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Activist Investors Curbed by Trump Come Up Short in New SEC Plan

July 18, 2022, 9:00 AM

Activists are looking to the courts to kill Trump-era rules restricting investors’ environmental, social and governance campaigns, after Biden’s SEC took modest steps to ease standards for submitting shareholder proposals.

The Securities and Exchange Commission announced plans July 13 to restrict some ways companies keep investor requests off proxy ballots for their annual meetings. But it didn’t relax related 2020 shareholder proposal submission standards that triggered litigation last year from As You Sow and other investor advocates.

The advocates have no intention of dropping their lawsuit, said Danielle Fugere, As You Sow’s president and chief counsel. The SEC’s new plans were insufficient, she said.

“Our lawsuit continues because the SEC did not address what we think are significant problems with the new rule,” Fugere said.

The Trump-era SEC under former Chairman Jay Clayton amended Rule 14a-8, which governs shareholder proposals. The agency raised the amount of stock shareholders need to file proposals and increased the level of shareholder support required to resubmit plans investors voted down previously, among other things. The 2020 changes created new barriers for investors seeking corporate action on ESG issues like climate change and diversity.

Last week’s plans targeted another part of 14a-8 that allows companies to exclude proposals that resemble other investor requests at annual meetings or that press companies to take actions that already are mostly done. The SEC, however, didn’t address a stock ownership threshold to bring shareholder proposals—currently set at $25,000 for new investors—and other provisions that activists want overturned.

SEC Chair Gary Gensler told reporters last week the SEC didn’t intend to take on the 2020 standards as part of its plans to help investors bringing proposals.

“We’ll see what the public thinks about these,” Gensler said of the July 13 plans. “We’ll see what the public says overall on 14a-8, as well.”

Investor Case

The courts are preparing to have their say as well.

Judge Reggie Walton of the US District Court for the District of Columbia said he plans to rule on whether to overturn the 2020 regulations by Aug. 25. The case, Interfaith Center on Corporate Responsibility v. SEC, alleges that the Trump-era SEC failed to justify the rules it adopted nor adequately considered how investor proposals can increase awareness of threats to a company.

The SEC under Gensler has disputed those claims, saying in a court filing that the plaintiffs can’t “find a valid legal hook on which to tether their disagreements with the Commission’s policy choices.”

The 2020 standards increased the stock ownership threshold to submit proposals from $2,000 to $25,000, if the investors only have had their shares for a year. An investor with $2,000 in company stock now must wait three years to file a proposal. The regulations also bumped up the shareholder support required to resubmit a failed proposal from 3% to 5%, if the investor brings it again within five years of shareholders voting it down, among other increases to submission thresholds.

The Trump-era requirements “are too high to allow important shareholder participation,” Fugere said.

In an amicus brief in support of the SEC, the Chamber of Commerce said that setting aside the 2020 changes “will devolve back to a free-for-all that a small minority of special interests use to advance their idiosyncratic social and policy agendas at the expense of Main Street investors.”

The SEC’s decision to avoid sweeping changes to shareholder proposal rules might not be a coincidence, said Sanford Lewis, director of the Shareholder Rights Group, which represents several ESG investors.

The agency is unlikely to propose a rollback of the 2020 standards when the lawsuit is pending, Lewis said. The judge has the power to overturn the rules without the need for SEC rulemaking, he said.

If the judge doesn’t toss the regulations, investor advocates will push the SEC for rules that would, Lewis said.

“We’re anxiously awaiting the outcome of the litigation,” he said.

‘Zombie Proposals’

The new plans would give companies less freedom to use a power that lets them exclude shareholder proposals that are already “substantially implemented.” Companies only could invoke the authority if they already have executed the “essential elements” of the new shareholder requests, according to the SEC’s plans.

The plans also would curtail a company’s ability to toss a shareholder proposal that “substantially duplicates” another one at an annual meeting. A company only would have the capability if the proposal “addresses the same subject matter and seeks the same objective by the same means,” under the SEC’s plans.

As a result, fewer shareholder proposals could be thrown out, and companies might be up against more such bids in the future than they would have under the 2020 amendment.

Thomas Quaadman, executive vice president for the US Chamber’s Center for Capital Markets Competitiveness, said that “zombie proposals"—repeatedly-submitted shareholder proposals that don’t gain majority support—are costing both companies and investors money, as well as detracting from important issues “that might have more of an impact” on a business.

The SEC’s plans from last week could further overburden the system and give “outsize influence” to a small set of investors, he said.

“This is the wrong rule at the wrong time in our view,” Quaadman said.

Elizabeth Ising, a partner at Gibson Dunn who advises companies on shareholder activism, said the plans from July 13 “really seem to relax” the balance that was achieved with the 2020 standards. The plans and the 2020 standards both were put out after party-line votes.

“This is really a reflection of the politicization of the SEC,” Ising said. It used to be that the SEC “would act by consensus,” she said, “but that’s not the case anymore.”

The SEC under Gensler is now moving more incrementally as it tackles rulemaking on shareholder proposals, focusing on battles the agency may have an easier time winning, said Jena Martin, a West Virginia University College of Law professor who studies securities regulation and human rights.

The commission faces a lot of pushback whenever it makes significant changes to how shareholders engage with companies, said Martin, a former SEC lawyer. Redoing the 2020 standards would increase small investors’ involvement, which companies would like to avoid, she said.

“If they had tried to engage on that level to get retail investors in particular more involved, they would’ve faced a firestorm,” Martin said.

To contact the reporters on this story: Andrew Ramonas in Washington at aramonas@bloomberglaw.com; Clara Hudson in Washington at chudson@bloombergindustry.com

To contact the editor responsible for this story: Michael Ferullo at mferullo@bloomberglaw.com, Melissa B. Robinson at mrobinson@bloomberglaw.com