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Rethinking Rule 14a-8: A Case for Repeal or Meaningful Reform of the Shareholder Proposal Rule

The shareholder proposal rule, Securities Exchange Act Rule 14a-8, has long been heralded as a democratizing tool in corporate governance, allowing shareholders to voice their concerns through inclusion in company proxy materials. While well-intentioned, Rule 14a-8 is no longer fit for purpose. The rule imposes disproportionate costs on issuers, enables misuse by a small group of activists, and distracts boards from their core fiduciary responsibilities. Attempts at reform have failed to address these systemic flaws. This article argues that Rule 14a-8 should be repealed entirely or, at a minimum, reformed to align with its original purpose while restoring balance to corporate governance.

The History and Evolution of Rule 14a-8

When Congress enacted the Securities Exchange Act of 1934, it delegated substantial authority to the Securities and Exchange Commission (SEC) to regulate proxy solicitation under § 14(a). In 1942, the SEC adopted Rule 14a-8, allowing shareholders to submit proposals for inclusion in company proxy materials, provided the proposals were proper subjects for shareholder action under state law. Over the decades, the rule has been amended repeatedly, expanding both its procedural and substantive reach.

Initially envisioned as a mechanism to enhance shareholder participation, Rule 14a-8 has instead evolved into a tool for a minority of activists to advance agendas often unrelated to the company’s financial performance. This evolution has come at a cost: growing procedural complexity, increased compliance burdens, and the diversion of board attention from strategic priorities.

Flaws in the Current Rule

High Costs and Burdens. The financial and administrative costs associated with Rule 14a-8 are significant. Estimates suggest that a single shareholder proposal can cost a company as much as $150,000 in direct expenses, not including the considerable time and effort required to manage the process. For many companies, these costs disproportionately benefit a small minority of shareholders while providing little value to the broader shareholder base.

Misuse by Activists. Rule 14a-8 is disproportionately utilized by a handful of "corporate gadflies," who submit proposals on personal, political, or social issues rather than matters of economic importance to the company. For instance, data indicate that a mere three individuals or groups account for a substantial portion of shareholder proposals submitted annually.

Moreover, union pension funds and other institutional investors often leverage the rule to advance private agendas, such as labor disputes or political initiatives, rather than promoting shareholder value. These practices deviate from the rule's intended purpose and impose additional costs on the majority of shareholders.

Distraction from Core Responsibilities. Rule 14a-8 also undermines board primacy by forcing directors to engage with proposals that delve into operational matters traditionally reserved for management. This distraction erodes the business judgment rule's protections and detracts from boards' focus on long-term value creation.

Arguments for Repeal

Restoring Board Autonomy. Repealing Rule 14a-8 would reaffirm the primacy of the board of directors in corporate governance. Directors are better positioned than shareholders to make informed decisions on operational and strategic matters. Eliminating the rule would allow boards to focus on their fiduciary duties without the procedural distractions imposed by frivolous or ideological proposals.

Encouraging Efficient Governance. Without Rule 14a-8, companies could allocate resources more effectively, investing in initiatives that directly contribute to shareholder value. The elimination of costly and time-consuming proposal processes would free management to address substantive business concerns.

Aligning Corporate Governance with State Law. Corporate governance is traditionally the domain of state law, which emphasizes the contractual nature of corporate charters and bylaws. Rule 14a-8’s federal overlay disrupts this framework, imposing uniform requirements that often conflict with state-level governance principles. Repeal would restore the balance between federal and state authority in corporate governance.

Proposals for Meaningful Reform

If outright repeal is deemed impractical, significant reforms should be implemented to mitigate the flaws in Rule 14a-8.

Raising Eligibility Thresholds. The Rule currently provides that a proponent must have held “(A) At least $2,000 in market value of the company's securities entitled to vote on the proposal for at least three years; or (B) At least $15,000 in market value of the company's securities entitled to vote on the proposal for at least two years; or (C) At least $25,000 in market value of the company's securities entitled to vote on the proposal for at least one year.” These ownership thresholds are outdated and fail to ensure that proposal proponents have a meaningful economic stake in the company. Increasing the threshold to a scalable percentage of company value or a significantly higher dollar amount, such as $200,000, would deter frivolous proposals.

Lengthening Holding Periods. Requiring shareholders to hold their positions for at least three years without regard for the amount of stock they own, rather than the current tiered periods, would ensure that proposals come from long-term investors genuinely committed to the company’s success.

Narrowing the Scope of Eligible Proposals. Rule 14a-8(i)(5) should be amended to limit proposals to matters of material economic significance. The Rule currently permits a company to exclude a proposal that “relates to operations which account for less than 5 percent of the company’s total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business.”

Activists seized on the "not otherwise significantly related" language to argue that proposals with ethical and social significance should not be excludable even if they had no substantial economic significance. The courts and the SEC agreed. But mere ethical or social significance in the air should not be enough. Adopting a materiality standard aligned with federal securities law would prevent the inclusion of proposals addressing social or political issues unrelated to the company’s business.

The SEC should ask whether a reasonable shareholder of this issuer would regard the proposal as having material economic importance for the value of his shares. This standard is based on the well-established securities law principle of materiality. It is intended to exclude proposals made primarily for the purpose of promoting general social and political causes, while requiring inclusion of proposals a reasonable investor would believe are relevant to the value of his investment. Such a test seems desirable so as to ensure that an adopted proposal redounds to the benefit of all shareholders, not just those who share the political and social views of the proponent. Absent such a standard, the shareholder proposal rule becomes nothing less than a species of private eminent domain by which the federal government allows a small minority to appropriate someone else’s property—the company is a legal person, after all, and it is the company’s proxy statement at issue—for use as a soapbox to disseminate their views. 

Strengthening the "Ordinary Business" Exclusion. The Rule 14a-8(i)(7) exclusion allows companies to omit proposals related to ordinary business operations. Unfortunately, court and SEC decisions have largely eviscerated the ordinary business operations exclusion. Corporate decisions involving “matters which have significant policy, economic or other implications inherent in them” may not be excluded as ordinary business matters, for example, which creates a gap through which countless proposals have made it onto corporate proxy statements. As a result, the exclusion no longer fulfills its core function of preventing shareholders from micromanaging the company. The exclusion thus should be revitalized to empower boards to exclude proposals that intrude on management’s operational prerogatives.

