Desai Legal Services can provide aggressive representation of shareholders but also strong defensive protection to Boards.
With this video, I will highlight how to both pressure uncooperative Boards over time to report more information, as well as how to protect your business from misdirected, micromanaging shareholders using the recent example of the skirmish between a group of shareholders who collectively hold $1.9 trillion in assets under management consisting of New Jersey nuns, the Church of England, and the New York State Pension Fund on one side as shareholders of ExxonMobil and ExxonMobil on the other.
So, in the Exxon case, the first group of Exxon shareholders, made up of the New York Pension Fund and the Church of England as co-lead filers on behalf of a few other institutional investors sent this shareholder proposal:
Shareholders request that the Board of Directors, in annual reporting from 2020,
include disclosure of 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°C and to pursue efforts to limit the increase to 1.5°C. This reporting should cover both the corporation's operations and products, omit proprietary information, and be prepared at reasonable cost.
At the same time, the Sisters of St Dominic of Caldwell New Jersey sent this shareholder proposal:
Resolved: Shareholders request that ExxonMobil issue a report, at reasonable cost and omitting proprietary information, on how ExxonMobil’s business activities contribute to the provision of affordable reliable, sustainable, and modern energy to alleviate energy poverty, in alignment with the Paris Climate Agreement goal to limit global average temperature increases to well below 2⁰C above pre-industrial levels.
This proposal was similar to the New York proposal, but focused instead how ExxonMobil will address the issue of energy poverty, as it is known, which refers to how 1.2 billion people around the world, who reside in some of the poorest regions of the world, have no access to electricity at all. So, the nuns were asking how Exxon will be able to help increase access to energy to all these regions and people (who also, by the way do not have the sophisticated, energy-efficient, clean burning power generation plants, while simultaneously reducing greenhouse gas emissions.
So, these shareholders sent this proposal to the Exxon Board, requesting that they submit their shareholder proposal for a vote at the 2019 Annual Meeting of Shareholders in May 2019. Immediately the Board sent letters to the staff of the Securities and Exchange Commission, Division of Corporate Finance asking whether or not they would face SEC disciplinary action if they excluded these proposals from their proxy materials and ballot.
So, what is the legal basis for these series of events?
Under the authority granted to the SEC by the Securities Exchange Act of 1934, the SEC issued Rule 14a-8 which provides that a company must include a shareholder proposal in its proxy materials unless the proponent fails to comply with the rule’s eligibility and procedural requirements or the proposal falls within one of thirteen substantive bases for exclusion.
Companies seeking to omit a proposal under Rule 14a-8 generally request a “no-action letter” from the Staff of the SEC’s Division of Corporation Finance (the “Staff”) seeking the Staff’s concurrence that with the company’s conclusion that it may exclude the shareholder proposal under Rule 14a-8. And seeking this letter is as easy as drafting a memorandum that argues your legal position along attaching all relevant materials and correspondence with shareholders and sending it to email@example.com.
If you have continuously held at least $2,000 worth of a company’s stock (or 1% of the shares eligible to vote, whichever figure is smaller) and wish to propose a shareholder resolution Desai Legal Services can represent you in interactions with the Board as well as in responding to inappropriate Rule 14a-8 maneuvers by Boards to try to exclude your proposal.
Alternatively, Desai Legal Services can represent Boards if they are faced with an inappropriate shareholder proposal and wish to avoid disruption to your annual shareholder meetings.
Now on a personal note, I have always advocated for increasing shareholder rights, especially ending the poison pill mechanism that prevents new shareholders or “hostile” shareholders as Boards refer to them, from acquiring significant or controlling interests so that they can shake up underperforming companies or put companies assets to better use, but my personal favor for shareholders comes from understanding how strong the legal protections are for Directors to exercise exclusive control and judgement over the ordinary business matters of a company. There are few corporate law practitioners who can use the full strength of the law to protect the business judgement domain of the Board of Directors as it stands today as well as I can. So, if your Board judgement or actions are facing scrutiny call Desai Legal Services.
Now back to the Exxon case…
Exxon argued that the New York proposal was not appropriate subject matter for shareholders to vote on because the proposal was:
1. Vague and indefinite so as to be inherently misleading under Rule 14a-8(i)(3);
2. Because it proposal attempts to micromanage or to deal with the company’s ordinary business operations, which as a matter of law must be managed by a company’s Board of Directors and not by a company’s shareholders, and this principle is required by Rule 14a-8(i)(7); and finally that
3. Exxon has already substantially implemented the shareholder proposal and thus the proposal can be suppressed under Rule 14a-8(i)(10).
