Faculty of law blogs / UNIVERSITY OF OXFORD

How to Reestablish the Authority of Corporate Law in the Shareholder Proposal Process


Bernard S. Sharfman
Senior Corporate Governance Fellow, RealClearFoundation
James R. Copland
Senior Fellow and Director of Legal Policy, Manhattan Institute


Time to read

8 Minutes

The shareholder proposal process has gone too far. How else to interpret the proposal recently sponsored by the climate activist investors Arjuna Capital and Follow This at ExxonMobil, which called on the oil giant to reduce further its carbon footprint? The company in response took the extraordinary measure of filing suit in federal court seeking a declaratory judgment permitting it to exclude the proposal from its proxy statement and not present it for a vote at the annual meeting. Soon after, the sponsors withdrew their proposal.

Though the litigation remains active, the lack of any case or controversy for the court to resolve may scuttle the prospects for a judicial decision, leaving unaltered for now the troubling manner in which the SEC oversees its shareholder-proposal process. We argue that the SEC must stop overreaching in this area and allow private ordering under corporate law to re-establish shareholder proposals as ways to enhance economic efficiency rather than diminish it.

The Shareholder Proposal

Arjuna and Follow This filed the following proposal for shareholders to consider at ExxonMobil’s 2024 annual meeting:

Resolved: Shareholders support the Company, by an advisory vote, to go beyond current plans, further accelerating the pace of emission reductions in the medium-term for its greenhouse gas (GHG) emissions across Scope 1, 2, and 3, and to summarize new plans, targets, and timetables.

Scope 1 refers to direct GHG emissions from the company. Scope 2 refers to indirect GHG emissions from the utilities that a company purchases. Scope 3 refers to indirect GHG emissions that result from the activities or assets upstream or downstream along the company’s value chain not owned or controlled by the company, ‘such as the burning of gasoline by a motorist.’

The support statements included with the Arjuna-Follow This proposal explain that the activists want Exxon Mobil to reduce its operational GHG emissions by 50 percent on an absolute basis by 2030 and to introduce targets reducing Scope 3 emissions consistent with limiting global warming to 1.5 degrees Celsius.  To accomplish such an aggressive timetable, ExxonMobil would probably have to give up its planned $60 billion acquisition of Pioneer Natural Resources, and severely contract current operations.

Board Authority

The rationale for this type of proposal is baffling.  The company’s board and its Environment, Safety and Public Policy Committee regularly engage with senior management on climate matters. Moreover, ExxonMobil provides a comprehensive annual report on its historical performance and goals for reducing GHG emissions over time.  To be sure, the activists and the board disagree on how fast the company should be moving to reduce emissions—but under corporate law, these types of decisions are to be made by the board, the most informed locus of authority in a corporation.  The submission of this proposal is a direct result of the SEC’s increasingly permissive and arguably lawless regulatory approach to shareholder proposals.

The SEC’s Overreach

The U.S. Supreme Court has repeatedly stated that the SEC does not have the authority to interfere in the governance of corporations unless Congress has provided it with express authority to do so: ‘Corporations are creatures of state law, and investors commit their funds to corporate directors on the understanding that, except where federal law expressly requires certain responsibilities of directors with respect to stockholders, state law will govern the internal affairs of the corporation.’ In this case, corporate law directs that the substantive control of a corporation be concentrated in the hands of the company’s board of directors. To be sure, the company and shareholders are owed fiduciary duties, but shareholders are not afforded direct control over ordinary business decisions.

Indeed, it is hardly clear that under state corporate law shareholders generally have any right, even as a default rule, to speak in a corporate annual meeting or to introduce a proposal for vote at the meeting. Whether to take a shareholder vote on a matter is wholly an issue of board discretion, aside from certain matters requiring a shareholder vote by law or as otherwise specified in corporate bylaws or articles of incorporation.

A reading of Section 14(a) of the Securities Exchange Act of 1934, the statutory section on proxy solicitations, reveals that when it comes to deciding which shareholder proposals are to be included in a company’s proxy materials and voted on at the annual meeting, there is no congressional command in the text that directs the SEC to interfere in this area of substantive board decision-making.  Section 14(a) only provides the SEC with authority to regulate disclosures in the proxy solicitation process, including the submission of shareholder proposals.  As the Supreme Court noted in its Borak decision in 1964: ‘The purpose of § 14(a) is to prevent management or others from obtaining authorization for corporate action by means of deceptive or inadequate disclosure in proxy solicitation.’ Or as the D.C. Circuit has observed, ‘Proxy solicitations are, after all, only communications with potential absentee voters.’

Since the mid-1940s, however, the SEC has argued that it could weigh in on substantive corporate decision making through its oversight of corporate proxy ballots, based solely on the shareholder-proposal process it created and oversees. Under Rule 14a-8, the SEC provides 13 substantive bases upon which management can exclude shareholder proposals from its proxy materials. Such an approach sounds as if it gives great deference to board authority under corporate law, but this is hardly the case.

At least initially, the SEC took seriously the notion that its regulations on the shareholder-proposal process would not empower shareholders to introduce proposals related to companies’ ordinary business operations or those ‘primarily for the purpose of promoting general economic, political, racial, religious, social, or similar causes.’ But over time, starting around 1976, the agency has reduced its insistence on the former, in combination with reversing its view on the latter.  Currently, the SEC, as promulgated by its staff in Legal Bulletin No. 14L, thinks it has the authority to compel the insertion of shareholder proposals on social issues, not only when they are not significant to a company’s business, but also when there is not even a nexus between the social issue and the company—essentially empowering shareholders to use the corporate proxy process as a platform for any issue the agency staff deems important.

