Shareholder setback: US SEC ruling worsens proposal issues for Minerva-Manifest

A recent federal ruling has sanctioned new rules introduced by the US Securities and Exchange Commission (SEC) that will make it significantly more difficult for shareholders to submit proposals at companies’ Annual General Meetings (AGMs). The amendments to the 14a-8 rule, which oversee the submission of shareholder proposals, impose stricter criteria regarding the minimum investment required to file a proposal and the level of support necessary for resubmitting proposals. These changes are particularly expected to impact proposals focused on Environmental, Social, and Governance (ESG) matters.

Under the updated regulations, shareholders will now need to have invested a minimum of U$25,000 in a company for a year to be eligible to submit a proposal at an AGM. This represents a substantial increase from the previous requirement, which allowed investors to file proposals if they owned U$2,000 or 1% of a company’s securities for at least 12 months. Although the investment threshold will decrease to U$15,000 after two years and U$2,000 after three years, smaller shareholders will be delayed by two years in submitting proposals compared to the previous guidelines.

Moreover, the new rules also raise the level of support needed for a proposal that had been rejected at an AGM to be resubmitted. The updated regulation now mandates that proposals must receive a minimum of 5% of votes from investors to be eligible for resubmission, up from the previous threshold of 3%.

Initially adopted in November 2020, just before the end of the first term of US President Donald Trump, the rules went into effect in January 2021. However, legal challenges regarding the procedure through which the rules were enacted have delayed their full enforcement since June 2021.

The SEC justified the rule change by stating that it would modernize and improve the efficiency and integrity of the shareholder-proposal process, ensuring that proponents had a substantial “economic stake or investment interest” in a company before submitting a proposal. Some investors contested the rule, arguing that it would significantly curtail shareholder rights, especially those of mainstream investors. Subsequently, a coalition of nearly 200 US shareholder groups campaigned against the SEC rules, denouncing them as an assault on corporate democracy.

The recent court ruling in favor of the SEC rules has elicited criticism from the organizations challenging the regulations. They argue that the amendments will obstruct shareholders’ ability to address critical issues with companies and fellow shareholders, ultimately harming both parties. The ongoing debate surrounding these rules has sparked uncertainty about their future implications and where they may lead next.

In addition to the SEC rules, shareholder rights have encountered numerous challenges this year. For instance, Tesla modified its bylaws to stipulate that shareholders must possess a minimum of 3% of the company’s stock to take legal action against its board or executives for breaching fiduciary duties. Further, the SEC has made additional moves to scale back shareholder rights, including rescinding prior guidance and facilitating the exclusion of shareholder proposals by companies.

Beyond the SEC’s actions, individual US states have also sought to limit shareholders’ ability to submit proposals, further complicating the landscape of shareholder activism and engagement. The evolving regulatory environment poses significant challenges for shareholders seeking to exercise their rights and influence corporate behavior through proposals and engagement efforts.