SEC Restraint on Shareholder Proposals to Stoke State Competition

Corporate America is entering a proxy season unlike any in recent memory. The Securities and Exchange Commission has announced a major shift in how it will handle shareholder proposals for inclusion in company proxy statements, heightening state competition in the realm of corporate law.

For decades, SEC staff served as the main referee, issuing views on when companies could omit a shareholder proposal. That system placed most of the interpretive weight on federal law, with state corporate law playing only a modest role. That is now poised to change.

SEC Chair Paul Atkins indicated last month that state corporate law should have a greater effect on what topics shareholders may properly ask companies to put to a vote. And the SEC’s staff just announced it will weigh in only on questions that turn on state law—specifically, whether a proposal is a proper subject for shareholder action. On all other disputes, companies and shareholders will proceed without SEC staff views.

The objectives are clear: Reduce the costs of being a public company and stimulate capital formation by encouraging more companies to go or to remain public. But the implications run deeper. These developments will further energize competition among states seeking to provide the most attractive corporate law.

The shareholder proposal mechanism—though a small component of US securities regulation—sits at the center of debates about corporate purpose, board oversight, and investor voice. Those are fundamentally matters of state corporate law. Yet many state-based policymakers and practitioners have limited familiarity with how the federal process has worked in practice.

Reactions to the SEC announcements have surfaced two gaps.

First, expertise has been concentrated among a relatively small cadre of federal securities specialists at national law firms, not among state corporate bar leaders who may soon become the key decision-makers.

Second, there is little empirical insight into how corporate “customers”—public companies and their shareholders—regard the current rule or what reforms they would support.

In Delaware, researchers aleready have mobilized to help close these gaps. The principal effort is a large-scale survey sponsored by a diverse national coalition of companies and investors. It will map how the process functions, its benefits and costs, and where participants believe it falls short. Another project examines how state competition in corporate law, revived recently by Nevada and Texas, may intersect with increased state responsibility for shareholder proposal governance.

If states must answer the SEC’s invitation to play a larger role, they will confront difficult questions. Which proposals pertain to a corporation’s “business and affairs” and merit inclusion? Which stray into issues outside directors’ responsibilities, better suited for public debate than corporate ballots? And how should states define boundaries that preserve both shareholder voice and board oversight?

Clear approaches are conceivable. One approach would make the entire topic the subject of private ordering, so company bylaws or charters rule. Another would draw bright-line statutory boundaries, permitting all proposals on voting rights or board structure while excluding proposals on personal political views or similar matters. A middle range could be subject to case-by-case evaluation based on a proposal’s relationship to long-term shareholder value.

States could pursue these answers using legislation, agency guidance, or judicial doctrine—informing each with the SEC’s decades of precedent. This would set up a new dimension of state-level competition.

Delaware may leverage its established balance of director authority and shareholder rights, supported by the deep expertise in all branches of its government and the private sector. Texas might emphasize business attraction and stock exchange listings and draw sharper statutory limits accordingly. Nevada could focus on economic materiality metrics such as impacts on revenue, assets, or cash flows.

State competition has been constrained by a pervasive sense that a race to the bottom could provoke federal preemption of state corporation law. In the current setting, federal authorities are stoking additional competition. To succeed, states will need data—about history, current market dynamics, and the preferences of companies and investors—to chart the best course.

Among the many experiments now underway at the SEC, this one sits at the crossroads of corporate governance and state charter competition. And it offers states a pivotal opportunity to shape the future of shareholder participation in US corporations.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law, Bloomberg Tax, and Bloomberg Government, or its owners.

Author Information

Lawrence A. Cunningham is presiding director of the John L. Weinberg Center for Corporate Governance at University of Delaware and Henry St. George Tucker III Professor Emeritus at George Washington University Law School.

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