What a lawsuit by Exxon could mean for shareholder resolutions

Exxon Mobil did something very unusual earlier this year: It sued two of its own shareholders who were seeking to force proxy votes on climate change issues.

Even more unusual is that the oil giant is pressing ahead with the lawsuit after the two groups – Arjuna Capital and Follow This – voluntarily withdrew their shareholder proposal.

It’s a case that’s being watched closely by investor groups, environmental advocates, and public companies across industries. There’s uncertainty about whether the case is simply a one-off instance of an oil company fending off activist investors on a specific issue or whether it could have broad implications for the shareholder resolution process.

In either case, it’s clear that dragging the shareholders into court was effective in getting them to drop their proposals, and that alone could make some investors think twice about filing resolutions.

The company has asserted – both in court and in public statements – that it’s defending itself against an onslaught of proposals brought by activists seeking to dismantle its business model.

Another perspective, shared among those in the sustainable investing world, is that Exxon is blatantly intimidating shareholders.

“The Exxon response has been over the top,” says Leslie Samuelrich, president of Green Century Funds. “It’s an affront to its shareholders. It’s dismissive of [Exxon’s] role in causing climate change… It feels like an unnecessary escalation in a time when shareholder rights are already being attacked.”

Industry lobbying groups appear to see an opportunity in the lawsuit. Last week, the US Chamber of Commerce and the Business Roundtable filed a brief asking the judge to allow Exxon to exclude the shareholder proposal, claiming that “special interest groups have used SEC Rule 14a-8 to hijack the proxy-vote process.”

In mid-December, Arjuna submitted a shareholder proposal asking Exxon to accelerate the pace of the reduction of its greenhouse gas emissions and publish new plans, targets, and timetables. Follow This signed on to the proposal after it was filed, according to Exxon’s lawsuit, which the company brought more than a month later in US District Court in the Northern District of Texas.

In its complaint, the oil company detailed the recent history of shareholder proposal filing, the pace of which has ramped up quickly since the SEC softened its stance on activist investors in 2021. Since then, the regulator has denied “no-action” letter requests by public companies that ask for its blessing to keep various shareholder resolutions off their proxy ballots. Many of the resolutions over the past several years have focused on environmental, social, and governance issues, although more recently some have taken an anti-ESG stance.

Exxon has noted that Arjuna and Follow This are small shareholders and that they have filed very similar proposals with the company in the past that have won minority support in the proxy votes.

“This proposal was designed to do one thing – put us out of business. That’s literally what the proponents said,” the company stated on its site. The results of such votes are non-binding, although they put pressure on corporate boards and staff to address issues.

Exxon has stated that it hasn’t dropped the lawsuit even after the proposal was withdrawn because it wants the SEC’s rules to be clarified in court.

If the case moves forward, that clarification could happen soon, as the company is set to finalize its proxy statement by March 20 for the shareholder meeting scheduled for April 11.

“On the one hand, this is a serious situation with unpredictable results, and we need to take it seriously. But the facts and circumstances of this case are such that this could remain a discrete and contained episode,” says Jonas Kron, chief advocacy officer at Trillium Asset Management. “There’s a lot going on right now” in the court system, he says.

Danielle Fugere, president and chief counsel at As You Sow, says it’s unlikely that Exxon’s case will be successful.

“They would very much like this court to say that shareholders don’t have the right to bring proposals at all. I can’t even imagine a way they could limit who could bring a shareholder proposal,” Fugere says. “The size of your holdings does not dictate whether you are bringing an important proposal or not.”

Often, it’s the resolutions filed by small shareholders that see high levels of support in votes, she notes.

Even if the case goes in the plaintiff’s favor, other US district courts would likely rule differently, meaning that any similar lawsuits potentially brought by other public companies would hardly be guaranteed, Fugere says.

“I don’t think it is going to be replicated across the board by companies,” she says. “Shareholder rights go back decades. It is clear that shareholders play an important role in governance.”

The defendants filed a motion to dismiss the lawsuit after pulling their resolution.

“Exxon’s continued legal attack reveals its true goal: circumvent the SEC in order to seek a court ruling that Exxon is not violating the securities laws by omitting shareholder proposals that support the company to accelerate the pace of reductions for all its greenhouse gas emissions … the root cause of the climate crisis,” Mark van Baal, founder of Follow This, says in a statement.

Arjuna Capital did not respond to a request for comment.

Exxon has become a shining example of what’s possible through shareholder resolutions, which is likely part of why it is now pursuing litigation. In 2021, the mutual fund company Engine No. 1 succeeded in having three of Exxon’s board members replaced as part of a campaign to get the company to expand its energy business beyond oil.

US SIF: The Sustainable Investment Forum is watching the new lawsuit closely.

“Our members are very concerned about this case. It could have a real chilling effect on the shareholder proposal process,” says Bryan McGannon, managing director at the group. “I don’t see any scenario where this is an isolated outcome.”

While sustainable investing advocates say that the case should embolden shareholders to take companies to task, it is also easy to see why Arjuna and Follow This withdrew their proposal.

“There’s a clear reality that the shareholder proponents were facing a mountain of legal bills that were not in their interest and would not advance their objectives,” McGannon says.

But the case could also cause a backlash against Exxon, Samuelrich says.

“It should embolden other investors to be more assertive in their rights as shareholders. What I hope is that investors see this as the attack it is and respond accordingly, exercising more of their rights,” she says.

The case also highlights one of the reasons why Green Century doesn’t invest in fossil-fuel companies, Samuelrich says.

“Engaging with fossil-fuel companies in trying to challenge their core business model has never been fruitful,” she says. “It’s an example of why we and other investors have chosen to stop investing and trying to engage with them.”