Administration Increases Efficiency and Reduces Costs of SEC Process

Recent efforts of the Securities and Exchange Commission (SEC) Staff to create a more objective and efficient process for handling shareholder proposals have borne fruit in 2023, resulting in a 30 percent reduction in company-filed challenges to shareholder proposals. Clearer guidelines from the Staff have made it possible for shareholders to draft more defensible proposals.

Staff Legal Bulletin 14L issued in November 2021 revoked a number of opportunities for companies to argue for exclusion of proposals that were added to the SEC no-action process during the Trump administration. The 2021 bulletin reset the process to better align with the rule as written by the Commission.

According to analysis by the Sustainable Investments Institute, as of January 31, 2023, 140 no action requests had been submitted as compared with 209 on the same date last year. All told, it appears that there will be about 30 percent fewer no action requests submitted to the SEC this year.

The new guidance provided by the Staff provides, for the first time in decades, objective indicators to allow both proponents and companies to assess whether a given proposal will withstand a challenge based on the ordinary business rule. With its framework for proponents to draft compliant proposals, the bulletin has made the drafting process more predictable and therefore less likely that proponents will file proposals subject to contests at the SEC. The reduction in unnecessary legal challenges is a good government initiative because it reduces unnecessary costs of the process for issuers, proponents and SEC Staff.

Pending Lawsuit and Rulemaking

In 2020, the SEC finalized a rulemaking that increased the thresholds for filing and resubmission of shareholder proposals and which otherwise complicated the process for filing of proposals with new rules on representation and engagement. A lawsuit attempting to vacate the rule was filed by the Interfaith Center on Corporate Responsibility, As You Sow and James McRitchie. The judge hearing the lawsuit has repeatedly deferred a decision, with a possible decision expected later this year.

In 2022, the Commission also proposed further amendments to the shareholder proposal rules regarding substantial implementation, resubmission and duplication. For instance, the current rule assessing whether the company has “substantially implemented the proposal” allows companies to argue that even if they have not taken an action consistent with what the text of the proposal requests, they have more or less met the “essential purpose” of the proposal. This leads to extended philosophical arguments in company challenges to proposals, often distorting the purpose of a proposal to align with the company’s existing actions. The new rule would look instead to the essential elements of the proposal and not invite this extended debate over “purpose.”

Similarly, the proposed amendments on duplication and resubmission would provide a welcome solution to a growing phenomenon in the market regarding disingenuous anti-ESG proposals that could have the effect of displacing a subsequently submitted pro-ESG proposal, whether for the same proxy statement or as a resubmission of the topic in a subsequent year.