You might recall that this past proxy season witnessed a significant number of shareholder proposals related to ESG—from both sides of the aisle. (See this PubCo post.) One of those proposals was submitted by the National Center for Public Policy Research to The Kroger Co., which operates supermarkets, regarding the omission of consideration of “viewpoint” and “ideology” from its equal employment opportunity policy. Kroger sought to exclude the proposal as “ordinary business” under Rule 14a-8(i)(7), and Corp Fin concurred. After Corp Fin and the SEC refused reconsideration of the decision, the NCPPR petitioned the Fifth Circuit for review. Now, the National Association of Manufacturers has requested, and been granted, leave to intervene in the case, claiming that neither the federal securities laws nor the First Amendment allows the SEC to use Rule 14a-8 to compel companies to speak about contentious political or social issues, such as abortion, climate change, diversity or gun control, that are “unrelated to its core business or the creation of shareholder value.” That is, NAM isn’t just arguing about Corp Fin’s greenlighting of the exclusion of NCPPR’s proposal—in fact, NAM agrees that “Kroger should not be forced to include petitioners’ policy proposal in Kroger’s proxy statement.” Rather, NAM is upping the ante considerably by challenging whether the SEC has any business “dictat[ing] the content of public company proxy ballots and the topics on which shareholders are required to cast votes.” According to NAM’s Chief Legal Officer, “[m]anufacturers are facing an onslaught of activists seeking to hijack the proxy ballot to advance narrow political agendas, and the SEC has become a willing partner in the effort. The corporate proxy ballot is not the appropriate venue for policy decisions better made by America’s elected representatives, and manufacturers are regularly caught in the middle as activists on the left and the right bring fights from the political arena into the boardroom.”
Background. In December 2022, NCPPR submitted a proposal to Kroger requesting that Kroger “issue a public report detailing the potential risks associated with omitting ‘viewpoint’ and ‘ideology’ from its written equal employment opportunity (EEO) policy.” (If the name NCPPR rings a bell, it may be because the organization has been a plaintiff in litigation challenging California’s board diversity statutes, SB 826 and AB 979 (see this PubCo post) and the Nasdaq board diversity rule (see this PubCo post).) In its supporting statement, NCPPR observed that Kroger’s EEO policy did not explicitly prohibit discrimination based on viewpoint or ideology, and pointed to “ample evidence” that persons with conservative viewpoints “may face discrimination at Kroger.” For example, NCPPR contended that Kroger removed “patriotic and Second Amendment related paraphernalia from store shelves” and “simultaneously pushed a leftwing social agenda.” “Removing pro-America items,” NCPPR contended, “from store shelves while publishing ‘allyship’ training guides for staff certainly raises concerns over how Kroger treats employees with diverse points of view….”
Kroger sought to exclude the proposal, and asked Corp Fin for a no-action letter, arguing that the proposal related to the company’s “ordinary business operations” within the meaning of Rule 14a-8(i)(7). In support, Kroger pointed out that “the Staff consistently has permitted exclusion of proposals under Rule 14a-8(i)(7) that relate to management of a company’s workforce” and identified several proposals that were “substantially similar” to the NCPPR proposal where the Staff “permitted exclusion of proposals under Rule 14a-8(i)(7),… including proposals submitted after the publication of SLB 14L in November 2021.” (See this PubCo post.) In this case, Kroger maintained, “the Proposal focuses on Kroger’s management of its workforce and policies concerning employees, both of which are ordinary business matters.” Although Kroger acknowledged that “a proposal may not be excluded under Rule 14a-8(i)(7) if it is determined to focus on a significant policy issue,” simply “touch[ing] upon a significant policy issue,… does not preclude exclusion….In this instance, even if the Proposal were to touch on a potential significant policy issue, the Proposal’s overwhelming concern with how Kroger manages its workforce through employee policies demonstrates that the Proposal’s focus is on ordinary business matters.”
NCPPR responded that substantial discrimination was a significant social policy issue that transcended ordinary business. The proposal, NCPPR said, did not seek to manage the workforce, but rather “seeks the issuance of a report gauging the risk of not prohibiting discrimination—a request that has been consistently recognized by the Staff as an appropriate request that either does not inappropriately interfere with workforce management or implicates such significant social policy issues as to transcend that concern.” Consistent with SLB 14L, NCPPR argued, the proposal raised “human capital management issues with a broad societal impact,” which the SLB stated “would not be subject to exclusion solely because the proponent did not demonstrate that the human capital management issue was significant to the company.”
