US business lobby warns of litigation over shareholder proposals amid SEC review

The Business Roundtable, which represents CEOs of leading US companies, has warned that companies may have “no choice but to consider litigation” on shareholder proposals as the Securities and Exchange Commission (SEC) reviews the rules about excluding conflicting resolutions.
The comments come in a letter to Institutional Shareholder Services (ISS) and Glass Lewis asking them to “exercise restraint” while the SEC considers its stance, though the letter will likely be of interest to investors involved in filing proposals as well.

Last week, the SEC announced that it was reviewing the part of the Securities Exchange Act [Rule 14a-8(i)(9)] which allows firms to exclude a shareholder proposal that “directly conflicts” with companies’ own proposals after complaints that it had become a loophole to dodge unwanted shareholder proposals on proxy access, where shareholders have the right to nominate board candidates.

The whole issue was sparked by a proposal filed by shareholder activist James McRitchie at retailer Whole Foods, which was followed up by an intervention from the Council of Institutional Investors (CII), which represents major asset owners with a combined $3trn.

The SEC said it would “express no views” on the application of Rule 14a-8 during the current proxy voting season.

Now, John Engler, president of the Business Roundtable and former governor of Michigan, has written directly to Gary Retelny and Katherine Rabin, respectively the heads of ISS and Glass Lewis.

He stresses that the SEC review does not change the legal effect of the rule and that companies are still able to rely on it as a basis to exclude a shareholder proposal from their proxy statements.

“It remains in full force and effect unless and until the Commission takes formal action to amend or suspend the rule. Clearly, that is not the case here,” says Engler. But the SEC’s move had created “significant disruption” for companies.He goes on to say the SEC announcement “means that companies may have no choice but to consider litigation if they want to adjudicate their rights” – though he notes the timing means it “may not be realistic” for companies to litigate before they finalize their proxy materials.

“The Business Roundtable, therefore, believes that it would be inappropriate for ISS and Glass Lewis to apply their voting policies in a way that substitutes their own judgment as to the appropriate course of action in place of the Board’s judgment,” Engler writes.

He urged the two dominant proxy firms to “proceed in a deliberate fashion and exercise restraint” as the SEC considers the issue.

In response, Subodh Mishra, executive director, communications, at ISS said the firm “appreciates hearing the Roundtable’s views on this evolving issue” and will consider them alongside those of its clients and other industry constituents as it applies its guidelines.

Robert McCormick, chief policy officer at Glass Lewis, said his firm would evaluate the “reasonableness and rationale” of firms’ responses to proxy access proposals from shareholders. It would look at the terms of the proposals as well as companies’ own governance, performance, board independence and responsiveness to shareholders.

Responding to the Roundtable’s letter, McRitchie told RI: “Why would any fund subscribe to a proxy advisory service if that service was unwilling to express an opinion contrary to that of management? Absurd.

“Most of the investors I have talked to agree that companies that omit proposals based on their own interpretation … will face dire consequences… such as a vote against all directors. Board reputations are at risk, especially this year.”

The CII had tweeted the Roundtable’s letter with the comment “Not so fast: #Shareholders will rebuke boards who omit proposals due to #SEC pause”.