Allowing Corporations to Opt Out. Finally, companies should be permitted to opt out of Rule 14a-8 through shareholder-approved charter amendments. This approach would respect shareholder preferences while reducing regulatory burdens.

Addressing Counterarguments

Critics of repeal or reform often argue that Rule 14a-8 is essential for holding boards accountable and providing shareholders with a voice. However, alternative mechanisms, such as direct engagement with management, annual meetings, and state-law remedies, can serve these functions without the inefficiencies associated with the current rule. Moreover, reforms like higher thresholds and longer holding periods would preserve shareholder oversight while minimizing abuse.

Conclusion

Rule 14a-8 has outlived its usefulness. Its costs, procedural inefficiencies, and susceptibility to misuse outweigh its benefits, particularly in a modern corporate governance environment where other tools for shareholder engagement exist. Repealing the rule would restore balance to corporate governance, empowering boards to focus on their fiduciary responsibilities and long-term value creation. If repeal proves politically unfeasible, meaningful reforms—such as higher ownership thresholds, stricter materiality standards, and revitalized exclusions—must be implemented to align the rule with its intended purpose.

By embracing either repeal or robust reform, policymakers can ensure that corporate governance evolves to meet the needs of modern shareholders and issuers alike.

A critique of SEC Commissioner Caroline Crenshaw's statement opposing Staff Bulletin 14M and defending the broken shareholder proposal regime

Predictably, Democratic SEC Commissioner Caroline Crenshaw opposed the important and timely SEC Staff Bulletin updating the way the SEC applies the economic significance and ordinary business exclusions to the shareholder proposal rule. I discussed the new bulletin in the prior post.

In this post, I reply to some of the claims Crenshaw makes trying to defend the indefensible.

Crenshaw repeatedly says this is a political decision: 

This type of political policy shifting mid-season serves to undercut capital formation, not facilitate it.

The rescission comes as no surprise given that the shareholder proposal process has become the target of politicized messaging ...

We are so focused on undoing the prior Commission’s agenda that we sow chaos now. 

... this leadership has rushed out staff guidance for the sake of political expediency

Elections have consequences. More important, the shareholder proposal rule has become politicized precisely because for the past several decades it has been a tool almost exclusively used by either gadflies or progressive political interest groups to advance an agenda unshared by their fellow investors. It is Crenshaw's political sponsors who have brought us to this point by turning the proposal rule into a soapbox paid for by investors at large.

True, it has finally been the case that some conservative activists are using the proposal rule to advance their agenda. (As far back as 2004, I wondered why they ignored this potential communication medium.) Not that they had much luck under Gensler.

In any case, while I acknowledge that what is sauce for the goose should also be sauce for the gander, I would prefer that no activists of any political stripe be able to abuse the rule as they have done.

Crenshaw also says that the rule has become "a  preferred punching bag of those who wish to diminish corporate democracy."

Sigh.

There is no such thing as corporate democracy. 

Just as a large city cannot be run as a New England town meeting, a large corporation is a poor candidate for direct democracy. There simply are too many widely dispersed shareholders who have varying degrees of information about the company, differing goals and investment time horizons, and competing ideas about optimal business practices for their preferences to be aggregated efficiently. Accordingly, state corporate law traditionally has given primary decision-making authority to the board and the managers to whom the board properly delegates authority. As the Delaware General Corporation Law puts it, the “business and affairs” of a corporation “shall be managed by or under the direction of a board of directors.”

Stephen M. Bainbridge, Revitalizing SEC Rule 14a-8's Ordinary Business Exclusion: Preventing Shareholder Micromanagement by Proposal, 85 Fordham L. Rev. 705, 707–08 (2016). Put simply, democracy is not an appropriate metaphor for corporate governance. It thus cannot serve as a justification for the shareholder proposal rule.

Finally, Crenshaw complains that the new bulletin will allow exclusion of "topics relating to poison pills, compensation, emerging issues such as AI, political and lobbying expenditures, and environmental or other issues that shareholders have identified as materially impacting the firm’s financial value." (My emphasis.)

I call BS. These are not topics that investors have identified as materially impacting the firm’s financial value.

How do I know? Because proposals advanced by leftwing activists relating to those proposals almost always fail to receive majority support. In a 2003 Barrons op-ed, for example, I wrote that:

Recent SEC guidance allowing more proposals dealing with broad societal issues to be considered has led to a significant increase in the number of shareholder proposals centered on political questions. But while the SEC insists that investors are demanding these changes, shareholders are increasingly rejecting proposals dealing with social issues. In fact, in 2023, support for ESG-related proposals fell to just 22% on average, a decline of 11 percentage points since 2021.

ExxonMobil, Chevron, JP Morgan, and Goldman Sachs all defeated proposals that would require the companies to disclose their absolute emissions data rather than carbon intensity metrics, Bloomberg Law recently reported. ...

As I explained in my recent book, The Profit Motive, most investors still care mainly about maximizing value rather than advancing partisan agendas.

In thinking about Crenshaw's statement I couldn't help but recall a Friends episode in which Russ told Ross "You could not be more wrong. You could try but you would not be successful."

Acting SEC Chair puts long needed limits on shareholder activism via proposals

Last week the SEC issued Staff Legal Bulletin No. 14M. It makes some key changes in how the SEC will apply the shareholder proposal rule during the current proxy season.

In brief, the shareholder proposal rule (SEC Rule 14a-8) allows shareholders to submit proposals for inclusion in company proxy materials, provided the proposals are proper subjects for shareholder action under state law.

Initially envisioned as a mechanism to enhance shareholder participation, Rule 14a-8 has instead evolved into a tool for a minority of activists to advance agendas often unrelated to the company’s financial performance. This evolution has come at a cost: growing procedural complexity, increased compliance burdens, and the diversion of board attention from strategic priorities.

