Lawsuit challenges SEC over shareholder voting rules

October 1, 2021

The Council of Institutional Investors (CII) has challenged the Securities and Exchange Commission's (SEC) planned changes to shareholder proposal rules.

In an 'amicus brief' filed in the district court for the District of Columbia on 23 September, the CII's general counsel Jeffrey Mahoney contended that the US regulator's planned higher thresholds for refiling shareholder proposals "sharply limited" investors' ability to influence company behaviour.

Mahoney and Cornish Hitchcock, a lawyer at Hitchcock Law Firm in Washington DC, provided the legal opinion in support of a case brought against the SEC by the Interfaith Center on Corporate Responsibility and non-profit corporate responsibility campaign group As You Sow.

The groups, along with shareholder advocate James McRitchie, filed the lawsuit in June in an attempt to stop the rule coming into force as planned in January 2022.

Mahoney and Hitchcock argued that the SEC's justification for the rule change was based on an approach that "gave too much significance to the supposed 'cost' of shareholder proposals and underestimated the benefits".

The brief stated: "As a result, by raising the ownership thresholds needed to resubmit proposals, the Commission underestimated the fact that many governance reforms that have received widespread acceptance in the marketplace were offered by shareholders (often individuals) with smallholdings.

"The size of an individual’s holdings has no correlation with the significance of a given issue for the long term health of a company."

The brief also set out a series of historical examples of shareholder proposals that have "promoted good corporate governance practices and long-term shareholder value".

The SEC's rule change was introduced under previous chair Jay Clayton, who was appointed by then-US president Donald Trump.

Since Joe Biden moved into the White House and Gary Gensler took over as SEC chairman, the regulator has begun taking a different approach to environmental, social and governance issues, in line with similar changes of direction at other agencies.