Activist investors are expected to feel more empowered to bring forward measures on climate change and human capital management in the next corporate proxy season after the Securities and Exchange Commission reversed Trump administration policies that had blocked some shareholder proposals.
Companies seeking to avoid shareholder votes on environmental, social and governance issues face a higher burden to have the SEC grant their requests. SEC staff issued a legal bulletin last week on no-action requests under a provision known as Rule 14a-8 under the Securities Exchange Act of 1934.
The agency, led by Democrat Gary Gensler, said it will be more likely to require companies to hold shareholder votes on public policy issues such as the environment and worker arbitration than it was during the Trump administration as part of its repeal of three legal bulletins issued between 2017 and 2019.
“Staff will no longer focus on determining the nexus between a policy issue and the company, but will instead focus on the social policy significance of the issue that is the subject of the shareholder proposal," said Staff Legal Bulletin 14L from the Division of Corporation Finance.
It's also reversing a position it took in 2017 that companies could exclude proposals if they deal with a subject that accounts for less than 5 percent of the company’s total assets, net earnings or gross sales. The SEC will allow proposals on “issues of broad social or ethical concern” regardless of their economic effects, it said.
The legal bulletin also changes the agency’s approach on "micromanagement" arguments for purposes of the ordinary business exclusion. SEC staff noted that shareholder proposals that suggest targets with specific timetables or ask for details on certain issues do not meet the threshold to exclude on the basis of micromanagement.
The SEC’s policy changes are significant because they give investors concerned with companies’ environmental, social and governance issues more clout to ensure their measures will make it onto corporate voting ballots in time for next spring and summer, when the bulk of major U.S. corporations plan to hold their annual shareholder meetings.
Shareholders generally have until the end of the year to bring forward proposals to change policies and corporate governance for next proxy season, which gets underway in April.
“Most resolutions that will be voted on in the 2022 proxy season will have filing deadlines in December,” Jackie Cook, director of sustainability stewardship research at Morningstar, said in a research note. “This gives shareholders enough time to file resolutions that can take advantage of this new stance.
“Shareholder resolution filing is part of a ‘virtuous cycle’ of shareholder influence supported by the proxy process,” she said. “Because the reversal tilts favor back toward shareholders, it strengthens shareholders’ position in pre-proxy-season engagements. Corporate management will be more motivated to engage with shareholder proponents to achieve resolution of a proposal before it goes to a vote.”
According to the SEC, it has 18 pending no-action requests from companies filed under Rule 14a-8. Two-thirds of those requests for excluding shareholder proposals come from Apple Inc. and The Walt Disney Co., and several of those requests pertain to broad policy issues and arguments for exclusion affected by the SEC’s announcement.
Apple filed an Oct. 18 request asking the SEC to allow the tech company to exclude resolutions to explain how it decides to remove certain mobile applications from the App Store due to government pressure that may limit freedom of expression or access to information. It also wants to avoid votes on resolutions to report on its use of concealment clauses in cases of workplace harassment and discrimination, and to discuss the environmental and social benefits of making iPhones, Mac computers and other Apple devices more easily repairable by consumers and independent repair shops.
Meanwhile, Disney wants to knock down a proposed resolution on examining potential gender and racial pay gaps among employees, according to an Oct. 26 filing with the SEC. The company also faces shareholder proposals that promote conservative political attitudes, such as banning the company from forcing employees to consume “political polemics, material and biases,” and ensuring that Disney includes a mannequin of former President Donald Trump in Walt Disney World's Hall of Presidents in Florida.
Both companies are also trying to avoid votes on proposals to mandate disclosures on their business operations and supply chains’ connections to forced labor and other human rights violations.
The SEC’s policy changes provide “clear guidance” for investors and companies on what types of resolutions can be voted on and which ones would not be acceptable, according to Lisa Woll, CEO of US SIF: The Forum for Sustainable and Responsible Investment, which supports expansion in ESG and sustainable investing.
Revoking the SEC staff bulletins issued during the Trump administration “will restore clarity and practicality to the evaluation of 14a-8 challenges,” Woll said. The SEC’s announcement “protects shareholders’ rights to raise important policy decisions with companies and present them to fellow shareholders.”
“With today’s Staff Legal Bulletin, the SEC begins restoring shareholders’ rights by making it a little bit easier for shareholders’ proposals to qualify for inclusion in a company’s proxy voting materials," said Rep. Maxine Waters, D-Calif., chair of the House Financial Services Committee.
While investors and ESG advocates have largely cheered this policy shift, some Republicans and experts say the changes will be more burdensome for companies to weed out shareholder proposals that are either not relevant to their operations or a nuisance to their corporate policies.
“This latest overreach by the SEC dispenses with the fiction that its ESG regulatory campaign has anything to do with financial performance and investor demands,” Sen. Patrick J. Toomey, R-Pa., ranking member of the Senate Banking, Housing and Urban Affairs Committee, said in a statement. “Liberal activists and their corporate enablers should be careful what they wish for. It’s only a matter of time before conservative activists will start forcing businesses to take positions on significant social policy matters they care about, too.”
Gibson, Dunn & Crutcher LLP attorneys said that unlike many past legal bulletins from SEC staff, the most recent notice was not previewed or discussed in advance at stakeholder meetings.
“As a result, SLB 14L injects more uncertainty for companies evaluating shareholder proposals under Rule 14a-8 and further clouds an already opaque no-action review process,” lawyers from Gibson Dunn’s securities regulation and corporate governance practice, led by co-chairs Elizabeth Ising and Lori Zyskowski, said in a note to clients.
The firm said the new guidance creates an “open season for environmental and social proposals” and will likely lead to an increase in both the number of shareholder proposals submitted and the number of such ESG measures being included in proxy statements, they said.
Peter Feltman contributed to this report.