SEC wins dismissal of lawsuit challenging tighter rules on shareholder proposals

A U.S. federal judge dismissed a lawsuit challenging the SEC's 2020 rule changes that increased requirements for shareholders to file proposals at company annual meetings, including those related to ESG issues. The judge rejected arguments that the SEC acted arbitrarily, stating the agency properly determined the changes would promote efficiency, competition, and capital formation. Plaintiffs, including the Interfaith Center on Corporate Responsibility and As You Sow, argued the changes hurt shareholders and companies by restricting the ability to raise important ESG proposals.

Analysis

A U.S. District Court has dismissed a lawsuit challenging the Securities and Exchange Commission's (SEC) November 2020 rule changes, thereby upholding regulations that make it more difficult for shareholders to file proposals at corporate annual meetings, including those concerning environmental, social, and governance (ESG) issues. Judge Reggie Walton affirmed that the SEC did not act arbitrarily and fulfilled its obligation to consider whether the amendments would "promote efficiency, competition, and capital formation." These rules, adopted under the Trump administration via a 3-2 party-line vote and subsequently defended by the SEC under the Biden administration, increased the stock ownership thresholds (both amount and duration) required for shareholders to submit proposals and introduced stricter criteria for resubmitting proposals previously rejected by shareholders. Plaintiffs, including the Interfaith Center on Corporate Responsibility and As You Sow, contended that the SEC failed to quantify the benefits of ESG proposals and overlooked a potential loss of "billions of dollars in long-term shareholder value" due to these restrictions. Despite the ruling, which the U.S. Chamber of Commerce supported, the plaintiffs have stated their intention to continue engaging with corporations on their environmental and social impacts, arguing the rule changes are detrimental to both shareholders and companies. The SEC maintained the changes aim to ensure proposals reflect broader shareholder interests and that resubmitted proposals achieve sufficient support to warrant company action.

Key Decisions for Investors

• Investors focusing on ESG advocacy through shareholder proposals should recognize the sustained higher thresholds for submission, potentially necessitating larger, longer-term investments or alternative engagement strategies with corporate management.
• Institutional investors should evaluate how these affirmed SEC rules affect their stewardship activities and the relative effectiveness of direct proposal mechanisms compared to other forms of corporate engagement on governance and social issues.
• All investors should monitor whether the increased difficulty in filing shareholder proposals impacts corporate responsiveness to ESG concerns and governance reforms, which plaintiffs argued could affect long-term shareholder value.