Exxon argued that the Nuns’ proposal was not appropriate subject matter for shareholders to vote on for much of the same reasons.
Let’s look at each of their arguments in turn.
Under the first sub rule that Exxon pointed to, Rule 14a-8(i)(3), shareholder proposals can be excluded if they are “so inherently vague or indefinite that neither the shareholders voting on the proposal, nor the company in implementing the proposal (if adopted), would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires."
So, when Boeing shareholders requested that Boeing executives be stripped of certain “executive pay rights” this was excludable because it was not clear what pay rights Boeing should eliminate. Or when General Electric shareholders asked requested that General Electric executive salary and benefits be capped at $1,000,000, the proposal was excludable because the term “benefits” was too ambiguous. And these are both examples cited by Exxon in its response letter.
Exxon argued that New York’s proposal demanding the company set greenhouse gas emission targets for its “operations and products” to align with the goals of the Paris Climate agreement was basically unintelligible because while Exxon can control the greenhouse gas emissions caused by its operation activities, like flaring, venting, and fugitive emissions, as well as emissions involved in refining and chemical production, it cannot control the greenhouse gas emissions of its customers as they use Exxon products.
As Exxon put it, “Oil and gas produced by ExxonMobil is used by millions of commercial and individual consumers around the world. ExxonMobil does not control or in many cases know the identities of these consumers, who are best positioned to make appropriate decisions regarding their energy usage and resulting emissions.”
Moreover, Exxon argued that the Paris Climate Agreement is a government-to-government accord, in which governments set targets for greenhouse gas reduction, which they go about trying to achieve by setting policies. Thus, where governments are still debating strategies for greenhouse gas reduction, Exxon cannot set GHG goals to comply with government strategies and policies that have not even been created. If Exxon were to reduce its product related GHG emissions by selling less oil and gas, it argued that that demand could be met by some oil company who lacked Exxon’s “operational expertise, technological advantages and commitment to conducting its operations efficiently,” and thus increase GHG emissions.
Under the second sub rule that Exxon pointed to, Rule 14a-8(i)(3), shareholder proposals can be excluded if they deal with ordinary business operations that are the province of the board of directors who can oversee day-to-day management operations, as opposed to shareholders who are not in the position to probe deeply into complex business operations and then to make one-off judgements at shareholder meetings.
Exxon argued that setting goals for short, medium, and long-term GHG targets for customer-caused GHG emissions, Exxon would have to involve nearly all its business lines and would have to make complex day-to-day management decisions about its portfolio of undeveloped oil assets as well as its operations, technologies and research projects that are ongoing around the world. Exxon argues that these are the types of matters, that is monitoring its operations and products for compliance with emerging global environmental goals, (these are the types of matters) that are more appropriately handled by the Board of Directors as opposed to shareholders who cannot really appreciate the complexities involved.
Exxon cited a number of cases in support of its argument:
JPMorgan Chase was able to suppress a shareholder proposal under this rule that would have required consideration of potential impact on indigenous peoples rights when making financing decisions and one to require specifying risks of investing in tar sands and whether it will affect meeting the goal included in the Paris Agreement.
Walgreens Boots Alliance, Inc. was able to avoid shareholder referendums on stock buybacks that would interfere with the company’s ability to manage its capital.
Amazon was able to avoid a requirement to list certain efficient showerheads before others on its website and describe the benefits of these showerheads.
And Apple was able to avoid preparing a report evaluating potential for Apple to achieve net-zero greenhouse gas emissions by certain date fixed by shareholders.
In support of its argument, Exxon distinguished the SEC staff divisions 2017 decision to allow TJX shareholders (and TJX is an apparel and hoe goods company) to vote on a report about whether TJX could achieve net-zero emissions for its retail sales operations. Exxon argued that this was a much more manageable area for shareholders to wade into because the GHG emissions from TJX clothing sale operations were a fairly simple matter to consider and plan for, and control.
Under the third sub rule that Exxon pointed to, Rule 14a-8(i)(10), shareholder proposals can be excluded if they have substantially implemented the essential objective of actions required by the proposal.
