Shareholder activists on both sides of the Canada/U.S. border watched warily as the U.S. Securities and Exchange Commission (SEC), the federal regulator of securities, held hearings in May that openly questioned the future of shareholders’ rights to file non-binding proposals at U.S. companies.
Over many decades, shareholders have been able to put proposals on the proxy ballot that have brought their specific concerns into sharp focus, a crucial process for all investors who vote their proxies. When successful, such proposals have brought real and significant change to North American companies.
For supporters of non-binding shareholder proposals, the disturbing aspect of the SEC roundtables—held May 7, 24 and 25—were arguments presented in favour of eliminating or truncating that right, currently provided for under SEC Rules.
The threat to non-binding proposals at the SEC roundtables came mainly from corporate lawyers and law professors. Opposition focused on the costs companies incur in discussing proposals with shareholders and the fact that shareholders with a relatively small stake in a company may submit a proposal. The non-binding proposal in the U.S. is a particularly vulnerable shareholder right because action by the SEC alone could change or destroy it.
Non-binding proposals have been permitted under SEC Rules since 1942. Since that time, amendments to the Rules have expanded the types, and therefore the number, of non-binding proposals that appear on public company ballots.
In the U.S., as in Canada, shareholders may make proposals of two very different types: binding and non-binding. In the U.S., proposals that put forward director candidates or propose a change to company by-laws are binding under U. S. State corporate laws. If such a proposal is approved by shareholders, it must be put into effect by the board of directors. Conversely, a company can legally ignore proposals that are non-binding regardless of how much shareholder support they get when they appear on the proxy ballot.
However, should shareholders’ right to put proposals on U.S. proxy ballots be compromised, their ability to influence the companies in which they invest will be significantly reduced. Many shareholders engage in dialogue with companies in an effort to bring about changes to their environmental, social, governance (ESG) and labour practices. The knowledge that a ballot proposal may well be the end point of a failed discussion motivates companies to deal seriously with its shareholders. Issues previously raised by shareholders in non-binding proposals have subsequently been accepted as best practices.
In Canada, binding and non-binding proposals are provided for under most of the corporate law statutes of the provinces and territories, as well as under the Canada Business Corporations Act and Bank Act. For shareholder activists who worry that the attack on the non-binding shareholder proposal may travel northward, it is very comforting to know that changes to a dozen pieces of regulation and/or legislation would be required to end it here.