SEC regulation of shareholder climate proposals

Activist shareholders are increasingly using the shareholder resolution process to pressure corporations to take various steps in pursuit of goals related to climate change. A rule of the U.S. Securities and Exchange Commission allows companies to exclude certain proposals that seek to “micromanage” a company’s “ordinary business” operations. But as recent SEC action shows, there can be a fine line between reasonable proposals and micromanagement.

Staff at the U.S. securities regulator have issued a pair of "no-action letters" telling two companies that staff will not recommend enforcement action against the companies if they exclude from shareholder ballots certain resolutions calling for greenhouse gas emissions reduction targets, because the proposals seek to "micromanage" the companies' ordinary business. At the same time, the U.S. Securities and Exchange Commission staff concluded that another company could not exclude a more general reporting proposal on this basis. The letters highlight the role of shareholder activism and its impacts on companies and climate change.

The U.S. Securities and Exchange Commission is charged with protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation. The SEC is the primary enforcer of federal securities laws.

On December 17, 2018, counsel for trucking company J.B. Hunt Transport Services, Inc. informed the SEC of the company's intent to exclude a shareholder proposal and supporting statement from the proxy materials for the company's 2019 annual meeting of shareholders. The proposal was submitted by Trillium Asset Management, LLC, the Timken Matthews Family Foundation, the Community Environmental Council, and the Threshold Foundation, and requested the company to "adopt company-wide, quantitative targets to reduce total greenhouse gas (GHG) emissions, taking into account the goals of the Paris Climate Agreement." The company argued it could exclude the proposal from the proxy materials under an SEC rule allowing exclusion of proposals dealing with "a matter relating to the company's ordinary business operations."

As described in a 2017 SEC legal bulletin, SEC Rule 14a-8(i)(7) permits exclusion of certain proposals dealing with a company's ordinary business operations "to confine the resolution of ordinary business problems to management and the board of directors, since it is impracticable for shareholders to decide how to solve such problems at an annual shareholders meeting." SEC guidance explains that this policy rests on two central considerations: the proposal's subject matter, and the degree to which the proposal "micromanages" the company.

On February 14, 2019, the SEC staff wrote to J.B. Hunt Transport Services that the Trillium proposal "seeks 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." Staff noted that it would not recommend enforcement action to the Commission if the company omits the proposal from its proxy materials.

In a similar vein, on January 30, 2019, counsel for Devon Energy Corporation informed the SEC of the company's intent to omit a shareholder proposal and supporting statement that it received from the George Gund Foundation and As You Sow from inclusion in the company's 2019 proxy materials. The resolution proposed to request that the company's board disclose "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." In support of the company's intent to exclude this proposal from its 2019 proxy materials, the company argued that the proposal "relates to Devon’s ordinary business operations and the Proposal attempts to micromanage Devon by probing too deeply into matters of a complex nature upon which shareholders, as a group, are not in a position to make an informed judgment."

On March 4, 2019, SEC staff issued a letter to Devon Energy Corporation, again agreeing that the proposal  "would micromanage the Company by seeking to impose specific methods for implementing complex policies in place of the ongoing judgments of management as overseen by its board of directors." The no-action letter concludes that staff would not recommend enforcement action to the Commission if the company omits the proposal from its proxy materials on this basis.

But the SEC staff reached a different conclusion on a more general proposal requesting that Anadarko Petroleum Corporation issue a report describing if, and how, it plans to reduce its total contribution to climate change and align its operations and investments with the Paris Agreement's goal of maintaining global temperatures well below 2 degrees Celsius. While Anadarko invoked the "ordinary business" rule, SEC staff wrote that the reporting proposal "transcends ordinary business matters and does not seek to micromanage the Company to such a degree that exclusion of the Proposal would be appropriate", and therefore said staff did not believe the company could omit the proposal from its proxy materials on this basis.

These letters illustrate the role of shareholder activism on corporate climate change matters, and the regulators' present response to activist efforts to prompt management attention on climate issues.