s7-23-19/s72319-6660881-203867.pdf; see also Weintraub Comment Letter, supra, at 1-2. ↩

  16. See Amy Borrus et al., Comment Letter on Procedural Requirements and Resubmission Thresholds Under Exchange Act Rule 14a–8, at 3 (July 29, 2020), https://www.sec.gov/comments/s7-23-19/s72319-7502063-221908.pdf. ↩

  17. Weintraub Comment Letter, supra, at 1-2; Shareholder Rights Group, Comment Letter on Procedural Requirements and Resubmission Thresholds Under Exchange Act Rule 14a–8, at 14 (Feb. 3, 2020), https://www.sec.gov/comments/s7-22-19/s72219-6741112-207740.pdf (“First Amendment jurisprudence endorses the idea of counter-speech.”). ↩

  18. See Public Statement, Caroline A. Crenshaw, Commissioner, Statement on Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8 (Sept. 23, 2020), https://www.sec.gov/news/public-statement/crenshaw-14a8-2020-09-23-0 [hereinafter Public Statement, Caroline A. Crenshaw]; Public Statement, Allison Herren Lee, Commissioner, Statement on the Amendments to Rule 14a-8 (Sept. 23, 2020), https://www.sec.gov/news/public-statement/lee-14a8-2020-09-23 [hereinafter Public Statement, Allison Herren Lee]. ↩

  19. Public Statement, Caroline A. Crenshaw, supra. ↩

  20. Public Statement, Allison Herren Lee, supra. ↩

  21. Id. ↩

  22. Final Rule, supra, at 77. ↩

  23. Id. ↩

  24. 84 Fed. Reg. at 66463, 66469 (stating the submission ownership requirements had been in place since 1998 and the resubmission thresholds have been in place since 1954); Citizens United, 558 U.S. at 310. ↩

  25. Final Rule, supra, at 19. ↩

  26. Id. ↩

  27. Id. at 20. ↩

  28. Id. at 23. ↩

  29. See Citizens United, 558 U.S. at 370. ↩

  30. Id. ↩

  31. Sanford Lewis, Analysis and Recommendations on Shareholder Proposal Decision-Making under the SEC No-Action Process, Harv. L Sch. F. on Corp. Governance (July 26, 2018), https://corpgov.law.harvard.edu/2018/07/26/analysis-and-recommendations-on-shareholder-proposal-decision-making-under-the-sec-no-action-process/. ↩

  32. See Business Roundtable, Comment Letter on Procedural Requirements and Resubmission Thresholds Under Exchange Act Rule 14a–8, at 4 (Feb. 3, 2020), https://www.sec.gov/comments/s7-23-19/s72319-6742491-207776.pdf. ↩

  33. See Matteo Tonello & Matteo Gatti, Board-Shareholder Engagement Practices, Harv. L Sch. F. on Corp. Governance (Dec. 30, 2019), https://corpgov.law.harvard.edu/2019/12/30/board-shareholder-engagement-practices/; see also Shareholder Engagement Trends and Considerations, Cleary Gottlieb Steen & Hamilton LLP (Jan. 10, 2020), https://www.clearygottlieb.com/news-and-insights/publication-listing/shareholder-engagement-trends-and-considerations (“Communication with investors no longer takes place solely within the bounds of the proxy season.”). ↩

  34. See Pacific Gas & Electric Co. v. Pub. Utils. Comm’n of Cal., 475 U.S. 1, 14 n.10 (1986) (Rule 14a-8 “regulations govern speech by a corporation to itself.”). ↩

  35. Sarah C. Haan, Shareholder Proposal Settlements and the Private Ordering of Public Elections, 126 Yale L.J. 262, 272 (2016). ↩

  36. Christina Karam, Access Denied! The Case for Extending Full First Amendment Protection to Proxy Speech Under Citizens United, 73 Ohio St. L.J. 63, 74 (2012). ↩

  37. See Final Rule, supra, at 140; see Karam, supra, at 75 (arguing Rule 14-8 violates the First Amendment because it regulates a corporation’s speech on matters of public concern. ↩

  38. See Ciara Torres-Spelliscy, A Trump Administration Plan that Could Boost Corporate ‘Dark Money’ in Elections, Brennan Center for Justice (Nov. 19, 2019), https://www.brennancenter.org/our-work/analysis-opinion/trump-administration-plan-could-boost-corporate-dark-money-elections; David Earley & Ian Vandewalker, Transparency for Corporate Political Spending: A Federal Solution, Brennan Center for Justice 12 (2019), https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&ved=2ahUKEwjdp7mCu_jsAhXqc98KHZrNDRAQFjAAegQIBRAC&url=https%3A%2F%2Fwww.brennancenter.org%2Fsites%2Fdefault%2Ffiles%2F2019-08%2FReport_Transparency%2520for%2520Corporate%2520Political%2520Spending.pdf&usg=AOvVaw3vTiZz-IjWbG37bsVslJT3 (“The SEC should promulgate regulations requiring public corporations to disclose all of their political expenditures on a periodic basis.”); Elizabeth Pollman, A Proposal for Transparency and Accountability in Corporate Political Spending 2 (Sept. 2019), https://www.law.berkeley.edu/wp-content/uploads/2019/10/Pollman-A-Proposal-for-Transparency-and-Accountability-in-Corporate-Political-Spending_3565859_1.pdf. ↩

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