ExxonMobil’s Lawsuit Against its Shareholders: A Cautionary Tale

Posted by Timothy Smith, ICCR, on
Wednesday, June 12, 2024
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Timothy Smith is Senior Policy Advisor at the Interfaith Center on Corporate Responsibility (ICCR).

On January 21, ExxonMobil filed a case in the Fifth Circuit Court in Dallas, Texas suing two shareholders, Arjuna Capital and Netherlands-based FollowThis, who had dared to file a proposal requesting that the company do more to reduce its greenhouse gas (GHG) emissions to help counter the growing climate crisis. The lawsuit set in motion months of investor opposition including a widely-supported investor campaign against Lead Director Joseph Hooley and CEO/Director Darren Woods. The response to the lawsuit was global in scope and included a number of sizeable institutional investors who viewed the unprecedented invocation of the courts to block a shareholder proposal as unnecessarily punitive and akin to a “SLAPP” suit meant to silence shareholder dissent on climate risk and ward off future shareholder filings. Most concerning to investors was the company’s flagrant “end run” around the Securities and Exchange Commission (SEC), the federal regulator charged with protecting investor interests and adjudicating proxy disputes. The lawsuit quickly became a lightning rod for the attack on shareholder rights, raising the specter of future lawsuits against shareholder proponents seeking more information and improved corporate policies to better manage climate risk.

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Six Early Takeaways from the 2024 Proxy Season

Posted by Diana Lee and Sydney Carlock, Teneo, on
Wednesday, June 12, 2024
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Diana Lee is Senior Vice President and Sydney Carlock is a Managing Director at Teneo. This post is by Ms. Lee, Ms. Carlock, Martha Carter, Matt Filosa, and Sean Quinn.

Introduction

With November’s election on the horizon, the politicization of ESG topics remains a key concern for both investors and corporations. Over three quarters of North American CEO respondents to Teneo’s CEO and Investor Survey[1] have stated that it has impacted the way their business operates. Nevertheless, an overwhelming 92% of CEOs stand behind their companies’ ESG-related programs, per the same survey. Similarly, large institutional investors have underscored their focus on material ESG issues in their 2024 stewardship reports (as summarized in Teneo’s Three Key Considerations for Companies Heading Into the 2024 Season) with an emphasis on governance and fiduciary duty.

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2024 Proxy Season: Preliminary Analysis of Say-on-Pay Voting Trends

Posted by Marc Treviño and June Hu, Sullivan & Cromwell LLP, on
Wednesday, June 12, 2024
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Marc Treviño is a Partner and June Hu is Special Counsel at Sullivan & Cromwell LLP.

Introduction and Note on Data

The data on say-on-pay voting and recommendations derives from ISS publications and SEC disclosure with respect to annual meetings of S&P 500 and Russell 3000 companies through May 20, 2024.  From January 1, 2024 to May 20, 2024, shareholders have voted on 257 and 1,177 say-on-pay proposals, respectively, at S&P 500 and the Russell 3000 companies. We estimate that roughly one-third of H1 2024 say-on-pay votes were still pending as of May 20, 2024. Therefore, the results summarized here reflect our preliminary analysis, and we expect to publish our annual proxy season review—which will summarize say-on-pay voting trends based on complete H1 2024 data—in the coming months.

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Did Tesla Directors Take a Big Accounting Bet without any Independent Accounting Advice?

Posted by Lucian Bebchuk (Harvard Law School) and Robert Jackson (NYU School of Law), on
Tuesday, June 11, 2024
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Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance, and Director of the Program on Corporate Governance, at Harvard Law School. Robert Jackson is a professor of law at NYU School of Law who served as a Commissioner of the U.S. Securities and Exchange Commission from 2018 to 2020.

This week, Tesla’s stockholders will vote on a Board proposal to restore Elon Musk’s massive options grant that a Delaware court invalidated in January. A key reason that the Board cited for favoring this restoration route over negotiating a new pay package is that reinstating the old one would not involve any new accounting charge. However, the prediction of no accounting charge is contestable, and it seems that the Board’s claim that no new charge would be required is not based on any independent accounting advice.  Therefore, stockholders voting this week should take into account that restoration of the old grant may well result in a massive account charge. READ MORE »

Letter in support of the proposed amendments to § 122 DGCL

Posted by Lawrence Hamermesh (Widener University), on
Tuesday, June 11, 2024
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Lawrence A. Hamermesh is an Emeritus Professor at Widener University Delaware Law School. This post is based on his letter to Senator Townsend and Representative Griffith, and is part of the Delaware law series; links to other posts in the series are available here.

