When the Securities and Exchange Commission (SEC) initially created Rule 14a-8 in 1942, it was intended to ensure shareholders had a voice in how a company was run by requiring that qualifying shareholder proposals be included in the proxy materials ahead of a shareholder meeting.
In recent decades, Rule 14a-8 has been criticized because clever or determined shareholders have been able to use the rule to submit proposals promoting agendas that are often more about social or ethical issues than economic performance.
In enacting Senate Bill (SB) 1057 in May, lawmakers took a stand in support of corporate autonomy, further demonstrating why Texas is a top destination for businesses. The Texas commercial litigation lawyers at MehaffyWeber are dedicated to helping commercial clients get the maximum benefit from the state’s business-friendly laws.
Why the Federal Rule Allowing Shareholder Proposals Has Come Under Fire
A company must include a shareholder proposal in its proxy materials if the proposal meets the substantive and procedural requirements of Rule 14a-8. Share ownership is one of the qualifying criteria. The SEC has modified share ownership requirements over the years, with the most recent amendments taking effect in 2021.
Eligibility to submit a proposal requires a shareholder to have continuous share ownership in one of the following ways:
- At least $2,000 in market value of the company’s securities entitled to vote on the proposal for at least 3 years
- At least $15,000 in market value of the company’s securities entitled to vote on the proposal for at least 2 years
- At least $25,000 in market value of the company’s securities entitled to vote on the proposal for at least 1 year
Even after the most recent amendments, the share ownership bar is fairly low, which makes it easier for shareholders with very small stakes in the company to submit shareholder proposals.
The problem is that many times the proposals only represent the interests of a minority of shareholders while burdening the company with considerable financial and administrative costs. Taking time to review ill-considered shareholder proposals also distracts board members from their core responsibilities to the company and the broader shareholder base.
SB 1057 Increases Share Ownership Requirements When Submitting Shareholder Proposals to Nationally Listed Texas Companies
The provisions of SB 1057 will take effect September 1, 2025. The law modifies the Texas Business Organizations Code (BOC) by adding the new section 21.373 regarding shareholder proposals. The law allows a company listed on a national stock exchange that has its principal office in Texas to amend its governing documents and incorporate the new increased share ownership requirements.
If a qualifying company makes the election, only company shareholders who meet the following ownership requirements will be allowed to submit a proposal at a shareholder meeting.
- A shareholder (or group of shareholders) must own shares worth $1 million in market value or totaling 3% of the company’s voting shares.
- Share ownership must be continuous for at least 6 months before and throughout the duration of the meeting.
- A shareholder must solicit the holders of at least 67% of the voting power of shares entitled to vote on the proposal.
The legislative statement of intent says shareholders will be allowed to aggregate holdings to meet the $1 million requirement so that smaller investors will still have the opportunity to submit proposals. The higher threshold is designed to exclude proposals from investors with minimal stakes in a company and self-serving agendas.
Companies that elect to adopt the state-specified share ownership requirements will need to notify shareholders and advise them of the new requirements for submitting proposals.
Can Texas Legally Impose Stricter Share Ownership Standards than the Feds?
Texas is making it clear that businesses are more than welcome in the Lone Star State. The 89th Texas Legislature was busy during its session and passed several pro-business bills.
SB1057 is a bold move to help Texas companies avoid the cost and distraction of dealing with frivolous shareholder proposals. The new ownership requirements for submitting shareholder proposals are significantly more stringent than the federal requirements under Rule 14a-8.
Texas law now clearly conflicts with federal law. Before businesses opt in to the new shareholder requirements, they may want to know whether or not there could be legal challenges down the road.
The Supremacy Clause of the US Constitution declares federal law to be supreme. The US Supreme Court has established that federal law preempts conflicting state law either expressly or impliedly.
Implied preemption can be found where states attempt to regulate a field where there is a sufficiently dominant federal interest. Implied preemption can also be found when it is impossible to comply with both state and federal laws.
Though no other state has yet to implement shareholder proposal ownership requirements different than those contained in Rule 14a-8, there is some indication that the federal intent behind the rule was not to supersede a state’s authority to make its own laws regarding ownership qualifications for submitting proposals.
Rule 14a-8 allows a corporation to reject a shareholder proposal if it is contrary to state law. Further, at the 2023 Society for Corporate Governance National Convention, SEC Commissioner Mark T. Uyeda commented that the intent of Rule 14a-8 was merely to facilitate a shareholder’s rights under state law and in keeping with the primacy of state law a company should have the right to adopt requirements for shareholder proposals that are different from those outlined in Rule 14a-8.
MehaffyWeber Helps Businesses Build a Bright Future in Texas
Texas is establishing itself as the headquarters for business headquarters. In the last few years, Texas has become home to companies of all sizes, including Fortune 500 giants like Chevron, Tesla, Charles Schwab, and Caterpillar. SB 1057 is more evidence that Texas is going big on big business.
The nationally recognized business and commercial trial lawyers at MehaffyWeber have been successfully serving the business and litigation needs of small to mid-sized Texas companies as well as large national and multi-national corporations for more than 70 years. For comprehensive and effective legal representation, contact MehaffyWeber.