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Column: Manufacturers group accuses SEC of abusing proxy oversight to advance liberal agenda



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By Alison Frankel

May 30 (Reuters) -(The opinions expressed here are those of the author, a columnist for Reuters.)

A pro-business trade group has devised an unusual new tactic to try to squelch progressive shareholder activism on issues like diversity, climate change, gun control and abortion.

The National Association of Manufacturers (NAM)intervened last week in a dispute at the 5th U.S. Circuit Court of Appeals over a shareholder proposal by the conservative nonprofit National Center for Public Policy Research. The proposal called on supermarket chain The Kroger Co KR.BLUEto conduct a study of the risks posed by its equal employment policies, which do not prohibit discrimination based on political viewpoint and ideology. (It's confusing, but the group's ultimate intention seems to be to prod Kroger to ban employment decisions based on a worker's politics.)

The National Center’s case at the 5th Circuit challenges a U.S. Securities and Exchange Commission letter advising Kroger that the SEC would likely not bring an enforcement action against the supermarket chain for excluding the proposal from the proxy materials it sends to shareholders in advance of the company's annual meeting.

The nonprofit, which describes itself as a conservative counterweight to liberal shareholder activists, contends that the SEC’s Division of Corporate Finance engaged in “unconstitutional viewpoint discrimination” when it blessed Kroger’s exclusion of the shareholder proposal.

The SEC, meanwhile, argues that Kroger was entitled to exclude the National Center's proposal because it addressed ordinary business matters. The SEC also said the conservative nonprofit cannot challenge the no-action letter because the letter is not a final agency decision.

Those are all important questions, but the SEC and the National Center briefs are narrowly focused.

NAM wants to escalate the stakes of the case dramatically.

The trade group doesn't merely echo the National Center’s contention that the SEC favors progressive activists when it advises companies on whether they are entitled to exclude shareholder proposals. NAM asserts a vastly broader argument that the SEC has no authority at all to force companies to include policy-oriented shareholder proposals in corporate proxy filings.

The commission, according to NAM, has statutory authority only to assure that companies do not mislead investors in proxy materials discussing shareholder-nominated board candidates. But the SEC, NAM said, has abused that “modest” statutory power to claim a right to dictate whether corporations are obliged to inform shareholders about all kinds of policy proposals by activist shareholders.

That over-expansion of the SEC’s role, according to NAM, has allowed progressive shareholders to “hijack the proxy-vote process to advance their preferred social policies,” forcing companies to spend tens of millions of dollars a year to address shareholder proxy proposals that have nothing to do maximizing the value of the company.

The regime that the SEC has developed, NAM said, violates the 1st Amendment of the U.S. Constitution by allowing the government to compel corporate speech. Federal securities law, the group said, simply does not give the SEC authority “to compel corporations to publish dissenting shareholders’ speech in the corporations’ own proxy statements.”

Ironically, NAM's brief argued that the SEC was right to issue a no-action letter to Kroger in response to the National Center’s shareholder proposal – but only because, in its view, “the SEC lacks authority to force any public company to include any shareholder-selected policy proposal in the company’s proxy solicitation.”

NAM, in other words, does not even support the party whose case it is using to advance a brash argument that could affect every big public company in the U.S.

The SEC declined to comment on the NAM brief, as did National Center counsel Jonathan Berry of Boyden Gray & Associates. Kroger did not respond to my query. NAM, which is represented by Lehotsky Keller Cohn, referred me to a press release accusing the SEC of being a “willing partner” of activist investors who are using the proxy process “to advance narrow political agendas.”

The SEC pointed out in its brief opposing the National Center’s motion to expedite the Kroger case that the agency has, in fact, sided with the conservative group in several cases rejecting corporate arguments to exclude National Center proposals from shareholder proxy materials.

When PayPal Holdings Inc PYPL.O,for instance, sought the SEC’s blessing earlier this year to exclude a National Center shareholder proposal calling for a study of its anti-discrimination policies, the agency disputed the company’s assertion that the proposal involved ordinary business matters. The SEC also cautioned Eli Lilly and Co LLY.Nin March against excluding a National Center shareholder proposal calling for a study of the risk of revising the company’s abortion policies. Previously, the SEC advised CVS Health Corp CVS.N, Levi Strauss & Co LEVI.Nand The Walt Disney Co DIS.Nthat various National Center proxy proposals fell outside of the exclusion for ordinary business matters.

NAM and the National Center nevertheless told the 5th Circuit that the SEC favors progressive activists, consistently rebuffing companies that seek to exclude left-leaning shareholder proposals related to controversial social issues. Both groups pointed, by way of example, to SEC letters addressing shareholder proposals at Mastercard Inc MA.Nand American Express Co AXP.Nabout tracking gun purchases. According to NAM’s summary of the SEC’s allegedly irreconcilable holdings, the SEC required Mastercard to include an anti-gun rights proposal in its proxy statement but allowed American Express to exclude a nearly identical pro-gun-rights proposal.

“The only basis for the difference between the proposals was a difference in the proponents’ public-policy views about gun sales,” the National Center insisted. “One side of the debate gets to speak; the other doesn’t.”

The National Center seems to be hoping for a receptive audience at the 5th Circuit, which is dominated by judges appointed by Republican presidents. Two Texans who own Kroger shares were named as co-plaintiffs in the National Center's 5th Circuit petition. The SEC, however, has argued that the 5th Circuit is not a proper venue for the case, which, according to the agency, should be heard in the D.C. Circuit

5th Circuit Judges Jennifer Elrod, James Graves and James Ho denied the National Center’s motion to expedite the case in a one-paragraph order earlier this month.

NAM’s intervention should spice up subsequent proceedings.



Reporting By Alison Frankel; editing by Leigh Jones

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