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Shareholders forging ahead with lawsuit over US SEC rule limiting ability to submit resolutions

27 July 2021 Amena Saiyid

A group of investors is not waiting for a US district court to decide whether a US Securities and Exchange Commission (SEC) rule limited their rights by making it difficult to raise climate risk issues through individual resolutions filed with public corporations.

The Interfaith Center for Corporate Responsibility (ICCR)-led coalition is moving ahead with preparing its members, which number at least 300, to comply with the change in rules for introducing resolutions during the 2022 proxy season, which Josh Zinner, the group's CEO said begins this summer ahead of the spring annual general meetings.

The ICCR-led coalition is not seeking a motion to stay the rule until its lawsuit over the SEC rule is resolved in court. "We have chosen to move ahead to seek a decision on the case as expeditiously as possible by moving ahead with a briefing schedule" for filing opening arguments and responses, Zinner told Net-Zero Business Daily 27 July.

A day earlier, the US District Court for the District of Columbia approved the schedule under which the coalition is scheduled to file its motion for summary judgment, or a judgment entered by the court without a trial, by 19 November. The SEC's response is due 10 December.

The ICCR, the nonprofit shareholder advocacy group As you Sow, and individual investor James McRitchie sued the SEC on 15 June for revising the shareholder proposal rule known as Rule 14a-8.

They have asked the court to vacate the rule, claiming the revisions, made in September 2020 under President Donald Trump's administration, "severely" impaired the ability of shareholders to file resolutions that would change how companies are governed.

The lawsuit was filed as climate change becomes an increasing focus of shareholder proposals with a majority of resolutions seeking greater transparency on climate-related actions and emissions disclosures. During the just-ended proxy voting season, eight of 34 votes were cast for climate or broader environment, social, and governance issues. These ranged from adding climate-savvy directors to ExxonMobil's board of directors to requiring the oil corporation to report on its GHG emissions.

"When investors buy shares in a company, they are entitled not only to receive a return on their investment, but also to vote on how the company is run," the groups claimed.

The bulk of the SEC rule changes dealing with "filing thresholds, re-submission thresholds, and representation" were not in effect in 2021, but will be in place for the 2022 proxy season, Zinner said.

According to the lawsuit, the prior rule required that a shareholder own only $2,000 of stock for a single year, but the new rule requires a shareholder to own as much as $25,000 of stock, depending on the number of years for which the shareholder has held the shares.

The revised rules also bar shareholders from aggregating their holdings together to meet this threshold, and also set a higher threshold for resubmitting a proposal the following year. They also prevent prevents shareholders from using a third party to file on their behalf.

"Due to the higher thresholds, this will mean that our members will not be able to file as many resolutions as would have been filed under the old rules, and we are obviously very concerned about this," Zinner said.

Unlike Zinner, As you Sow CEO Andrew Behar remains unfazed by the SEC rule changes; he said shareholders are becoming more aware of their power to hold corporations accountable.

"We see the direct impact of corporate policies and practices on our society and the environment, on the climate and on justice," Behar told Net-Zero Business Daily. "We expect shareholder power to grow regardless of new SEC rules that are designed to suppress our voices."

Perplexed by SEC action

At least, two legal scholars who specialize in securities law and regulation remain "perplexed" by the Trump SEC's rulemaking, given the interest in climate related concerns.

One is Cynthia Williams, a business of law professor emerita with York University's Osgoode Hall School of Law, and the other is Donna Nagy, acting executive associate dean for Indiana University's Maurer of School of Law.

Williams agreed with Zinner that the change in resubmitting resolutions will have a dampening effect on shareholders down the road, as it takes time for new developments to take effect.

Previously, support of at least 3% of the voting shareholders for the first submission was required for the resolution to be eligible for submitting again in the following three years. The SEC raised that eligibility threshold for submitting proposals for a first-time proposal to 5%. The SEC also raised the eligibility threshold for proposals submitted two and three times previously from 6% and 10% to 15% and 25% for the following three years.

Professionals stepping in

As far as the increased voting thresholds are concerned, "I don't think it is going to have a huge effect because institutional shareholders and hedge funds are increasingly beginning to see the power of shareholders," Williams said.

Fidelity International, which holds $787.1 billion in total client assets and is a separate company to Boston-based Fidelity Investments, said 26 July it will introduce new voting practices at general meetings for companies in which it holds shares, and will vote against boards that resist efforts to make climate change alignment binding.

"Individual investors clearly paved the way for these shareholder revolts, but now the professionals are stepping in," IHSMarkit Climate & Cleantech executive director Peter Gardett said. "Large asset managers are realigning their portfolios with climate risk in mind, and they expect company boards to be responsive to those efforts."

Discussing the rulemaking in a July 2021 paper on that appeared in the Texas Law Review, both Williams and Nagy cited SEC Commissioner Allison Herren Lee as noting that that the SEC finalized the regulation without providing any explanation for why it ignored the vast majority of comments the agency received in opposition. Lee voted against the rule, which passed the commission 3-2.

Willliams told Net-Zero Business Daily 27 July that the shareholder groups are accusing the SEC of violating the US Administrative Procedure Act (APA), which governs federal rulemaking proceedings.

"The APA requires the agency to give reasons for what it is doing and especially if it is going to ignore a vast majority of comments," Williams added.

SEC revisiting rule

In a 15 March speech, speaking in her capacity as acting chair of the agency, Lee said the SEC would revisit and clarify Rule 14a-8, which lists criteria for submitting and including votes on shareholder resolutions.

Since Lee's remarks, SEC Chairman Gary Gensler has not made any public statements about this particular rule change. However, the regulatory agenda for SEC, which was published in June, indicated a proposed rule is on the books for April 2022.

According to the agenda, the SEC's Division of Corporate Finance is "considering recommending that the Commission propose rule amendments regarding shareholder proposals under Rule 14a-8," but doesn't say whether it will undo the prior rule change.

Meanwhile Zinner remains confident that the court will vacate and remand what is a "highly flawed rule."

"We believe we have a very strong case, and we are hopeful that in the end we w will prevail," Zinner said.

Posted 27 July 2021 by Amena Saiyid, Senior Climate & Energy Research Analyst, IHS Markit

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