US outlines new approach for proxy disputes, seen as blow to shareholder activists

By Ross Kerber

(Reuters) -The top U.S. financial regulator on Monday changed the grounds on which companies may seek permission to skip votes on shareholder resolutions, a move seen as making ​it more difficult for activists to force votes on contentious topics such as climate change or workforce diversity.

In a ‌notice posted to its website on Monday, the Securities and Exchange Commission said that at least through next June, it would no longer make rulings ‌on common proxy objections, such as whether an activist’s proposal was filed late or if a filer owned enough shares. An exception, the SEC said, is if companies claim jurisdictional reasons such as state laws giving them grounds to exclude the item.

The new approach comes as SEC Chairman Paul Atkins, an appointee of President Donald Trump, last month suggested many shareholder proposals ⁠are improper under Delaware law.

The new policy and ‌Atkins’ views will result in companies relying on the state exemption in filing their requests, said Erik Gerding, a partner at law firm Freshfields and the division’s director until last ‍December.

Depending on whether Delaware courts and its legislature back Atkins’ views, Gerding said, “This could be the end of shareholder proposals as we know them.”

SEEKING ASSURANCES

Starting around this time each year, hundreds of companies ask the SEC’s Division of Corporation Finance for ​assurances they will not face enforcement action if they leave shareholder resolutions off their ballots at annual meetings, and are ‌granted permission roughly half the time.

Resolutions on topics such as workforce diversity and emissions have drawn much attention at recent shareholder meetings, even though support from top investors has fallen off in recent years.

Fund industry leaders say their backing is required less often because of voluntary reforms recently put in place by companies on environmental, social and governance questions. Many Republicans have derided ESG efforts, and this year, the agency has already taken other steps to reduce activists’ influence.

Sanford Lewis, ⁠an attorney who represents ESG activists, said nearly all proposals could be ​blocked under what he called an “extreme assault on shareholder rights.”​ Activists might shift their focus to challenging individual directors, he said.

An SEC spokesperson said via email that its decision “was made after thoroughly considering the staff’s role in the shareholder proposal process,‍ staff resources, and ⁠timing issues.”

“With over 900 registration statements and many other filings received during the government shutdown, this decision will allow staff to focus on time-sensitive transactional matters, including capital formation and investor protection,” the ⁠spokesperson said.