A new federal approach giving U.S. companies more say over which proposals shareholders can vote on at their annual meetings is creating regulatory uncertainty and leading to litigation, activists said.
The U.S. Securities and Exchange Commission in November changed its traditional process of having staff sign off before a company rejected votes on shareholder proposals. Instead it gave executives more discretion to pick which resolutions would appear on their proxy statements, the mandated document issued before shareholder meetings.
The change has prompted at least three investor lawsuits—against AT&T, Axon Enterprises and PepsiCo—and potentially more to follow. By stepping back, the SEC injected uncertainty into the engagement process, said Giovanna Eichner, shareholder advocate at Green Century Capital Management, a climate-focused Boston asset manager.
“More than anything, this lack of structure and rules is actually just leaving everyone unsure about the best way to move forward,” Eichner said.
In November, activists said they were worried the change was in line with other efforts by Trump-appointed regulators to rein in shareholder efforts on environmental, social and governance (ESG) investing. Many Republicans from energy-producing states have decried ESG efforts for cutting into corporate profits.
The legal threat, however, seems to have made U.S.-listed companies cautious with their new power. Shareholder activist group As You Sow has filed 47 proxy resolutions so far this year, and companies have used their new power to block up to a half-dozen. That’s roughly the same rate as last year, when companies blocked 8 of 63 such resolutions.
“Companies have to decide: Do you want to have a good relationship with your shareholders, or do you want to pay your corporate attorneys millions?” said As You Sow CEO Andy Behar.
An SEC spokesman declined to comment. A person familiar with the agency’s thinking said in November the change was driven partly to save staff time.
Changing Tack After Lawsuits
On January 5 Pepsi told the SEC it would skip a proposal seeking a review of animal-welfare practices within its supply chain, such as whether bulls at Indian sugar facilities are forced to haul overloaded sugarcane carts. Among other things, Pepsi said the filer failed to detail their availability to discuss the proposal as required.
The filer sued on Feb 19, noting she had offered to meet with the company. The next day Pepsi said it would include the resolution on its proxy.
“It was us bringing the lawsuit that forced Pepsi to follow the necessary procedure here,” said Asher Smith, attorney for the People for the Ethical Treatment of Animals Foundation, representing the filer.
Pepsi didn’t respond to questions.
Communications giant AT&T was sued on February 17 by New York City pension funds after the company refused to let shareholders consider a proposal seeking details about the company’s workforce demographics.
A week later, New York Comptroller Mark Levine, who oversees the city’s pension money, said AT&T agreed to settle the suit by allowing a vote, calling it a “major win for investors amid ongoing attempts to undermine transparency and accountability” by corporations.
AT&T did not respond to requests for comment.
Stun-gun maker Axon plans to skip a vote calling for a report on its political contributions, saying it would “micromanage” its business. The filer, Nathan Cummings Foundation, sued the company in U.S. District Court for the District of Columbia to force a vote. That suit is pending.
Laura Campos, senior director at the foundation, said the suit was necessary for shareholders to defend their right to file resolutions. “When the Securities and Exchange Commission stepped back from providing substantive responses to no-action requests, it left shareholders hoping to preserve their rights with few options for doing so,” she said via e-mail.
Axon did not respond to questions.
Other companies have taken a different course. On November 7, Starbucks asked to skip a resolution on transsexual healthcare coverage filed by conservative think tank National Center for Public Policy Research. Starbucks said the matter concerned “ordinary business,” which would allow a vote to be skipped.
After the SEC’s change Starbucks could have buried the resolution, but instead scheduled the vote for its March 25 annual meeting. The company declined comment.
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