SEC No-Action Letters On Proxy Materials And Other Developments Reinforce Commission-Wide Commitment To ESG

• Jurisdiction: United States,Federal
• Law Firm: Katten Muchin Rosenman LLP
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Securities, Shareholders
• Author: Ms Danette R. Edwards, Richard Zelichov and Trevor Garmey
• Published date: 25 May 2023

Any doubts about the commitment of the Securities and Exchange Commission (SEC or Commission) to environmental and social governance (ESG) disappeared in recent months, as its Division of Corporation Finance (DCF) slammed the door on requests by prominent issuers to exclude shareholder proxy proposals related to human rights, diversity, equity and inclusion ("DEI"), and climate change.

Read in isolation, the DCF decisions, which were memorialized in no-action letters from the SEC staff (Staff), may not seem groundbreaking. But when considered alongside other SEC activity, including (1) the growing number of ESG-focused comments from DCF, (2) numerous public statements about the importance of ESG by high-ranking SEC officials, (3) the SEC's recent $55.9 million settlement with Vale SA regarding its sustainability reports and ESG disclosures, and (4) the anticipated release of the final SEC rule on climate-related disclosures, the DCF proxy rulings reflect an agency-wide emphasis on "values-based" capitalism.

In this article, we start by analyzing DCF's no-action letters and demonstrate how the Staff has narrowly interpreted Rule 14a-8(i)(12)(i) of the Securities Exchange Act of 1934 (the Exchange Act) and related regulations, empowering activists to demand action on matters that, until recently, were not the focus of shareholder scrutiny. We then frame the no-action responses in the broader context of SEC actions across multiple Divisions and commentary from Commission leaders, demonstrating that the emphasis on ESG starts at the top, and filters down to ordinary matters of corporate regulation. Finally, we provide key takeaways for issuers struggling to manage the expanding impact of ESG across corporate operations.

I. The No-Action Letters

Shareholders of public companies may seek to have matters acted on by the board or management of a company by submitting proposals for inclusion in a corporate proxy statement if the proposal meets certain conditions. Even if more than fifty percent of the shareholders' votes are cast in favor of the proposal, the proposal is typically non-binding on a company or its board. As a practical matter, however, it is difficult for the board and management simply to ignore proposals that have support from a majority of shareholders. The SEC's rules concerning shareholder proposals do not require that the board or management include every proposal that is submitted and Rule 14a-8(i)(7) of the Exchange Act allows the exclusion of proposals concerning "ordinary business operations." Traditionally, when activists sought information on how a corporation was responding to a matter of broad social concern, issuers could exclude the proposal by demonstrating the absence of any nexus between the issue and corporate operations. However, DCF issued a bulletin (the "2021 guidance") on November 3, 2021, regarding Rule 14a-8 of the Exchange Act, which instructed the Staff to focus not just on whether a proposal related to...