Washington, D.C. – A pair of investor representative groups dedicated to corporate responsibility and the rights of investors today filed a legal challenge to a new policy from the Securities and Exchange Commission’s (SEC) Division of Corporation Finance. The policy undermines a long-standing rule that governs shareholder proposals, which have been a linchpin for decades of productive engagement between companies and shareholders on matters related to long-term corporate value.
The Interfaith Center on Corporate Responsibility (ICCR) and As You Sow, represented by Democracy Forward, seek to stop implementation of the new policy, which gives companies an effective rubber-stamp from the SEC to stop investors from presenting and voting on proposals regarding issues directly relevant to a company’s long-term performance and risk profile.
The SEC’s revised policy allows companies to omit shareholder proposals by filing a simple letter and receiving a “No Objection” statement from the SEC, without benefit of any analysis by the SEC of the company’s claims or proponents’ response. Omitting a proposal from the company proxy prevents shareholders from making and voting on proposals that raise concerns about a company’s long-term performance and risk profile.
“The SEC’s actions in undermining the shareholder proposal process are a short-sighted departure from decades of precedent in which shareholder proposals, a critical tool in a private ordering process, have led to important improvements in corporate governance and corporate practices that benefit both companies and investors. This long-standing process has given generations of American investors greater voice and power, in turn helping build a stronger and more dynamic economy, and safeguarding the investments that millions of American families depend upon,” said ICCR CEO Josh Zinner.
“Both companies and investors benefit from the give and take provided by the shareholder proposal process,” said Danielle Fugere, President & Chief Counsel of shareholder representative As You Sow. “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. Since proposals are generally non-binding, the only real benefit of these changes appears to be shielding companies from having to consider hard issues that would be easier to sweep under the rug. This ultimately weakens the fundamentals of capitalism and investor confidence in the market.”
The SEC has long had an effective process, pursuant to Rule 14a-8, that generally requires companies to include shareholder proposals in a company’s proxy materials unless a company challenged the proposal. Under the prior process, SEC staff exercised its independent judgment by assessing the validity of a company’s claim that the proposal could be excluded. Proponents and companies were not formally bound by the SEC’s decision, but they almost universally respected them as conclusive. Under the new process, a company need not meet Rule 14a-8’s burden of proving that their omission of a shareholder proposal is justified. Now, the SEC accepts at face value a company’s “unqualified representation” and issues a letter stating that the SEC has “No Objection” if the company omits the resolution.
“The new SEC policy is an undemocratic hall pass to corporate mismanagement that sends a message to investors to ‘sit down and shut up’ about how the company they own is managed,” said Skye Perryman, President and CEO of Democracy Forward. “This policy is inconsistent with existing SEC rules, and was adopted without following the legally-required process to consider a policy change. We are honored to work with corporate responsibility advocates to challenge this new policy and to fight for the rights of shareholders to have a say in how their investments are managed.”
The case is ICCR et al. v. SEC et al. in the U.S. District Court for the District of Columbia. The legal team at Democracy Forward on this case includes Simon Brewer, Brian Netter, and Victoria Nugent.
Read the complaint here.
– # # # –
Democracy Forward Foundation is a national legal organization that advances democracy and social progress through litigation, policy, public education, and regulatory engagement. For more information, please visit www.democracyforward.org.
