No-Action Letter for Chevron Corporation Did Not Permit Exclusion of Public Climate Change Policies Proposal

In Chevron Corporation, 2016 BL 92735 (Mar. 23, 2016), Chevron Corporation (“Chevron”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit omission of a proposal submitted by Legal & General Assurance (Pensions Management) Limited on behalf of Hermes Equity Ownership Services, and from Wespath Investment Management on behalf of UMC Benefit Board, Inc. (collectively, the “Shareholders”) requesting that Chevron publish an annual assessment of long-term portfolio impacts of possible public climate change policies. The SEC declined to issue the requested no action letter under Rule 14a-8(i)(7) and 14a-8(i)(12). 

Shareholder submitted a proposal providing that: 

• RESOLVED, Shareholders request that by the Annual Meeting of Stockholders in 2017, Chevron Corporation (Chevron), with board oversight publishes an annual assessment of long-term portfolio impacts to 2035 of possible public climate change policies, at reasonable cost and omitting proprietary information. The report should explain how current capital planning processes and business strategies incorporate analyses of the short and long-term financial risks of a lower carbon economy. Specifically, the report should outline impacts of fluctuating demand and price scenarios on the company’s existing reserves and resource portfolio - including the International Energy Agency’s “450 Scenario,” which sets out an energy pathway consistent with the internationally recognized goal of limiting the global increase in temperature to 2 degrees Celsius.

Chevron sought exclusion of the proposal from its proxy materials under subsections (i)(7) and (i)(12) of Rule 14a-8. 

Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. In addition, the Rule includes thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC.  

Rule 14a-8(i)(7) permits a company to omit a proposal that relates to the company’s “ordinary business” operations, including the company’s litigation strategy and legal compliance. “Ordinary business” refers to those issues that are fundamental to management’s ability to run the company on a day-to-day basis. As such, “ordinary business” issues cannot practically be subject to direct shareholder oversight.  For additional discussion of the exclusion, see Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7), 93 DU Online L. Rev. 183 (2016), and Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, 93 DU Online L. Rev. 263 (2016).   

Under Rule 14a-8(i)(12)(ii), a stockholder proposal dealing with "substantially the same subject matter as another proposal or proposals that has or have been previously included in the company's proxy materials within the preceding 5 calendar years" may be excluded from the proxy materials "for any meeting held within 3 calendar years of the last time it was included if the proposal received . . . [l]ess than 6% of the vote on its last submission to shareholders if proposed twice previously within the preceding 5 calendar years."

Chevron asserted the proposal should be excluded under subsection (i)(7) because the company assesses the environmental impact on existing reserves and resource portfolio in the ordinary course of business. The Company argued the proposal focused on how Chevron responded to government regulation and public policy, which required an assessment of long-term portfolio impacts and business strategies that implicated ordinary business. While the proposal touched on a significant policy issue, the proposal focused on day-to-day business matters.

Chevron also argued that within the past five years it has included in the proxy materials at least two stockholder proposals, in 2011 and 2015, regarding the perceived financial risks to the Company associated with climate change and related public policies and the Company's actions to protect stockholders' investments in light of those risks. Chevron further pointed out that the proposals do not need to be identical, but rather the “substantive concerns” must be similar. As such, Chevron asserted the proposal should be excluded under subsection (i)(12).

In response, the Shareholders argued the proposal focused on a significant policy issue of climate change, an issue that the staff has repeatedly recognized. The Shareholders also claimed the prior proposals Chevron cited were fundamentally different from this proposal. Specifically, the 2015 proposal related to a dividend policy premised on global oil demand and climate change concerns, and the 2011 proposal sought a report on “impact to shareholder value” in relation to Chevron’s portfolios under different possible scenarios.

The Commission disagreed with Chevron’s reasoning and concluded Chevron may not omit the proposal from its proxy materials in reliance on Rule 14a-8(i)(7) because the proposal “focuses on the significant policy issue of climate change.” It also concluded Chevron could not exclude the proposal under subsection (i)(12). The staff noted “the proposal does not deal with substantially the same subject matter as the proposal included in the company’s 2015 proxy materials.” It expressed no position on whether the proposal deals with substantially the same subject matter as the proposal included in the company’s 2011 proxy materials. Accordingly, the Commission decided it would recommend enforcement action if Chevron omitted the proposal from its proxy materials in reliance on either Rule 14a-8(i)(7) or 14a-8(i)(12).

The primary materials for this post can be found on the SEC Website.