Hitting the 'Del' button: SEC Proposes to Rescind Rule 14a-8 and Fundamentally Reallocate Authority Over Shareholder Proposals

The SEC proposed rescinding Rule 14a-8, eliminating the federal framework through which shareholders may have a proposal included in a company’s proxy materials for all shareholders to vote. If adopted, the proposal would move responsibility for determining shareholder proposal rights away from a nationally uniform federal standard and toward a patchwork of state corporate law, company governing documents, and judicial resolution.

 This proposal represents a sea change for shareholder proposals by eliminating not only the SEC’s role in the process (the SEC staff had already signaled it was and has been exiting its role as arbiter) but the entire federal rule. If adopted, the proposal would require shareholders and companies to resolve disputes about whether shareholder proposals can be included on the company’s ballot according to state corporate law. State corporate statutes generally contain few explicit provisions for this, opening up a period of uncertainty for both shareholder proponents and public company management. In essence, the SEC proposes hitting a giant “Del” button: delete 14a-8 and make shareholder proposals Delaware’s problem (and the problem of other states).

How does this impact the current proxy season, and when would this go into effect?

The status quo stands for the 2027 proxy season. This is a proposed rule, meaning the SEC must review any comment received before voting on a final rule, let alone having the rules go into effect. We estimate that the earliest this rule could be effective (with the caveat of no litigation challenging a final rule) would be for the 2027-28 proxy season. Rule 14a-8 remains fully operative unless and until a final rescission becomes effective, and any such rescission may indeed face judicial review.

 We expect that with sufficient lead time and with the release of this rule proposal just as shareholder proponents are preparing for the 2027 proxy season, proponents will leverage what they may see as a last proxy season to try to preserve shareholder proposals through private ordering in a company’s bylaws.

What then should public companies do in the current proxy season? 

Given (as noted above) that the Division of Corporation Finance Staff has stated that it will not grant no-action relief for the current proxy season, well-advised public companies will be carefully considering the extensive body of prior no-action precedent when evaluating shareholder proposals and potential exclusion arguments. At the same time, companies will need to weigh litigation, investor-relations, and other company-specific considerations. Notably, under Rule 14a-8, only a federal district court can compel a company to include a shareholder proposal in its proxy materials.

Would removing 14a-8 increase or decrease shareholder proposals?

In the near term after rescission, we expect a decrease. One of the benefits of Rule 14a-8 is that it is an inexpensive way for shareholders to bring a ballot measure to all shareholders. Other avenues continue to exist with sufficient funding. Whether there continues to exist a low-cost way to introduce these measures will be tested against a backdrop of scant state corporate law statutory provisions and case law on shareholder proposals being included on the company ballot. Game theory might then drive behavior as much as blackletter law. The practical result may be less about the absolute number of proposals and more about who possesses the leverage, resources, and influence to pursue them.

How would Delaware and other states respond to the elimination of Rule 14a-8?

The SEC includes allowing states to develop their own law on shareholder proposals as a reason for eliminating Rule 14a-8. We would anticipate that some states might act to make submission of shareholder proposals on the company ballot more difficult than Rule 14a-8. The Texas legislature already includes Section 21.373 in their corporate statute, which imposes much higher thresholds than Rule 14a-8 for how much stock a shareholder must own (and how long the shareholder must own it) before the shareholder can submit a proposal. State legislatures will consider changes in this space in the context of the competition for company charters and the so-called “DEXIT” debate. The disappearance of a uniform federal standard also may create greater divergence among states, company charters, and bylaws, potentially resulting in materially different shareholder proposal regimes depending on a company's state of incorporation and governing documents.

Does the risk of SEC enforcement disappear?

No. SEC enforcement risk changes rather than disappears. The focus may shift away from proposal eligibility and toward disclosure accuracy, solicitation conduct, voting mechanics, disclosure controls, and the integrity of the decision-making process. In many cases, the principal regulatory question may become not whether a proposal was excluded, but whether the company can demonstrate a reasonable, well-documented, and consistently disclosed basis for that decision. The SEC may become less focused on governance outcomes and more focused on governance process, disclosure integrity, and whether investors received a complete and accurate explanation of the company's actions. The risk therefore may shift from disputes over proposal eligibility to more traditional proxy and disclosure-related issues, including potentially misleading statements or omissions, voting-process deficiencies, and disclosure-controls failures.

The risk of litigation also does not disappear. With the SEC opting out of its traditional role as arbiter during the last proxy season, there was a small, but impactful, uptick in litigation to compel companies to include proposals on their ballots. In the near term, rescission of Rule 14a-8 may not materially increase litigation. Over time, however, divergent state-law responses and the absence of a uniform federal framework could generate additional disputes, leading to more frequent litigation and creating costly, uncertain, and disruptive outcomes for companies.

The most significant consequence of the proposal may not be whether more proposals are excluded, but that shareholder proposal disputes increasingly move from an SEC-administered process to investor engagement, board judgment, state-law litigation, and market discipline. Moreover, in the hydraulic theory of shareholder engagement, changing the calculus of one shareholder right and approach to engagement may pressure other methods of engagement and feedback, including director, say-on-pay, and equity votes, among others. What is clear, even in the earliest of days of this proposal, is that the impact of a deletion is likely to be far-reaching and have long-term knock-on effects for companies, their shareholders, and other stakeholders.

Clients interested in the implications of this proposal for them or submitting a comment to the SEC should contact the authors or their Freshfields capital markets team contacts.

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