Amicus Brief from Shareholder Commons in Challenge to the Shareholder Proposal Rule

The Shareholder Commons has filed an amicus brief in the challenge to the SEC’s rule restricting shareholder proposals. An excerpt:

Plaintiffs are asking this Court to vacate and set aside the Amendments. Plaintiffs argue that the Commission failed to quantify the impact of the Amendments on the number of proposals that will be filed, otherwise failed to quantify the costs and benefits of the Amendments, and made changes to Rule 14a-8 that were otherwise arbitrary and capricious, all in violation of the law that governs the Commission’s rulemaking…

In addition to muffling the voice of small shareholders in general, the Amend- ments are also likely to reduce one particular category of proposal: those that address corporate conduct based on its impact on the economy and the financial markets gen- erally (in contrast to proposals that only address the impact of a corporation’s conduct on its own financial returns). Unlike shareholders who own only a few companies, the financial returns to diversified shareholders depend largely on the return of the mar- ket as a whole, rather than on the individual performance of particular companies. For example, while a concentrated shareholder might benefit if the few companies in its portfolio create external costs that weigh on the economy, a diversified investor whose portfolio includes those same companies is likely to find that those externalities weigh down the financial performance of the rest of its portfolio and that this downside outweighs any benefit it might receive from those few companies adding to their profits by means of those externalities.

Thus, diversified shareholders are financially incentivized to bring proposals that seek to rein in corporate behavior that creates significant costs to the economy. Shareholder engagement on these issues can protect the U.S. economy as a whole, as well as the return of the markets overall. But by forcing small holders to choose be- tween diversifying and making shareholder proposals, the Amendments essentially remove any incentive for small shareholders to participate in such private ordering that preserves a healthy national economy. The Commission failed to account for any change to the types of proposals presented that the Amendments might engender, or the economic impact of any such change.

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