There has been a lot of speculation about the extent to which Congress would take advantage of the Congressional Review Act to dispense with some of the “midnight regulations” adopted during the prior administration. (See this PubCo post.) We may finally be getting some insight into that question.  Senator Sherrod Brown has now introduced a joint resolution providing for congressional disapproval of the SEC’s new(ish) shareholder proposal amendments, which were the subject of strong dissents from the Democratic SEC Commissioners when they were adopted in September 2020. The resolution simply provides that Congress disapproves the rule and, as a result, the rule will have no force or effect. As reported by Bloomberg, Brown stated that “[b]y raising eligibility and resubmission thresholds for shareholder proposals, the rules take away an important tool to push for better corporate governance, increase transparency, and address the gender pay gap….Congress must repeal the rule, and we need to find ways to increase shareholder participation and to make executives more accountable.” As reported by Reuters, the National Association of Manufacturers described the resolution as “heavy-handed” and stated that it “does not believe the CRA is the appropriate mechanism for review of the SEC’s rule to modernize the proxy process […] and looks forward to engaging with the SEC to defend the vital reforms included within it.” Will the resolution win the necessary support? 

Ordinarily, reversing a final regulation that has been published in the Federal Register requires compliance with the lengthy notice-and-comment process under the Administrative Procedure Act. The CRA, however, allows both houses of Congress to nullify a recently adopted rule by passing a joint resolution that is signed by the president.  The CRA is applicable to rules (and even some  guidance) that were finalized by the executive branch and sent to Congress in the previous 60 “legislative days,” calculated in this instance, after application of a complex reset mechanism, as August 21, 2020; that is, regulations published in the Federal Register and sent to Congress after August 21 are subject to nullification under the CRA.  One consideration in employing the CRA is that, once a rule has been disapproved under the CRA, the agency may not issue a new rule in “substantially the same form” without subsequent statutory authorization. As we learned in connection with the SEC’s recently adopted new rules for disclosure of payments by resource extraction issuers, where the SEC acknowledged its struggle with the limitation (see this PubCo post), the statute does not define “substantially the same form,” and there is no case law or guidance as to the meaning of that term.  What’s more, there is apparently some question as to who would make the determination as to whether a new rule is “substantially the same.”

You might remember that the first piece of legislation signed into law by the previous administration in 2017 was, according to the Washington Post, a bill that relied on the CRA to dispense with the resource extraction payment disclosure rules. (See this PubCo post.) According to the Congressional Research Service, before the preceding administration took up the cudgel in 2017, “[o]f the approximately 72,000 final rules that [had] been submitted to Congress since the [CRA] was enacted in 1996, the CRA [had] been used to disapprove one rule: the Occupational Safety and Health Administration’s November 2000 final rule on ergonomics, which was overturned using the CRA in March 2001.” That may be because the stars are rarely in proper alignment: generally, the CRS indicated, for successful use, there will have been a turnover in party control of the White House and both houses of Congress will be majority–controlled by the same party as the President. That was the case in 2017, and, as of January 9, 2020, the CRA had been used to overturn a total of 17 rules, according to the CRS.  Well, the stars are in proper alignment now.

The highly controversial shareholder proposal amendments revised the requirements for submission of shareholder proposals in Rule 14a-8 by modifying the eligibility criteria for submission of proposals, as well as the resubmission thresholds; providing that a person may submit only one proposal per meeting, whether as a shareholder or acting as a representative; prohibiting aggregation of holdings for purposes of satisfying the ownership thresholds; facilitating engagement with the proponent; and updating other procedural requirements. (See this PubCo post for a more detailed summary of the amendments.)  The rulemaking generated an energetic—some might say heated—discussion among the Commissioners in the course of the long meeting held to consider its adoption, as well as substantial pushback through the public comment process, discussed in more detail in this PubCo post and this PubCo post.  

Prior to adoption of the amendments, various corporate groups had long pushed the SEC to raise the bar on shareholder proposals. For example, in 2014, the Chamber of Commerce, along with other corporate groups, submitted a rulemaking petition requesting the SEC to raise the resubmission thresholds, citing a “growing crescendo of respected voices…attesting to the unacceptable negative consequences for investors of the overwhelmingly verbose and often senseless assault on the ability of shareholders and portfolio managers to focus on how to manage their securities investments wisely, as well as the diversion of serious management focus away from the best interests of shareholders.”  

