By Bill Flook
The SEC on November 27, 2019, asked a federal judge to dismiss a lawsuit by the Sierra Club that seeks to force the commission to hand over correspondence related to shareholder proposals on climate change and other topics. The environmental group sued the SEC in October, accusing the market regulator of stalling on a Freedom of Information Act (FOIA) Request.
In the filing in U.S. District Court for the Northern District of California, the SEC denied the Sierra Club’s allegations and argued it “has not improperly withheld any documents under the FOIA.”
Both the lawsuit and the April FOIA request seek documents on the market regulator’s use of no-action letters to allow public companies to exclude the climate proposals on the basis of “micromanagement.”
Sierra Club, in its suit, said it sought documents from the SEC seeking “communications between the SEC and external parties related to climate-focused shareholder proposals,” as well as “records in SEC’s possession related to SEC’s processes for rejecting or approving a company’s decision to exclude shareholder proposals related to climate change.” SEC staff told the Sierra Club it would need to wait three years before the commission would begin reviewing the documents in question.
The SEC, in its November 27 response, said the Sierra Club request was properly placed on its “complex track” due to the “volume of responsive documents.”
Sierra Club said it launched the FOIA in light of what it frames as a spike in “no-action” letters issued by the SEC allowing issuers to exclude certain proposals from being voted on by shareholders, pursuant to Rule 14a-8 of the Securities Exchange Act of 1934.
“The SEC, which regulates publicly held companies, may take action against such companies if they improperly block shareholders from exercising their rights to bring issues to a vote,” the group wrote in the suit. “Since President Donald Trump took office, the SEC has increasingly allowed companies to exclude shareholder proposals aimed at curbing global warming and adopting environmental standards. In effect, the SEC has quietly allowed companies to kill such proposals before they can even be presented for a shareholder vote.”
The suit points to one instance in particular: the February 2018 no-action letter to EOG Resources Inc. allowing it to exclude a proposal “that the Company adopt company-wide, quantitative, timebound targets for reducing greenhouse gas emissions and issue a report discussing its plans and progress towards achieving these targets.”
“In our view, the Proposal seeks to micromanage the Company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment,” the SEC’s Division of Corporation Finance wrote in the no-action letter, which said the SEC would take no enforcement action if the company omitted the proposal from its proxy materials under Rule 14a-8.
“Until the EOG Resources decision, the SEC had never issued a shareholder proposal no-action letter on the issue of greenhouse gas targets,” Sierra Club wrote in the lawsuit. “Recently, however, SEC has increasingly cited ‘micromanagement’ to support its recent shareholder proposal no-action letters.
A June 2019 memo from Skadden, Arps, Slate, Meagher & Flom LLP framed micromanagment as “an increasingly viable avenue for relief” following SEC staff’s October 2018 issuance of Staff Legal Bulletin (SLB) No. 14J, Shareholder Proposals, which was seen as expanding use of the micromanagement exception.
Skadden found that SEC staff agreed to no-action requests on the basis of micromanagement 21 times during the 2019 proxy seasons, compared to 11 the year before and four in 2017.
The Sierra Club lawsuit comes amid a broader battle over how and why companies are allowed to block shareholder proposals, especially those dealing with so-called Environmental, Social, and Governance (ESG) issues.
A split SEC in November voted to issue a proposal, supported by the business lobby, in Release No. 34-87458, Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8, which would make a series of changes that would increase the difficulty for shareholders to bring proposals up for vote.
This article originally appeared in the December 3, 2019 edition of Accounting & Compliance Alert, available on Checkpoint.
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