Dear Senator Townsend and Representative Griffith:

I write in support of S.B. 313, and in particular the proposed amendments to Section 122 of the Delaware General Corporation Law (DGCL) that validate corporate power to enter into agreements that grant stockholders significant governance rights. These amendments respond to a recent decision by the Court of Chancery in the Moelis case, which invalidated a stockholder agreement giving the corporate founder the right to require, among other things, that the board of directors recommend the election of his director nominees. The proposed amendments validate such agreements as a general matter, but leave the courts with the ability to invalidate any such agreement if its adoption or use violates the directors’ fiduciary duty.

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Key priorities for an “early days” GenAI strategy

Posted by Barbara Berlin, PricewaterhouseCoopers LLC, on
Tuesday, June 11, 2024
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Barbara Berlin is Managing Director at the PricewaterhouseCoopers (PwC) Governance Insights Center. This post is based on her PwC memorandum.

We are in what might be termed the early days of generative AI (GenAI). It was only in November 2022 that the consumer release of ChatGPT captured the world’s imagination. Since then, companies have been struggling to keep pace as GenAI’s potential and risks continue to expand. Early leaders have developed a strategy to address six critical priorities for effective GenAI adoption. To fashion and maintain a successful early days GenAI strategy, boards should engage with management and consider focusing their attention on the following key priorities.

Priority 1

Oversee the balancing of AI risks and rewards

Organizations need to strike a balance, finding ways to tap GenAI’s undeniable excitement and potential while taking the associated risks seriously. Opportunity seekers and risk-minded leaders need a healthy dose of appreciation for the priorities and concerns of the other and to be on the same page. This demands management and board alignment on the company’s risk tolerance and appetite around GenAI. Achieving healthy tension often starts with developing an agreed-upon core set of principles and adopting a framework for responsible AI use. These activities can provide practical safeguards and guidelines for directors and management to steer decision-making and help the organization move forward faster and with more confidence.

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Tesla Should Take the Court Decision Seriously, Not Dismissively

Posted by Lucian A. Bebchuk (Harvard Law School), on
Monday, June 10, 2024
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Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance, and Director of the Program on Corporate Governance, at Harvard Law School.

At the end of a long trial, a massive option grant that Tesla awarded in 2018 to its CEO Elon Musk was invalidated by a Delaware court, which (as the New York Times described) cast “a harsh light on the behavior of … Tesla’s board of directors.” Tesla’s Board, however, did not react to the decision with contrition and an attempt to improve its governance. Instead, the Board seems to be following an approach of dismissal and defiance.

To begin, a well-governed board should take a highly critical court decision with the seriousness that it deserves, according a high priority to addressing the problems identified by the decision. But the Tesla Board chose not to do so. For example, as discussed in an earlier post  I co-authored with Rob Jackson, because the court concluded that various Tesla directors displayed a lack of independence, the Board should have addressed this concern by adding candidate(s) that are “indisputably independent” (a term used by the court) for election in the annual meeting taking place this week; yet no such director was added to the slate for the upcoming annual meeting.

Similarly, as discussed in detail in another earlier post co-authored with Rob Jackson, the court explained that, in negotiating the terms of Musk’s award, the Board failed to include (or even attempt to discuss with Musk) a contractual commitment that would limit the amount of time and effort that Musk would spend on endeavors outside Tesla. Given that the Board cited a desire to get Musk’s time and attention as a major objective, one would have expected the Board going forward to seek such a commitment before providing Musk with a large compensation award. However, the Board elected to not negotiate for a new pay package with terms that would not be structurally defective. Instead, the Board is seeking stockholder support for a proposal to ratify and thus reinstate the invalidated grant exactly as it was, without even trying to obtain from Musk a time-and-attention commitment as a condition for bringing such a proposal to a vote.

Most disconcerting might well be how Tesla has been misdescribing the court’s decision in its efforts to obtain stockholder votes for the ratification proposal. In seeking such support, Tesla has been criticizing the court’s opinion in ways that could be viewed as unfair, dismissive, and disrespectful.