Among the Commissioners, the proposal was contentious from the get-go. To the Commissioners voting in support, in light of significant changes in communications and the mode of retail investing over time, the proposal reflected an appropriate and necessary rebalancing of the costs and interests of shareholder proponents as against the subject companies and the other shareholders (who must share in the costs). For example, Commissioner Elad Roisman maintained that the “thresholds in Rule 14a-8 were always intended to strike a balance.  On the one hand the rule offers a powerful tool for a shareholder to bring attention to his or her particular proposal.  But, on the other hand, each proposal comes at a cost, since other shareholders bear the expense associated with including a proposal in a company’s proxy statement and they must devote time and attention to considering each proposal.”

To the opponents, the changes restricted yet another mechanism for shareholder oversight of management, particularly affecting smaller holders and proposals related to ESG issues, with little cost savings for most companies. For example, current Acting SEC Chair Allison Lee, who dissented, viewed the rulemaking as the “capstone in a series of policies that will dial back shareholder oversight of management at the companies they own,” putting “a thumb on the scale for management in the balance of power between companies and their owners.” Although the changes purported to be looking after the interests of shareholders, she remarked, the weight of comment letters on the proposals made clear that shareholders “strongly oppose” these changes. In her view, the rules were not balanced, “but rather almost universally reject the comments and data submitted by shareholders, failing in the process to reckon with very real costs of reducing shareholder oversight.”  First, she contended that the “changes will be most keenly felt in connection with ESG issues, which comprise the main subject matter of shareholder proposals, at a time when such proposals are garnering increasing levels of support.” Second, Lee argued that the amendments would have the most impact on “individual shareholders with smaller holdings who will be shut out of the shareholder proposal process to a startling degree by today’s amendments.” The change to the eligibility threshold—”an increase of 12-and-a-half times in the required investment amount for a one-year holding period”—would require many smaller shareholders to invest a large portion of their investment portfolios or force a much longer holding period.  In addition, shareholders may no longer aggregate to meet the submission threshold, thus further disadvantaging small holders, who “are among the least likely to be able otherwise to get management’s attention in the way that wealthier shareholders can.”

And, in remarks earlier this month to the Center for American Progress, Lee reiterated that investors are increasingly submitting shareholder proposals on ESG-related issues, constituting more than half of all proposals filed in recent seasons, and support for these proposals has almost tripled in the last decade. Some proposals have actually received majority support.  Accordingly, Lee viewed the shareholder proposal process as an “important mechanism for investors to improve corporate governance and advance sustainable long-term strategies at the businesses they own.”  Lee reported that she is looking at revisiting the shareholder proposal process: she has

“asked the staff to develop proposals for revising Commission or staff guidance on the no-action process, and potentially revising Rule 14a-8 itself. The goal is to bring greater clarity to the no-action relief process, increase the number of proposals on the ballot that are well-designed for shareholder deliberation and votes, and reduce the number that are not. This could involve reversing last year’s mistaken decision to bar proponents from working together and restricting their ability to act through experienced agents. It could also involve reaffirming that proposals cannot be excluded if they concern socially significant issues, such as climate change, just because they may include components that could otherwise be viewed as ‘ordinary business.’” (See this PubCo post.)

In addition, in 2020, the SEC’s Investor Advisory Committee voted to submit to the SEC a recommendation, authored principally by Acting Director of Corp Fin, John Coates, that was highly critical of the proposal. (See this PubCo post.) And as discussed in this PubCo post, the SEC’s Investor Advocate also recommended reversal of this rulemaking. 

The proposal was also widely debated in the public sphere, drawing a proliferation of comments, in part because, as noted above, shareholder proposals have recently assumed an increasingly significant role as investors focused on environmental issues, such as climate change, and social issues, such as racial injustice and inequity. The pandemic has also highlighted workforce health and safety issues. According to a comment letter submitted by Senator Brown on the proposed amendments, the shareholder proposal process has, over many decades, been a mechanism used by shareholders to challenge injustices and drive corporate responsibility. “Disturbingly,” he wrote, the amendments “would thwart that engagement by substantially increasing the ownership levels for filing an initial proposal and the resubmission thresholds for refiling in subsequent years and could deny a significant number of individual investors the ability to raise concerns to management and other shareholders.” The changes, he contended, “could silence the consideration of [proposals regarding] gender and racial pay equity, workplace diversity, and racial discrimination and social and economic justice that have increased in recent years and that will undoubtedly be proposed in the future.”

The resolution has been referred to the Senate Committee on Banking, Housing, and Urban Affairs, which Brown chairs. A House staffer told Reuters that “Democrats had the votes in both chambers to get it through,” but with a 50/50 Senate, whether the resolution is adopted remains to be seen.

Posted by Cydney Posner