Harvard Law School Corporate Governance Forum: SEC Resets Shareholder Proposal Process

 Media Advisory 

December 23, 2021

SEC Policy Change Supports ESG Shareholder Proposals

On November 3, 2021,  the Securities and Exchange Commission issued a Staff Legal Bulletin regarding shareholder proposals.  The change streamlined the process by which companies can ask the SEC to issue an opinion as to whether a proposal is eligible for exclusion under its rules.

According to a new analysis  by Sanford Lewis, Director of the Shareholder Rights Group published today in the Harvard Law School Corporate Governance Forum,   the new bulletin has renovated the program to better enable shareholders to write clearly articulated ESG requests in their proposals.   “The new  Staff Legal Bulletin is a laudable move by the SEC that will reduce costs and uncertainties for shareholders who file proposals, as well as for the companies who receive them,” said Lewis. 

The potential for a company to try to exclude a shareholder proposal is typically determined through written company requests to the SEC for a “no action letter.” In recent years, that process became more complicated as staff added new interpretations that were inconsistent with the existing rule, according to the article.

The principal effect of the bulletin is allowing investors to write their proposals more clearly, in order to describe what they would like the company to do.   The bulletin restored the ability of shareholders to file proposals on issues like asking a company to set  greenhouse gas reduction targets aligned with global goals, or asking a company like J.P. Morgan Chase to evaluate the effect it is having on the broader economy by underwriting  multiclass stock companies.

 A number of corporate  lawyers and law firms have made outsized claims that the bulletin will change the purpose of the corporation or allow inappropriate proposals to appear on corporate proxies. But according to the article, these concerns are exaggerated and the  new bulletin is better aligned with  the shareholder proposal rule written by the Commission.  The rule is intended to allow investors to weigh in on significant social issues that may be important to their companies.   The growing support of shareholders for improved ESG disclosure and performance  demonstrates that  the shareholder proposal process  is a critical channel for investor intelligence and guidance for companies.

 In addition to issuing the new bulletin, on December 13, 2021 the Staff announced that it would go back to the prior practice of issuing a written letter describing the rationale for each no action decision. This change will also benefit shareholders and companies by providing additional clarity on the rationale used by staff, according to the Shareholder Rights Group.

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Shareholder Rights Group Hails New SEC Staff Legal Bulletin: Important Relief for Investor Rights

November 3, 2021

Washington, DC

Today the Securities and Exchange Commission issued a Staff Legal Bulletin that will reduce costs and uncertainties associated with filing of shareholder proposals, allowing proponents of proposals that address important environmental, social and governance issues to file proposals under a clear set of rules as established by the Commission.

During the last four years, through informal staff rulings and Staff legal bulletins 14 I, J and K the interpretive guidance from the Staff had grown increasingly burdensome, laying down numerous problematic  new interpretive hurdles to successfully filing proposals. Director of the Shareholder Rights Group, Sanford Lewis noted that the Staff interpretations over the last four years increasingly deviated from the rules as articulated by the Commission.

For example, prior Staff interpretations expanded the concept of micromanagement to effectively preclude advisory proposals asking a company to adopt a particular strategy, such as establishing  greenhouse gas reduction targets aligned with net zero or the Paris Agreement.^⁠1  The new Staff Legal Bulletin 14 L restores the prior position expounded by the Commission which is based on whether the proposal is overly  granular in its requests for action.  In particular, the new Bulletin noted  the climate change proposals that were excluded under the prior interpretation.

The new Staff interpretation  swept away complicated rules about determining whether a proposal is significant to a company,  and replaced them with  requirements under the ordinary business rule and relevance rules that look to whether the proposal addresses an issue of significant societal impact.  If a proposal addresses such an impact, it likely transcends ordinary business and is relevant to the company as “otherwise significantly related to the company’s business.” 

In sweeping away the Staff legal bulletins of recent years, the new bulletin also eliminated the need for companies to submit board opinions to support an ordinary business or relevance challenge, and eliminated  additional tests regarding whether a proposal is “significant to a company.”

We congratulate the Commission and staff for the new bulletin which will empower shareholders to pursue ESG proposals at their companies. ESG issues affect long-term value as well as posing externalities that may otherwise affect portfolio values.   The new  Staff Legal Bulletin is a laudable move by the SEC that should reduce costs and uncertainties for shareholder proponents as well as companies.

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¹ The climate proposals that were allowed to be excluded in the prior administration involved advisory proposals asking a company to develop greenhouse gas targets aligned with particular external policy or scientifically designated goals, e.g. net zero by or alignment with the Paris agreement temperature goals.^⁠ e.g., PayPal Holdings Inc. (March 6, 2018), Deere & Company (December 27, 2017), Apple Inc. (December 21, 2017), Verizon Communications Inc. (March 6, 2018), Apple Inc. (December 5, 2016), Amazon.com, Inc. (March 6, 2018).  The staff decisions asserted that the proposals were "probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment."    

Shareholder Rights Group Letter to Acting Director of Corporation Finance John Coates

From Shareholder Rights Group letter to  John Coates, Acting Director, Securities and Exchange Commission Division of Corporation Finance  (February 4, 2021):  

The last four years saw the Corporation Finance leadership undertake significant doctrinal experimentation in the Rule 14a-8 program, implemented through a series of Staff Legal Bulletins and no-action rulings. We acknowledge the dutiful and diligent work of the Staff in developing and implementing regulatory innovations; yet in the wake of this prolific experimentation, we strongly recommend that the Division now take careful stock of the various experiments and reverse problematic initiatives.

 

Among these novel doctrinal and procedural devices were: (a) a new definition of 'micromanagement', (b) a new approach to 'substantial implementation', (c) a request for opinions from boards of directors, (d) a decision to not issue written rulings on each no-action request, (e) a new approach to 'relevance', and (f) a new way to exclude proposals based on the concept of a 'delta' between the proposal and prior company actions.

We questioned the viability of these so-called innovations at the time, and now have had enough time to work under them to be able to conclusively state that they interfere with the ability of shareholders to engage in active stewardship through the shareholder proposal process.

Read the Letter