Exxon Mobil Corporation (Exxon) has begun implementation of its retail voting program, following the receipt of no-action relief from the Securities and Exchange Commission (the SEC). In support of this program, Exxon will begin sending notices to retail investors through their brokers and has publicly filed solicitation materials encouraging its retail shareholders to participate in the program. This program is expected to increase the ability and ease of retail investors to vote at shareholder meetings, increase voter turnout accordingly, and may provide a counterbalance to activist voting campaigns. Other public companies are expected to consider adoption of similar programs.
Background of Exxon’s Retail Voting Program
Exxon has launched this program to assist increased retail turnout amidst a landscape of frequent activist campaigns and delivery of shareholder proposals. Retail investors tend to support board and management proposals but do not always vote. For example, as noted in Exxon’s no-action request, fewer than a quarter of Exxon’s retail investors voted at its most recent annual meeting. Shareholder voting, which often must be done through a broker’s voting system, can be difficult, and as Exxon emphasized in a related statement, retail investors “lack access to numerous services that make voting fast and easy for larger institutional investors.” While the impact of any individual retail investor’s vote may be minimal, the collective input of a company’s retail investor base has the potential to have a meaningful impact at certain companies.
With its retail voting program, Exxon may reach a significant, but historically difficult to engage, portion of its shareholder base and will provide retail investors with an opportunity to cast their ballots consistently. Increased turnout can help ensure that voting results reflect the input of a larger portion of a company’s shareholder base while also making it more difficult for activists to influence the company through matters requiring a shareholder vote.
Key Elements of the Program
Though the Securities Exchange Act of 1934 generally prohibits proxies that confer authority for more than one meeting, Exxon’s retail voting program is structured to allow retail investors to elect to vote their shares in accordance with the board’s recommendations indefinitely. The SEC’s no-action letter emphasized several key features of Exxon’s retail voting program:
- Completely voluntary and available to all retail investors at no cost. All of Exxon’s retail investors, including any registered owner or beneficial owner (via their bank, broker or plan administrator), have the same opportunity to participate in the program, at no cost.
- Choices for the matters on which a voting instruction will apply. Shareholders will be able to apply their standing voting instruction to either all matters, or all matters except contested director elections or any acquisition, merger, or divestiture transaction that would require the approval of Exxon’s shareholders.
- Not available to investment advisors. The program is not available to investment advisers registered under the Investment Advisers Act of 1940 exercising voting authority with respect to client securities.
- Opt-out option. Participating retail investors have the ability and choice to opt out and cancel their standing voting instruction, as well as the ability to override the instruction regarding any proposals.
- Annual reminders. Participating retail investors will receive annual reminders of their opt-in status and selection, and their ability to opt out and cancel their standing voting instruction for subsequent meetings.
- No voting restrictions; continued receipt of proxy materials. Exxon will continue distribution of all proxy materials for shareholder meetings to participating retail investors, and there will be no restrictions on participating retail investors voting using the proxy materials they receive for each such meeting.
- Full disclosure. Full disclosure of the voting program will be included on Exxon’s website and in its proxy statements.
Key Considerations for Companies
While the SEC’s no-action letter provides public companies interested in implementing their own retail voting program with regulatory comfort, companies must also evaluate whether a similar program makes sense for them.
The composition of a company’s shareholder base (including the relative proportions of retail investors, institutional investors, and passive investors) and its historical voting patterns will inform the potential impact of a retail voting program. A company with a large retail investor base, like Exxon, may similarly have an opportunity to harness a previously overlooked, and often management-friendly, shareholder base. By establishing norms of retail participation, a company could more easily establish a quorum and pass company proposals with the requisite vote. A company may also become a less attractive target for activist campaigns relying on garnering a majority of votes at a low turn-out meeting. In fact, some activist investors, recognizing the threat this can pose to the traditional corporate gadflies, have already criticized such programs, framing them as a loss for shareholder rights.
Companies must consider the cost to establish and administer such a program, which will also be influenced by the composition of the company’s shareholder base and the level of turnover in its retail investor base. A retail voting program may be costly to implement and maintain, and there is not data available currently about these likely costs.
Further, companies should evaluate the anticipated receptiveness of their retail investors to a retail voting program. Retail voters may not be inclined to participate, just as many have historically not been inclined to vote. Companies may wish to monitor the receptiveness of retail investors to Exxon’s and any other similar programs, and the practical ease of participation, before implementing their own.
The widespread adoption and success of retail voting programs could also be impacted by relevant public reception. Neither ISS nor Glass Lewis has yet publicly commented on Exxon’s proposed program, and neither has indicated whether their views on retail voting programs could impact their proxy voting guidelines. Additionally, the legality of automatic voting programs has been largely untested in state courts.
Despite possible concerns about such a program, proponents have hailed the program as a win for shareholder democracy by enabling retail investors to make their voices heard.
Please contact your Foley & Lardner attorney if your company may be interested in exploring a retail voting program. Companies should plan to address with the SEC the goals and specifics of any program they wish to implement to determine whether additional no-action support may be necessary to proceed.
