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Introduction
As Wall Street’s primary regulator, the Securities and Exchange Commission (SEC) plays a critical role in mediating the relationship between public companies and shareholders. At annual shareholder meetings, company shareholders propose and vote on high-level initiatives for the company. If approved, shareholder proposals can greatly influence corporate strategies, annual revenue, public perception, employee retention, and overall company performance. In some situations, corporations have asked the SEC for advisory guidance on these proposals before proceeding. The SEC’s guidance in these situations is non-binding. However, recent debates question whether the SEC’s advisory role oversteps its authority.
What are proxy proposals?
SEC’s oversight is particularly evident in the proxy proposal process, where the SEC sets the rules for how shareholders can formally raise certain concerns through company proxy statements. A proxy statement is a document, put forth by a publicly traded company to its shareholders, which provides essential information and is mandated by the SEC. The proxy statement must be circulated prior to shareholder meetings and ensures that shareholders remain informed by disclosing its voting procedures, proposed nominees for its board of directors, information regarding directors’ compensation, etc. Shareholders have the right to submit a proxy proposal to be included in the company’s proxy statement. These proposals consist of climate impact disclosures, government lobbying, political contribution disclosures, and environmental, social and governance (ESG) disclosures. Given a proposal’s impact, shareholders must vote on it under SEC regulation. The SEC has the authority to sue corporations that block votes without an adequate reason. As a result, many companies request the SEC’s advice before finalizing their decisions.
National Center for Public Policy Research v. SEC
The National Center for Public Policy Research (Center) appealed directly to the Court of Appeals for the Fifth Circuit, alleging that the Commission engaged in viewpoint discrimination and failed to maintain neutrality. The Center wanted to include a proxy statement in the Kroger Company’s 2023 proxy materials because the Center was concerned about Kroger’s “leftwing actions.” To prevent Kroger from discriminating against conservative viewpoints, the Center requested Kroger to issue a public report about the potential risks associated with omitting viewpoints and ideology from its equal employment opportunity policy. Kroger declined to include this proposal. The Commission staff then responded with a no-action letter, agreeing with Kroger that the company had some basis for excluding the proposal because it did not relate to ordinary business matters. The Center asked Commission staff to reconsider its decision but was unsuccessful, twice. Surprisingly, after the Center filed its appeal, Kroger filed its 2023 shareholder proxy materials and included the Center’s proposal. When put to a vote at the shareholder meeting, the proposal failed, only receiving less than 2% of votes.
The Court of Appeals granted the SEC’s motion to dismiss for mootness and lack of subject matter jurisdiction. The court explained that Kroger’s decision to include the Center’s proposal in its proxy materials eliminated any live controversy, rendering the appeal moot. The Center attempted to argue for an exception but failed to establish a reasonable expectation that it would be subjected to the same action again. The court found that the Center’s arguments were purely theoretical, as there is no guarantee that Kroger or other companies would respond the same way after the Center submits the same proposal for future meetings. Second, the Court of Appeals lacked jurisdiction because the no-action letter was simply guidance from Commission staff, and staff statements do not constitute an order or an official expression of the Commission’s views. The court recognizes that courts and companies might view no-action letters as persuasive, but “persuasive does not equate to precedential.” The letter does not bind Kroger, shareholder proponents, staff, or the Commission, and without an order or agency action, the court dismisses this appeal for lack of jurisdiction.
So, what does this all mean and why is it important?
This case is the first time a court has commented on the SEC’s authority to issue recommendation letters for proxy proposals. The SEC has been issuing recommendation letters on proxy proposals for years. But, as tensions between adversarial investors have risen, so has the spotlight on the SEC’s practices—especially those that are associated with being politically left or right-leaning. The National Center for Public Policy Research v. SEC illustrates that the corporation has differing opinions on ESG investments, given that it is associated with the democratic party. Opponents of SEC’s actions, such as Judge Edith Jones, assert that these letters are an arbitrary and capricious abuse of the agency’s authority. Even though the guidance is non-binding, the SEC’s position imposes an implied threat of regulatory action exacted on companies inconsistently.
Conversely, given that the SEC is the most qualified expert on SEC compliance, its guidance could very well be embraced by corporations with welcome arms. Moreover, the inconsistent critiques are also easily countered by the rationale that companies only seek guidance when necessary. There are likely just as many corporations that do not find it necessary to seek the SEC’s guidance with the proposals they receive, or they may not receive out-of-the-ordinary proposals at all. The real question is whether the SEC is dancing the careful line between guidance and implied orders. But the Fifth Circuit has answered this question. The court stated clearly that the SEC’s guidance did not bind Kroger or qualify as official agency action. Despite opponents’ concerns over Administrative Procedure Act (APA) violations, they seem left without a viable case to argue for now.
However, the timing of this decision, which was a mere week after the most recent election, could indicate similar lawsuits the SEC may face going forward. President-Elect Trump has been very public on his plans to reduce SEC enforcement and eliminate ESG actions by the SEC. This dispute may soon be one of many as the pendulum swings in response to SEC Chair Gary Gensler’s push to enforce misleading ESG and greenwashing. As regulatory matters have become more politicalized, there is a higher chance that SEC proxy guidance on ESG proposals could be litigated more frequently. With the influx of cases and the Fifth Circuit officially commenting on the matter, the issue has the potential to domino into a circuit split.
*The views expressed in this article do not represent the views of Santa Clara University.
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