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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 and Energy Research Analyst