In addition, NCPPR contended that Kroger’s request was, in effect, “asking the Staff to discriminate on the basis of viewpoint in violation of the First Amendment.” Corp Fin has “routinely denied no-action relief to similar requests focusing on risks from discrimination on other grounds….So if the Staff opts to issue relief to exclude our Proposal, one might reasonably conclude that it could only do so because of its opinion of the distinctive political views our Proposal expresses.” According to polling, NCPPR said, “the vast majority of conservatives feel discriminated against,” and NCPPR had “been sounding the alarm over viewpoint and ideology discrimination for years, yet these concerns have been—and continue to be—ignored by the Staff.” It appeared to NCPPR that “the only reason the Staff has refused to agree with this assessment is because it, as a matter of personal policy preference, or perhaps unconscious or even conscious bias, does not object to viewpoint and ideology discrimination of the sort that too many companies have indulged in over the past few years.” If the Staff doesn’t deny relief to Kroger, NCPPR argued, that “would provide a clear demonstration of how the Staff’s open-ended discretion in determining which views count as ‘socially significant’ may be facially invalid under the First Amendment.”
In a foreshadowing of the NAM motion to come, NCPPR maintained that if Corp Fin issued a no-action response to Kroger, then “it would raise significant concerns that the Staff is acting beyond its statutory authority,” effectively “regulat[ing] the substance of corporate governance” by “regulat[ing] the substantive matters that a corporation is required to include in its proxy statement.”
Corp Fin agreed with Kroger that the proposal could be excluded under Rule 14a-8(i)(7) because it “relates to, and does not transcend, ordinary business matters.” NCPPR sought reconsideration of Corp Fin’s decision, but without success.
Petition for review. NCPPR then filed a petition in the Fifth Circuit requesting review of the Staff’s letter, contending that the no-action decision was “deemed a final order of the Commission and thus reviewable.” The Court then issued an administrative stay.
The SEC’s response noted that, in many instances involving NCPPR proposals, the Staff has issued letters concluding that the proposal was not excludable.
As a procedural matter, the SEC contended, the Court lacked subject matter jurisdiction because “a no-action letter from staff is not a ‘final order’ of the Commission under the Act and is thus excluded from review in this Court.” The SEC observed that when a company elects to exclude a shareholder proposal, it must notify the SEC and the proponent of the proposal as to the reasons for doing so. But that “requirement ‘is informational only’ and ‘[n]o response by the Commission or its staff is required.’” Rather, its purpose is to advise the SEC “in case ‘enforcement action may be appropriate’ and to ‘alert the shareholder proponent’” in the event it chooses to pursue its own remedies. Practically speaking, however, there are serious limitations on the SEC’s enforcement capabilities in this area, and, instead, private action by aggrieved “provides a necessary supplement” to SEC action. (See, e.g., this PubCo post, this PubCo post, this PubCo post and news briefs of 3/18/14, 3/13/14 and 3/3/14.) When the Staff provides its advice to companies on whether a proposal may be properly excluded, that advice is “informal,” and “‘does not constitute an official expression of the Commission’s views.’” The SEC, the SEC said, “has issued no order concerning this matter, final or otherwise.” Accordingly, the SEC argued, the no-action letter to Kroger was not a reviewable SEC order.
Most importantly, however, the SEC contended the petition should be dismissed because it was moot. Why? Because, after NCPPR’s petition was filed, Kroger filed its final proxy statement with the SEC; the proxy statement “included NCPPR’s proposal in its final proxy statement…, and thus petitioners have already obtained all the relief that they have sought from this Court.” Nor did the case fall within the exception for matters “capable-of-repetition-yet evading-review.” Even “if the challenged action were capable of repetition,” the SEC contended, review would still be available, including direct relief against the company. (The SEC noted that NCPPR did file private litigation directly against Kroger in federal district court.) In addition, “any assertion that petitioners will suffer the same alleged harm in the future would be speculative and remote.”
Motion by NAM. However, prior to the SEC’s motion to dismiss, NAM had moved to intervene in the case “to raise a fundamental threshold issue addressed by neither party but affecting every publicly traded company in the United States: Whether the First Amendment and federal securities laws allow the SEC, through its Rule 14a-8, to compel a corporation to use its proxy statement to speak about abortion, climate change, diversity, gun control, immigration, or other contentious issues unrelated to its core business or the creation of shareholder value.” According to NAM, the answer to that question is “‘No. It is ‘firmly established’ that the States have the authority ‘to regulate domestic corporations.’… And state corporate law typically empowers corporate management, subject to oversight by the board of directors, to determine whether and how the corporation will speak or act.”
NAM contended that, under Rule 14a-8, the SEC “asserts federal governmental power to override management and compel a corporation to publicize dissenting shareholders’ proposals on divisive issues in its own proxy solicitation.” The SEC has statutory authority only to prevent “deceptive” or “misleading” statements in proxy materials, NAM asserted, but the “SEC’s claimed power to dictate the contents of corporate proxy statements has no basis in federal securities law, and it violates the First Amendment’s prohibition against government-compelled speech.”
