United States: Proposed Amendments To Shareholder Proposal Rules—bruised But Unbowed?

The SEC may have postponed until next week the open meeting originally scheduled for yesterday to consider adoption of revisions to the shareholder proposal rules, but Reuters has the inside scoop on the outcome of at least one controversial provision: according to Reuters, say farewell to the "momentum" provision. The expected deletion of the provision, Reuters observed, "marks a critical reprieve for supporters of social and environmental motions, which can take years on the ballot to gain traction." Reuters reports that investors have continued to press the SEC in letters and meetings with SEC staff, hoping to put the kibosh on the proposed amendments altogether. They appear to be having some impact. Will the SEC move ahead in the face of this strong opposition?

Another contributing factor in the delay-well, maybe-could have been the letter submitted on September 4 by a group that included the Council of Institutional Investors, the Shareholder Rights Group, Ceres and the AFL-CIO, among others, which characterized themselves as "deeply involved in the proxy process because we file shareholder proposals." These groups were "troubled by the 11th-hour submission" from the Division of Economic and Risk Analysis "on August 14, long after the February 3, 2020, public comment deadline, of the staff's analysis of previously undisclosed data that is material to the public's understanding of [the proposed amendments'] predicted impact." According to the group, the SEC has had the data from DERA for over a year, but did not include the data or the staff's analysis in the proposing release, but held the data until the vote was announced by the SEC, "without an opportunity for public comment." The group asked the SEC to re-open the comment period so that the public could comment on the new data. The request was important, the group said, "because the data reveals that the impact of the proposed amendments would be much broader than the Commission's Release asserted, effectively depriving most retail shareholders of the rights and ability to use the shareholder proposal process to protect and advance their interests as investors."

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Notably, the new DERA analysis estimated "that in 22%-55% of all companies (an increase in 9%-42% from the baseline) and 2%-15% of S&P 500 companies (an increase in 1%-14% from the baseline), less than 5% of accounts would be eligible to submit a shareholder proposal under the proposed amendments. In addition, we estimate that in 82%-99% of all companies (an increase in 38%-55% from the baseline) and 59%-99% of S&P 500 companies (an increase in 52%-93% from the baseline), less than a quarter of accounts would be eligible to submit a shareholder proposal under the proposed amendments."

You might recall that the proposed amendments to the shareholder proposal rules would modify the criteria for eligibility and resubmission of shareholder proposals, permitting exclusion of proposals that received votes lower than 5%/15%/25% if voted on one, two or three or more times, respectively. (See this PubCo post.) The proposal would also provide that a person may submit only one proposal per meeting, whether as a shareholder or acting as a representative; facilitate engagement with the proponent; and update procedural requirements. However, in addition to the higher resubmission thresholds, the proposal also included a new "momentum" provision that would "allow for exclusion of a proposal that has been previously voted on three or more times in the last five years, notwithstanding having received at least 25 percent of the votes cast on its most recent submission, if the proposal (i) received less than 50 percent of the votes cast and (ii) experienced a decline in shareholder support of 10 percent or more compared to the immediately preceding vote." An example would be a proposal that received 30% of the vote on the second submission, but only 26% in favor on the third submission, reflecting a decline of over 10% on the third vote; that proposal would be excludable under the momentum provision even though the vote on the third submission exceeded the 25% threshold. According to Reuters' sources, the contentious momentum provision is now kaput.

Shareholder proposals, which used to be viewed-and for many companies, still are viewed-as more of an irritant unnecessarily diverting management's and shareholders' attention from the real business of the company, have recently assumed an increasingly significant role as investors have begun to intensify their focus on environmental issues, such as climate change, and social issues, such as racial injustice and inequity. The pandemic has also highlighted workforce health and safety issues. Shareholder proposals are viewed by their proponents and others as instrumental in driving companies to address many of these issues and their potential impact on sustainability and long-term shareholder value. However, the proposed rule amendments will certainly constrain the use of these proposals. In their comment letters, opponents of the rulemaking identified a number of shareholder proposals that the new higher thresholds or momentum provisions would have prevented from being submitted to shareholders but that ultimately garnered hefty votes in favor. (See, e.g., this letter.)

On the other hand, various corporate groups have long pushed the SEC to raise the bar on shareholder proposals. In 2014, the Chamber of Commerce, along with other corporate groups, submitted a rulemaking petition requesting the SEC to increase the resubmission thresholds, citing a "growing crescendo of respected voices.attesting to the unacceptable negative consequences for investors of the overwhelmingly verbose and often senseless assault on the ability of shareholders and portfolio managers to focus on how to manage their securities investments wisely, as well as the diversion of serious management focus away from the best interests of shareholders." The petition was cited in the SEC's proposing release as among the many voices calling for reform of the rules.

The proposal has been highly controversial from the get-go, drawing a proliferation of comments that have continued through at least September 15, including quite a number of comments from Congress. For example, Senator Sherrod Brown wrote in his last submitted letter that because "the Proposal would prevent a substantial portion of individual investors from submitting shareholder proposals, the SEC should withdraw the Proposal and, instead, must work to promote shareholder engagement." In his view, that process has, over many decades, been a mechanism used to challenge injustices and drive corporate responsibility. The proposal, he contended, "could silence the consideration of [proposals regarding] gender and racial pay equity, workplace diversity, and racial discrimination and social and economic justice that have increased in recent years and that will undoubtedly be proposed in the future." For the first six months of 2020, proposals on these social issues "received substantial shareholder support," including many that received majority support. "More importantly," he argued,

The Senator was also disturbed that the "SEC's own analysis, prepared before the Proposal was issued, but disclosed only last week, indicates a significant portion of individual shareholders would be ineligible to submit proposals under the increased ownership thresholds in the Proposal..While your staff suggests the data do not help to analyze the Proposal, I find that hard to believe and am troubled by the belated release of this information."