No-Action Letters

The SEC has allowed its staff to become a policy gatekeeper in the shareholder proposal process.  The staff’s discretion is revealed through the no-action letter process. No-action letters are informal responses to company requests seeking to know if the SEC staff would recommend to the commission that an enforcement action be taken if the company were to exclude a shareholder proposal.  SEC staff point to one or more of the 13 substantive bases for exclusion and their own interpretations of those bases, such as found in Legal Bulletin No. 14L, in granting or denying no-action requests.  But the issuance of no-action letters can be based on staff preference, not the law.  As observed by Professor Mohsen Manesh, the no-action letter ‘process is itself opaque, unpredictable, and lawless.’  The courts are also aware of this.  In Trinity Wall St. v. Wal-Mart Stores, Inc., the court referred to the SEC staff’s no-action letter process on shareholder proposals as a ‘we-know-it-when-we-see-it’ approach.

Therefore, as James Copland noted in a 2020 comment letter to the SEC: ‘The entire legal foundation of the SEC’s shareholder-proposal rule is suspect; the SEC’s role as shareholder-proposal gatekeeper goes beyond the Commission’s proper role, which should be to facilitate disclosure rules necessary to the functioning of national securities markets—not intervening in corporations’ annual-meeting process in substantive matters reserved to state law.’

The ExxonMobil Complaint

Given the SEC staff’s prior handling of its no-action process, it is hardly surprising that ExxonMobil may have concluded that it was highly likely that the SEC staff would deny any no-action request to exclude the Arjuna-Follow This proposal—notwithstanding the potentially harmful ramifications for the company and its shareholders were the board to act on the proposal.

On 21 January 2024, the company filed suit. ExxonMobil argued that the company was authorized to exclude the proposal from its proxy ballot based on two of the SEC’s criteria, as promulgated in Rules 14a-8(i)(7) and 14a-8(i)(12)—the ‘ordinary business’ and ‘previously rejected’ rationales. 

Under SEC Rule 14a-8(i)(7), a company has the right to exclude a shareholder proposal from its proxy materials if it ‘deals with a matter relating to the company’s ordinary business operations.’ According to the SEC’s Division of Corporate Finance, the purpose of the exception is ‘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.’  If the filed proposal does not relate to a company’s ordinary business operations, we are not sure what does.  If implemented, it will disrupt ExxonMobil’s ordinary business operations.

Under SEC Rule 14a-8(i)(12), a company may exclude a shareholder proposal when it ‘addresses substantially the same subject matter as a proposal, or proposals, previously included in the company’s proxy materials within the preceding five calendar years if the most recent vote occurred within the preceding three calendar years and the most recent vote was . . . [l]ess than 15 percent of the votes cast if previously voted on twice.’ Follow This had sponsored essentially the same shareholder proposal with ExxonMobil in 2023, the company had placed it on its proxy ballot, and 89.5 percent of shareholders had voted against it. (For vote totals on this and other ExxonMobil shareholder proposals, see the Manhattan Institute’s Proxy  Monitor website.)

Based on the wording and voting results of the prior proposals, it appears clear, at least to the authors, that the requirements of this exclusion have been met. Whether or not ExxonMobil genuinely worried that the SEC staff would deny a no-action request, or whether the company was hoping to litigate to stop the madness for future proxy seasons, the decision by Arjuna and Follow This to fold and withdraw their proposal may forestall any judicial action. Following the withdrawal, ExxonMobil dropped its request for an expedited ruling, though it still intends to continue the litigation. But given that the company is going forward with its proxy without the proposal on its ballot, it will have to persuade the court that an actual case or controversy exists, notwithstanding formal mootness, because the SEC’s capricious application of its proxy rules in these cases are “capable of repetition, yet evading review.” FEC v. Wis. Right to Life, Inc., 551 U.S. 449, 462 (2007).


The SEC’s entire shareholder proposal process rests on dubious legal foundations. At a minimum, the agency should be discouraging, not encouraging the filing of proposals that would do serious harm to both the company and its shareholders.  As stated in the complaint, the Arjuna Capital and Follow shareholder proposal ‘seeks to usurp the role of management and the board to impose Defendants’ personal policy preferences through a shareholder proposal process that was not designed or intended for such use.’ Therefore, it is clearly an unlawful interference in the corporate governance of a public company.

We strongly endorse SEC Commissioner Mark Uyeda’s recommendation that private ordering as provided for under corporate law should govern which shareholder proposals enter a company’s proxy materials.  This would mean allowing the board to use its discretion to exclude a shareholder proposal on substantive grounds under the applicable charter amendments and by-laws that govern a company’s proxy process.  In regard to the amendments and by-laws used, divergence between companies may result.  But this should lead to greater efficiency as each company is allowed to establish those rules and procedures that best meets its needs.  As stated by Professor Monash in his new article The Corporate Contract & the Private Ordering of Shareholder Proposals: ‘Through private ordering, each corporation may tailor shareholder proposal rights to best meet its needs, and securities markets may efficiently price those rights for the benefit of investors.’

Bernard S. Sharfman is a research fellow at the Law & Economics Center of George Mason University’s Antonin Scalia Law School, and James R. Copland is a senior fellow and the Director of Legal Policy at the Manhattan Institute. The opinions expressed here are the authors’ alone and do not represent the official position of any organization with which they are currently affiliated.

This post first appeared on Columbia Law School’s Blue Sky Blog (here).


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