In September 2020, the SEC under Chairman Jay Clayton issued amendments to Rule 14a-8 that substantially restrict shareholders’ access to the corporate proxy statement. The Clayton SEC’s actions came in the context of years of lobbying by major trade associations like the Business Roundtable, the U.S. Chamber of Commerce, and the National Association of Manufacturers to limit shareholders’ ability to effectively engage with the companies they own on critical environmental, social, and governance issues. 

The rule changes significantly raise the ownership requirement for filing a resolution, cutting off smaller investors’ rights; more than double the thresholds to resubmit most proposals, which will prevent value-enhancing proposals from being considered by other shareholders; and put numerous other barriers in the way of filing, including limits on both access to skilled representatives and the aggregation of shareholdings to meet the ownership requirement. The rule changes have gone into effect for the 2022 proxy season.

Thousands of investors weighed in on the rule change, and the comments were overwhelmingly opposed to the rule. Commenters emphasized the critical importance of the shareholder proposal process in identifying risks and building long-term shareholder value; the relatively meager costs of putting shareholder proposals on corporate ballots; and the arbitrary nature of some of the rule changes, which seemed more tied to an ideological agenda than a rational assessment of the costs and benefits of the 14a-8 process. Commissioners Allison Herron Lee and Caroline Crenshaw dissented. Commissioner Lee stated that the amendments “put a thumb on the scale for management in the balance of power between companies and their owners,” and further stated that while “support for [ESG-related] shareholder proposals has been on the rise,” it was no coincidence that the Commission was moving “to restrain these efforts just as they are gaining real traction.”

In June 2021, the Interfaith Center on Corporate Responsibility, along with As You Sow and James McRitchie, challenged the rule changes in U.S. District Court. The complaint alleges that the rule changes were arbitrary and capricious and violated the federal Administrative Procedure Act because the cost-benefit analysis underpinning the rule was highly deficient. The Commission made no efforts to quantify the benefits of shareholder engagement to investors and companies despite the enormous amount of studies and data on the positive effects of the shareholder process provided by commenters. The Commission also used wildly exaggerated estimates of the cost of including proposals on the proxy statement. The complaint also focused on the SEC’s refusal to consider evidence obtained by the Commission’s staff before the start of the rulemaking process, which showed that the rule change under consideration could reduce shareholder proposals by up to 78 percent; the SEC withheld the study from the rulemaking record and only quietly released it to the public a month before the final rule came out – and long after the comment period had closed.

In the fall of 2021, the plaintiffs and the SEC filed cross motions for summary judgment. The parties are awaiting the Court’s decision, which may be issued in spring 2022.

Josh Zinner

CEO, Interfaith Center on Corporate Responsibility