SEC Staff Permits “Micro-Management” Argument to Exclude Climate Change Proposals
During the 2018 proxy season,1 the SEC has been taking a more nuanced, company-friendly approach to certain climate change and environmental protection shareholder proposals. Specifically, the Commission recently concurred with the exclusion of several climate change shareholder proposals on the grounds that they sought to “micro-manage” the company under the “ordinary business” exception to Rule 14a-8.
Under Rule 14a-8(i)(7), a shareholder proposal that “deals with a matter relating to the company’s ordinary business operations” may be excluded by the company from its proxy statement, meaning it will not be presented to the shareholders for a vote at the company’s annual meeting. In practice, this “ordinary business” exception is among the most complex bases companies may use in a no-action request letter2 submitted to the Commission, and is subject to numerous interpretive subtleties and limitations. Traditionally, the Commission has two central considerations in determining whether a proposal is excludable under Rule 14a-8(i)(7): (1) whether a proposal concerns tasks “so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight,” and (2) “the degree to which the proposal seeks to ‘micro-manage’ 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.” Exchange Act Release No. 12999 (Nov. 22, 1976). In the past, the Commission has used the “micro-management” prong of the “ordinary business” exception rarely.
In the 2018 proxy season, the SEC appears to have shifted from its prior reluctance to concur with “micro-management” company arguments, and has concurred with exclusion of several shareholder proposals, including several climate change proposals, on the grounds that they seek to “micro-manage” the company. In EOG Resources, Inc. (avail. Feb. 26, 2018; recon. Mar. 12, 2018), the SEC staff concurred with exclusion on these grounds of a shareholder proposal asking the company to “adopt company-wide, quantitative, time-bound targets for reducing greenhouse gas (GHG) emissions and issue a report…on its plans and progress towards achieving these targets.” Similarly, in Apple Inc. (avail. Dec. 21, 2017) the SEC concurred with exclusion on “micro-management” grounds of a shareholder proposal asking the company to “prepare a report to shareholders by December 31, 2019 that evaluates the potential for the Company to achieve, by a fixed date, ‘net-zero’ emissions of greenhouse gases relative to operations directly owned by the Company and major suppliers,” and in Deere & Co. (avail. Dec. 27, 2017), the SEC concurred with exclusion on “micro-management” grounds of a shareholder proposal asking the company to “prepare a report to shareholders by December 31, 2018 that evaluates the potential for the Company to voluntarily address its role in climate change by achieving ‘net-zero’ emissions of greenhouse gases by a fixed future target date.” And yet, as recently as 2016, the SEC rejected a “micro-management” argument against a shareholder proposal that requested that the company “adopt time-bound quantitative, company-wide goals… for reducing total greenhouse gas (GHG) emissions, and issue a report by September 2016.” CBS Corporation (avail. Mar. 1, 2016). And in 2015, the SEC rejected a “micro-management” argument against a shareholder proposal that requested that the company “adopt quantitative, time bound, carbon dioxide reduction goals to reduce corporate carbon emissions, and issue a report to shareholders on its plans to achieve the carbon reduction goals it sets.” Great Plains Energy Incorporated (avail. Feb. 5, 2015).
The 2018 proxy season trend arguably began in the 2017 proxy season when the SEC issued a number of decisions concurring on “micro-management” grounds with the exclusion of shareholder proposals requesting that the companies “generate a feasible plan for the Company to reach a net-zero GHG emission status by the year 2030 for all aspects of the business which are directly owned by the Company.” Apple Inc. (avail. Dec. 5, 2016); Deere & Company (avail. Dec. 5, 2016). However, the same proxy season year, the SEC rejected a “micro-management” argument with respect to a shareholder proposal requesting that the company “prepare a report to shareholders that evaluates the feasibility of the Company achieving by 2030 ‘net-zero’ emissions of greenhouse gases from parts of the business directly owned and operated by the Company…as well as the feasibility of reducing other emissions associated with the Company’s activities.” PayPal Holdings, Inc. (avail. Mar. 13, 2017). Just one year later, the SEC concurred with exclusion on “micro-management” grounds of a nearly identical proposal submitted to PayPal. PayPal Holdings, Inc. (avail. Mar. 6, 2018). See also, Verizon Communications Inc. (avail. Mar. 6, 2018). Given these developments, it appears that climate change shareholder proposals requiring quantitative, time-bound greenhouse gas emissions goals or targets (or reports regarding the same) can likely be consistently excluded under (i)(7).
In JPMorgan Chase & Co. (avail. Mar. 30, 2018) (The Christensen Fund), the SEC staff’s response is a less obvious expansion of the application of the “micro-management” exclusion. The staff concurred with exclusion of a shareholder proposal3 calling for “a report…on the reputational, financial and climate risks associated with project and corporate lending, underwriting, advising and investing for tar sands production and transportation” and requiring that the report assess four detailed factors. JPMorgan argued that the proposal amounted to micro-management because the proposal was not limited to the publication of a report, but also sought the adoption of specific policies and required the Company to take specific action — “restricting financing for tar sands projects and companies” — that would restrict the company’s financing decisions, which are central to the company’s day-to-day business. In issuing its guidance, the SEC stated, “the Proposal micromanages the Company by seeking to impose specific methods for implementing complex policies.” The SEC’s no-action determination in JPMorgan arguably extends the Commission’s prior position of concurring with the exclusion of shareholder proposals that “involve intricate detail, or seek to impose specific time-frames or methods for implementing complex policies.” SEC Release No. 34-40018 (1998).
Climate change and other environmental shareholder proposals have become among the most frequently submitted and difficult to exclude proposals over the past few years. As discussed in our June 2017 blog post, “The Ascendance of 2° Celsius Proposals in ESG Activism,” “2° Celsius” proposals succeeded at annual meetings for the first time, and preliminary data for the 2018 season suggests that these proposals have been popular again this year. However, the Commission’s recent decisions may indicate a slight but not insignificant shift in approach: while information-only climate change proposals that merely seek reporting on carbon transition or physical asset risks are likely to remain difficult to exclude, proposals that seek to require companies to take particular actions to respond to climate risk, particularly within a specified time frame, may well fall within the “micro-management” exclusion.
1 For the purposes of this post, the 2018 proxy season runs from October 1, 2017 through April 30, 2018.
2 Companies intending to omit a shareholder proposal pursuant to the exclusionary rules under Rule 14a-8 must notify the SEC of their intention to do so by filing a “no-action” request with the Office of the Chief Counsel of the Division of Corporation Finance.
3 The full text of the proposal reads as follows, “Shareholders request that JPMorgan Chase prepare a report, omitting proprietary information and prepared at reasonable cost, by September 2018, on the reputational, financial and climate risks associated with project and corporate lending, underwriting, advising and investing for tar sands production and transportation. This report should include assessments of:
- Short- and medium-term risk of portfolio devaluation due to stranding of high cost tar sand assets.
- Whether JPMC’s tar sands financing is consistent with the Paris Agreement’s goal of limiting global temperature increase to ‘well below 2 degrees Celsius.’
- How tar sands financing aligns with our company’s support for Indigenous People’s rights.
- Reducing risk by establishing a specific policy, similar to that of other banks, restricting financing for tar sands projects and companies.”
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.