Dive Brief:
- The Securities and Exchange Commission will sit out most of the no-action process this proxy season and only respond to requests based on company jurisdiction, the SEC Division of Corporation Finance said Monday. These include proposals submitted on companies’ environmental, social and governance initiatives, or lack thereof.
- The agency said outside of submissions based on company jurisdiction, “the Division has determined to not respond to no-action requests for, and express no views on, companies’ intended reliance on any basis for exclusion of shareholder proposals under Rule 14a-8.”
- The SEC said it would weigh in on the applicability of state laws but largely leave it to companies to decide whether or not a shareholder proposal is excludable under applicable laws and agency guidance for the 2025-26 proxy season.
Dive Insight:
The SEC’s no-action process is a procedure where a company can request the agency staff's informal assurance that they will not recommend enforcement action for a certain proposed initiative that might violate securities laws. Historically, companies that are looking to have shareholder proposals excluded from the proxy ballot approach the agency, which has frequently provided relief in the past.
The Division of Corporation Finance said Monday it made these changes to its no-action process after it “thoroughly considered its role” in the no-action process for the proxy season that began in October. The agency said it’s sitting out the bulk of the no-action process due to resource and timing constraints following the recent conclusion of the longest government shutdown in U.S. history, as well as the “extensive body of guidance” from the SEC already available to companies and filers.
The Division of Corporation Finance said it will review no-action requests that look to exclude proposals based on the laws of the company’s jurisdiction, after it “determined that there is not a sufficient body of applicable guidance for companies and proponents to rely on.”
Companies looking to exclude a proposal for any basis will still be required to notify the submission’s filers and the agency at least 80 days before filing a definitive proxy statement.
The agency decision to continue to weigh in on exclusions based on jurisdiction comes after SEC Chair Paul Atkins questioned last month whether nonbinding, or precatory, shareholder proposals — including environmental and social proposals — could be excludable under certain states’ laws. Atkins’ comments are cited among the agency’s reasoning for the process change in the Nov. 17 statement.
While delivering an Oct. 9 keynote at a University of Delaware gala, Atkins said that environmental and social proposals “frequently involve issues not material to the company’s business,” receive lower support than other proposals and “consume a significant amount of management’s time and impose costs on the company.”
“However, is a company actually required to include these precatory shareholder proposals in its proxy materials?” Atkins asked. “The answer to this question lies at the intersection of the Commission’s Rule 14a-8 and state corporate law.”
In the same speech, Atkins pointed to a recent paper that argued that the state laws of Delaware — where 80% of public companies are incorporated, as of 2024 — do not give shareholders the right to bring non-binding proposals.
Investor organization the Shareholder Rights Group said in a statement Monday that 98% of shareholder proposals before U.S. companies are advisory, or nonbinding in nature. Shareholder Rights Group Director and General Counsel Sanford Lewis said without the agency’s informal rulings, “the only legal recourse for shareholders is to sue the company to force them to include the proposal after receiving a notice of intent to exclude.”
“This creates significant new uncertainty for companies and investors.” Lewis said. “The uncertainty for companies is compounded by governance implications of excluding proposals without an informal SEC ruling on the merits.”
The change “has the potential to end shareholder proposals as we know them,” according to Erik Gerding, a partner at law firm Freshfields. Gerding directed the SEC’s Corporation Finance Division from February 2023 until December 2024, and told ESG Dive Monday that Atkins’ theory “could apply to any non-binding shareholder proposal to a Delaware corporation,” not just environmental or social ones.
“The staff statement today essentially said that the staff will only grant no-action relief under the one ground for excluding proposals that Chairman Atkins mentioned in the speech,” Gerding said in emailed comments.
“We will see how many companies pursue this theory and how Delaware law firms and Delaware courts might respond,” he added. “Will they accept this theory that non-binding shareholder proposals are not proper matters for shareholders to vote on? Will they apply this only to ‘environmental’ and ‘social’ proposals or will they apply it to all non-binding proposals?”
