The Security and Exchange Commission was established as a regulatory body to protect investors from misconduct. This role can become complicated as companies and investors sometimes feel misalignment in their goals and values. This type of conflict was demonstrated in a case that led to the Fifth Circuit’s Court of Appeals ruling to affirm the SEC’s ability to intervene in shareholder proposals. This ruling came after a more than year-long exchange.
At MehaffyWeber, we understand that this may have lasting implications for how the shareholder proposal process will work in the coming years, and we are committed to helping you navigate concerns regarding quality legal representation.
What Prompted This Ruling?
The Fifth Circuit Court of Appeals ruling began with a dispute between KrogerCo and the National Center for Public Policy Research (NCPPR), one of its shareholders. According to 14-a8 of the Securities Exchange Act of 1934, shareholders are entitled to submit proposals to be reviewed in annual meetings.
The NCPPR reported concerns about the political leanings of some of Kroger Co’s actions and submitted a proposal to the Kroger Company to provide a public report on the risks of the choice to omit the terms ‘viewpoint’ and ‘ideology’ from their equal employment opportunity policy. The company sought and received a “no action” letter from the SEC.
The letter was based on the grounds of an ‘ordinary business exclusion,’ claiming that the shareholder proposition focused on the daily operations of staff management and, therefore, was ordinary business. SEC staff granted the no action letter, essentially stating that Kroger was allowed to exclude this proposition from their annual meeting without facing consequences from the SEC.
Dismissal
The NCPPR appealed the case to the SEC, and after facing denials to their appeals, they took it to the Fifth Circuit of Appeals, but on November 14, 2024, a three-judge panel disputed this decision. The court initially dismissed the case based on irrelevance because the NCPPR’s proposition was ultimately included in the pamphlet, giving no reason for a case. However, they also determined they did not have jurisdiction over the guidance given by the no-action letters because they are informal recommendations.
The Fifth Circuit further stated that the no-action letters fail to constitute final orders according to the SEA or “final agency actions” according to the Administrative Procedure Act. The panel determined that these letters have no legal consequence and are not a formal position of the SEC but guidance from SEC staff. This makes them unenforceable and outside the court’s subject matter jurisdiction since the SEC did not provide a legal decision in issuing and confirming the decision not to intervene.
Important Considerations in the Proposal Criteria
The key components of the case surround rule 14-a, addressing shareholder proposals. The rule states that a shareholder is eligible to provide input or submit a proposal at an annual meeting under the following criteria:
- The shareholder has continuously held $2,000, $15,000, or $25,000 market value of the company’s securities and is entitled to vote on the proposal for at least three years, two years, or one year, respectively.
- The shareholder must provide the company with a statement, in writing, that they intend to continue to hold this amount of securities through the shareholder meeting in which the proposal is shared.
- The shareholder must provide contact information and a time they are available to discuss the proposal within 10-30 calendar days after they submit the proposal.
Failure to comply with these procedural guidelines may be an automatic exclusion from the proxy ballot. Additionally, stakeholders must ensure their proposals avoid topics that meet exclusionary criteria.
Exclusionary Criteria
The source of the complaints leading to the court decision was based on the company’s attempt to exclude the proposal based on what they, and presumably SEC staff, considered valid exclusionary criteria. Some of the potential reasons provided in rule 14-8a include:
- The proposal would violate the law.
- It would violate proxy rules.
- The proposal is related to a personal grievance.
- The proposal relates to operations that account for less than 5% of the company’s total assets based on the most recent fiscal year.
- The company does not have the authority to implement the proposal.
- The proposal deals with a matter relating to the company’s ordinary business operations.
- The action would affect director elections.
- The proposal conflicts with a proposal presented at the company meeting.
- It has already been implemented.
Implications for the Future
There are some situations in which a company may be able to exclude the proposal, and it can be critical to consult an attorney, especially following the recent ruling. Historically, companies could request a ‘no action’ letter to provide reassurance that they would not be penalized for excluding proposals. However, after the ruling, this process may be affected.
While a no-action letter may provide general guidance to support a company’s decision, it does not hold any legal standing or serve as an official waiver of responsibility, which may lead companies to seek further guidance from their legal team. Additionally, if the letter is not considered legally binding or an official opinion, shareholders may be left without recourse or with fewer options if they fear they are treated unfairly.
Contact a Commercial Litigation Attorney Today
Prior to this ruling, no-action letters were the support a company needed to ensure they were lawfully excluding proposals for the proxy ballets and that the SEC would not intervene or sanction them for doing so. With the new changes, securing this staff-issued documentation may not ensure the SEC will stay uninvolved. It may leave shareholders and companies lacking stability while navigating these situations.
If you are uncertain how to proceed in your situation to minimize the chance of a lawsuit, MehaffyWeber has 70 years of experience in commercial law. Chambers USA recognizes our firm, and we support commercial law cases through litigation, mediation, arbitration, or other means. These cases can become complex very quickly, and our goal is to resolve them promptly and fairly while aggressively advocating for your interests. Contact us today for a case consultation.