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Shareholders said rule limited ESG proposals

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Judge says SEC considered benefits, wasn't arbitrary

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Plaintiffs pledge to keep engaging with companies

By Jonathan Stempel

June 5 (Reuters) - A federal judge on Thursday dismissed

a lawsuit challenging U.S. Securities and Exchange Commission

rule changes that made it harder for shareholders to file

proposals at companies' annual meetings, including for reforms

on environmental, social and governance (ESG) issues.

U.S. District Judge Reggie Walton in Washington, D.C.

rejected arguments that the SEC arbitrarily and capriciously

adopted the changes, including on the alleged pretext it

supported corporate opposition to reforms on contentious issues

such as climate change and workplace diversity.

The SEC was required to determine whether the changes would

"promote efficiency, competition, and capital formation, and it

did so," Walton wrote in a 64-page decision.

Adopted in November 2020, late in Republican President

Donald Trump's first White House term, the SEC rule changes

increased how much stock shareholders had to own, and how long

they had to own it, before submitting proposals.

The changes also added requirements for resubmitting

proposals that shareholders had rejected in the last three

years.

Plaintiffs in the June 2021 lawsuit included the Interfaith

Center on Corporate Responsibility, which represents more than

300 faith-based institutional investors, shareholder advocacy

group As You Sow and shareholder advocate James McRitchie.

They said the SEC, before adopting the rule changes, failed

to quantify the benefits of ESG and other shareholder proposals,

or address the expected loss of "billions of dollars in

long-term shareholder value" by adding restrictions.

In a joint statement following Walton's decision, the

plaintiffs said the changes "only serve to hurt shareholders and

companies alike. Despite this decision, shareholders will

continue to engage with corporations on their environmental and

social impacts."

The SEC declined to comment.

In seeking the lawsuit's dismissal, the SEC said the rule

changes would help ensure that proposals reflect the interests

of all shareholders, and that resubmitted proposals could

receive levels of support "likely to lead to company action."

SEC commissioners voted 3-2 along party lines for the

changes, with Republican appointees in the majority.

The regulator defended the changes during Democratic

President Joe Biden's administration. The U.S. Chamber of

Commerce supported the SEC's position.

The case is Interfaith Center on Corporate Responsibility et

al v SEC, U.S. District Court, District of Columbia, No.

21-01620.