The shareholder proposal rule, Securities Exchange Act Rule 14a-8, has long been heralded as a democratizing tool in corporate governance, allowing shareholders to voice their concerns through inclusion in company proxy materials. While well-intentioned, Rule 14a-8 is no longer fit for purpose. The rule imposes disproportionate costs on issuers, enables misuse by a small group of activists, and distracts boards from their core fiduciary responsibilities. Attempts at reform have failed to address these systemic flaws. This article argues that Rule 14a-8 should be repealed entirely or, at a minimum, reformed to align with its original purpose while restoring balance to corporate governance.
The History and Evolution of Rule 14a-8
When Congress enacted the Securities Exchange Act of 1934, it delegated substantial authority to the Securities and Exchange Commission (SEC) to regulate proxy solicitation under § 14(a). In 1942, the SEC adopted Rule 14a-8, allowing shareholders to submit proposals for inclusion in company proxy materials, provided the proposals were proper subjects for shareholder action under state law. Over the decades, the rule has been amended repeatedly, expanding both its procedural and substantive reach.
Initially envisioned as a mechanism to enhance shareholder participation, Rule 14a-8 has instead evolved into a tool for a minority of activists to advance agendas often unrelated to the company’s financial performance. This evolution has come at a cost: growing procedural complexity, increased compliance burdens, and the diversion of board attention from strategic priorities.
Flaws in the Current Rule
High Costs and Burdens. The financial and administrative costs associated with Rule 14a-8 are significant. Estimates suggest that a single shareholder proposal can cost a company as much as $150,000 in direct expenses, not including the considerable time and effort required to manage the process. For many companies, these costs disproportionately benefit a small minority of shareholders while providing little value to the broader shareholder base.
Misuse by Activists. Rule 14a-8 is disproportionately utilized by a handful of "corporate gadflies," who submit proposals on personal, political, or social issues rather than matters of economic importance to the company. For instance, data indicate that a mere three individuals or groups account for a substantial portion of shareholder proposals submitted annually.
Moreover, union pension funds and other institutional investors often leverage the rule to advance private agendas, such as labor disputes or political initiatives, rather than promoting shareholder value. These practices deviate from the rule's intended purpose and impose additional costs on the majority of shareholders.
Distraction from Core Responsibilities. Rule 14a-8 also undermines board primacy by forcing directors to engage with proposals that delve into operational matters traditionally reserved for management. This distraction erodes the business judgment rule's protections and detracts from boards' focus on long-term value creation.
Arguments for Repeal
Restoring Board Autonomy. Repealing Rule 14a-8 would reaffirm the primacy of the board of directors in corporate governance. Directors are better positioned than shareholders to make informed decisions on operational and strategic matters. Eliminating the rule would allow boards to focus on their fiduciary duties without the procedural distractions imposed by frivolous or ideological proposals.
Encouraging Efficient Governance. Without Rule 14a-8, companies could allocate resources more effectively, investing in initiatives that directly contribute to shareholder value. The elimination of costly and time-consuming proposal processes would free management to address substantive business concerns.
Aligning Corporate Governance with State Law. Corporate governance is traditionally the domain of state law, which emphasizes the contractual nature of corporate charters and bylaws. Rule 14a-8’s federal overlay disrupts this framework, imposing uniform requirements that often conflict with state-level governance principles. Repeal would restore the balance between federal and state authority in corporate governance.
Proposals for Meaningful Reform
If outright repeal is deemed impractical, significant reforms should be implemented to mitigate the flaws in Rule 14a-8.
Raising Eligibility Thresholds. The Rule currently provides that a proponent must have held “(A) At least $2,000 in market value of the company's securities entitled to vote on the proposal for at least three years; or (B) At least $15,000 in market value of the company's securities entitled to vote on the proposal for at least two years; or (C) At least $25,000 in market value of the company's securities entitled to vote on the proposal for at least one year.” These ownership thresholds are outdated and fail to ensure that proposal proponents have a meaningful economic stake in the company. Increasing the threshold to a scalable percentage of company value or a significantly higher dollar amount, such as $200,000, would deter frivolous proposals.
Lengthening Holding Periods. Requiring shareholders to hold their positions for at least three years without regard for the amount of stock they own, rather than the current tiered periods, would ensure that proposals come from long-term investors genuinely committed to the company’s success.
Narrowing the Scope of Eligible Proposals. Rule 14a-8(i)(5) should be amended to limit proposals to matters of material economic significance. The Rule currently permits a company to exclude a proposal that “relates to operations which account for less than 5 percent of the company’s total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business.”
Activists seized on the "not otherwise significantly related" language to argue that proposals with ethical and social significance should not be excludable even if they had no substantial economic significance. The courts and the SEC agreed. But mere ethical or social significance in the air should not be enough. Adopting a materiality standard aligned with federal securities law would prevent the inclusion of proposals addressing social or political issues unrelated to the company’s business.
The SEC should ask whether a reasonable shareholder of this issuer would regard the proposal as having material economic importance for the value of his shares. This standard is based on the well-established securities law principle of materiality. It is intended to exclude proposals made primarily for the purpose of promoting general social and political causes, while requiring inclusion of proposals a reasonable investor would believe are relevant to the value of his investment. Such a test seems desirable so as to ensure that an adopted proposal redounds to the benefit of all shareholders, not just those who share the political and social views of the proponent. Absent such a standard, the shareholder proposal rule becomes nothing less than a species of private eminent domain by which the federal government allows a small minority to appropriate someone else’s property—the company is a legal person, after all, and it is the company’s proxy statement at issue—for use as a soapbox to disseminate their views.
Strengthening the "Ordinary Business" Exclusion. The Rule 14a-8(i)(7) exclusion allows companies to omit proposals related to ordinary business operations. Unfortunately, court and SEC 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. As a result, the exclusion no longer fulfills its core function of preventing shareholders from micromanaging the company. The exclusion thus should be revitalized to empower boards to exclude proposals that intrude on management’s operational prerogatives.
Allowing Corporations to Opt Out. Finally, companies should be permitted to opt out of Rule 14a-8 through shareholder-approved charter amendments. This approach would respect shareholder preferences while reducing regulatory burdens.
Addressing Counterarguments
Critics of repeal or reform often argue that Rule 14a-8 is essential for holding boards accountable and providing shareholders with a voice. However, alternative mechanisms, such as direct engagement with management, annual meetings, and state-law remedies, can serve these functions without the inefficiencies associated with the current rule. Moreover, reforms like higher thresholds and longer holding periods would preserve shareholder oversight while minimizing abuse.
Conclusion
Rule 14a-8 has outlived its usefulness. Its costs, procedural inefficiencies, and susceptibility to misuse outweigh its benefits, particularly in a modern corporate governance environment where other tools for shareholder engagement exist. Repealing the rule would restore balance to corporate governance, empowering boards to focus on their fiduciary responsibilities and long-term value creation. If repeal proves politically unfeasible, meaningful reforms—such as higher ownership thresholds, stricter materiality standards, and revitalized exclusions—must be implemented to align the rule with its intended purpose.
By embracing either repeal or robust reform, policymakers can ensure that corporate governance evolves to meet the needs of modern shareholders and issuers alike.