Rule 14a-8 is disproportionately utilized by a handful of "corporate gadflies," who submit proposals on personal, political, or social issues rather than matters of economic importance to the company. For instance, data indicate that a mere three individuals or groups account for a substantial portion of shareholder proposals submitted annually.

Moreover, union pension funds and other institutional investors often leverage the rule to advance private agendas, such as labor disputes or political initiatives, rather than promoting shareholder value. These practices deviate from the rule's intended purpose and impose additional costs on the majority of shareholders.

Rule 14a-8 also undermines board primacy by forcing directors to engage with proposals that delve into operational matters traditionally reserved for management. This distraction erodes the business judgment rule's protections and detracts from boards' focus on long-term value creation.

There are a number of grounds on which management can refuse to include a proposal. Two are particularly significant at the moment.

The first is the exclusion for proposals lacking economic significance. It permits a company to exclude a proposal that “relates to operations which account for less than 5 percent of the company’s total assets at the end of its most recent fiscal year, and for less than 5 percent of its net earnings and gross sales for its most recent fiscal year, and is not otherwise significantly related to the company’s business.”

Activists seized on the "not otherwise significantly related" language to argue that proposals with ethical and social significance should not be excludable even if they had no substantial economic significance. The courts and the SEC under liberal administrations agreed. In recent years, under the execrable Gary Gensler, progressive proposals lacking any meaningful nexus to the company's business have been waved through by the SEC.

Not anymore:

The Division’s analysis will focus on a proposal’s significance to the company’s business when it otherwise relates to operations that account for less than 5% of total assets, net earnings and gross sales. Under this framework, proposals that raise issues of social or ethical significance may be excludable, notwithstanding their importance in the abstract, based on the application and analysis of each of the factors of Rule 14a-8(i)(5) in determining the proposal’s relevance to the company’s business.

Because the rule allows exclusion only when the matter is not “otherwise significantly related to the company,” we view the analysis as dependent upon the particular circumstances of the company to which the proposal is submitted. That is, a matter significant to one company may not be significant to another.  ...

... The proponent could continue to raise social or ethical issues in its arguments, but in accordance with these Commission statements it would need to tie those matters to a significant effect on the company’s business. The mere possibility of reputational or economic harm alone will not demonstrate that a proposal is “otherwise significantly related to the company’s business.” 

I suggest that in applying this standard that the SEC should ask whether a reasonable shareholder of this issuer would regard the proposal as having material economic importance for the value of his shares. This standard is based on the well-established securities law principle of materiality. It is intended to exclude proposals made primarily for the purpose of promoting general social and political causes, while requiring inclusion of proposals a reasonable investor would believe are relevant to the value of his investment. Such a test seems desirable so as to ensure that an adopted proposal redounds to the benefit of all shareholders, not just those who share the political and social views of the proponent. Absent such a standard, the shareholder proposal rule becomes nothing less than a species of private eminent domain by which the federal government allows a small minority to appropriate someone else’s property—the company is a legal person, after all, and it is the company’s proxy statement at issue—for use as a soapbox to disseminate their views. 

The other is where the proposal speaks to the ordinary business of the company (Rule 14a-8(i)(7)).

As I explained in my article, Revitalizing SEC Rule 14a-8's Ordinary Business Exemption: Preventing Shareholder Micromanagement by Proposal, Rule 14a-8(i)(7) raises fundamental issues of corporate governance:

Who decides what products a company should sell, what prices it should charge, and so on? Is it the board of directors, the top management team, or the shareholders? In large corporations, of course, the answer is the top management team operating under the supervision of the board. As for the shareholders, they traditionally have had no role in these sort of operational decisions. In recent years, however, shareholders have increasingly used SEC Exchange Act Rule 14a-8 (the so-called shareholder proposal rule), to not just manage but even micromanage corporate decisions.

The rule permits a qualifying shareholder of a public corporation registered with the SEC to force the company to include a resolution and supporting statement in the company’s proxy materials for its annual meeting. In theory, Rule 14a-8 contains limits on shareholder micro-management. The rule permits management to exclude proposals on a number of both technical and substantive bases, of which the exclusion in Rule 14a-8(i)(7) of proposals relating to ordinary business operations is the most pertinent for present purposes. Rule 14a-8(i)(7) is intended to permit exclusion of a proposal that “seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.”

Unfortunately, court decisions have largely eviscerated the ordinary business operations exclusion. Corporate decisions involving “matters which have significant policy, economic or other implications inherent in them” may not be excluded as ordinary business matters, for example, which creates a gap through which countless proposals have made it onto corporate proxy statements.

In effect, the exclusion no longer fulfills its core function of preventing shareholders from micromanaging the company.

The new staff bulletin goes at least part of the way towards giving the exclusion teeth.

... the staff will take a company-specific approach in evaluating significance, rather than focusing solely on whether a proposal raises a policy issue with broad societal impact or whether particular issues or categories of issues are universally “significant.” Accordingly, a policy issue that is significant to one company may not be significant to another. The Division’s analysis will focus on whether the proposal deals with a matter relating to an individual company’s ordinary business operations or raises a policy issue that transcends the individual company’s ordinary business operations.

The new staff bulletin also reinstates two Trump 1.0 era staff bulletins on the exclusion that Gensler gutted. Both speak to the micromanagement issue. Bulletin 14J stated:

... a proposal may probe too deeply into matters of a complex nature if it “involves intricate detail, or seeks to impose specific time-frames or methods for implementing complex policies.”

A proposal thus can be excluded if it:

“micromanages” the company “by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.”

Importantly, the bulletin made clear that a standard activist technique to end run the exclusion would no longer work:

This framework also applies to proposals that call for a study or report. For example, a proposal that seeks an intricately detailed study or report may be excluded on micromanagement grounds.

Bulletin 14K provided that:

In the past, proponents and companies have often focused on the overall significance of the policy issue raised by the proposal, instead of whether the proposal raises a policy issue that transcends the particular company’s ordinary business operations. The staff takes a company-specific approach in evaluating significance, rather than recognizing particular issues or categories of issues as universally “significant.” Accordingly, a policy issue that is significant to one company may not be significant to another.