So, for example, Ford Motor Company in 2016 was permitted to exclude a shareholder proposal requiring disclosure of the gender and race of Board nominees because it already made charts available that provided aggregate gender and minority status of the Board. This was a case cited by Exxon among other cases.
Exxon argued that the company had already released an Energy and Carbon Summary report that detailed all its efforts to reduce GHG emissions caused by its direct operations. Moreover, Exxon argued that due to a requirement from a previous successful shareholder resolution, it had, in its ECS report, detailed how it would shift its operations to profitably comply with the systematic measures that governments would have to implement to get close to the Paris Climate Agreement goal of containing global average temperature to well below 2 degrees Celsius above pre-industrial levels by the end of this century.
Exxon admitted that the ECS does not disclose or establish goals for reducing GHG caused by the use of its products by customers (drivers and power companies). However it argues that the ECS along with press releases and other materials describe how it is selling customers more natural gas which emits up to 60 percent fewer GHG than coal as well as offering weight reducing plastics, friction reducing lubricants, and mileage-increasing tire lines that can reduce emissions and it also is producing tiny amounts of algae biofuels (it threw that in there). Finally, it heighted its carbon capture technology that has some promise in capturing and storing millions of tons of carbon dioxide.
Let’s briefly look at New York and the nun’s counter arguments as well:
As to whether New York’s proposal was inherently vague or indefinite under Rule 14a-8(i)(3), New York had a few arguments.
First, New York argued that while the Paris Climate Agreement is a government to government accord in which each government has to create policies to meet the GHG emission reduction commitments, the Paris agreement also called for redirecting financial flows consistent with global goals. As a result of this call investors are already tracking the carbon footprints of their equity portfolios, including the prominent Climate Action 100+ Initiative which is backed by 324 investors with more than $33 trillion assets under management, which launched in December 2017.
And New York offered several more examples of groups and initiatives that measure and try to reduce the carbon-intensity of their capital management.
New York was even able to point to how Shell, the Dutch oil super-major, in 2018 included product related GHG reduction targets.
Thus, New York argued that these GHG targets are not so vague that shareholders or the company would not be able to determine what the proposal requires.
As to whether New York’s proposal was an attempt by shareholders to involve themselves in ordinary business operations under Rule 14a-8(i)(7), New York argued that their proposal is flexible (it just asks for short, medium, and long term goals as opposed to specific deadlines) and also is neutral as to the exact strategy that the company should adopt to come into compliance with the Paris agreement.
Moreover, New York argued that the proposal did not infringe on the ordinary business operation territory of the Board of Directors, but instead focused only on the larger-scale policy issue of climate change and does not try to impose detailed timeframes or methods.
New York also made a subtle accusation of political influence when it noted the SEC staff has “recently” changed its interpretation of the legal standard under Rule 14a-8(i)(7) (a subtle dig at the Trump administration). In support of this accusation it pointed to long held interpretation articulated in the D.C. Circuit case, Medical Committee for Human Rights v. SEC, in which Dow Chemical company shareholders proposed that Dow should not sell napalm to any buyer unless that buyer givers reasonable assurance that the substance will not be used on human beings. The Court in that case held that shareholders should be allowed to propose such a resolution using the following reasoning:
“We think that there is a clear and compelling distinction between management’s legitimate need for freedom to apply its expertise in matters of day-to-day business judgment, and management’s patently illegitimate claim of power to treat modern corporations with their vast resources as personal satrapies implementing personal political or moral predilections.”
In other words, while Boards must be allowed to make all business decisions for a company, shareholders should be allowed to make broad social/political decisions for the company.
For their part, the Nuns’ argued that preparation of a single report is not the kind of day-to-day task the Commission intended to bring within the ambit of the ordinary business exclusion.
They also argued that consulting firms like EY, PwC, Deloitte and Accenture can easily provide advice to companies on aligning with the SDGs, setting targets and reporting on progress.
Finally, with respect to whether Exxon had already substantially implemented the shareholder proposals through its Energy and Carbon Summary (“ECS”) and company information released through its website, investor filings, and pres releases, New York and the Nuns’ made a few arguments.
