Last month, a Texas federal court refused to dismiss the state’s antitrust claims against BlackRock, Vanguard and State Street associated with their engagement with portfolio companies on ESG-related matters. This Cleary memo says that the Court’s decision is going to add another layer of complexity to engagements between companies and shareholders. This excerpt lays out why companies and shareholders are likely to proceed even more cautiously as a result of the decision:

Companies may be taking on greater risk when they take an action advocated by one or more shareholders (or other climate change advocates) that are also lobbying for actions at competing firms. Companies should avoid engaging with their competitors and overlapping shareholders in a group setting, or taking action because shareholders promise that they will also pressure competing firms to act similarly. The Texas case provides new contours to risk of a finding of collective action through industry or other groups, by including shareholders as a nexus to potential coordination.

Similarly, we expect shareholders may also refresh their engagement effort strategies in light of this case and take a more conservative, thoughtful and tailored approach to outreach with each company to avoid any optics of coordination among themselves or among their portfolio companies.

The blog contends that the potential for conspiracy liability raised by this decision together with the SEC’s guidance narrowing the path for major investors to file short form Schedule 13G beneficial ownership disclosures may have a cooling effect on the frequency of shareholder engagements and reduce the pressure placed on companies to make changes in line with investor policies.

As we previously blogged, the DOJ and FTC submitted a Statement of Interest in the Texas lawsuit. While the antitrust agencies weren’t supportive of the defendants on most of the issues raised by the lawsuit, they did clarify that engagements on governance topics wouldn’t typically jeopardize shareholders’ status as passive investors for purposes of the antitrust laws.

– John Jenkins