... we believe the focus of an argument for exclusion under Rule 14a-8(i)(7) should be on whether the proposal deals with a matter relating to that company’s ordinary business operations or raises a policy issue that transcends that company’s ordinary business operations. When a proposal raises a policy issue that appears to be significant, a company’s no-action request should focus on the significance of the issue to that company.

In sum, the new bulletin is a good start. It addresses some key problem areas that have allowed activist shareholders to use the rule to advance social proposals largely unrelated to the business of the company.

More needs to be done. But that is a story for another post.

ExxonMobil shareholders crush climate activist shareholder efforts to make company go green

Exxon faced a revolt by ESG-oriented shareholder activists at its most recent annual shareholder meeting. As the meeting turned out, however, it was a clean sweep for Exxon. Despite activist opposition to reelecting two board members--chief executive Darren Woods and lead independent director Jay Hooley--all 12 of Exxon's board members were reelected. All directors got at least 87% of the vote.

ESG activists also put several proposals on the proxy statement. One requested that executive pay to emission reductions. Three requested reports by the board on, respectively, gender and racial pay gaps, the future of Exxon's plastic business, and the social impact of energy transition. All four lost.

Exxon CEO Woods reportedly stated that:

“Today, our investors sent a powerful message that rules and value-creation matter… we expect the activist crowd will try and claim victory on today’s vote, but common sense should tell you otherwise in light of the large margin of the loss."

I was particularly interested in this meeting, as I recently had an op-ed appear in the OC Register and its sister papers, CalPERS Continues to Play Politics Despite Poor Performance, attacking CalPERS announced it intended to support the ESG proposals. 

Exxon’s recent track record suggests that it is focused on short and long term returns for their shareholders. In fact, Exxon earned a record profit $7.6 billion in 2022 and also posted strong performance in 2023, allowing the company to pay their investors nearly $15 billion in dividends in 2023 alone.

Unfortunately, California’s public workers are not as lucky as those invested directly in Exxon. CalPERS regularly succumbs to political pressure and has consistently bad performance. From mid-2022 to mid-2023, a report from the Pacific Legal Institute noted that CalPERS only achieved a 5.8 percent return on their investments versus the 17.6 percent return earned by investors in the S&P 500. This poor performance followed what CalPER’s investment chief dubbed as a “lost decade” for failing to invest in private equity and trailing peer pension funds in almost every asset class.

Criticizing CalPERS for siding with shareholder activists rather than Exxon

The OC Register published my op-ed "CalPERS continues to play politics despite poor performance,"criticizing CalPERS for siding with shareholder activists versus Exxon.https://t.co/f4wVu3OEZJ

— Steve Bainbridge (@PrawfBainbridge) May 27, 2024

Why is Exxon suing climate change activist shareholders?

In response to my post Exxon's Lawsuit Against Activist Shareholders Continues, a friend and fellow corporate law academic sent along an interesting comment:

You think ExxonMobil's attempts to limit what kinds of proposals shareholders can put in management's proxy are good.  But are they as good for Exxon as the cost TO Exxon? That is, would a purely profit-maximizing ExxonMobil pursue the case? Presumably they would pay all the cost while only reaping a small portion of the benefit...

In response, I wrote that:

I am reminded of a couple of cases from my case book. Hoddeson v. Koos Bros., 47 N.J.Super. 224, 135 A.2d 702 (App.Div.1957). Koos Bros. went to trial over a $168.50 dispute. And then fought the case on appeal. The casebook then poses the question: “This is one of several cases in this text in which parties vigorously litigated disputes involving seemingly trivial amounts. Why on earth would Koos Bros. have gone to such lengths and expense?”

See also National Biscuit Company v. Stroud, 249 N.C. 467, 106 S.E.2d 692 (1959). National litigated a $171.04 bill all the way up to the North Carolina Supreme Court.

In 1954, according to a study by the Department of Commerce, the average income of lawyers in the United States was $10,220, more than twice as much as the average family income of the time. Slightly more than a quarter of these lawyers made less than $5,000 a year, and 18 percent earned $15,000 a year or more. The majority, almost two-thirds, earned between $5,000 and $10,000 yearly. So the fee likely exceeded the amount in dispute. So it seems to make no economic sense. So why did they do it? Granted, they may desire to set a precedent that benefits them, but most of the benefit would go to other businesses. As such, they bear all the costs of setting the precedent and reap only a small portion of the benefits. We puzzle some about that it in class, usually unsatisfactorily.

It seems to me not implausible that corporate executives are not always rational actors functioning on strict cost-benefit analyses. Perhaps Exxon management is simply fed up with climate activists trying to shut down their business. After all, they have had to put up with the Little Engine hedge fund fight and annual climate-related shareholder proposals.

Alternatively, the economics of the decision may be analogous to that of hedge fund activism. If a hedge fund succeeds in compelling a target company to make changes that raise the stock price, most of the gains flow to other shareholders who are freeriding on the activist. Yet, the activist makes enough money to justify the expense. Maybe Exxon thinks the costs to it of the shareholder proposal regime—including opportunity and reputational ones—justify setting a precedent.

Or maybe Exxon management thinks there will be non-pecuniary benefits to winning, such as the gratitude of public company CEOs everywhere.

Exxon's Lawsuit Against Activist Shareholders Continues

Climate activist investment funds Arjuna Capital and Follow This filed shareholder proposals with Exxon. If included in the proxy statement and approved by the shareholders, the proposal would have asked Exxon to “go beyond current plans, further accelerating the pace of emission reductions in the medium-term for its greenhouse gas (GHG) emissions ... and to summarize new plans, targets, and timetables.” 

As Exxon pointed out:

• The proposal addresses substantially the same subject matter as the 2022 and 2023 proposals – both of which were overwhelmingly rejected by our shareholders.
• This proposal was designed to do one thing – put us out of business. That’s literally what the proponents said.
  • Arjuna Capital believes “Exxon should shrink.”
  • Follow This says its proposals are “Trojan Horse” proposals designed to wind down the company’s business in oil and natural gas.

Activist shareholders (the vast majority being progressives advancing progressive policy goals) have long used the shareholder proposal rule to publicize their causes and seek to change corporate behavior. Since Gary Gensler became SAEC Chairman, the SEC has made it ever easier for progressive activists to get their proposals on proxy statements.

