The Washington Post editorial board recently argued that Texas's higher thresholds for shareholder proposals and lawsuits will help curb "frivolous abuses", along with making it a more attractive location for businesses, as seen with Exxon redomiciling there from New Jersey. But recent events suggest the opposite.
For decades, the SEC's shareholder proposal process under Rule 14a-8 provided a predictable, low-cost way for companies and investors to resolve disputes. When disagreements arose over whether a proposal belonged on a proxy ballot, the SEC's no-action process served as a neutral referee and helped avoid costly litigation.
Now that the SEC has stepped back from issuing substantive no-action decisions, investors increasingly have little choice but to turn to the courts. The result has not been fewer disputes, but more lawsuits. Consider recent cases involving AT&T, PepsiCo, Axon Enterprise, and BJ's Wholesale Club. These are not examples of shareholders pursuing frivolous claims. They are examples of investors seeking judicial review after companies excluded proposals without the benefit of the SEC's traditional oversight process. In several cases, companies ultimately settled and agreed to place the proposals on their ballots.
Shareholder proposals are not a burden on businesses; they are a mechanism for communication between companies and their owners. Weakening shareholder rights does not reduce conflict; it shifts it into courtrooms. These higher threshold laws might seem attractive on paper, but the results speak for themselves.
Strong capital markets require accountability and clear rules of engagement. The answer is not to make it harder for shareholders to be heard, but to preserve their rights and the proven processes that have allowed investors and companies to resolve disagreements without unnecessary litigation.
Steven M. Rothstein is the Chief Program Officer at Ceres.