No-Action Letter for ExxonMobil Denied Exclusion of Proposal Concerning Increasing Shareholder Distributions to Prevent Losses from Climate Change Related Risks of Stranded Carbon Assets
In ExxonMobil Corporation, 2017 BL 76009 (March 7, 2017), ExxonMobil Corp. ("Exxon") asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a shareholder proposal submitted by Arjuna Capital/Baldwin Brothers Inc. on behalf of Susan B. Inches (collectively, "Shareholder") requesting Exxon increase the amount authorized for capital distributions in order to prevent the climate change related risk of losses stemming from unburnable carbon. The SEC denied the requested no-action letter under Rule 14a-8(i)(2).
The Shareholder submitted a proposal providing that:
RESOLVED: Shareholders hereby approve, on an advisory basis, that ExxonMobil commit to increasing the total amount authorized for capital distributions (summing dividends and share buybacks) to shareholders as a prudent use of investor capital in light of the climate change related risks of stranded carbon assets.
Exxon sought to exclude the proposal under subsection (i)(2) of Rule 14a-8.
Rule 14a-8 provides shareholders with the right to include a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholder, however, must meet certain procedural and ownership requirements. Moreover, the Rule includes thirteen substantive grounds for exclusion. For a more detailed discussion of the requirement of the Rule, see The Shareholder Proposal Rule and the SEC and The Shareholder Proposal Rule and the SEC (Part II).
Rule 14a-8(i)(2) allows the exclusion of a proposal that, if implemented, would force a company to violate any state, federal, or foreign law. For additional discussion of the exclusion, see Jason Haubenreiser, Rule 14a-8 and the Exclusion of Proposals that Violate the Law. 94 Denv. L. Rev. 231, (2016) (discussing Rule 14-a-8). At issue here, the New Jersey Business Corporation Act (the “Act”) gives companies’ boards of directors authority to manage business affairs and allows a restriction of this right if the company amends its certificate of incorporation. If the company's shares are traded on a national securities exchange, an amendment of this type is not permitted under the Act.
Exxon argued for omission of the proposal under Rule 14-a-8 (i)(2) because implementing the proposal would cause Exxon to violate the Act. Exxon argued the Shareholder was asking for a mandated, regular, and indefinite increase to capital distributions when the proposal requested a "commit[ment] to increasing" capital distributions. Exxon further argued an amendment to its certificate of incorporation to satisfy this proposal would restrict the board in its management of the business, thus violating the Act because its shares trade on the New York Stock Exchange.
The Shareholder claimed the proposal is neither asking, nor directing Exxon to violate New Jersey law because the proposal leaves leeway for the board's implementation. The proposal did not require a "specific quantity of capital distributions, nor an open-ended or time-bound commitment to increasing capital distributions regardless of other financial considerations, including debt repayment, leverage, and solvency." Last, the Shareholder asserted the proposal did not attempt to reduce the board's discretion or force it to amend its certificate of incorporation because the proposal could not be reasonably read as requiring Exxon to violate the Act.
The SEC disagreed with Exxon’s reasoning and concluded Exxon may not omit the proposal under Rule 14a-8(i)(2).
The primary materials for this case may be found on the SEC website.