When an issuer wishes to exclude a proposal fro its proxy statement, the usual move is to ask the SEC for permission to do so via a no action letter request. But Gensler's SEC is widely regarded as leaning heavily on the activist side.

So Exxon decided to bypass the usual process and sued the activists in federal court:

• The intent of our lawsuit is simple – we want clarity on a process that has become ripe for abuse. 
• The current process to get proxy proposals excluded is flawed.
• We believe activists with minimal or even no shares should not be permitted to re-submit proposals that do not grow long-term shareholder value.

A few days ago, the LA Times business columnist Michael Hiltzik--who is undoubtedly the country's most progressive anti-business columnist charged with covering business--published a rant against Exxon's suit. Hilzick accuses Exxon of being the "world’s biggest corporate bully" for having to tried to defend its shareholders against a pair of activists whose interests are totally opposed to those of other Exxon shareholders. After all, the proponents themselves admitted is intended to “shrink” the company – which would ultimately hurt shareholders.

However, the SEC became political first when it changed its policy to explicitly allow proposals dealing with issues of “broad social significance” onto corporate ballots. Since that change, an unprecedented number of proposals dealing with Democratic policy priorities, namely climate and DEI matters, have been voted on and overwhelmingly rejected by shareholders.

Exxon’s ask of the court is simple and uncontroversial: protect our public markets by affirming the rules governing the shareholder proposal process that’s meant to empower shareholder and company collaboration instead of creating a company-funded forum for activist grandstanding.

Exxon's suit has survived a motion to dismiss on mootness grounds:

U.S. District Judge Mark Pittman ruled that Exxon could continue its case against Arjuna Capital, citing jurisdiction to hear the case over a U.S.-based firm. However, he said it could not pursue its claim against Follow This as it is Netherlands-based and outside the court's jurisdiction.

Exxon sues climate activist shareholders in federal court because Gary Gensler's SEC won't do its job

The WSJ reports:

Exxon Mobil is suing two sustainable investment firms in a bid to block them from putting forward a shareholder proposal that would commit the oil company to further curb its greenhouse-gas emissions and target its customers’ emissions. ...

“Defendants are asking Exxon Mobil to change its day-to-day business by altering the mix of—or even eliminating—certain of the products that it sells,” the oil company said in the lawsuit. Their goal, it alleged, is “to force Exxon Mobil to change the nature of its ordinary business or to go out of business entirely.”

The problem Exxon is facing is one about which I have frequently blogged; namely, that Gary Gensler's SEC is now full of ESG activists who he has authorized to allow shareholders to micromanage corporate business operations via Rule 14a-8 shareholder proposals. In July of last year, for example, I noted that:

As I detailed at some length in my article, Revitalizing SEC Rule 14a-8’s Ordinary Business Exclusion: Preventing Shareholder Micromanagement by Proposal, 85 Fordham L. Rev. 705 (2016), the SEC shareholder proposal was never intended to allow shareholders to manage--let alone micro-manage--the corporations in which they invest. Yet, in recent decades, the SEC staff has basically eviscerated those safeguards.

Back in November 2021, I had predicted that Gensler approved changes to how the SEC staff interprets Rule 14 a-8 would lead to that result:

In effect, the SEC is saying that corporate proxy statements can be conscripted by somebody owning a trivial amount of stock to solve "societal problems" that may have virtually no nexus to the company.

In addition, the SEC is encouraging shareholders to micromanage the company when it comes to woke issues:

For example, a proposal requesting a company set greenhouse gas emission targets, but providing the company with discretion on a method for its implementation, will no longer meet the threshold for exclusion based on micromanagement.  

How is deciding corporate environmental policy not micromanagement?

Wachtell concludes:

it is not clear which social issues the Staff will deem broad enough to “transcend the ordinary business,” beyond the Staff’s examples of proposals relating to human capital management with a broad social impact or to greenhouse gas emissions targets without specific methodologies.  

Piffle. It is perfectly obvious that the SEC has become a tool of the Warren/Sanders/AOC wing of the Democratic Party and is now leading the charge towards woke capitalism. I feel confident in predicting that woke shareholder proposals will breeze through the process. In the unlikely event that conservatives emulated progressives and started using the shareholder proposals to effect their policy goals, however, I'd bet the SEC allows their exclusion.

The message seems to finally be reaching a wider audience. The WSJ report continues:

Under normal circumstances, companies that want to exclude shareholder proposals from their proxy statements submit a request to the SEC. Exxon’s move is an unusual attempt to bypass that process as the SEC during the Biden administration has become less inclined to let companies block proposals. 

In the lawsuit, Exxon said the shareholder proposal and proxy voting process has become “ripe for abuse by activists.” 

In 2021, the SEC reversed a Trump-era policy that made it easier for public companies to reject shareholder proposals, which—though typically nonbinding—have long been a thorn in the side of executives. The guidance indicated that SEC staff would be more receptive to shareholder proposals regarding issues that have “a broad societal impact” and focus less on an issue’s relevance to a particular company.

It seems woke capitalism remains Gary Gensler's main policy goal.

SEC Staff Continues to Allow Shareholder Proposals Amounting to Micromanagement of the Company

As I detailed at some length in my article, Revitalizing SEC Rule 14a-8’s Ordinary Business Exclusion: Preventing Shareholder Micromanagement by Proposal, 85 Fordham L. Rev. 705 (2016), the SEC shareholder proposal was never intended to allow shareholders to manage--let alone micro-manage--the corporations in which they invest. Yet, in recent decades, the SEC staff has basically eviscerated those safeguards. Skadden Arps lawyers Marc Gerber and Ryan Adams' review of the 2023 proxy season concludes that that trend continues:

The SEC Staff continues to grant no-action requests in some cases where companies argue that a shareholder proposal relates to ordinary business matters, would result in micromanagement or suffers from a procedural defect, among other things.

Nonetheless:

Companies were slightly more successful in excluding proposals under the micromanagement prong of the ordinary business exclusion in the 2023 season than in the previous season.