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Section 122(18) DGCL: A proposed compromise

Posted by Marcel Kahan and Edward Rock (New York University School of Law), on
Monday, June 10, 2024
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Marcel Kahan is the George T. Lowy Professor of Law and Edward B. Rock is the Martin Lipton Professor of Law at New York University School of Law. This post is part of the Delaware law series; links to other posts in the series are available here.

Delaware finds itself in a post-Moelis crisis. On the one hand, the Chancery Court’s opinion is a well-supported interpretation of current Delaware law. If DGCL § 141(a) imposes any restrictions at all, the stockholder governance agreement at issue in that case – an agreement that gave founder Ken Moelis almost complete control over corporate decisions and governance – must violate those limits.

On the other hand, there are a host of existing stockholder governance agreements drafted by lawyers following current market practice whose validity has been called into question by the Moelis holding. The resulting uncertainty has led the DSBA’s Corporation Law Council to propose an amendment to DGCL § 118 that provides “bright-line authorization” for provisions of the sort at issue in Moelis.

This proposed amendment, in turn, has elicited opposition by us and others (here, here and here) because of its potentially far reaching effects on Delaware law, as well as because of the uncertainty that it introduces. This controversy, in turn, has complicated the normally smooth process of amending the DGCL.

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Call to Action: ISSB Global Adoption

Posted by Elisa Cencig, Wilhelm Mohn, and Carine Smith Ihenacho, NBIM, on
Monday, June 10, 2024
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Elisa Cencig is Head of Policy Engagement, Wilhelm Mohn is Global Head of Active Ownership, and Carine Smith Ihenacho is Chief Governance and Compliance Officer at Norges Bank Investment Management (NBIM). This post is based on a statement endorsed by NBIM and other organizations.

The transition to a net zero, sustainable global economy requires an efficient allocation of capital, and effective management of the associated risks and opportunities. In this context, consistent, reliable and decision-useful sustainability data from organisations is essential. With this data:

  • Corporate boards can better exercise their oversight responsibilities on how sustainability-related risks and opportunities should be addressed in corporate strategy.
  • Corporates can more clearly demonstrate their performance to investors and in turn gain greater access to capital to accelerate progress on their sustainability targets.
  • The financial industry can allocate capital efficiently, accounting for sustainability-related financial risks and opportunities, and address sustainability goals.
  • Governments and international organisations can deploy the power of capital markets more effectively to achieve their sustainability priorities and track sustainability-related progress from the private sector.

Yet, as it stands, there remain significant gaps in even the most basic sustainability-related data. For example, 2022 research shows that, of the 4,000 largest listed companies globally, over 40% do not disclose their operational carbon emissions.[1]

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Takeaways from SEC v. SolarWinds Motion to Dismiss Hearing

Posted by Jennifer Lee, Shoba Pillay, and Charles D. Riely, Jenner & Block LLP, on
Sunday, June 9, 2024
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Jennifer Lee, Shoba Pillay, and Charles D. Riely are Partners at Jenner & Block LLP. This post is based on a Jenner & Block memorandum by Ms. Lee, Ms. Pillay, Mr. Riely, Andrew P. Csoros, and Reanne Zheng.

The SEC’s high-profile litigation against SolarWinds and its Chief Information Security Officer (CISO), Timothy Brown, reached a critical juncture on May 15, 2024, when the parties presented oral arguments before Judge Paul A. Engelmayer in the Southern District of New York on Defendants’ motion to dismiss. This client alert discusses the key critiques of the SEC’s approach, important developments in the litigation, and highlights from the motion to dismiss hearing.

Background

As we noted in our prior client alert, the SEC filed its initial complaint against SolarWinds and its CISO Brown in October 2023, alleging that Defendants misled the company’s investors and customers by overstating the company’s cybersecurity practices and concealing mounting cybersecurity risks between October 2018 and January 2021.

The SEC’s complaint focused on SolarWinds’ flagship network monitoring product, Orion, which purportedly had abilities ranging from reducing network outages to improving network performance. Orion was used by virtually all Fortune 500 companies and many US government agencies. The SEC alleged that SolarWinds overstated the strength of its cybersecurity practices and prevention measures, and then failed to tell the whole truth after learning of a massive breach regarding Orion that impacted many of its key customers.

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