Investor lawsuits challenging SEC changes granting more power to firms

Investor Legal Actions Challenge Recent SEC Modifications Granting Corporations More Influence

The alteration in U.S. federal policy that permits companies to have increased control over the proposals shareholders can vote on during their annual meetings is generating insecurity in regulations and has sparked litigation, according to activists.

In November, the U.S. Securities and Exchange Commission transformed its conventional practice, which entailed staff approval before a company dismissed votes on shareholder proposals. Instead, the SEC granted executives greater discretion in selecting which resolutions would be included in their proxy statements, the mandated document circulated before shareholder gatherings.

This shift has resulted in at least three legal actions by investors against AT&T, Axon Enterprises, and PepsiCo, with prospects of more lawsuits on the horizon. The SEC’s move has introduced an air of uncertainty into the engagement process, remarked Giovanna Eichner, a shareholder advocate at Green Century Capital Management, a Boston-based asset manager with a focus on environmental concerns.

Eichner expressed concerns about the absence of a framework and clear guidelines, leaving everyone uncertain about the appropriate path forward.

Earlier comments from activists highlighted apprehensions that the change aligned with previous efforts by regulators appointed during the Trump administration to restrict shareholder activities pertaining to environmental, social, and governance (ESG) investing. Numerous Republicans from states heavily reliant on energy production have criticized ESG initiatives for potentially encroaching on corporate profits.

The perceived legal risks, however, appear to have compelled U.S.-listed companies to exercise caution in wielding their newfound authority. Shareholder activist group As You Sow has presented 47 proxy resolutions this year, and companies have utilized their enhanced power to block up to six resolutions, mirroring comparable rates from the previous year.

Andy Behar, CEO of As You Sow, highlighted the dilemmas facing companies, urging them to choose between fostering a positive relationship with shareholders or incurring exorbitant legal fees.

The SEC refrained from providing comments on these developments, with insights into the agency’s rationale in November hinting at a desire to streamline the process to save time.

Following the onset of these lawsuits, Pepsi decided on January 5 to forgo a proposal requesting a review of animal welfare practices in its supply network. However, a subsequent lawsuit compelled the company to incorporate the resolution in its upcoming proxy.

At the core of these legal disputes is the fundamental question of shareholder rights in the face of corporate decisions. The lawsuits, centered around resolutions proposed by shareholders, illuminate the evolving landscape that companies must navigate in dealing with investor activism.