Bloomberg reports:
A recent change to an SEC rule governing shareholder proposals “guts” the process in return for “minuscule and largely hypothetical cost savings,” a group of institutional investors say in a federal complaint filed Tuesday in Washington.
The amendments to the Securities and Exchange Commission’s Rule 14a-8 “dramatically increase” how much stock shareholders must own to submit a proposal, and the agency’s “purported justifications for the amendments were flawed at every turn,” according to the complaint filed in the U.S. District Court for the District of Columbia.
Shareholder advocate James McRitchie, the Interfaith Center on Corporate Responsibility—a coalition of more than 300 institutional investors—and corporate engagement and shareholder advocacy nonprofit As You Sow filed the lawsuit challenging the rule.
We're dealing here with groups who dump masses of "social justice" proposals onto company proxy statements, presumably because they have nothing better to do with their time.
As I wrote last year, the changes to SEC Rule 14a-8 were minor and long overdue reforms intended to preserve legitimate use of the shareholder proposal rule while requiring the sort of hobbyists who filed this suit to have a little more skin in the game.
It used to be that a shareholder needed to own a mere $2,000 for just one year in order to make use of Rule 14a-8. A shareholder now must demonstrate continuous ownership of at least:
- $2,000 of the company’s securities entitled to vote on the proposal for at least three years;
- $15,000 of the company’s securities entitled to vote on the proposal for at least two years; or
- $25,000 of the company’s securities entitled to vote on the proposal for at least one year.
- Aggregation of holdings for purposes of meeting the ownership requirements will no longer be permitted.
These tweaks ought to be unobjectionable. The previous $2,000 limit was adopted in 1998 and has never been adjusted for inflation:
Under the new rule, as long as the shareholder is a long-term investor, you actually need a smaller investment—in real dollars—than you did in 1998.
In addition, the new thresholds are still set so low that owners of minuscule percentage of a company's stock get to force a vote on their pet proposal:
Are the hobbyists so broke that they can't afford to hold the very modest amount of stock the rule requires?
In my humble opinion, this suit not only deserves to be tossed for failure to state a claim but slapped with Rule 11 sanctions.
