IN-DEPTH: Investors sound alarm as SEC chair floats new route to exclude proposals
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A car wreck waiting to happen. Radical and short sighted. An attempt to silence investors. Just some of the words used by shareholder groups reacting to recent comments from Securities and Exchange Commission (SEC) Chair Paul Atkins, who questioned the validity of precatory proposals under Rule 14a-8, which has governed them since 1942.
Atkins' October 9 keynote addressing the John L. Weinberg Center for Corporate Governance have sparked concern that the SEC could be stepping up efforts to narrow shareholders’ ability to raise issues through the proxy process. Atkins asked whether such resolutions should even be considered “a proper subject” and argued that “nothing has epitomized the politicization of shareholder meetings more than shareholder proposals focused on environmental and social issues.”
The topic has long been controversial, with five SEC legal bulletins since 2017, four of which have been rescinded.
However, Investor groups have argued that such a shift in policy could potentially usher in the biggest retreat in shareholder rights seen in decades.
"This is a car wreck waiting to happen," Danielle Fugere, president of As You Sow, told DMI. "We have seen time and time again what happens when you deregulate, when you remove all of the rules. It doesn't end well."
Testing the theory
Atkins suggested that shareholders should not be entitled to draw their right to submit precatory proposals from Exchange Act Rule 14a-8 but should instead have to justify that right under Delaware state law or the company’s bylaws.
The remarks have widely been observed to serve as an open invitation to Delaware-incorporated companies to take the matter to the Delaware Supreme Court to seek confirmation that there is no wide-ranging right to submit shareholder proposals, with the SEC chair declaring his "high confidence that the SEC staff will honor this position."
And at a time when states are competing with Delaware to offer a more shareholder-friendly framework, Atkins’ speech could provide further incentive to create legal frameworks less friendly to precatory proposals. Indeed, in the same speech, Atkins cited recent legislation in Texas that would set the ownership threshold required to file shareholder proposals at $1 million or 3% of the outstanding stock.
However, moves to amplify the role of state law are seen by some as a backward step. "The call to defer to Delaware law and permit exclusion of precatory proposals would return corporate governance to a pre-Depression era of managerial dominance," warned veteran shareholder advocate James McRitchie.
Meanwhile, others have questioned the SEC's very mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. "At a time of growing unease about the condition and direction of the U.S. economy, Chair Atkins should be seeking to strengthen rather than undermine investor protections, particularly given his agency’s investor protection mandate," Interfaith Center on Corporate Responsibility (ICCR) CEO Josh Zinner, told DMI.
Proponents argue shareholder proposals provide a vital safety valve that allows investors to flag emerging risks before they escalate. Without them, they say, investors could turn to more combative measures such as “vote no” or withhold campaigns - steps that are generally more costly and more disruptive for companies. Proposals are also generally limited to reporting or target-setting, with requests that constitute micromanaging frequently excluded under existing processes.
"Since these resolutions are non-binding, it makes little sense to effectively ban them and deny investors the ability to pose a simple question," said Leslie Samuelrich, president of Green Century.
Call for due process
While Atkins has said he believes “a fundamental reassessment of Rule 14a-8 is in order,” investor groups insist that any changes must follow a transparent process.
“Certainly, the new chair may want to amend rules in some manner," said Fugere. "In that case, however, the agency must go through a public notice and comment process, where all stakeholders can have input on the proposed changes. That's how you make good laws."
For now, investors are being urged to make their voices heard. "In the weeks ahead, it is crucial for shareholders and their allies to speak out forcefully against this proposal to change 80 years of precedent supporting the rights of shareholders to file resolutions with companies, further weakening accountability at every level," said Zinner.
