‘Regulators are listening more to companies than capital providers’: the state of shareholder rights in US and the EU

The US Court of Appeals sided with proxy advisors last week, in their long-running battle with the Securities and Exchange Commission (SEC).

Judges upheld a 2024 ruling that overturned requirements for proxy advisors to file their voting recommendations with the regulator.

The SEC argued this was appropriate because proxy advisors seek to drum up support for their voting positions, which counts as proxy solicitation; but judge Karen Henderson disagreed, saying the advice they offer “is simply a recommendation”.

Elsewhere, the SEC has more successfully intervened in the voting and engagement process.

Earlier this week, IPE explored the impact of guidance from February, clamping down on shareholders’ influence over US-listed companies. And last month, it was revealed the regulator had stopped nearly a quarter of resolutions from reaching the ballot this season.

Investor rights are also under attack at state-level.

Joel Fleming, a partner at Boston-based law firm Equity Litigation Group, describes “a race to the bottom” between Delaware – the long-standing home of US incorporation – and states like Texas and Nevada, which want to tempt businesses away from Delaware with the offer of looser rules.

“Nevada has been promising what it describes as enhanced protections for directors and officers, and what most investors would describe as reduced rights for shareholders, for years,” says Fleming.

This includes making it trickier than in Delaware for shareholders to sue companies, or access confidential documents like board minutes.

While a firm incorporated in Delaware must give investors a chance to elect its directors every 13 months, that drops to every 18 months in Nevada – and only a shareholder with more than 15% of the voting rights is allowed to enforce the rule.

More recently, Texas passed a bill allowing companies to adopt bylaws banning shareholders with less than 3% of shares from filing derivative lawsuits.

“If you think about that in the context of a company like Tesla, it would mean you’d have to have about $30bn before you had the right to enforce even minimal fiduciary duties,” Fleming notes.

Delaware has been feeling the pressure to compete, and has responded with its own reductions in shareholder rights.

These include introducing limits on the information they can access from companies to scrutinise conflicts of interest, and reductions to associated legal guardrails.

Sarah Wilson, the chief executive officer of British proxy advisor Minerva Analytics, says “regulators are listening more to companies than to capital providers in the US”.

“Someone needs to sit down with the directors and chairs of the companies lobbying for these changes, and explain in boring detail why shareholder rights should not be seen as a burden,” she argues.

“It’s shareholders they ask to bail them out when things go wrong, so they need to have a say on the way the company is being run.”

In the EU, there is appetite among regulators to strengthen investor participation rather than weaken it, but progress is slow.

Earlier this year, the European Commission concluded an assessment of the Shareholders Rights Directive (SRD2), which seeks in part to encourage equity investors to exercise their voting rights.

“Now it’s considering ways to improve the text,” explains Pierre Colladon, a senior public affairs advisor at Societe Generale Securities Services.

A formal process is expected to kick off early next year.

“There has been an acknowledgement that some things haven’t gone well so far, and the assessment highlights areas of potential improvement,” Colladon says.

“There are improvements that can be made relatively easily through revisions to SRD”

Pierre Colladon, Societe Generale Securities Services

Wilson hopes the Commission will update the Directive to make it easier to see who the ultimate shareholder is, not just the intermediary.

The way it works now makes it harder for companies and actual investors to build a relationship and have a dialogue, because the issuer has to pay through the nose to get accurate information on who owns it,” she says.

She also hopes SRD2 will be overhauled to require companies across Europe to disclose their voting results in a standardised way, and to force managers to be more transparent about the use of automation when voting on behalf of clients.

But Colladon, who was a member of the Commission’s former advisory body on governance and SRD2, insists that the directive is not the answer to all the challenges around shareholder rights.

“There are improvements that can be made relatively easily through revisions to SRD,” he says, pointing to the thresholds for identifying shareholders.

But differences in the way various member states have transposed and enacted the law, along with broader challenges like costs and behavioural trends, mean it can’t all be solved through a centralised rule.

“The Commission needs to push member states to improve domestic corporate law as well,” argues Colladon.

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