By John M. Jascob, J.D., LL.M.
The Interfaith Center on Corporate Responsibility, As You Sow, and shareholder activist James McRitchie have filed an action under the Administrative Procedure Act seeking to vacate the SEC’s recent amendments to Exchange Act Rule 14a-8. In a complaint filed in federal district court in Washington, D.C., the plaintiffs argue that the amendments to the rule, which allows shareholders to submit proposals for inclusion in a company’s proxy statement, will severely impair Main Street investors’ ability to raise concerns with corporate management by, among other things, dramatically increasing the amount of stock a shareholder must own to submit a proposal. Despite the fact that shareholder proposals are an important engine of corporate democracy, the SEC failed to meet its legal obligation to provide an economic analysis of the proposed rule’s costs and benefits, while offering purported justifications for the amendments that were "flawed at every turn," the plaintiffs contend (Interfaith Center on Corporate Responsibility v. SEC, June 15, 2021).
Concealed data. For example, the plaintiffs argue that the Commission made no meaningful effort to analyze the number of shareholder proposals that would be excluded by its new ownership requirements. Although the SEC claimed it could not properly quantify that impact because it lacked data on how long shareholders typically held their shares, the plaintiffs assert that the Commission did have that data because Broadridge Financial Solutions, the firm that distributes the majority of investor proxy materials, had submitted anonymized shareholder data for tens of millions of investor accounts that enabled the SEC to estimate those holding periods. According to the plaintiffs, the SEC concealed that data from the public, belatedly disclosed it only after the comment period ended, and then arbitrarily refused to incorporate the data based on "minor quibbles" that were "both unfounded and inadequate" to support the agency’s decision.
Deficient analysis. The complaint alleges that the SEC’s cost-benefit analysis was also deficient because the Commission arbitrarily refused to quantify the benefits that proposals achieve by promoting greater awareness and responsiveness to material threats to a company. This failure left the SEC unable to weigh those benefits against the cost savings the new rule would supposedly achieve, a problem which the Commission then compounded by relying upon unreliable data to determine those cost savings with no serious scrutiny, the plaintiffs assert.
Finally, the plaintiffs argue that the SEC imposed arbitrary new restrictions on ownership aggregation and the use of representatives to submit proposals. While justifying those amendments largely on the basis that they would reduce the number of shareholder proposals, the SEC offered no rational justification for singling out those particular proposals, the plaintiffs contend. "As with much of its rule, the Commission seemingly pursued a policy of reducing shareholder proposals by any means necessary," the complaint states.
In the plaintiffs’ view, new Rule 14a-8 "guts the shareholder proposal process in exchange for minuscule and largely hypothetical cost savings." Accordingly, the plaintiffs have asked the court to declare the SEC’s final rule unlawful under the Administrative Procedure Act and vacate that rule in its entirety.
The case is No. 21-cv-01620.