Limits on shareholder proposals should be increased as part of a series of measures to reduce the influence of shareholder activists, according to SEC commissioner Daniel Gallagher.
In a speech to Tulane University Law School, the commissioner said the SEC should limit its involvement in issues related to corporate governance and that other rules, such as minimum required shareholdings and ownership lengths, should be revised to rein in shareholder activism.
‘Currently, a proponent can bring a shareholder proposal if he or she has owned $2,000 or 1 percent of the company’s stock for one year, as long as the proposal complies with a handful of substantive – but in some cases discretionary – requirements,’ Gallagher noted. ‘Activist investors and corporate gadflies have used these loose rules to hijack the shareholder proposal system.’
Gallagher says the $2,000 limit is ‘absurdly low’ and proposes it be raised to ‘perhaps $200,000 or, even better, $2 mn.’ Ultimately, however, he believes the limits should be based on a fixed percentage that ‘is scalable, varies less over time, better aligns with the way many companies manage their shareholder relations, and is more consistent with the commission’s existing requirements.’
Gallagher also proposes the commission ban the practice of allowing ‘proposal by proxy’ whereby the proponent of a resolution can act on behalf of another shareholder, and lengthen the minimum term shareholders must own stock in order to vote to beyond the current level of one year.
In addition, the SEC should implement a ‘three strikes’ policy that prohibits a proposal from being voted after three annual rejections in a row, Gallagher says. He further suggests the proposal be banned from another vote for five years after three rejections. For a proposal to be accepted for a third annual vote, ‘the thresholds for the prior two years should be high enough to demonstrate that the proposal is realistically on the path toward 50 percent – for example, 5 percent and 20 percent.’
