By Amanda Maine, J.D.
Chevron must include two shareholder proposals relating to the environment and climate change in its proxy materials, the staff of the SEC’s Division of Corporation Finance stated. Chevron had argued that the proposals, which request that the company issue reports on aligning its business model with a decarbonizing economy and minimizing methane emissions caused by fracking, are attempts to dictate its litigation strategy because it is a defendant in eight lawsuits seeking relief for climate change injuries. As such, Chevron asserted that it should be allowed to omit the proposals under Rule 14a-8(i)(7)’s “ordinary business” exception.
Proposals. The proposals were submitted by corporate responsibility non-profit As You Sow on behalf of Chevron shareholders. One proposal requests a report describing how Chevron could adapt its business model to align with a decarbonizing economy by reducing its dependence on fossil fuels. The other proposal requests that Chevron report on its actions beyond regulatory requirements to minimize methane emissions from its hydraulic fracturing operations.
Chevron’s request for relief. In seeking to exclude the proposals from its proxy materials, Chevron noted that it is currently one of many defendants in lawsuits filed by several cities and counties alleging that the company is liable under state tort law related to its production, promotion, and sale of fossil fuels. According to Chevron, the proposals involve the same subject matter as the litigation and would directly implicate its legal strategy and conduct in these lawsuits by asking it to reveal information central to its defense, undermining its ability to vigorously defend against the plaintiffs’ claims.
Chevron cited several no-action letters where the staff had allowed the exclusion of such proposals when the subject matter is the same or similar to current litigation in which the company is involved and when the implementation of the proposal would amount to an admission by the company. It also noted the staff has allowed the exclusion of proposals that touch upon a significant policy issue if they implicate ordinary business matters. The proposals seek to substitute the judgment of the stockholders for that of Chevron on decisions involving litigation strategy by requiring it to take action contrary to its legal defense, and is therefore excludable under Rule 14a-8(i)(7), Chevron argued.
Proponents’ response. In their response letters, the proponents disagreed with Chevron’s assertion that the proposal should be excluded because it dictates the company’s legal strategy, drawing a distinction between its submissions and those previously allowed by the staff to be omitted. Unlike the no-action letters cited by Chevron, these proposals do not ask for information on the litigation, make recommendations as to how it should be defended, or ask for information on its resolutions or repercussions, according to the proponents.
The responses also cited several previous staff determinations that matters pertaining to climate change, greenhouse gas emissions, and methane emissions resulting from fracking address significant policy issues that transcend ordinary business and that there is growing interest in these issues from investors, as demonstrated by the number of climate change proposals submitted in 2018 and some large asset managers voting for climate proposals for the first time ever.
In addition, the proponents pointed out that both proposals are prospective in their requests for reporting on carbon impacts and methane emissions, while the crux of the litigation is retrospectively focused on fault for past actions. The proposals do not seek information on whether the company is liable for some share of past emissions, the proponents advised.
According to the proponents, even if the proposals would affect Chevron’s ability to defend itself in the litigation, the effect would be minimal. If Chevron’s argument were accepted, the proponents contended, it would essentially prevent all climate-related proposals at the largest fossil fuel companies from going forward, as most of them are subject to climate lawsuits and the number of lawsuits is likely to grow as litigation gains traction. The proposals do not address pending litigation and do not attempt to “micromanage” Chevron’s litigation strategy, the proponents concluded, and requested that the staff deny Chevron’s requests for no-action relief.
Requests denied. Regarding both shareholder proposals, the staff stated that it was unable to concur in Chevron’s view that it may omit either proposal from its proxy materials in reliance on Rule 14a-8(i)(7).