 

 

 

Do we really want to encourage more retail investor participation in corporate governance?

Ann Lipton posted a couple of weeks ago about proposals to encourage retail investor participation in corporate governance (I'm a little behind).

A while back, Jill Fisch proposed that retail shareholders be given access to the type of electronic tools available to institutional shareholders so that they could create standing voting instructions, allowing them to cast ballots in corporate elections automatically according to predefined preferences.  That vision appears to close to realization; today, there are new programs that make it easier for retail shareholders to cast ballots, including in accordance with preset preferences.  As I understand the Iconik service, for a monthly fee, you can set your preferences and have the app automatically vote them – or you elect to follow the instructions provided by a third party provider like As You Sow or Third Act.  If you do that, it’s free.

And of course, we know that mutual fund companies are proposing to give more voice to retail shareholders through various kinds of pass-through voting experiments.  There are now voting platforms being developed that allow automatic voting in this context, as well.

I am deeply skeptical. In the first place, there are lots of sound theoretical reasons to limit participation by all shareholders--retail or institutional--in corporate governance. See my article The Case for Limited Shareholder Voting Rights: https://ssrn.com/abstract=887789.

Second, retail investors have strong incentives to be rationally apathetic--i.e., to refrain from exercising their voting rights:

1. Lack of Information: Retail investors may not always have access to comprehensive and timely information about the companies they invest in. This can make it challenging to make informed voting decisions. Additionally, the sheer number of companies in which retail investors may hold shares can make it difficult to keep up with all the voting matters.

2. Limited Influence: Individual retail investors often own a relatively small percentage of a company's shares, which can lead to a perception that their votes may not significantly impact the outcome. As a result, some may feel that their vote will not make a meaningful difference.

3. Time and Effort: Voting requires time and effort, especially for retail investors who hold shares in multiple companies. Researching the issues, reviewing the proxy statements, and casting votes can be time-consuming, and some investors may prioritize other aspects of their investment activities.

4. Trust in Management: Some retail investors may trust the management and board of directors of the companies they invest in to make decisions in their best interest. They may believe that voting is unnecessary or that management will act in accordance with shareholder interests without their active participation.

Historically, retail investors have been apathetic. In 2017, for example, the NY Times reported that " 91 percent of the shares owned by institutional investors — but only 29 percent of those held by individuals — were voted." 

There are several reasons why we might want to let there sleeping dogs lie. First, as Ann points out, we are currently observing in real time retail investors in action--i.e., the objections being filed in connection with the proposed settlement of the AMC Entertainment litigation. (For background on that litigation see my posts AMC APEs, Retail Investor Rational Apathy, Blank Check Preferred Stock, Class Voting, and Blasius and Chancery Daily, AMC, DGCL 242, and the Delaware Legislature.) As Ann delicately puts it:

a lot of the comments are, well, uninformed, to put it mildly.  There are some fairly odd conspiracy theories floating around regarding AMC shares, and, in particular, something about an inflated share count and “synthetic” shares that are improperly voting.  Many of the objecting shareholders buy into those theories.  

I've read a lot of these objections and the vast majority do not inspire confidence in the knowledge or judgment of the objectors.

Second, as Ann also pointed out, many retail investors are now day traders and meme stock traders who are very different from the traditional perception of retail investors who are long-term shareholders. Research examining "how the influx of retail shareholders has directly affected the governance outcomes at the meme stock companies" concluded that "meme stock companies have experienced a significant decrease in participation by their shareholders with respect to voting. Shareholder proposals under Rule 14a-8 have also been extremely limited, with most meme firms seeing no proposals brought after the rapid increase in retail ownership." 

The same research also concluded that meme stock companies' "ESG scores have gotten worse subsequent to the meme surge.

Predictions that retail investors will "revolutionize corporate governance and make public companies more responsive to social concerns" thus seem unfounded.

Third, many retail investors are deeply engaged with social media and increasingly exhibit the pathologies associated with social media. In the AMC Entertainment litigation, for example, one of the two lawsuits challenging the plan was filed by an individual Usbaldo Munoz. The AMC Apes have been viciously attacking Munoz. Things apparently got so bad that Munoz has now ghosted his own lawyers, leaving them without guidance as to how to proceed.

Today, the WSJ reported that:

... the ticker MMTLP has become a rallying cry for people angry at the Financial Industry Regulatory Authority and, by extension, the entire financial system. Market veterans say the investors’ rage is misguided.

The episode is the latest example of how social media is a double-edged sword in today’s stock market. Online communities allow individual investors to connect and share trading tips, but they can also fan conspiracy theories and lead to disastrous investing decisions.

...

Some Finra employees and market veterans caught up in debate around MMTLP have received death threats. In one anonymous message to a market veteran seen by The Wall Street Journal, the sender alluded to mass shootings and vowed to come “piss on your casket.”

In sum, maybe it'd be best to leave things alone.

Activist Hedge Funds versus Social Justice Warrior CEOs

In the preceding post, I noted how even prominent social justice warrior CEO like Marc Benioff is embracing shareholder capitalism during the present economic turmoil. Why is he doing so? At least in part, according to the WSJ, because he's facing pressure from activist hedge funds:

At least five activist investors have taken positions in the company, including Elliott Management Corp. and Starboard Value LP. They are pressuring Mr. Benioff to change the way he runs things. In a presentation last year, Starboard said Salesforce wasn’t doing enough to increase profits.

This would not surprise readers of my book The Profit Motive, in which I discuss the role hedge funds like Elliott and Starboard have played in checking ESG impulses by CEOs. I used Etsy as a case study of the phenomenon:

The Etsy story in fact stands as a paradigmatic example of the increasing pressure public companies face from activist hedge funds to improve share price performance. ...

In one sense, activist hedge funds are akin to traditional value investors. They seek to identify target companies that they believe to be undervalued by the market. Unlike traditional value investors, activist funds are willing to be much more involved “hands on” investors. Although some activists seek value-enhancing changes through negotiation, the subcategory with which we are mainly concerned tend to be highly confrontational.  In either case, however, the standard hedge fund compensation 2-and-20 rule—i.e., an annual management fee of two percent of assets under management and a performance fee of 20% of returns above a specified benchmark—encourages managers of these funds to have a laser-like focus on the stock price of the companies in which they invest. ...

