Several investor groups, with backing from institutional investors, filed a complaint Tuesday in U.S. District Court challenging rule amendments adopted last year by the Securities and Exchange Commission that raised the requirements for investors that wish to submit a shareholder proposal.
The complaint alleges that the SEC's final rule was "arbitrary, capricious, and not in accordance with law." Moreover, the SEC exceeded its statutory authority, according to the complaint, which was filed in the U.S. District Court in Washington by the Interfaith Center on Corporate Responsibility, a coalition of more than 300 faith-based institutional investors representing more than $4 trillion in assets; As You Sow, a corporate engagement and shareholder advocacy group; and shareholder advocate James McRitchie.
The plaintiffs are seeking a judgment declaring the SEC's final rule unlawful under the Administrative Procedure Act and vacating that rule in its entirety.
In a 3-2 vote in September, with the commission's two Democrats dissenting, the SEC amended Exchange Act Rule 14a-8 by replacing the ownership threshold to submit a shareholder proposal, which required holding at least $2,000 or 1% of a company's stock for at least one year, with three alternative thresholds: $2,000 of the company's stock for at least three years, $15,000 for two years or $25,000 for one year, among other changes.
The SEC also raised the vote thresholds a proposal must get to be eligible for resubmission. Under the amendment, proposals must get at least 5% support in the first year, 15% in the second and 25% in the third in order to be resubmitted within a five-year span, up from the previous thresholds of 3%, 6% and 10%, respectively.
The amendments, which will apply to any proposal submitted for an annual or special meeting held on or after Jan. 1, 2022, were approved under the Trump administration and welcomed by the business community. With a new administration now in charge, the SEC in its most recent regulatory agenda, which was unveiled June 11, noted that the division of corporation finance is "considering recommending" that the SEC "propose rule amendments regarding shareholder proposals under Rule 14a-8."
A representative from the SEC could not immediately be reached to provide further comment Tuesday.
Amy Borrus, executive director of the Council of Institutional Investors, said in a news release that the rule amendments adopted last year were an attempt to weaken the voice of investors by making the filing process more complicated and costlier. "For decades, the shareholder proposal process has been a well-functioning pillar of corporate governance in U.S. capital markets," Ms. Borrus said. "It is a cost-effective way for shareholders to communicate with each other and for shareholders as a group to communicate with management through votes on proposals. Not surprisingly, CEOs and corporate directors do not like being second-guessed by shareholders on environmental, social and governance matters."
Scott M. Stringer, New York City comptroller and fiduciary of the five pension funds within the $253.4 billion New York City Retirement Systems, said in the same news release that he strongly supports "the plaintiffs and investors taking this important step to overturn the SEC rule change, protect shareholders' ability to hold companies accountable, and create meaningful, systemic change in corporate America."
In March, Democrats in the House and Senate introduced a joint resolution to undo the SEC rule amendments under the Congressional Review Act. To date, no action on the resolutions have been taken. Invoking the CRA requires a majority vote in both the House and the Senate.
