SEC Grants No-Action Relief for ExxonMobil’s Retail Voting Program—Key Takeaways for Public Issuers

Exxon’s Retail Voting Program Overview

Exxon’s auto-voting program was designed to increase the voting participation of typically board-friendly retail stockholders by offering them a voluntary, cost-free mechanism to provide standing instructions to vote their shares in accordance with the board’s recommendations at any annual or special meetings.¹ Retail shareholders notoriously vote far less frequently and consistently than institutional shareholders, who are more likely to be critical of incumbent leadership. Retail owners are generally more management-friendly but, by and large, they simply fail to vote their proxies, for myriad reasons, including high investment of time for a relatively low prospect of obvious financial return, the seemingly arcane rules of shareholder voting  that they may feel are not worth the effort to study, and the general sense that an individual investor’s vote is not that meaningful compared to institutions who often have a significant share of voting rights. Having said this, at certain companies, the retail voting base can collectively be very meaningful. Were it to be harnessed to vote in numbers, it could impact proxy votes – and activism generally – in potentially significant ways.

Exxon’s program is open to all retail shareholders who affirmatively opt in but is unavailable to investment advisers registered under the Investment Advisers Act of 1940. Under the program, participants would receive annual reminders of their participation and could opt out or override their voting instructions at any time at no cost. Participating shareholders would continue to receive all proxy materials and retain the right to vote directly on any proposal, regardless of their standing instruction.

Exxon asserts that it would provide full disclosure of the program on its website and in proxy statements, and would file information about the program with the SEC under Schedule 14A.

Implications for Public Issuers

The Exxon no-action letter and concurrence by the SEC is a signal that the SEC is open to innovative approaches that facilitate retail shareholder engagement that are voluntary, transparent, non-coercive and inclusive, and that otherwise comply with the technical requirements of the proxy rules, including those governing the form and execution of proxies.

This novel program may encourage other public companies to explore mechanisms to boost retail voting participation. But there are costs and risks associated with auto-voting plans, and each company should carefully consider them when contemplating whether the implementation of such a plan is right for that company.

Establishing a retail voting program will likely require significant work and hard-to-quantify expenses, including coordinating with transfer agents, vote-processing agents and others, developing backend systems, and communicating with shareholders. Furthermore, the amount of uptake from retail investors, who are notoriously difficult to turn out for any proxy-related matters, is untested, so it is unclear how successful sign-ups will prove to be. Ongoing compliance, recordkeeping and communication with shareholders will also require additional resources. While the SEC’s concurrence goes a long way in showing that there will be no federal prohibition on this type of arrangement, the legality of auto-voting plans is largely untested in state courts. Further, companies may be subject to burdens (and, theoretically, liability) in the administration of these plans. A company should consider whether the cost of implementing an auto-vote program will be worth doing, a decision that may center on the composition of its stockholder base. A company with a diffuse stockholder base, a high percentage of which is retail, may receive more benefit than one with a concentrated, institutional-heavy stockholder base.

Auto-voting programs are still in an early stage. There may be costs and uncertainties that are yet unknown. If your company is considering implementing a retail voting program or similar shareholder engagement initiative, or if you simply have questions on these developments, we encourage you to contact your Vinson & Elkins team.

¹ Note that the Exxon program specifically contemplates multiple voting options: to vote with management on all matters, or to vote with management on all matters other than contested director elections and certain M&A transactions that may require stockholder approval.