Post-Election Regulatory Changes to Corporate Governance Mirror Broader Political Shift

In the immediate aftermath of the 2024 presidential election and the second inauguration of President Donald Trump, corporate governance policies at the Securities and Exchange Commission (“SEC”) and other organizations are already changing at a rapid pace. The new policies on issues of public company disclosure and shareholder engagement may reflect a shift in attitude at the regulatory level on matters of corporate governance, particularly on environmental, social and governance (“ESG”) issues. Each of the new policy changes is described in this Dechert OnPoint.

SEC Requests to Put an End to Climate-Disclosure Rule Litigation

On February 11, 2025, Acting Chairman of the SEC Mark Uyeda announced¹ that he had directed SEC staff to request that the Eight Circuit Court of Appeal not schedule further argument in the litigation over the SEC’s climate disclosure rules adopted in March 2024 (the “Climate Disclosure Rule”).² The directive echoes the arguments in the dissenting statements by Acting Chairman Uyeda and Commissioner Hester Peirce against the Climate Disclosure Rule’s adoption that the SEC lacked both the “statutory authority or expertise” to address climate change issues and a Congressional mandate to facilitate disclosure “not clearly relating to financial returns.” The directive also cites the recent Presidential Memorandum regarding a regulatory freeze³ and recent changes to the composition of the SEC as further reasons to halt the SEC’s defense of the Climate Disclosure Rule.

It is worth noting that despite the possibility of the SEC withdrawing the Climate Disclosure Rule altogether, other jurisdictions and legal regimes have adopted their own climate-disclosure rules that remain in effect subject to applicable phase-in periods. In 2022, the European Union (“EU”) adopted the Corporate Sustainability Reporting Directive (“CSRD”), which requires certain large and listed companies and other entities, including non-EU entities, to issue reports in line with the European Sustainability Reporting Standards.⁴ And in California, the Climate Corporate Data Accountability Act and the Climate-Related Financial Risk Act, which are proceeding to their compliance dates, would require significant climate-related disclosures by large entities doing business in California, regardless of their jurisdiction of incorporation, location of headquarters, status as a public or private corporation, or how much of their revenue is generated in California.⁵

SEC Releases New Guidance on Shareholder Influence and Eligibility to File a Schedule 13G

Also on February 11, 2025, the staff of the SEC Division of Corporation Finance (the “Staff”) released a revised Question 103.11 and a new Question 103.12 to the Compliance and Disclosure Interpretations (“C&DIs”) interpretating Securities Exchange Act Sections 13(d) and 13(g) and Regulation 13D-G Beneficial Ownership Reporting.⁶ The C&DIs address the eligibility of shareholders to report beneficial ownership on the short-form Schedule 13G as a passive investor rather than on the longer form Schedule 13D when they engage with issuer management on a particular topic. The revised guidance suggests that the Staff might be more likely than it had previously been to disqualify a shareholder from reporting on Schedule 13G who engages with management on a particular topic (such as on ESG-related matters) if the shareholder applies pressure on the issuer to adopt the shareholder’s recommendations.

Taken as a whole, the previous guidance in C&DI 103.11 suggested that engagement with management on ESG issues was usually a safe zone for continuing to file on Schedule 13G, so long as the discussions did not rise to the level of demanding action that would lead to a change of control.

The revised version of C&DI 103.11, while advising that the determination of shareholder disqualification is based on all relevant facts and circumstances, states simply that the determination of the shareholder’s intent behind the engagement “will be informed by the meaning of ‘control’ as defined in Exchange Act Rule 12b-2.”⁷ The new C&DI 103.12 provides further color on how the Staff might find in the shareholder’s engagement a disqualifying “purpose or effect of changing or influencing control of the issuer.” While the revised C&DI 103.12 reiterates that generally, a shareholder who discusses with management its views on a particular topic and how its views may inform its voting decisions, without more, would not be disqualified from reporting on a Schedule 13G, the Staff adds that a shareholder who “exerts pressure” on management to implement certain changes might be influencing control of the issuer for purposes of Rule 13d-1(e). The new guidance thus indicates that the Staff’s standard for disqualifying shareholders from reporting on Schedule 13G on the basis of their engagement with management is lower than the previous standard, which was essentially that the shareholder call for action tantamount to a change of control by the issuer. Now, engagement on ESG topics, when coupled with a suggestion that the shareholder may not support the issuer’s director nominees if its recommendations are not adopted, may disqualify the shareholder from reporting on Schedule 13G.

Takeaways for Schedule 13G Filers

In light of the Staff’s revised guidance, investors that have policies or strong preferences for avoiding a reporting requirement on Schedule 13D should consider, in consultation with counsel, whether and how to engage with management on ESG or other issues. Investors wishing to maintain their status as Schedule 13G filers while discussing priority issues with management may want to take care to limit their remarks to straightforward statements of their viewpoints while avoiding explicit or implicit pressure tactics or efforts to influence company policy. Going forward, the question of when a significant investor’s presentation of its policy views to management necessarily implies a certain pressure on management will remain a gray area until further guidance or enforcement action from the Staff.

