Debate looms over SEC shareholder proposals plan

The SEC’s plan to update the grounds on which companies may be allowed to exclude shareholder proposals looks set to divide opinion along traditional lines, even with the deadline for official feedback more than a month away.

The commission last month proposed amendments to Rule 14a-8, which governs the process for including shareholder proposals in a company’s proxy statement. The rule provides several bases on which companies can apply for no-action relief if they exclude a proposal. The proposed amendments would revise three of these bases for exclusion.

SEC chair Gary Gensler said in a statement at the time: ‘I believe these proposed amendments would provide a clearer framework for the application of this rule, which market participants have sought. They also would help shareholders exercise their right to submit proposals for consideration by their fellow shareholders.’

Specifically, the proposed changes would revise the following grounds for exclusion:

• Substantial implementation – If approved, the changes would specify that a proposal may be excluded if the company has already implemented the ‘essential elements’ of the proposal
• Duplication – The amendments would specify that a proposal ‘substantially duplicates’ another proposal previously submitted for the same AGM if it addresses the same subject matter and seeks the same objective by the same means
• Resubmission – The amendments would provide that a proposal constitutes a resubmission if it substantially duplicates another proposal that was previously submitted for the same company’s previous shareholder meetings.

The proposals follow on from the SEC’s division of corporation finance last fall updating its guidance on its process for deciding whether to give no-action relief to companies seeking to exclude shareholder proposals. The division rescinded three staff legal bulletins introduced during the Trump administration in a move widely seen as making it less likely that it would grant such relief and, in turn, meaning that a wider array of ESG proposals would get onto proxy statements.

Industry professionals say that expectation has come true. According to a report from Proxy Impact and As You Sow, a record-breaking 529 ESG proposals were filed this year. More recently, those groups and the Sustainable Investments Institute reported that in the six months to the end of June a record-breaking 282 votes were taken on ESG shareholder proposals.

INITIAL FEEDBACK
Groups behind ESG-related shareholder proposals are, unsurprisingly, broadly positive about the planned changes. The SEC’s proposal is open for public feedback until September and has yet to attract more than a handful of responses. But in one of those early comment letters, Sanford Lewis, director of the Shareholder Rights Group, welcomes the agency’s action as including ‘overdue changes that would reduce costs and uncertainties to proponents and issuers alike.’

The Shareholder Rights Group is an association of proponents of shareholder proposals including Arjuna Capital, As You Sow, Boston Trust Walden, Mercy Investment Services and Trillium Asset Management.

The current framing of the rule has ‘placed the staff in the awkward position of making highly subjective determinations on substantial implementation, duplication or resubmission, and has increased the number and length of no-action requests,’ Lewis writes. ‘It has also led to exclusion of numerous proposals, the consideration of which would have been of clear benefit to companies and their investors.’

For example, Lewis says, the proposed wording that a proposal will be considered substantially implemented if ‘the company has already implemented the essential elements of the proposal’ would streamline such analysis by eliminating claims that a company has implemented the ‘essential purpose’ without implementing guidelines included with the proposal.

‘Under the existing rule, issuers and their lawyers have gone to great lengths to argue about the underlying purpose of the proposal, typically asserting that existing company activities meet a proposal’s purpose even when the activities clearly do not meet the proposal’s guidelines,’ Lewis continues.

Separately, Tejal Patel, corporate governance director with SOC Investment Group, tells Corporate Secretary that it is important for the SEC to be looking at what ‘substantial implementation’ means. She was instrumental in driving a new type of proposal last year asking companies to have third parties conduct racial equity audits. Such measures are gaining traction in terms of investor support. But Patel says many companies have claimed they have substantially implemented them.

She also says the planned changes to the duplication basis for exclusion are important in terms of conservative proposals. Industry professionals report seeing conservative proponents sometimes file proposals that appear very similar to ones later filed by pro-ESG proponents – although their supporting materials make clear they have opposing intentions. Research from Georgeson has found that the number of submissions critical of the ESG landscape have doubled to 52 in 2022 compared with 26 in 2021.

Patel says the planned changes to Rule 14a-8 would help by looking at a proponent’s intent rather than just focusing on a proposal itself.

Issuers and their counsel who seek Rule 14a-8 relief to omit proposals are expected to be less pleased with the proposed changes.

Skadden Arps Slate Meagher & Flom partner Brian Breheny heads the law firm’s SEC reporting and compliance practice and previously held leadership positions in the division of corporation finance. He expects the proposals to face criticism from the corporate community, although he says it is too early to know whether the changes will face a challenge in court.

Breheny describes the proposal as codifying the position the division took last fall and says it reverses long-standing guidance, in doing so narrowing or eliminating certain bases for excluding resolutions.