Looking Ahead to Potential Changes Coming with the New Administration

As we await January 20, 2025, and the transition of power in the U.S., we speculate about the changes to come. At Robbins LLP, we are particularly interested in how the new administration will impact all things financial, especially as they relate to stockholder rights. Three topics that fall into the realm of shareholder rights are ripe for discussion.

Shareholder Advisory Firms

Shareholder advisory firms, or proxy firms, provide research and recommendations to help shareholders – usually institutional investors - vote their shares at shareholder meetings, among other things. There are two main players – Institutional Shareholder Services (ISS) and Glass Lewis. Recently, they have come under scrutiny for supporting environmental, social and governance (ESG) initiatives in corporate policy and for having significant influence over voting decisions.

Historically, republicans side with companies demanding restrictions on the proxy firms, while democrats typically side with pensions funds that rely on the research provided by proxy firms in deciding how to vote at annual shareholder meetings. 

In 2020, the Securities and Exchange Commission (SEC) voted to regulate the proxy research firms, citing the firms' extensive control over substantial parts of the annual meeting vote. In 2022, the SEC adopted certain amendments that rescinded those rules. There is currently litigation pending regarding the regulations.

This conflict is taking center stage with headlines that read "Shareholder Advisors fear clamp down in new Trump administration." Selected to lead the SEC under Trump's term, Paul Atkins has long been critical of proxy firms. Project 2025, the Heritage Foundation's conservative policy manifesto, recommends legislation that would create more competition for ISS and Glass Lewis. Finally, both ISS and Glass Lewis recommended rejecting Elon Musk's $56bn bonus at Tesla. Despite the challenge, Musk won the shareholder vote on his pay. These factors do not bode well for proxy firms. Only time will tell if the full breadth of restrictions come to fruition.

ESG and Other Proposals

During Trump's first term, the SEC increasingly allowed companies to exclude shareholder proposals on ESG issues. However, under Biden's term, the Division of Corporate Finance of the SEC issued Staff Legal Bulletin 14L, which outlined new guidance on shareholder proposals submitted to public companies and raised the burden for public companies seeking to exclude shareholder proposals, particularly as they related to environmental and social issues.

Rule 14a-8 allows shareholders to present proposals for inclusion in a company's proxy statement to be presented for a shareholder vote. However, a company can rely on several exclusions to prevent a shareholder proposal from making it into the proxy statement. One exclusion is the “ordinary business” exclusion, which permits a company to omit a shareholder proposal that “deals with a matter relating to the company’s ordinary business operations.” 

An exception to the ordinary business exclusion is the “significant social policy” exception, which precludes exclusion of the proposal if the proposal “would transcend the day-to-day business matters and raise policy issues so significant that it would be appropriate for a shareholder vote.”  Prior to the implementation of Legal Staff Bulletin 14L, the SEC evaluated “whether the proposal raises a policy issue that transcends the particular company’s ordinary business operations” – rather than discussing whether the particular issue is of general significance. As such, companies emphasized the significance of the policy issue in relation to the company instead of focusing on a significant social policy. Accordingly, through the implementation of Legal Staff Bulletin 14L the SEC “will no longer focus on determining the nexus between a policy issue and the company, but will instead focus on the social policy significance of the issue that is the subject of the shareholder proposal. In making this determination, the staff will consider whether the proposal raises issues with a broad societal impact, such that they transcend the ordinary business of the company.”

As Trump prepares to take office again, there are questions surrounding the future application of Legal Staff Bulletin 14L, including whether it will be rescinded. There is also speculation of greater hostility towards ESG proposals in general and a likelihood that the new SEC leadership will be "more amenable to companies excluding ESG proposals."  

Mergers and Acquisitions

During the Biden presidency, the Federal Trade Commission (FTC) and the Department of Justice (DOJ) implemented stringent antitrust policies that resulted in numerous blocked mergers. In 2023, the FTC revised the guidelines that determine when the agency can intervene in mergers and acquisitions. The revised guidelines lowered the threshold needed to justify FTC oversight and prohibited a company from merging or acquiring multiple smaller companies, even if those acquisitions wouldn't violate the guidelines individually.

This move was greatly criticized and Trump’s administration is predicted to adopt a more lenient approach, potentially reducing antitrust scrutiny and facilitating faster approvals for mergers. In addition, several economic factors such as lower corporate taxes, deregulation, and declining interest rates, are expected to influence the M&A environment. When these factors point in the right direction, it spurs acquisitions since buying a new product or service is faster than creating a new one.

Lower taxes – During his first term, Trump reduced the corporate tax rate from 35% - 21%. This tax cut is expected to expire in 2025, but Trump vowed to lower the rate to 20% and make it permanent. Less taxes paid means more money saved, money that can be used to acquire other businesses.

Deregulation – Trump has promised deregulation, which can lower the cost of operations, eliminate restrictions for new businesses to enter the market, and lower prices for consumers.

Declining interest rates – Lower interest rates will lower the cost of capital for private equity firms and make it easier to underwrite investments, including acquisitions to increase a company's portfolio.

As happens every four to eight years, new administrations put their spin on the rules or change the rules completely. Only time will tell if the new Trump administration maintains the current rules and regulations, makes minimal changes, or completely overhauls the current systems.    

The information provided here is for general purposes and should not be considered as legal, financial, or investment advice.