Fifth Circuit Affirms SEC’s Authority Over Shareholder Proposals

On November 14, 2024, a panel of the U.S. Court of Appeals for the Fifth Circuit affirmed the SEC’s ability to intervene in shareholder proposals under Rule 14a-8 of the Securities Exchange Act of 1934 (“Rule 14a-8 Proposals”). In siding with the SEC, the court noted that it lacked subject-matter jurisdiction over the SEC’s issuance of no-action letters because the letters constitute non-binding staff guidance, rather than a legal order, and therefore are not a final agency action subject to judicial review.

Summary of Facts

The dispute stemmed from KrogerCo.’s (“Kroger”) initial decision to exclude a shareholder proposal from the National Center for Public Policy Research (“NCPPR”) from its 2023 proxy materials. NCPPR, a right-leaning advocacy group, accused Kroger of discriminating against conservative viewpoints and submitted a proposal requesting that Kroger issue a public report detailing the potential risks associated with omitting “viewpoint” and “ideology” from its equal employment opportunity policy.

Kroger sought and received a no-action letter from SEC staff, which advised that NCPPR’s Rule 14a-8 Proposal could be excluded from Kroger’s proxy materials under the “ordinary business exclusion” of Rule 14a-8(i)(7). Kroger argued that NCPPR’s Rule 14a-8 Proposal fell within the “ordinary business exclusion” by focusing on ordinary business matters such as Kroger’s management of its workforce and policies concerning its employees. The SEC staff acknowledged that there appeared to be a basis for Kroger’s request to exclude NCPPR’s Rule 14a-8 Proposal, and that the SEC staff would not recommend an enforcement action to the SEC commissioners if Kroger omitted NCPPR’s Rule 14a-8 Proposal from its proxy materials. Dissatisfied with this outcome, NCPPR sought review by the SEC commissioners. When the SEC denied the subsequent requests, NCPPR appealed to the Fifth Circuit, alleging that the SEC engaged in viewpoint discrimination and arbitrary decision-making.

In an opinion issued on November 14, 2024, a three-judge panel of the Fifth Circuit rejected these arguments in a 2-1 split along party lines, with two Democratic-appointed judges versus one Republican-appointed judge. First, the court dismissed the case for mootness because Kroger ultimately included the proposal in its proxy materials, where it failed to garner more than 2% of the vote. Second, the court determined it lacked jurisdiction to review the SEC’s no-action letter, finding that such letters are informal, nonbinding guidance provided by SEC staff and do not constitute “final orders” under the Securities Exchange Act or “final agency actions” under the Administrative Procedure Act. The court emphasized that no-action letters carry no legal consequences, do not represent an official position of the SEC, and are not enforceable. Thus, according to the court, “[w]ithout an order, agency action, or finality, the Center is left tilting at windmills.”

Key Takeaways

Tensions Remain Around the No-Action Process

The Fifth Circuit’s decision reinforces the SEC’s ability to guide Rule 14a-8 Proposal exclusions through informal no-action letters. The decision, along with other recent litigation by companies taking Rule 14-8 Proposals to court rather than relying on the SEC’s no-action letter process, highlights ongoing tensions between investors pushing for greater corporate accountability and companies looking to limit shareholder influence on their operations. While proponents of shareholder proposals argue they are crucial for promoting social responsibility and transparency, critics suggest that they can be burdensome, distracting for companies and are often not aligned with other shareholders’ interests.

No-Action Letters are on the Rise

The SEC received roughly 50% more no-action requests from corporate issuers in 2024 than in 2023, signaling that companies are growing more inclined to request no-action relief and reversing a multi-year downward trend since the SEC issues Staff Legal Bulletin No. 14L in 2021, which made it more difficult for companies to exclude Rule 14a-8 Proposals. While the Staff Bulletin granted more no-action requests in 2024 than in 2022, representing an increase to 53% from 35%, the rate of success remains far below the high-water mark of 71% in 2021. The new administration and expected changes to the SEC’s priorities may lead to an even greater number of no-action requests and/or granting of no-action relief if the SEC signals a willingness to backtrack on its recent proponent-friendly posture.

En Banc Petition Still Possible

Although the ruling is seen as a win for the SEC, it may not be the final word on the matter. As with the Nasdaq board diversity rule, the possibility exists that NCPPR may decide to file a petition asking for a hearing by all of the judges on the Fifth Circuit or an en banc review. Given the ongoing debates over shareholder activism, this legal landscape may continue to evolve, with potential for further challenges to the SEC’s authority.

We will continue monitoring developments in this case. Please reach out to your Vinson & Elkins team to discuss these matters and their implications on your business.

This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.