Bloomberg Securities Regulation and Law Report advises that:
House Financial Services Chairman Jeb Hensarling (R-Texas) wants to require anyone seeking to put a proposal on the corporate ballot to hold a minimum of 1 percent of a company's outstanding stock for three years. Currently, shareholders with as little as $2,000 in shares for a year or more can do so.
The shareholder proposal rule (SEC Exchange Act Rule 14a-8), of course, has been abused by so-called gadflies for years who put forward proposals that often have little to do with the company's business and sometimes are even inimical to the company's interests. It also has been a sometime tool of activist hedge and pension funds for legitimate corporate governance changes, but left-leaning state and local pension funds and union pension funds have often used it to achieve political or social ends not shared by other investors. The Manhattan Institute's Jim Copland's written testimony to the House in 2016 gives an excellent explanation of how the rule gets abused and ways it could be reformed.
I certainly favor significantly increasing the ownership threshold, but I also believe that the rule needs substantive changes to prevent activists from meddling in matters that are appropriately the responsibility of the board and management rather than shareholders. I have proposed tightening the ordinary business exclusion to do so:
Who decides what products a company should sell, what prices it should charge, and so on? Is it the board of directors, the top management team, or the shareholders? In large corporations, of course, the answer is the top management team operating under the supervision of the board. As for the shareholders, they traditionally have had no role in these sort of operational decisions. In recent years, however, shareholders have increasingly used SEC Exchange Act Rule 14a-8 (the so-called shareholder proposal rule), to not just manage but even micromanage corporate decisions.
The rule permits a qualifying shareholder of a public corporation registered with the SEC to force the company to include a resolution and supporting statement in the company’s proxy materials for its annual meeting. In theory, Rule 14a-8 contains limits on shareholder micro-management. The rule permits management to exclude proposals on a number of both technical and substantive bases, of which the exclusion in Rule 14a-8(i)(7) of proposals relating to ordinary business operations is the most pertinent for present purposes. Rule 14a-8(i)(7) is intended to permit exclusion of a proposal that “seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.”
Unfortunately, court decisions have largely eviscerated the ordinary business operations exclusion. Corporate decisions involving “matters which have significant policy, economic or other implications inherent in them” may not be excluded as ordinary business matters, for example, which creates a gap through which countless proposals have made it onto corporate proxy statements.
This article proposes an alternative standard that is grounded in relevant state corporate law principles, while also being easier to administer than the existing judicial tests. Under it, courts first look to the state law definition of ordinary business matters. The court then determines whether the matter is one of substance rather than procedure. Only proposals passing muster under both standards should be deemed proper.
Bainbridge, Stephen M., Revitalizing SEC Rule 14a-8's Ordinary Business Exemption: Preventing Shareholder Micromanagement by Proposal (March 29, 2016). UCLA School of Law, Law-Econ Research Paper No. 16-06. Available at SSRN: https://ssrn.com/abstract=2750153
It seems unlikely that the requisite reforms could get through the Senate, where Democratic obstructionism and spineless Republicans seem likely to derail Dodd-Frank reform. Fortunately, however, the SEC has full power to rewrite the rule--it is after all an SEC rule, not a statute--and should do so.