This year proxy and shareholder proposal rules and practice are evolving to create greater accountability and efficiency. Simultaneously, so called anti-ESG efforts are pressing a more disruptive policy agenda that could eviscerate the rights of share owners to file and vote on environmental and social proposals. These include:

Evolving Rules and Practice

• In the current proxy season, SEC staff determinations continue to refine the implementation of Rule 14a-8 to address new issues, while preventing shareholders from micromanaging or addressing ordinary business. As an example, the staff recently declined to concur with ordinary business exclusion of shareholder proposals addressing artificial intelligence in the business operations of Disney and Apple, including disclosure of any ethical guidelines that the companies have adopted regarding the use of AI. In contrast, the staff has allowed exclusion of a number of proposals this season based on the micromanagement or ordinary business exclusions. Examples include proposals about mining near the Okefenokee swamp and sector-specific analysis of GHG emissions.

• Because the SEC’s newly promulgated climate rules fail to require companies to consistently report scope three emissions, shareholder proposals now have an important role in asking for action that fills this regulatory gap.

• The process of voting on proposals is also undergoing significant disruptive change. Examples include the increased opportunities for individual beneficiaries to vote their shares held by asset managers and the emergence of an exchange for the sale of proxy voting rights.

• Beginning with an August 31, 2024, deadline, fund reporting of proxy votes (Form N-PX) will be better organized for accountability, with categorization of votes according to one or more of 14 categories, ranging from “Director elections” and “Corporate governance” to “Environment or climate” and “Diversity, equity, and inclusion,” covering votes cast from July 1, 2023 – June 30, 2024. This is a valuable change to make fund accountability more efficient; one can reasonably wonder whether at some time the commission will encourage or require issuers to organize proxies around the same topical categories.

• A legal challenge to the SEC’s 2020 rulemaking remains pending in the federal district court of Washington, DC; proposed amendments on substantial implementation, resubmission and duplication remain pending before the Commission.

• A federal district court in February 2024 struck down 2019 SEC guidance that had determined that proxy advice for a fee constituted “proxy solicitation”. The court held that the “SEC acted contrary to law and in excess of statutory authority when it amended the proxy rules’ definition of ‘solicit’ and ‘solicitation’ to include proxy voting advice for a fee.”

Anti-ESG Assaults

• A steady stream of anti-ESG assaults has targeted the 2021 SEC Staff Legal Bulletin 14 L (SLB 14L), asserting that the SEC bulletin opened the floodgates to environmental and social proposals, bogging companies down in controversy and politics. In fact, SLB 14L represented a reset and realignment of the staff interpretations, revoking changes that amounted to amendments to the rule without proper Administrative Procedure Act notice and comment. Despite frequently repeated assertions that proposals no longer need be relevant to a company are inaccurate, the SEC rule allowing exclusion of irrelevant proposals remains intact.

• Federal proposed legislation pose a fundamental risk to the right of shareholders to file proposals on environmental and social issues. This would pose an existential risk to most of the proposals described in this edition of Proxy Preview

• For the first time, Exxon bypassed the SEC no action process to sue two small shareholders who filed a proposal asking the company to accelerate its efforts to reduce greenhouse gas emissions

• Even the purpose of the shareholder proposal process is being debated, with some critics asserting that the only proper role of a proposal is advancing company profitability, while others point to the long-standing role of proposals in addressing corporate impacts on communities, employees, the environment and the economy—issues of vital interest to diversified investors, including those taking the universal ownership perspective.

• The law firm Wilson Sonsini Goodrich & Rosati recently analyzed antitrust allegations and concluded that “despite threats and incendiary rhetoric, ESG shareholder engagement poses negligible anti-trust risk.” (See memo and webinar.)

• In addition, the SEC promulgated recent amendments modernizing rules and guidelines regarding beneficial ownership, and clarifying (at p. 133) that most forms of coordination of proponents for engagement or development of shareholder proposals are permissible and do not trigger reporting requirements.

Sanford Lewis
Director and General Counsel, Shareholder Rights Group