Gallagher Proposes Changes to Shareholder Resolution Process

The Securities and Exchange Commission should extensively revise its shareholder proposal rule to ensure the process is not “hijacked” by activists and corporate gadflies, Commissioner Daniel Gallagher said March 27.  

In a speech at Tulane University Law School, the SEC commissioner noted that the “vast majority” of shareholder resolutions are brought by individuals or institutions with “idiosyncratic and often political agendas” that either do not relate to, or are in conflict with, the interests of other shareholders.

Among other changes, Gallagher called for substantially increasing the stock ownership thresholds that allow a shareholder to submit a proposal. In addition, proposals by proxy--where a nonshareholder acts on behalf of a shareholder--should be banned or required to meet higher eligibility thresholds, he said.

Gallagher said he expressed his own views, and did not speak on behalf of the commission or its staff.

Proposals by Proxy

Proposal by proxy has been the subject of recent no-action requests and lawsuits against John Chevedden and other shareholder proponents .

With respect to stock ownership thresholds, Gallagher suggested eliminating the flat-dollar test (currently $2,000), leaving only a percentage test.

Moreover, the length of holding requirements should be revised, Gallagher said.

The commissioner also urged the SEC to do a better job when setting requirements on the substance of proposals.

“In addition …, the commission needs to become more involved in the administration of this rule,” Gallagher continued. “In particular, I believe that the commission should be the final arbiter on the types of proposals for which the staff proposes to deny no-action relief on 'significant policy issue' grounds.”

Misleading Resolutions

Gallagher further called on the SEC and its staff to adopt a tougher stance against resolutions that are materially false or misleading. He said he supported companies' use of the federal courts to omit resolutions, calling litigation “a useful external check on the SEC's no-action process.”

Finally, Gallagher recommended a “three strikes and you're out” policy on how long proposals can be resubmitted once they make it onto the proxy. Currently, proposals need 3 percent, 6 percent or 10 percent of shareholder support votes to stay alive, depending on whether they have been brought once, twice or three times or more in the past five years, he said.

Under Gallagher's approach, a proposal that fails to receive majority support in its third year may be excluded for the next five years. In addition, the SEC should set the thresholds for the prior two years high enough to “demonstrate that the proposal is realistically on the path toward” majority shareholder support.

The text of Gallagher's speech is available at