SEC Chair Paul Atkins Continues His Focus on Reforming SEC Rule 14a-8 (The Shareholder Proposal Rule): Part II

The case for repeal or meaningful reform of the shareholder proposal rule

Speaking at the University of Delaware, SEC Chairman Paul Atkins criticized the “politicization of shareholder meetings,” specifically taking aim at shareholder proposals driven by environmental, social, and governance (ESG) concerns:

In the past few proxy seasons, perhaps nothing has epitomized the politicization of shareholder meetings more than shareholder proposals focused on environmental and social issues. These proposals, which reflect views from both sides of the political aisle, generally call for actions that are not binding on the company—referred to as “precatory proposals”—and frequently involve issues not material to the company’s business. When voted on at meetings, they almost always receive even lower support than shareholder proposals do generally. Nonetheless, these proposals consume a significant amount of management’s time and impose costs on the company.

Chairman Atkins went on to suggest that the problem could be addressed through state law.

If a proposal is not permissible under state law—that is, if it is not a “proper subject” for action by shareholders—Rule 14a-8 permits a company to exclude the proposal from its proxy statement. …

State law governs whether a proposal is a “proper subject.” …

… if there is no fundamental right under Delaware law for a company’s shareholders to vote on precatory proposals—and the company has not created that right through its governing documents—then one could make an argument that a precatory shareholder proposal submitted to a Delaware company is excludable under paragraph (i)(1) of Rule 14a-8. If a company makes this argument and seeks the SEC staff’s views, and the company obtains an opinion of counsel that the proposal is not a “proper subject” for shareholder action under Delaware law, this argument should prevail, at least for that company. I have high confidence that the SEC staff will honor this position.

But Chairman Atkins went on to state that:

While the interplay between paragraph (i)(1) and state corporate law is interesting, I believe a fundamental reassessment of Rule 14a-8 is in order. To that end, Shareholder Proposal Modernization is on the Commission’s policy agenda ….

In a prior post, I suggested that modernization should be embedded in the rule rather than through staff legal bulletins, so that it would be less likely to be reversed by future SEC chairs.

SEC Chair Paul Atkins Continues His Focus on Reforming SEC Rule 14a-8 (the Shareholder Proposal Rule): Part I

In this post, I turn to the substantive arguments for substantially modifying Rule 14a-8.