New York really had 2 arguments:
First, while the ECS does describe Exxon efforts to reduce emissions, “it is impossible to conclude that the Company’s activities are at a scale, pace and level of ambition that is aligned with the Paris Agreement commitment to confine global warming to a maximum of 2 degrees Celsius. New York points to the Exxon’s own admission in the ECS that the current projections in light of global progress so far indicate “an emissions profile [that] would result in average global temperature increase of approximately 2.4 degrees Celsius” by the end of the century. Thus, to the extend that the ECS does not demonstrate targets that would achieve the Paris agreement goals, it has not been substantially implemented.
Next, New York argued that the ECS only describes emissions targets related to its operations and does not describe the full picture of the emissions caused by the consumption of its products, which New York stated, “are likely to constitute more than 80% of the Company’s carbon footprint.”
For their part, the nuns argued that the ECS report was missing “any discussion of how meeting continued increases in demand, including those generated by alleviating energy poverty, using oil and natural gas, as ExxonMobil promotes elsewhere, serves either” the goal of reducing energy poverty or the goal of limiting emissions.
Or perhaps more succinctly, “ExxonMobil never connects its disclosures regarding climate change and the Paris Climate Agreement to addressing energy poverty.”
The SEC staff response letters, which do not provide any analysis, but only specify whether or not they will recommend enforcement action if the proposal is excluded and what subrule they are relying in making their commitment.
The SEC staff after evaluating all arguments and submitted materials, made the decision to allow Exxon to exclude both proposals from the proxy materials at their Annual Shareholder meeting.
They relied on rule 14a-8(i)(7) in deciding that the New York proposal could be excluded as relating to Exxon’s ordinary business operations and seeking to micromanage the company.
They relied on rule 14a-8(i)(10) in deciding that the Nun’s proposal could be excluded because Exxon’s had substantially implemented their proposal already when it issued its ECS report and Sustainability report.
Ultimately, the SEC staff made the right decision to allow exclusion of the proposals but relied on the wrong legal theories.
As to the ordinary business operation basis relied upon by the SEC, the case Medical Committee for Human Rights v. SEC implies ordinary business operations and micromanagement consideration should not extend so far as to bar shareholders from inquiring into how the use of corporate assets affects their socio-political interests.
Moreover, as to the sufficiency of the ECS report in already substantially implementing the New York and Nuns’ proposals, we have to admit that while Exxon makes very informative disclosures from which GHG emissions can be calculated, and I’m just quickly going to go through a few to illustrate this:
ExxonMobil stated that its non-proved reserves (which are those geologic hydrocarbon reservoirs that are currently uncertain due to technical, contractual, economic, or regulatory uncertainties (Society of Petroleum Engineers definition)) – that these reserves totaled about 76 billion oil equivalent barrels. And that its proved reserves total 21 billion oil equivalent barrels.
The GHG emissions associated with consumption of these reserves can be estimated with some certainty.
And Exxon even went onto estimate that:
“Under the 2°C scenarios average, ExxonMobil still would need to replenish approximately 35 billion oil-equivalent barrels of proved reserves by 2040, assuming the Company retains its current share of global production over that time period.
As we consider the implied oil and natural gas demand to 2040 under the 2°C scenarios average, it is possible that some higher-cost assets, which could be impacted by many factors including future climate-related policy, may not be
However, the carrying value of these non-Paris-appropriate, undeveloped liquids resources is less than 5 percent of ExxonMobil’s total net book value of property,
plant and equipment as of September 30, 2018.”
Pretty informative right – but we have to admit that even with these disclosures and the information that they imply, these disclosures do not set targets to voluntarily not develop these reserves to meet Paris goals or energy poverty goals. Therefore, rule 14a-8(i)(10) is an inappropriate basis to reject these proposals.
The fatal flaw of these shareholder proposals is that they are, under Rule 14a-8(i)(3), vague and indefinite so as to be inherently misleading.
Because Exxon’s owns the rights to around 100 Billion barrel-equivalents of hydrocarbon reservoirs- these underground oceans of oil/natural gas and the Board’s main responsibility is to use their $348 billion of assets to achieve the highest return for their shareholders within the bounds of law and policy of the jurisdiction in which they operate.
If a country’s law and policy allows and encourages consumers of Exxon’s oil products to consume these products by burning them for energy or transportation and in the process to emit carbon dioxide and other pollutants into our common atmosphere without regard to the interests of others, then consumers will continue to consume oil products to meet their increasing energy and transportation needs. It is Exxon’s responsibility to meet this demand for oil products in the most efficient way.
