Texas v. BlackRock, Inc.

State plaintiffs and The Vanguard Group, Inc. (Vanguard) reached a settlement in the states’ lawsuit alleging that Vanguard and two other institutional investors violated antitrust laws by collectively using their shareholdings in domestic coal producers to reduce coal output. Vanguard, which expressly denied that it had engaged in any unlawful act, agreed to pay $29.5 million into an escrow account established by the plaintiff states. Vanguard also agreed to abide by “Passivity Commitments” for five years regarding its stewardship of “U.S. Vanguard-Advised Funds,” which were defined as Vanguard-advised exchange-traded funds, collective investment trusts, and mutual funds domiciled in the U.S. The settlement agreement provided that “Vanguard Investment Stewardship, or any group that may succeed it by taking over its responsibilities for stewardship of U.S. Vanguard-Advised Funds, shall pursue engagement activities with portfolio companies and cast shareholder votes relating to U.S. Equity Investments made by U.S. Vanguard-Advised Funds solely to further the financial interests of investors in those funds,” which is defined as seeking “the best long-term investment returns for investors in each fund.” The settlement agreement set forth specific obligations, including that Vanguard “will not advocate to any portfolio company that it take any particular course of conduct to reduce carbon emissions” and that Vanguard will withdraw from the Principles for Responsible Investment and will not participate in any organization that advocates for setting specific output or emissions targets or that requires members to make commitments to achieve climate-focused objectives. The specific commitments also included obligations not explicitly related to climate or ESG such as requiring that Vanguard “will not dispose or threaten to dispose of securities of portfolio companies as a condition or inducement of specific action or nonaction by such company.” The settlement agreement also provided that Vanguard would use commercially reasonable efforts to offer proxy voting choice to investors and encourage investors to participate. In addition, Vanguard agreed to provide certain discovery materials.

The federal district court for the Eastern District of Texas denied three large institutional investors’ motion to dismiss 13 states’ federal antitrust claims alleging that the investors collectively used their shareholdings in coal producers to reduce coal output. Regarding the claim under Section 7 of the Clayton Act, which concerned the defendants’ use and acquisition of stock, the court found that the states sufficiently alleged that the defendants “acquired significant amounts of stock in coal companies and then used their market power to pressure the companies to decrease coal production.” The court cited “dozens of specific examples” of conduct supporting this theory, including the defendants’ joining of “climate initiatives” such as the Net Zero Asset Managers Initiative and Climate Action 100+ that involved public commitments to using stock to take action to reduce greenhouse gas emissions and address climate change; the affirmation of these commitments through public statements; and actions such as votes against directors at coal companies for failing to have adequate climate risk disclosures. The court further found at this state of the litigation that the defendants did not qualify for the Clayton Act’s safe harbor for passive investors. Under Section 1 of the Sherman Act, which concerned the defendants’ alleged agreement to work together, the court found that the states’ allegations included sufficient circumstantial evidence to suggest the investors’ “agreed to collectively pressure coal companies to reduce the output of coal in the relevant markets and disclose future output information.” The court cited alleged “parallel conduct” such as the joining of a climate initiative within the same time period and “plus factors suggestive of an agreement” such as the investors’ “shared moral imperative to combat climate change.” The court also found that the states sufficiently alleged anticompetitive harm with allegations that the investors’ actions decreased coal output and increased prices in certain markets between 2019 and 2022. The court also allowed consumer protection claims to proceed against one of the investors—BlackRock, Inc.—under the laws of Texas, Montana, Iowa, and Nebraska. The court dismissed claims under Louisiana’s consumer protection law and one of Nebraska’s statutes because they did not apply to marketing and sale of securities but found that claims under the other state laws were not barred on this basis. The court further found that the states plausibly alleged that BlackRock made deceptive and material statements that misrepresented certain “non-ESG funds.” Because the states plausibly alleged federal antitrust claims, the court dismissed parallel state antitrust claims.

Eleven states, led by Texas, filed a lawsuit in the federal district court for the Eastern District of Texas asserting that three institutional investors had violated antitrust laws by collectively using their shareholdings in domestic coal producers to reduce coal output. The complaint alleged that the investment managers used their collective power, including through proxy voting, to pressure the coal producers. The complaint also cited the defendants’ participation in initiatives such as the Net Zero Asset Managers Initiative and Climate Action 100+ as “substantial evidence of a horizontal agreement” to use common ownership to set and enforce output restrictions. The states contended that the defendants’ concerns regarding climate change did not allow them “to turn a blind eye to an illegal deal.” The complaint further alleged that one of the defendants, Blackrock, Inc., had actively deceived shareholders by representing that its non-ESG funds “would be dedicated solely to enhancing shareholder value” while in fact using all of its holdings to advance its climate goals. The complaint asserted that the defendants violated Section 7 of the Clayton Act and Section 1 of the Sherman Act. The complaint also asserted violations of state antitrust laws in Texas, Montana, and West Virginia. Texas asserted a deceptive trade practice claim against defendant BlackRock, Inc. Relief sought included declaratory relief, damages, injunctive relief (including divestiture to restrain the defendants from using their stock to restrain output and limit competition), and civil fines or penalties.