SEC Action Exposes Limits on Shareholder Proposals

Many impact investors posit that holding positions in public companies leads to positive impact because of the ability to pressure management through shareholder proposals. Champions of this approach point to recent examples like the ExxonMobil shareholder proposal that shareholders approved last May requesting that ExxonMobil consider enhanced reporting on climate change risks.

A recent SEC action highlights, however, the limitations of shareholder activism under federal and state law. Trillium Asset Management recently demanded that EOG Resources, an oil and gas company, submit for a shareholder vote a proposal to consider targets for reducing greenhouse gas emissions. In response, EOG Resources argued that SEC proxy rules did not require it to submit the proposal for a vote because of an SEC rule that allows companies to refuse proposals that related to “ordinary business operations.”  Furthermore, EOG sought confirmation from the SEC that it could legally refuse the proposal.

In a published “no-action letter,” the SEC agreed with EOG that it could refuse to submit the proposal for a vote stating that the proposal sought to “micromanage the Company by probing 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.”

One could argue that this is simply another example of the Trump administration’s disfavor of climate related regulation and activism. But this SEC action exposes real legal limitations on the ability of shareholders to influence corporate behavior. Both federal and state law prohibit shareholder actions that seek to dictate corporate management decisions.

Although ultimately heralded as a victory for activism, the ExxonMobil board was not legally required to implement its climate-related shareholder proposal even though the shareholders approved it. The proposal was completely non-binding from a legal perspective. ExxonMobil could likely have rejected from consideration a binding proposal because it would have impinged on the board’s exclusive authority to manage the company. It was fully seven months after ExxonMobil shareholders voted to approve the proposal that the ExxonMobil board announced that it had dropped its opposition  and would implement the proposal recommendations related to enhanced reporting.