Government-compelled speech in violation of the First Amendment seems to be a favorite argument of NAM. You may remember that NAM was part of the triumvirate—with the Chamber of Commerce and Business Roundtable—that took on the SEC over the conflict minerals rules—with some success. In April 2014, the D.C. Circuit issued a decision in National Association of Manufacturers, et al. v. SEC, concluding that that the conflict minerals rules “violate the First Amendment to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have ‘not been found to be “DRC conflict free.”’ Why? Because, by “compelling an issuer to confess blood on its hands, the statute interferes with that exercise of the freedom of speech under the First Amendment.” (See this PubCo post.) As a result, Corp Fin issued guidance advising that companies “should comply with and address those portions of Rule 13p-1 and Form SD that the Court upheld.” In 2015, the D.C. Circuit reaffirmed its initial judgment. (See this PubCo post.) On remand in 2017, the D.C. District Court entered final judgment, holding that the statute and related rules and forms violated the First Amendment to the extent that they required regulated entities to report to the SEC and to state on their websites that any of their products “have not been found to be ‘DRC conflict free.’” (See this PubCo post.) Following that action, Corp Fin issued an Updated Statement on the Effect of the Court of Appeals Decision on the Conflict Minerals Rule that provided substantial relief to companies subject to the rule. (See this PubCo post.) For additional discussions of the issue of “compelled commercial speech” under the First Amendment, see my posts of 4/14/14, 7/16/14, 7/29/14, 8/18/15, 3/13/17.
NCPPR has argued, NAM observed, that the “SEC has applied Rule 14a-8 in an inconsistent and politically motivated manner,” and NAM concurred in that view. However, NAM also concurred with the SEC’s view that Kroger should not be forced to include NCPPR’s proposal in its proxy statement. “That is because,” NAM contended, “the SEC lacks authority to force any public company to include any shareholder-selected policy proposal in the company’s proxy solicitation.” As characterized by NAM, under Rule 14a-8, if the Staff does not issue a no-action letter concurring with the company’s view that a proposal may be excluded, “the company will be required to include the proposal on its proxy statement.”
Because of Rule 14a-8, NAM contends, activists have hijacked the proxy process to “push their ideological agendas.” Even when the proposals are unsuccessful, they can “impose real costs on companies and, ultimately, shareholders.” In addition, NAM argues, proxy advisory firms “push institutional investors to support activist proposals…. But the ESG agenda that they support is often contrary to the financial interests of investors.”
NAM placed the SEC at the center of these policy debates. The SEC, NAM maintained, takes the “categorical position that ‘issues with a broad societal impact’ do not qualify for [the ordinary business] exception, regardless of whether there is any ‘nexus’ between the issue and the company’s actual business.” NCPPR and others have used Rule 14a-8 to submit conservative proposals; however, NAM charged, SEC Staff permit exclusion of “certain viewpoints significantly more often than it permits the exclusion of other proposals,… thus enabl[ing] the SEC to arbitrarily bolster certain proposals while also forcing companies to speak about controversial political topics when they would rather stay silent.” As an example, NAM cited an anti-gun-rights proposal that the SEC did not view as excludable and a pro-gun-rights proposal that was considered excludable.
NAM sought to intervene because neither of the parties would argue, as NAM does,
“that the SEC’s asserted power to compel corporations to publicize and discuss shareholder-submitted proposals violates the First Amendment. Rule 14a-8 authorizes the SEC to force public corporations to convey the message of third parties (activist shareholders) as part of the corporation’s speech (its proxy-vote-solicitation statements) and to take a position on those proposals. This ‘compelled’ corporate speech— and compelled ‘subsidization’ of shareholder speech—violates the First Amendment…. Nor is the speech compelled by Rule 14a-8 ‘limited to purely factual and uncontroversial information.’”
Moreover, NAM contends, there is no statutory “authorization to compel corporations to affirmatively engage in solicitation prompted by third parties or to discuss policy proposals raised by activist shareholders.” Citing West Virginia v. EPA (see this PubCo post), NAM also contended that the SEC’s interpretation of its statutory authority “implicates the major questions doctrine, a related clear-statement rule. It is a ‘major policy decision’ for the SEC to force corporations to publicize and discuss shareholder-submitted proposals that are ‘the subject of an earnest and profound debate across the country.’”
The Court granted NAM’s motion. What will be the impact? Will the SEC’s mootness argument win the day? Or will the Fifth Circuit raise the bar by taking up NAM’s more capacious argument that seeks to dismantle the SEC’s 14a-8 regulatory regime as unauthorized? That remains to be seen.