New Staff Legal Bulletin No. 14M Broadens Approach to Shareholder-Proposal Exclusion Requests

On February 12, 2025, the Staff issued new Staff Legal Bulletin (“SLB”) No. 14M regarding Rule 14a-8 to clarify its views on the scope and application of shareholder-proposal exclusion requests under Rule 14a-8(i)(5) and Rule 14a-8(i)(7).⁸ The new guidance suggests that the Staff will adopt a narrower view of the “economic relevance” and “ordinary business” exclusions of Rule 14a-8(i)(5) and Rule 14a-8(i)(7), respectively, and more readily allow exclusion of ESG-related shareholder proposals.

“Economic Relevance” Exclusion

In the (now rescinded) SLB No. 14L, the Staff advised that when analyzing whether to allow an issuer to exclude pursuant to the “economic relevance” exclusion, it would no longer focus on finding a nexus between the policy issue raised by the shareholder and the company, but would focus instead on the social policy significance of the issue, giving attention to whether the shareholder proposal raises issues with a “broad societal impact” that “transcend the ordinary business of the company.”⁹ In SLB No. 14M, the Staff takes the opposite tack, advising that its analysis will focus on the proposal’s relevance to the issuer’s business, “notwithstanding [the] importance [of the proposal] in the abstract.” The Staff adds that it generally views “substantive governance matters” as significantly related to almost all companies, by contrast with other matters (i.e., those with social or ethical significance) that may be “significant to one company” but not another. In this regard, while a shareholder can continue to raise social or ethical issues, the “mere possibility of reputational or economic harm alone will not demonstrate that a proposal is ‘otherwise significantly related to the company’s business.’”

“Ordinary Business” Exclusion

As to whether to exclude a proposal under the “ordinary business exclusion” due to the proposal’s subject matter, the Staff advises that it will take a company-specific approach in evaluating the significance of the proposal’s subject matter to the company, rather than focusing solely on whether a proposal raises a policy issue with broad societal impact or whether particular issues or categories of issues are universally “significant.” Accordingly, and echoing its guidance on the “economic relevance” exclusion, the Staff emphasizes that “a policy issue that is significant to one company may not be significant to another.”

In applying the “ordinary business exclusion” due to a proposal purportedly micromanaging the company, the Staff reinstates sections of SLB No. 14J and SLB No. 14K. Under this revived framework, a shareholder proposal that probes “too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment” is likely to be considered excludable.¹⁰ A proposal is more likely to considered micromanaging if it proposes a detailed or intricate plan to solve an issue, thereby undermining the judgment of the company’s board of directors.¹¹ An example given in the revived guidance is where the Staff allowed the exclusion of a proposal seeking annual reporting on “short-, medium- and long-term greenhouse gas targets aligned with the greenhouse gas reduction goals established by the Paris Climate Agreement to keep the increase in global average temperature to well below 2 degrees Celsius and to pursue efforts to limit the increase to 1.5 degrees Celsius.” This proposal was excludable on the basis of micromanagement because it prescribed the method for addressing reduction of greenhouse gas emissions, rather than allowing the board to determine how best to do so.

Nasdaq Drops Board Diversity Disclosure Rule

On January 24, 2025, the SEC formally gave notice¹² that The Nasdaq Stock Market LLC (“Nasdaq”) had filed a proposed rule change with the SEC to remove from Nasdaq’s Listing Rules a requirement that most Nasdaq-listed companies either maintain at least two diverse directors on their board of directors or explain their failure to do so. Nasdaq’s rule change follows the Fifth Circuit Court of Appeals’ decision¹³ striking down the SEC order approving the Nasdaq rule. In its filing¹⁴ requesting the rule change, Nasdaq explained that removing the diversity-disclosure rule in accordance with the Fifth Circuit decision would prevent confusion about the applicability of the rules in question.

ISS Removes Diversity Standards from Director Election Guidelines; Glass Lewis Signals Change to Come

Proxy advisory firm Institutional Shareholder Services (ISS) recently announced that, for shareholder meeting reports published on or after February 25, 2025, it will “indefinitely halt” consideration of the gender and racial and/or ethnic diversity of a company’s board when making recommendations regarding the election or re-election of directors for U.S. companies.¹⁵ This change to ISS’s proxy voting guidelines¹⁶ comes in the wake of recently issued Presidential Executive Orders calling for an end to all DEI mandates, policies, programs, preferences, and activities in the federal government.¹⁷ ISS confirms in its press release that it will continue to provide assessments and vote recommendations on directors of U.S. companies under the other considerations outlined in its proxy voting guidelines, including a director nominee’s “independence, accountability, and responsiveness.”

Proxy advisory firm Glass Lewis has also told its clients that it is considering whether to “change its approach to voting guidance on board elections and DEI-related shareholder proposals at U.S. companies, particularly in areas where this guidance considers gender, ethnic, and racial diversity of the board.” In its letter, Glass Lewis says it is considering this change “given the uncompromising, hardline position of the U.S. Administration.” Glass Lewis says it will issue any new guidance on March 3, 2025, “following the issuance of a U.S. Justice Department report ‘containing recommendations… to end illegal discrimination and preferences, including policies relating to DEI and DEIA.’”¹⁸

Conclusion

The rapid pace of the SEC’s actions following the inauguration of President Trump suggests increased skepticism at the federal level for ESG-related initiatives and shareholder engagement. This shift in attitude, combined with the threat of federal action against institutional DEI-related policies, are already having an effect on proxy advisors and other market participants. Issuers and investors will need to continue to monitor for developments and their impact on business and investing strategy.