SEC Chair Outlines Plan to Revitalize U.S. Public Markets
Commentary by Steven Lofchie
SEC Chair Paul S. Atkins argued for a fundamental reassessment of the shareholder proposal process to reverse the decline in U.S. public companies. He called for simplifying disclosure rules, depoliticizing shareholder meetings, and reforming securities litigation.
Speaking at the John L. Weinberg Center for Corporate Governance, Mr. Atkins called for a reassessment of Rule 14a-8 ("Shareholder Proposals"), arguing that non-binding precatory proposals on social and environmental issues have politicized shareholder meetings. He questioned whether such proposals are a "proper subject" for shareholder action under Delaware law and said companies could seek to exclude them under Rule 14a-8(i)(1) ("Improper under state law"). He also cited new Texas legislation raising ownership thresholds for shareholder proposals and argued that state laws or corporate bylaws may validly set higher standards than the federal rule. Mr. Atkins added that the SEC’s "Shareholder Proposal Modernization" initiative will re-evaluate the original rationale for Rule 14a-8 and whether companies should be required to solicit proposals at little or no cost to proponents.
Mr. Atkins also urged reform of the securities litigation system to curb frivolous lawsuits that raise costs for all public companies. He criticized Delaware’s Senate Bill 95, which bans mandatory arbitration and fee-shifting for securities claims, arguing that companies should decide for themselves whether to adopt such measures to deter abusive suits. He warned that Delaware’s restrictions could push firms to reincorporate elsewhere, fueling talk of a potential "DExit," and encouraged the legislature to revisit its prohibitions.
Commentary
Under the prior Administration, there were continued complaints that the private capital markets had become overly important in comparison with the public markets. No serious consideration was given as to how that trend could be reversed, or as to whether the SEC shared material responsibility. One egregious example of the SEC refusing to ask itself what role its regulations had played in the decline of the public capital markets was former SEC Chair Gensler's claim that a twenty-five year long decline, by almost 50% in the number of listed companies, was attributable to factors such as "economic uncertainty relating to the war in Ukraine." Bottom line, Mr. Gensler did not have an interest in any line of thought that might argue for less regulation.
At the end of the day, there are certain benefits to being a public company (increased liquidity, access to retail investment including by mutual funds) and there are certain costs (particularly regulation). If the costs materially exceed the benefits, public companies go private, and private companies stay private. It's just economics.