To the extent that shareholders have successfully in the past pressured Exxon to reduce the carbon-intensity of their operations (less wasteful and polluting operations), these shareholder efforts are entirely appropriate, because to the extent that Exxon may lag behind other oil producers in terms operational efficiency or socio-political relations, shareholders have a right to direct them to make operations more environmentally friendly (less venting, flaring, etc.) and thus to enhance the profitability of Exxon assets.
To the extent that shareholders have pressured Exxon to reduce the carbon-intensity of their products so as to reduce climate impacts, Exxon has done so by investing more into natural gas production, which emits significantly less CO2 in its consumption, and Exxon has also made other investments in lightweight materials and packaging, and advanced lubricants. These shareholder efforts are also appropriate as the tradeoff decisions involved, between profitability, socio-political relations and the sort of forced introduction of new products which improve Exxon’s brand image are just enough outside the realm of Exxon’s ordinary business operations that are the province of the board, so that shareholders are right to demand these different efforts to enhance the long term sustainability of Exxon assets, of which they are the beneficiaries.
But to demand that Exxon set targets to reduce the GHG associated with consumption if their products presumably by not developing valuable oil-reservoir assets is so contrary to the responsibility of the Exxon Board, that such a demand is nonsensical. Moreover, to demand that Exxon set targets to reduce GHG emissions to try to meet the goals of the Paris climate agreement to keep average global temperatures under 2 degrees Celsius, this demand is perhaps even more nonsensical. Exxon has no ability to control global oil demand or consumption, or even oil demand and consumption in the U.S. as any drop-off in production and market share of Exxon will be replaced by other oil producers.
The goals of the Paris climate agreement will be reached not by production controls, that is limits on oil producers like Exxon, but by consumption controls. Perhaps the best of which is the very policy that Exxon has provided vague support for, which is a carbon emissions tax. Where emitters of CO2 and other pollutants have to bear the full costs of their consumption including the cost to others whose interest in a healthy atmosphere are affected by their consumption, only then will the free market function to reach an appropriate GHG emission rate of reduction. In other words, it is not in the hands of Exxon to craft these national policies, and to demand that act unilaterally to destroy their value is a demand that is “inherently misleading.” There is simply no clear way how they could possible affect the progress towards the goals of the Paris climate agreement, except for lobbying for a change in economic policy with respect to CO2 emissions aka a carbon tax, which Exxon is actually doing (at least on the surface). In 2017, they joined the Climate Leadership Council, whose stated goal is to introduce a carbon tax, albeit with some convoluted mechanisms and intentions. But nonetheless, this is the at the least the direction that would need to be pursued to meet Paris Climate goals.
Alternatively, since oil is consumed for power generation and transportation, oil consumption can be reduced and even eliminated by non-oil power generation and transportation. And companies like Tesla, that produce increasingly affordable non-oil consuming vehicles (their newest model is around $35,000) and also produce non-oil power generation and storage products through their solar roof and Powerwall line of products can do far, far more to reduce oil consumption and the resultant GHG than Exxon can.
As for the Nuns focus on energy poverty, affordable solar cell technology in the sun-soaked regions of Africa and Asia that lack power, again, presents much more of a solution than expecting Exxon to help build a clean electricity grid with expensive powerplants across vast, but intensely poor and unstable, continents.
Ultimately, the New York and the Nun’s shareholder resolutions that expect Exxon to make plans to target goals over which they have little to no ability to influence, are “vague and indefinite so as to be inherently misleading under Rule 14a-8(i)(3).
Though their shareholder pressure focused on climate change, year after year, which is only increasing, has resulted even in the case of Exxon, in more conscientiousness around these issues and in the sharing of more emissions information with shareholders. In fact, the Exxon’s ECS was likely a product of shareholder pressure in 2017, even though that resolution ultimately failed. It is shareholder pressure, that forces Boards to preempt them by sharing climate related information on their own terms and to try to preempt resolutions in the future by sharing more information. So even these New York and Nun shareholder proposals were not in vain and may result in some more dialogue and conscientiousness about these issues.
And again, Desai Legal Services can represent either side of these interactions so that the dialogue and efforts are focused in the right direction under the law.
Thanks for reading!