Exxon's legal blitz on activists' shareholder proposal presents new proxy battle approach

Tension between corporations and activist investors is nothing new when it comes to the proxy ballot, but a recent move by Exxon Mobil may change the calculus for all parties, sources said.

"Now that the strategy has at the bare minimum gotten the proposal excluded out of the proxy, which was the immediate goal, I think when you're putting those options on the table for a company then I think litigation becomes something that you consider as more of a viable option," said Sean Donahue, chair of the public company advisory practice and co-chair of the shareholder activism and takeover defense practice of Paul Hastings LLP.

The oil giant made news last month when it filed a lawsuit against climate activist investor Arjuna Capital and nonprofit Follow This to prevent shareholders from once more considering a proposal on its greenhouse gas emissions.

And despite criticism from climate groups and activist investors, the move worked: Exxon in a Feb. 1 court filing announced that the groups withdrew the proposal.

The lawsuit raised eyebrows because it was a departure from the way these disputes are typically worked out.

Shareholders can file proposals before a company's annual meeting and if a given proposal makes it on to the company's proxy statement, all shareholders have the chance to vote on it. If a company thinks a proposal is out of bounds or has already been addressed, it can file a no-action letter with the Securities and Exchange Commission, requesting permission not to include the proposal in its proxy statement.

But Exxon, in its lawsuit filed on Jan. 21 in U.S. District Court in Fort Worth, Texas, bypassed the SEC and brought its case straight to court.

"We're disappointed that Exxon is circumventing the SEC's shareholder proposal process by proceeding directly to litigation in federal court which will result in silencing investors that voice climate-risk concerns," said Natasha Lamb, chief investment officer at Arjuna Capital, in a statement. "Not only is the company sidestepping a critical corporate accountability mechanism that has upheld shareholder freedoms for decades, this amounts to tactics of intimidation and bullying."

In December, Arjuna Capital and Follow This submitted a shareholder proposal calling for a "further accelerating" of Exxon's emission reduction plans that include Scope 3 emissions, which are the indirect emissions generated from Exxon's supply chain.

A similar proposal last year gained just over 10% of shareholder support, down from 27% in 2022.

"The 2024 Proposal does not seek to improve Exxon Mobil's economic performance or create shareholder value," Exxon said in its complaint. "Like the previous proposals, it is designed instead to serve Arjuna's and Follow This' agenda to 'shrink' the very company in which they are investing."

Even though the proposal was withdrawn, Exxon said it's continuing with the lawsuit because "there are still important issues for the court to resolve."

Changes made by the SEC in recent years make the litigation route more appealing, said Charles Crain, vice president of domestic economic policy at the National Association of Manufacturers.

"The proxy process has been increasingly hijacked by politically motivated activists, the SEC is increasingly allowing those activists access to the proxy ballot and denying companies' attempt to exclude those proposals from the ballot," he said. "Companies are bearing the brunt of this, so it is not surprising to me at all that a company would seek to get around the SEC in the way that Exxon has sought to do."

The SEC's division of corporation finance issued a legal bulletin in November 2021 that rescinded the division's previous three legal bulletins — promulgated under the Trump administration — related to Exchange Act Rule 14a-8 that concern shareholder proposals. The November 2021 bulletin also outlined changes in the division's views on what constitutes "ordinary business" and "economic relevance" when it determines whether a shareholder proposal should be excluded from a company's proxy statement.

The bulletin made it easier for more environmental and social shareholder proposals to appear on company proxy ballot.

"The pendulum has swung way in favor of being able to have proposals included in the proxy statement, particularly with respect to E and S, and this litigation is really a response to the pendulum swinging pretty heavily one way," Donahue said.

In 2021, before the bulletin, the SEC granted no-action relief — meaning it allowed a given company to exclude a proposal from its proxy ballot — to a record 80 environmental and social proposals during the 2021 proxy season, according to data from proxy advisory firm Institutional Shareholder Services' governance and research unit. After the guidance, while the number of environmental and social proposals introduced increased, the number of no-action approvals dropped to 36 in 2022 and ticked up to 45 through the first eight months of 2023, ISS found.

Also, in July 2022, the SEC issued a proposal to make it more difficult for public companies to exclude shareholder proposals from proxy statements and make it easier for proponents to resubmit proposals.

"The message across the board from the SEC is very clear to corporate America: that politically motivated shareholder proposals deserve a place on the proxy ballot," Crain said.

A federal judge last year granted the National Association of Manufacturers' motion to intervene in a case challenging the SEC's authority to approve or disapprove whether a given shareholder resolution must appear on a public company's proxy statement. The motion to intervene allows NAM to state its case before the court even though it's not a plaintiff or defendant.

Oral arguments in that case — National Center for Public Policy Research vs. SEC — will be heard next month in the 5th U.S. Circuit Court of Appeals in New Orleans.

But not everyone agrees with Exxon's decision.

Exxon went to "an extreme length" to prevent shareholders from considering the proposal and the decision from Arjuna Capital and Follow This to withdraw it points to the vast disparity in resources between the two camps, said Andrew Logan, senior director of climate and energy, oil and gas at sustainability non-profit Ceres.

"If you're a small investor, the idea that you're going to go through a lengthy court case and then potentially be subject to paying legal fees, it's a pretty high hill to climb to justify that," Logan said.

Exxon, he added "has won the battle but not the war. They've pushed this vote off and maybe this has the effect of scaring off small investors in the future, which I think is really unfortunate because it's often been from these smaller investors that we've seen some of the more important issues come to light."

But investors won't stop pushing for change at big companies, Logan said.

"Exxon knows very well that if investors don't see a path to progress through normal channels, they will take more extraordinary measures like going at the board of directors," he said. "So if we end up in a world because of this case and others that investors don't feel like they can make change through the normal shareholder process, they won't give up, they're going to find other ways to pressure the company. So the company may end up regretting its approach here."

Amy Borrus, executive director of the Council of Institutional Investors, said in an email that companies always have a right to bypass the SEC no-action process and go to court. "But these straight-to-court challenges may be used as a scare tactic to deter proponents — particularly smaller ones with limited resources — and they can generate ill will within the proponent community," she said. "While we don't always agree with the SEC's no-action determinations, we view the SEC as a trusted, respected and generally fair referee."

Donahue said more companies may follow Exxon's lead. "The strategy worked," he said. "The proposal is not in their proxy. So if you're a company counsel like me you're saying, 'The point of the litigation was to not have this in your proxy and it's not included in your proxy.' The immediate goal has been achieved."