In his letter, Senator Chris Van Hollen asked SEC Chair Jay Clayton to report on the status of investigations into fraudulent comment letters that were submitted on this proposal. Over six months ago, when Clayton was testifying before Congress, Van Hollen had asked Clayton about several of the letters Clayton had identified in his public statement about the proposed rule as letters from "Main Street" investors that had been influential in developing his perspective on the rulemaking. However, these letters, Van Hollen wrote, that were "used to justify these new proxy regulations, had in fact been orchestrated by a dark money group..." He had also pointed out that many of the signatories had not actually written the letters, and that several of writers were related to personnel associated with the dark money group. During the hearing, Clayton "did not specifically acknowledge that the letters, first reported by Bloomberg News, were in fact fraudulent. You stated that there was an investigation underway." What is the status of that investigation, he wanted to know? But, more pointedly, he asked

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 According to Clayton, these letters had come "from long-term Main Street investors, including an Army veteran and a Marine veteran, a police officer, a retired teacher, a public servant, a single Mom, a couple of retirees who saved for retirement, all of whom expressed concerns about the current proxy process.  A common theme in their letters was the concern that their financial investments-including their retirement funds-were being steered by third parties to promote individual agendas, rather than to further their primary goals of being able to have enough money to lessen the fear of 'running out' in retirement or to leave money to their children and grandchildren." Journalists at Bloomberg, however, thought there was something fishy about these letters. Upon investigation, it turned out that there was. found that "they are the product of a misleading-and laughably clumsy-public relations campaign by corporate interests." According to Bloomberg, although the retired teacher's signature was her own, she said that she did not write a letter.  The Army and Marine vets were the brother and cousin of the chair of an "advocacy group paid by corporate supporters of the SEC initiative." The retiree claims never to have written a letter, but is a relative of the person who runs the same advocacy group.  The same group also wrote the letter purporting to be from the "single mom."  (See this PubCo post.)

A letter submitted by the above CII group in July argued that the proposals would result in significant economic harm: "[t]he evidence shows that shareholder proposals related to environmental and social matters, in particular, would be sharply curtailed, at a time when significant threats to shareholder value stemming from such issues have emerged, including risks related to the Covid-19 pandemic, diversity and inclusion, human capital management and climate change. These are material issues to many investors." Because these matters are not required to be disclosed under current SEC rules, these disclosures may depend on private ordering through shareholder proposals, they contended. While support for these types of proposals may be low initially and may not grow on the type of "steep curve" the proposal would require, they ultimately can be successful, the letter asserted.

A letter from the Shareholder Rights Group focused on the recent report on climate from the CFTC, which concluded that "[c]limate change poses a major risk to the stability of the U.S. financial system and to its ability to sustain the American economy," and called on U.S. financial regulators to "move urgently and decisively to measure, understand, and address these risks." (See this PubCo post.) The letter noted that there "has been no evidence of Commission interest in addressing these important issues through a binding regulation." Until the SEC takes some action, the letter argued, "the shareholder proposal process represents a leading mechanism by which shareholders can work to advance the goals of disclosure and risk management put forth by the Report on a private ordering basis." The proposed rulemaking, however, "appears to have the intended effect of reducing the number of shareholder proposals eligible to appear on corporate proxy statements, including proposals that seek to fill the information gaps identified in the Report on a company by company basis." In its economic analysis, the SEC must, the letter asserted, consider any benefits of the proposed rule changes "against the lost economic benefits associated with eliminating shareholder proposals that would otherwise address the various subject matters, including climate change."

Representatives Anthony Gonzalez and Bryan Steil, on the other hand, observed that the current SEC rules for shareholder proposals

They supported the SEC's proposed "tiered threshold approach" based on the "longevity and amount of an investment." They also supported the changes to the resubmission thresholds. In their view, these two amendments "will ensure that shareholders that submit proposals are doing so with a long-term interest in the company and are only resubmitting proposals that have demonstrated a meaningful level of support." They also indicated support for the required engagement between companies and shareholder proponents.

Representative Kevin Cramer believes that the proposed three-tier approach "logically takes into account the extent to which a shareholder has a sufficiently vested interest in the company" and that "it strikes the right balance between shareholders' interest and the interests of companies and other shareholders who bear the cost associated with including shareholders proposals in the company's proxy statement." With regard to the proposed resubmission thresholds, he agreed that shareholder proposals that have not achieved the revised levels of support "have been adequately tested." Moreover, he did "not believe that the proposal will impede shareholder advocacy on material issues." Rather, he believed that the proposal

Similarly, the National Association of Manufacturers was pleased with the "targeted changes" that would "center the proxy conversation on the needs of long-term shareholders and ensure that issuers and investors can focus their attention on the vital issues that drive long-term value creation." The NAM argued that the current low submission and resubmission thresholds allow shareholder voices to be "too-easily be drowned out by third parties with little-to-no stake in a company." The NAM viewed the proposal as "an effort to ensure that proposals are advanced as a means of increasing the value of the company and, thus, one's own investment - not 'an intention to use the company and the proxy process to promote a personal interest or publicize a general cause.'" The NAM also strongly supported the momentum provision because it "would allow companies and shareholders to avoid the time, cost, and distraction associated with the consideration of proposals that may have exceeded the resubmission thresholds but that are declining substantially in shareholder support."

According to Reuters, the final version of the rule amendments was still in process as late as the Tuesday before the originally scheduled meeting. Reuters' sources report that, although Clayton has the votes to pass the revisions to the rules, "the SEC has been wary of alienating investors and has been looking to strike a compromise, the sources said." Unless the anonymous sources come through with more scoops, I guess we'll have to wait until next week to see if there are other significant changes forged through that compromise.

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