SEC no action requests: ordinary business or business as usual?
How has corporate reasoning to avoid climate resolutions at US AGM's evolved?
Since its establishment in 1934, America’s Securities and Exchange Commission (SEC) has offered its interpretation of rules to any member of the public that asks for an opinion. Individuals often requested such advice, which was offered by a member of staff in charge of interpreting and implementing the rules. In the 1970s, the requests and responses were made public. Since then, each year, a reading of the SEC’s response to queries, provides a granular understanding of America’s securities playbook.
One such set of communications, of key importance during the proxy season, is a “no-action request”. These are mechanisms through which publicly listed companies can choose to avoid a proposed shareholder resolution. In 2024, over 30 such requests for avoidance were linked to climate-related shareholder avoidance.
Part -I of this series looked into the issues companies want to avoid – ranging from financed emissions and proxy voting to corporate lobbying.
Avoidance, however, is a legal art. An art, that comes to life in the SEC’s response. So, how do companies justify the avoidance of climate resolutions? Perhaps more importantly - is the SEC convinced?
Winning strategy
In 2023, the justification that was most likely to convince the SEC to grant a no-action request was procedural inaccuracy. Submitting a shareholder resolution requires the timely completion of a series of steps. For instance, filers must prove that they hold and intend to hold a given amount of the firm’s equity. Any flaw in how and when the steps were followed, is grounds for procedural inaccuracy.
Last year - Chevron, CDW Corporation, CNX Resources, Exxon Mobil, Levi Strauss, NextEra Energy and United Parcel Service filed no-action requests based on this logic. The SEC granted 50% of them.
In 2024, the format of the winning hand has changed. The ordinary business rule has taken the top spot, by some distance. Interestingly, in 2023 the ordinary business rule was the least successful in terms of convincing the SEC. Last year’s losing hand, is this year’s winner.
The ordinary business rule defines the functions of company management and distinguishes them from those of shareholders. The motivation behind the rule, established in the 1970s, is to protect the discretion of company management.
If an issue focuses on the ordinary business of a company, more often than not, the SEC grants a no-action request. The challenge however is defining whether a climate resolution deals with ordinary business.
Micromanagement
“It is well established that a proposal that seeks to micromanage a company’s business operations is excludable”, wrote the Chemours Company in a no-action request.
The chemicals manufacturer had filed a request against a shareholder resolution filed by Green Century Capital Management on behalf of the Felician Sisters of North America Endowment Trust.
The key demand - a report on biodiversity risks associated with titanium mining in the Okefenokee region.
Chemours made the case that since the resolution also asks for a permanent commitment on mining decisions, it amounts to micromanagement. The precedent the company cites is of supply chain decisions. Historically, the SEC’s interpretation of the rule suggests that when it comes to supply chain related decisions, shareholder oversight could restrict management’s autonomy.
The SEC agreed with the micromanagement logic and granted Chemours’ request.
Elsewhere, the micromanagement argument has been less successful. At Tesla, the SEC has rejected the company’s no-action request made on the grounds of micromanagement.
Tesla filed the request against a proposal seeking a moratorium on sourcing minerals through deep sea mining. This resolution too, deals with sourcing and supply chain factors.
Tesla’s argument rests on the fact that the selection of suppliers and the design of its supply chain is complex and critical. So much so that these decisions “are complicated matters that are integrally entwined with its ordinary business operations and fundamental to management’s ability to run the company’s day-to-day operations”.
The SEC disagrees. The SEC concluded that deep sea mining was a matter of significant social and environmental impact.
“The proposal concerns a substantial corporate policy consideration and a significant issue of social policy, both of which transcend ordinary business”, said the SEC.
The SEC has rejected Tesla’s no-action request.
It’s complicated.
There is more to the ordinary business rule than micromanagement. Knowledge of the business and who might possess it (shareholders or management) is also part of the conversation.
The central question for the ordinary business threshold is whether a given matter is so complex that shareholders cannot be expected to make an “informed judgement”.
The history of no-action requests suggests that when resolutions deal with matters that are too complex and granular for shareholders to consider – the SEC tends to grant the request citing the ordinary business rule.
2024’s no-action request data shows that complexity is the Achille’s heel of climate-related shareholder resolutions.
For instance, As You Sow filed a resolution at Exxon Mobil, asking for a report on the climate impact of the company’s divestment program. Exxon, according to the resolution, is one of America’s largest sellers of fossil fuel assets.
Exxon made the case that since the report asks for an assessment of “material climate impact”, it requires answers to a set of complex questions including what constitutes “material” impact and how that is to be measured.
The company’s lawyers argued, “We do not have answers to these questions in the context of this proposal and do not believe the proponent does either given the complexity of climate modeling and the size of global emissions each year in comparison to any of our asset divestitures”. The SEC agreed.
Over 70% of successful no-action requests in 2024 have relied on the ordinary business rule. As some of the world’s largest emitters head into their AGMs, it seems opportune to ask – does ordinary business incentivise business as usual?
No action requests 2024: the climate resolutions companies don't want to discuss