Although activist investors formerly concentrated on low hanging fruit, which typically consisted of poorly managed small firms, they are increasingly willing to take on even the largest companies.  Not surprisingly, the CFOs of about half of the companies surveyed by Deloitte reported their firm “made at least one major business decision specifically in response to shareholder activism,” with share repurchases being the most common.  In many cases, such decisions have had distinctly negative effects on stakeholders.

As Marc Benioff is now finding out.

As longtime readers know, I am deeply skeptical of shareholder activism. In a book chapter, Preserving Director Primacy by Managing Shareholder Interventions, in Research Handbook on Shareholder Power 231 (Edward Elgar Publishing; Jennifer G. Hill & Randall S. Thomas eds. 2015), I argued that:

... not all shareholder interventions are created equally. Some are legitimately designed to improve corporate efficiency and performance, especially by holding poorly performing boards of directors and top management teams to account. But others are motivated by an activist’s belief that he or she has better ideas about how to run the company than the incumbents, which may be true sometimes but often seems dubious. Worse yet, some interventions are intended to advance an activist’s agenda that is not shared by other investors.

I explained that:

As potential activists, hedge funds have several advantages. First, hedge funds are not subject to the sort of conflicts of interest that discourage activism by mutual funds and other financial institutions with relationships with corporate management. Second, hedge funds are not subject to the regulatory limitations applicable to mutual funds on the size of the stake they hold in portfolio companies. Hedge funds thus can take larger positions in portfolio companies than traditional mutual and pension funds, allowing them to capture a larger share of any gains. Third, because hedge fund compensation structures award them a percentage of any games earned by the fund, hedge fund managers have a higher incentive than those of mutual or pension funds to pursue activities that raise the value of their stake even if other investors are able to free ride on their efforts. (Effross 2013, 268) Finally, the free rider problem is further mitigated when multiple hedge funds band together in so-called wolf packs to target a specific company, sharing the costs and gains of activism.

...

Turning to the merits of the growing incidence of hedge fund activism, [Robin] Greenwood argues that “hedge funds may be up to the task of monitoring management—a number of recent academic papers have found that hedge funds generate returns of over 5 percent on announcement of their involvement, suggesting that investors believe these funds will increase the value of the firms they target.” (Greenwood 2007)

A recent study by Lucian Bebchuk, Alon Brav, and Wei Jiang of 2000 activist hedge fund interventions between 1994 and 2007 found “no evidence that interventions are followed by declines in operating performance in the long term; to the contrary, activist interventions are followed by improved operating performance during the five-year period following these interventions.” (Bebchuk et al. 2013) A contemporaneous literature review by Bebchuk concludes that shareholder interventions on the aggregate are  “beneficial for companies and their shareholders both in the short term and the long term.”

I go on to express doubts about cases in which hedge fund managers advocate specific business decisions, while expressing less skepticism about cases--like the interventions at Salesforce and Etsy--that operate at a high level of generality and seek to hold directors accountable for focusing on interests other than those of shareholders.

Yours truly interviewed re Nelson Peltz's run at Disney

From Yahoo news:

Trian, which Peltz cofounded in 2005, oversees about $8 billion in assets under management. “That has enabled them to take on some big game,” said Stephen Bainbridge, a professor at the UCLA School of Law who has extensively researched corporate governance.

“I would say that on the spectrum of hedge fund activists, that Peltz is definitely at the aggressive end,” Bainbridge continued, though he noted that in many cases, Trian has made “changes that were regarded as helpful.”

The trouble is getting executives to listen without a protracted battle, he said, since CEOs are known for “big egos” and “nobody wants what they would regard as a sort of professional rabble-rouser coming in and telling them to change their plans.”

...

To his critics, Peltz’s tactics prioritize short-term returns over long-term financial health. “They’re in it and then out of it,” Bainbridge said, summarizing the argument against many hedge fund investors. (Trian has said the firm invests in companies for an average length of six years when it receives a board seat, longer than some competitors.)

...

Despite his triumphs, in recent years Peltz’s name has more often been associated with his daughter, Nicola, who last spring married the son of soccer legend David Beckham and fashion designer Victoria Beckham. The event took place at Peltz’s Palm Beach estate.

“There’s a certain amount of irony here that a guy who’s a multi-billionaire, and in the corporate world is known and feared… is sort of in the back of a picture with a bunch of Beckhams in it,” said Bainbridge. “It’s kind of funny that way.”

Conservative activists are finally discovering SEC Rule 14a-8 and using it to make shareholder proposals: Will the SEC apply neutral principles?

I have long wondered why conservative activists don't make use of the shareholder proposal rule to the extent liberal activists do. In 2004, for example, I asked:

Every time I teach the shareholder proposal rule (Securities Exchange Act Rule 14a-8) in Business Associations, I always wonder the same thing: Why don't conservative activists use the rule more often?

An informed reader responded:

t seems that conservatives have attempted to push a limited agenda through the 14a-8 process. In almost all of these cases, these types of proposals were excluded under 14a-8(i)(7) [as an ordinary business matter]. Which brings me to your point. I think that most proposals pushing a conservative agenda would deal with ordinary business matters.

He had a point. But the SEC under Gary Gensler seems to have liberalized the ordinary business exception to allow a slew of social and environmental proposals from progressives to be included on company proxy statements. Which raised the question: Would he apply neutral principles and allow conservative proposals?

Accordingly, last fall, I took to Twitter to propose that "What I need are some really rich conservatives to finance a Rule 14a-8 shareholder proposal campaign."

It seems others have stepped up to the plate. Bloomberg reports:

More conservative proposals were filed this proxy season by activists looking to bend the ears of CEOs on social issues, aligning with a political crusade to skewer “woke capitalism.”

Conservative or anti-ESG proposals have doubled this proxy season, according to consulting firm Georgeson Inc., which counted 52 such resolutions filed this year—double the 26 filed 2021. ...

