Dive Brief:
- A pair of activist investor groups, As You Sow and the Interfaith Center on Corporate Responsibility, are suing the Securities and Exchange Commission, challenging policy changes that will allow companies to more easily exclude shareholder proposals.
- The complaint was filed Thursday in the U.S. District Court of the District of Columbia, alleging that the agency’s changes to the no-action process violated the Administrative Procedure Act. The investor groups are represented by legal nonprofit Democracy Forward, which announced the lawsuit in a March 19 press release.
- The SEC announced in November that it would sit out the bulk of the no-action process this proxy season, broadly allowing companies to exclude shareholder proposals without its input in most cases. The SEC declined to comment on the lawsuit.
Dive Insight:
The SEC no-action process has typically allowed companies to seek the agency’s informal assurance that it would not recommend enforcement action if a company excluded a shareholder proposal.
Under the announced changes, the SEC’s Division of Corporation Finances said it would only provide staff interpretations of no-action requests that are based on whether the proposal is allowable under state laws.
The lawsuit from As You Sow and ICCR alleges that policy is contrary to law, with the complaint calling it “inconsistent with the burden of persuasion established by Rule 14a-8,” which governs the shareholder proposal process.
The complaint also alleges the policy is contrary to law because it “improperly abdicates” the agency’s role in the process and violates the rights of shareholder proponents to submit evidence regarding the legitimacy of a shareholder proposal.
“Through the policy, the SEC effectuated in the middle of the ongoing proxy season an about-face in the half-century-old Rule 14a-8 process, on which both companies and shareholders have relied,” the complaint says. “Although dressed as a staff statement, the policy is a legislative rule that alters proponents’ legal rights and staff’s obligations in the Rule 14a-8 process.”
The complaint also alleges the policy violates the Administrative Procedure Act by being “arbitrary and capricious” and because the SEC didn’t observe the proper procedure for such a policy change under the law.
The groups seek to have the policy declared unlawful and vacated and/or permanently enjoined, according to the complaint.
As You Sow President and Chief Counsel Daniel Fugere said in the release that, because shareholder proposals are generally non-binding, “the only real benefit of these changes appears to be shielding companies from having to consider hard issues.”
“Both companies and investors benefit from the give and take provided by the shareholder proposal process,” Fugere said. “Eroding shareholders’ right to bring issues of concern to a vote of shareholders weakens an important check on company action and reduces information to shareholders.”
At the time the changes were announced in November, the SEC cited agency resource and time constraints as the reason for policy changes this proxy season, following the conclusion of the longest government shutdown in U.S history.
