The SEC has dropped Biden-era guidance on the parameters by which companies may seek the agency’s go-ahead to exclude shareholder proposals from their proxy statements. It is a move that will likely lead to fewer ESG-related resolutions making their way to a vote at future AGMs and comes as many companies are awaiting word from the agency on whether they will have to face certain proposals at their 2025 meetings.
Many governance experts had predicted that the division would take such action following the US presidential election, although the timing and details of the changes were not known.
The division of corporation finance on Wednesday released Staff Legal Bulletin (SLB) No 14M in which it rescinds SLB No 14L, which the division had released in November 2021 and was seen as opening the door for more ESG-based proposals by making it harder for companies to argue they could legitimately omit them.
In SLB No 14L the division rescinded previous legal bulletins that had been introduced during the first Trump administration. Now SLB 14M reintroduces elements of the bulletins nixed by its predecessor during the Biden administration.
The bulletins relate to Rule 14a-8, which provides a regulatory basis for stock owners to submit proposals for shareholders’ consideration in a company’s proxy statement. The rule also includes several bases on which companies can seek no-action relief for excluding proposals.
Both SLB No 14L and the new bulletin focus on two of these possible bases: Rule 14a-8(i)(7), the ordinary business exception, and Rule 14a-8(i)(5), the economic relevance exception.
Commissioner objects
In a statement, commission member Caroline Crenshaw says: ‘SLB 14M moves the goalposts smack dab in the middle of this year’s shareholder proposal process. Doing so at this hour creates undue costs and uncertainty for investors and corporations alike. This type of political policy shifting mid-season serves to undercut capital formation, not facilitate it.’
She states that the new bulletin implements ‘different rules of the road’ for the process of excluding shareholder proposals on topics such as poison pills, executive compensation, political and lobbying expenditures and environmental or other issues ‘that shareholders have identified as materially impacting the firm’s financial value.’
Crenshaw adds: ‘The rescission comes as no surprise given that the shareholder proposal process has become the target of politicized messaging and a preferred punching bag of those who wish to diminish corporate democracy. This is the case even though there are already numerous other mechanisms in place to limit the availability of the proxy ballot to shareholders…
‘Even though the rescission may not be a surprise, the timing of this action is arbitrary and inequitable. Shareholders have already crafted and submitted their proposals for this season. Corporations and shareholders will incur costs to supplement or alter no-action requests and responses.
‘Further, SEC staff have already issued no-action letter responses related to proposals for this proxy season. Even for those stakeholders and observers who prefer a different approach to this process, the end result is quite possibly disparate treatment not just for shareholders, but for issuers as well. We are so focused on undoing the prior Commission’s agenda that we sow chaos now.’
The SEC did not respond immediately to a request for comment.
Luke Morgan, staff attorney at shareholder advocacy group As You Sow, which is a frequent filer of ESG-based proposals, says in a statement: ‘We’re disappointed that the SEC has bowed to manufactured outrage about investors’ efforts to protect their portfolios from material risk by making unnecessary changes to its guidance in a way that will make it harder for shareholders to engage with companies. Even worse, the SEC made this change in the middle of the no-action season and invited companies to file retroactive challenges to proposals written with the old rules in mind. You can’t change the rules in the middle of the game.
‘Ultimately, although this change creates obstacles for shareholders seeking to engage with companies on issues of material risk, it is notable the extent to which it reaffirms – despite the political noise – that significant social and environmental risks are legal, legitimate and desirable subjects for shareholder engagement. Engagement on these issues is not going away.’
Executives at many companies are likely to support the division’s move as offering more protection from what they regard as unnecessary and irrelevant proposals and the accompanying cost of opposing them.
Tom Quaadman, executive vice president of economic policy at the US Chamber of Commerce, says in a statement: ‘The US Chamber welcomes this step by the SEC to restore the priorities of material economic and business interests to the agency’s shareholder proposal exemption process. US boardrooms should be focused on the issues relevant to their business, not politics, and the SEC should continue to pursue changes such as this one that cement the strength of our economy at the center of regulation.’
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Ben Maiden
Ben Maiden is the editor-at-large of Governance Intelligence, an IR Media publication, having joined the company in December 2016. He is based in New York. Ben was previously managing editor of Compliance Reporter, covering regulatory and compliance...
