Exxon paves the way for incumbents to secure the votes of retail investors, potentially upending the corporate election playbook.
Through a new, proposed retail voting program, Exxon Mobil Corporation (“Exxon”) seeks to secure the authorization of its retail investors (constituting all beneficial or registered shareholders other than investment advisers registered under the Investment Advisers Act of 1940 having voting authority) to vote a shareholder’s shares pursuant to the recommendation of Exxon’s board of directors on an ongoing basis unless and until the shareholder cancels such authorization or overrides the vote.
Recently, the SEC’s Division of Corporation Finance issued a no-action letter to Exxon, concluding that it would not recommend an enforcement action against Exxon if Exxon implemented its proposed retail voting program as described in that letter (the “Retail Voting Program”). As a result, Exxon may implement the Retail Voting Program without fear of adverse action from the SEC.
Exxon intends to provide its retail investors with the option to give a standing instruction that their votes be cast consistent with the recommendations of the Exxon board of directors. It will thus be much easier for retail investors to vote, particularly in parallel with the company’s recommendations rather than against the company’s recommendations. Retail investors are traditionally the hardest voters for companies or their proxy solicitors to reach. By making it easier to cast a vote for the company’s recommendations, the relief provided will likely strengthen the company’s hold over its retail investors and would do so for any company implementing such a program in the future.
Basics of the Retail Voting Program
Under the Retail Voting Program, Exxon’s retail investors may instruct that their votes be cast consistent with the board of director’s recommendations on either (i) all matters or (ii) all matters other than contested director elections and certain transactions that require approval of the company’s shareholders. A retail investor’s standing voting instruction will remain in effect unless and until that shareholder affirmatively opts out of their standing instruction. Otherwise, all future votes of that shareholder will be cast consistent with their standing instruction and thus consistent with the board’s recommendation.
There Is Tension Between the Retail Voting Program and Applicable Law
As a technical matter, the letter provides relief under SEC Rule 14a-4(d)(2) and Rule 14a-4(d)(3) under the Securities Exchange Act of 1934.
As Exxon notes, those rules generally have the effect of prohibiting any proxy from authorizing votes for more than one future meeting and instead require voting shareholders to choose how they vote in connection with each meeting. For instance, Rule 14a-4(d)(2) states, in pertinent part, that “[n]o proxy shall confer authority . . . [t]o vote at any annual meeting other than the next annual meeting.” Similarly, Rule 14a-4(d)(3) provides that “[n]o proxy shall confer authority . . . [t]o vote with respect to more than one meeting.” Absent relief, the Retail Voting Program is in conflict with those rules, as it would permit retail investors to issue a standing instruction directing how their votes are to be cast at more than one meeting in the future. (Exxon also notes that its program as proposed to be implemented would not violate pertinent state corporate law provisions, either in New Jersey where Excon is incorporated or in Delaware, where most U.S. businesses are incorporated).
In support of its request that the SEC staff agree that the terms of the program do not violate the rules, Exxon notes that, at no cost, (i) shareholders may opt out of the program and cancel their standing voting instructions at any time, and (ii) shareholders still retain the ability to vote at an annual meeting or via proxy and effectively “override” their prior instructions if so desired. In other words, shareholders may change their minds. Exxon also notes that it will regularly remind shareholders and also disclose on its website and in other corporate filings that shareholders retain this ability. Exxon asserts that “even participating shareholders that choose not to opt out are exercising a choice by leaving the standing voting instruction in place.” Essentially, Exxon is arguing that future inaction by retail investors is equivalent to making a new voting decision and issuing a new proxy.
However, a potential flaw in this argument is that it ignores the practical reality of how the Retail Voting Program is likely to operate in practice. Rather than choosing how to vote at each meeting, in reality many retail investors that issue a standing voting instruction may then disengage from shareholder voting and governance activities and may not even make themselves aware of the agenda of future meetings. At best, choosing through inaction lacks the intentionality associated with traditional participation in the proxy voting process.
Expectations Moving Forward
As Exxon states, the lack of retail investor voting has long vexed public companies. Unless the SEC retreats from its current position, this type of program is likely to be very popular, and it is likely that more companies will institute similar retail voting programs.
The full text of Exxon’s no-action letter is available here: https://www.sec.gov/rules-regulations/no-action-interpretive-exemptive-letters/division-corporation-finance-no-action/exxon-mobile-091525.
