SEC Continues to Advance ESG Agenda
A series of recent regulatory actions at the Securities and Exchange Commission (SEC) reaffirms the agency’s commitment to ESG (environmental-social-governance) issues under new Chair Gary Gensler. These actions, which affect shareholder proposals, contested director elections, and proxy advisory firms, will each impact publicly-traded retailers.
On November 3, 2021, staff in the SEC’s Division of Corporation Finance issued Staff Legal Bulletin 14L. SLB 14L concerns the staff’s approach to shareholder proposals under SEC Rule 14a-8 and is noteworthy because it rescinds three staff legal bulletins issued during the prior Administration on the topic. In addition to covering a series of technical elements under the rule, SLB 14L addresses the excludability of a shareholder proposal under the SEC’s ordinary business exception. Under SLB 14L, the staff will focus on the “broader societal impact” of a given issue, rather than evaluating a company’s argument about the significance of the issue to its business. For example, SLB 14L observes that proposals raising human capital management issues with a broad societal impact would not be excludable solely because the shareholder proponent did not demonstrate that the issue was significant to the company, and irrespective of whether the company’s board of directors considers the issue to be significant to the company. SLB 14L also sets the bar higher for companies seeking to exclude a proposal on the ground that it seeks to micromanage the company’s business. In sum, the net effect of SLB 14L is to make it far more difficult to exclude many shareholder proposals on ESG topics.
On November 17, 2021, by a vote of 4-1, the SEC approved new rules requiring the use of “universal” proxy cards by management and shareholders soliciting proxy votes for their candidates in contested director elections, other than elections at registered investment companies and business development companies. Under new Rule 14a-19, a universal proxy card must include all director nominees presented by management and shareholders for election at the shareholder meeting. Thus, the new rules do away with dueling proxy cards in contested director elections and will permit shareholders to pick and choose nominees from both sides in a proxy contest. To facilitate the use of universal proxy cards, the SEC amended the proxy rules so each side is permitted to list the other’s director candidates on its universal proxy card, a practice that prior rules prohibited. The new rules also establish new notice and filing requirements for all soliciting parties, as well as formatting and presentation requirements for universal proxy cards. Although the final rules contain no eligibility rules for shareholders such that an investor owning a single share of common stock would be eligible to use them, the final rules do require shareholders presenting their own director candidates to solicit holders of a minimum of 67 per cent of the voting power of shares entitled to vote in the election. The experience in other jurisdictions, such as Canada where universal proxy cards are already permitted, suggests that in the future it will be easier for dissidents to win board seats in proxy contests. Publicly-traded retailers should begin planning for the effectiveness of the new rules, which will take effect for shareholder meetings held after August 31, 2022.
Also on November 17, in a 3-2 party-line vote, the SEC voted to propose amendments to rules adopted in 2020 governing proxy advisor firms. The 2020 rules sought to provide greater protection to investors by requiring proxy advisory firms to give enhanced disclosures and subject them to additional legal liability. If adopted, the amendments proposed in response to a legal challenge by one of the proxy advisory firms and apparent outcry from some institutional investors take the unusual step of scaling back 2020 rules that have not yet taken effect. The SEC has proposed a public comment period that will run for 30 days after the publication of the proposed rules in the Federal Register. Retailers should consider whether to submit comments on the proposed amendments and these important issues concerning the proxy advisory industry.