The resolutions, most of which target major companies including Walmart Inc.and Comcast Corp., received very few shareholder votes on corporate ballots, regularly securing less than 3% support. But the number of proposals won’t be letting up, said Scott Shephard, a fellow at the National Center for Public Policy Research, one of the main organizations driving conservative shareholder activism.

“I wouldn’t expect the numbers to sink,” said Shephard, explaining that one of his aims is to put CEOs on notice for allegedly violating their fiduciary duties when they project personal preferences.

Activists Using SEC Shareholder Proposal Rule to Drag Companies into Abortion Debate

Bloomberg reports that the recent SEC changes liberalizing shareholder access under Rule 14a-8 are now coming into play in the abortion debate:

Walmart Inc., Lowe’s Cos., and TJX Cos. represent what’s potentially the tip of a burgeoning trend in shareholder activism in this area: All three companies will face votes on proxy proposals in the coming weeks aimed at shaping internal policies related to abortion access. ...

Proposals at Walmart, Lowe’s, and TJX ask the companies to assess the risks they face when abortion access to their employees is restricted—and to report on ways they are mitigating the impacts of the disruption.

Regardless of one's views on abortion, this ought to disturb anyone who thinks that the purpose of business is to make profits. At the moment, the rule is being used by abortion rights activists and any proponent of abortion rights who owns a few thousand dollars worth of stock in a company can use the shareholder proposal rule as a soapbox to get subsidized publicity for their cause. But there is nothing to stop abortion rights opponents from coming at the issue from the other side--assuming, and this is a huge assumption as to which I have serious doubts, that Gary Gensler's SEC uses neutral principles to decide which proposals get included and which get excluded.

I am not making a pro-Roe or an anti-Roe argument (although may view are probably no secret). I am making an anti-shareholder proposal rule argument. The rule functions on a tax on investors to subsidize a soapbox for gadflies and activists.

I used to believe the proposal rule could be fixed. https://ir.lawnet.fordham.edu/flr/vol85/iss2/15/… I'd still like to see that proposal adopted as a minimum. But I've come to believe the only real solution is repeal.

Do we really want ISS setting corporate climate policy?

Cahill Gordon identifies ISS new voting policies, two of which caught my eye:

Say on Climate. ISS has adopted two frameworks for analyzing Say on Climate proposals, one for proposals submitted by shareholders and another for those submitted by management. These new policies list the main, non- exhaustive criteria that will be considered in ISS’s analysis. Vote recommendations by ISS on such proposals will be made on a case-by-case basis, taking into account the completeness and rigor of the plan and disclosures and other relevant criteria, including with respect to shareholder proposals whether the request is unduly burdensome or overly prescriptive.

Climate Accountability. ISS has adopted a new policy applicable to companies that are significant greenhouse gas (GHG) emitters, defined for 2022 as those on the current Climate Action 100+ Focus Group list. Under the new policy, ISS generally will recommend voting against or withholding votes from the incumbent chair of the responsible committee (or other directors on a case-by-case basis) in situations where ISS determines that the company is not taking the minimum steps needed to understand, assess, and mitigate risks to the company and the larger economy relating to climate change. For 2022, ISS considers such “minimum steps” to be: detailed disclosure of climate-related risks (such as those published by the Task Force on Climate-Related Financial Disclosures (TCFD) framework), and appropriate GHG emissions reduction targets.

ISS is the largest proxy advisor, with over 1700 institutional investor clients that buy its advice on how to vote shares they hold. A substantial number of those clients robo-vote in lockstep with ISS recommendations.

This gives ISS "a bully pulpit from which to harangue corporate management and boards of directors on all matters of governance and compensation ...." Yet, as the Institute for Governance reports, there are some serious concerns about ISS:

• Lack of transparency as to the process by which they arrive at formulating their recommendations; • Inaccuracies in their analysis and unresponsiveness to corporate demands for corrections;
• Conflicts of interest, in particular for ISS, by their offering of several services to the same corporations which are the subject of their proxy recommendations;
• More subtle criticisms focus on their definition of «good» governance and the lack of (or very weak) empirical evidence that their kind of governance has any influence on the performance of companies;
• Proxy advisors have a vested interest in raising the bar of «good» governance from year to year to justify their continued employment;
• The influence of proxy advisers on corporate governance makes some, many, boards of directors overly preoccupied with ensuring favorable recommendations from proxy advisers, by taking pre-emptive steps to ensure that their policies on governance and executive pay will not trigger a negative score when fed into the proxy advisers’ standardized algorithm;
• Their business model is problematic. Because their clients, institutional investors, collectively own shares in all publicly listed companies, they have to provide «advice» for all these corporations. In Canada, some 1570 companies are listed on the TSX and another 2,200 are listed on the TSX Venture. The financial year of roughly 84% of companies listed on the TSX ends on December 31st. For some 80% of TSX listed companies, there were less than 50 days between the date the Management Information Circular is received by shareholders and the ultimate date for proxy voting. (IGOPP research, 2012). These statistics create a fundamental issue for these service providers and raise basic questions about their business model. How can they cope with this mass of data and come up with fair and thoughtful recommendations for thousands of corporations in a matter of a few weeks in the spring of each year;
• Surprising and puzzling is the role these proxy advisors are now playing in all cases of mergers, acquisitions, proxy contests and all other litigious matters. Proxy advisers offer their opinion on almost all litigious, contentious issues. As these issues often come about as a result of the actions of some activist hedge funds, a proxy advisor’s favourable opinion, from ISS particularly, is a highly prized input to the argumentation of activist funds. The potential for conflicts of interest is decupled in these highly charged confrontations with huge sums of money at stakes.

The Trump-era SEC tried to put some minimal restrictions on ISS and its fellow oligopolist Glass Lewis. Under woke SEC Chairman Gary Gensler, however, the Biden-era SEC is giving ISS a free pass.

It was bad enough when ISS confined its advice to legitimate issues of corporate governance, but it is increasingly injecting itself into controverted social and economic issues.

The Democrats in Congress and the White House have embraced ISS as part of their progressive a[[roach to business, so it's hard to expect them to take action. If the Republicans win back the Congress, however, they should use their influence to pressure ISS into sticking to its knitting.