The SEC’s influence over which shareholder proposals make it onto companies’ annual meeting ballots will see its closest judicial examination yet, as businesses and conservatives battle the Democratic-led agency’s power in court.
The US Court of Appeals for the Fifth Circuit will hear oral arguments Tuesday in a lawsuit over Securities and Exchange Commission guidance allowing
The SEC can sue companies that bar votes without adequate justification. To avoid this, companies often seek agency guidance before they nix ballot items.
This sway over the matters investors consider is at the heart of the conservative and manufacturers groups’ lawsuit. The groups claim the SEC is overstepping its authority, but the agency has denied the allegations and several investor advocates have backed the agency in the case.
SEC participation in the squabbles over ballot items drew considerable corporate backlash after agency Chair Gary Gensler eased investors’ ability to file environmental, social and governance proposals in 2021. The National Association of Manufacturers followed with its legal challenge in 2023 and
“The status quo was clearly unsustainable—the increase in politically motivated proposals and the SEC’s very forthright willingness to allow that to continue,” said Charles Crain, the vice president for domestic policy at the National Association of Manufacturers.
An SEC representative declined to comment.
Still Fighting
The National Center for Public Policy Research brought the case to the Fifth Circuit in April 2023 after failing to convince the SEC it had the right to submit a proposal for consideration by Kroger shareholders. The conservative group’s resolution urged the grocery store chain to report on any risks from excluding “viewpoint” and “ideology” from its equal employment opportunity policy.
The proposal sought to micromanage Kroger and didn’t transcend “ordinary business matters,” hurdles shareholder resolutions must clear for ballot access under SEC rules, the grocer said. The agency agreed, and, according to the National Center for Public Policy Research, declined to reconsider its decision to back Kroger.
But the center’s lawsuit prompted the Fifth Circuit to place the SEC’s decision on hold, leaving Kroger without clear SEC support to toss the proposal. The company ended up putting the item on the proxy statement for its June 2023 annual meeting. The proposal received the support of less than 2% of Kroger investors voting, according to Bloomberg Intelligence data.
The Kroger case still has unresolved issues related to the SEC’s handling of shareholder proposals, even though the center secured a vote on its resolution, said Scott Shepard, a fellow at the center and director of its Free Enterprise Project. Adding the manufacturers’ group to the case was a “blessing,” he said.
“We, as proponents, could hardly go to court and argue that the whole process is illegitimate,” Shepard said.
‘Effective’ System
As You Sow, the Interfaith Center on Corporate Responsibility and other investor advocates don’t share the center’s views about the SEC.
The agency needs the power it has to mediate fights between companies and shareholders on the makeup of proxy ballots, the organizations told the Fifth Circuit last year. “Corporate democracy is an empty promise” without SEC procedures and other mechanisms designed to protect it, As You Sow said in an amicus brief.
As You Sow has a decades-long history of submitting ESG proposals for consideration at annual meetings—and fighting for ballot access at the SEC. Sometimes the organization gets agency support; sometimes it doesn’t.
As You Sow CEO Andrew Behar and climate activist Follow This last year got votes on proposals targeting greenhouse gas emissions at Exxon, which failed to secure the SEC’s blessing to toss them. None of resolutions garnered the support of the majority of the oil giant’s investors.
Follow This filed another emissions-related proposal for consideration at Exxon’s 2024 annual meeting. This time, Exxon moved to block the proposal in January by suing Follow This and Arjuna Capital, which worked with the organization to submit the resolution. Unlike the Fifth Circuit case, the SEC isn’t a party in Exxon’s challenge.
Follow This and Arjuna Capital ultimately withdrew their proposal. But Exxon declined to drop its lawsuit, saying they should be barred from offering similar resolutions in the future. The SEC interprets shareholder proposal rules, “in a way that is inconsistent with the regulations and encourages Defendants and other activist organizations to submit shareholder proposals designed to disrupt the ordinary business operations of public companies and harm their shareholders,” the company said in a court filing.
Exxon and the National Association of Manufacturers in their cases are “throwing the baby away with the bathwater,” said Danielle Fugere, As You Sow’s president and chief counsel. At stake is shareholders’ ability to raise concerns before their fellow investors, and have company directors and managers discuss those issues, she said.
“This has been a system that has proven effective,” Fugere said. “It may not be comfortable for either party necessarily, but it does raise important shareholder issues.”
SEC’s Defense
The SEC pushed to toss the lawsuit stemming from the shareholder proposal at Kroger, telling the Fifth Circuit the case became moot after the resolution got a vote. The SEC’s views on the proposal also were non-binding, informal guidance from its staff and not a commission order, giving the court nothing to review, the agency said.
The SEC has provided advice on whether companies can exclude shareholder proposals through its staff for decades, after Congress entrusted the agency with protecting the voting rights of shareholders in 1934, the commission said.
The National Association of Manufacturers’ claims that the SEC is improperly aiding politicized shareholder proposals are misguided, said Sarah Haan, a Washington and Lee University School of Law professor, who helped submit an amicus brief supporting the agency in the Fifth Circuit case.
“I don’t think the SEC staff is trying to pursue some political ideology here,” Haan said. “These are corporation finance lawyers trying to do their best to interpret SEC rules.”
Final Say?
The Fifth Circuit now will have a say in the matter on Tuesday, with judges Edith Jones, James Dennis and Dana Douglas set to hear oral arguments.
Although the majority of Fifth Circuit judges were appointed by Republican presidents, Democratic picks have the edge on the panel for the shareholder proposal case. Dennis is a Bill Clinton appointee, while Douglas is a Joe Biden pick. Jones was tapped by President Ronald Reagan.
Theodore Weiman, an SEC senior appellate counsel, will defend the agency at the court. He will face Scott Keller, a Lehotsky Keller Cohn LLP partner arguing for the National Association of Manufacturers, and Trent McCotter, a Boyden Gray PLLC partner representing the National Center for Public Policy Research.
The panel’s makeup should please the SEC, said Adam Pritchard, a University of Michigan Law School professor and former agency lawyer who studies corporate and securities law. But the full Fifth Circuit could reconsider what the panel decides in the case, he said. The court is giving an en banc review of a ruling by a panel of Democratic-appointed judges who supported
“The Fifth Circuit seems to be not afraid of taking things en banc,” Pritchard said.
The case is National Center for Public Policy Research v. SEC, 5th Cir., No. 23-60230, oral arguments scheduled 3/5/24.
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