Exxon Suit Seeks Novel Path to Block Shareholder Climate Votes

ExxonMobil Corp. is being eyed as a potential trendsetter with its unusual approach of trying to use the court system to keep environmental and social investor bids out of annual meetings.

The Houston oil company is no stranger to pressure from activist investors over its greenhouse gas emissions, facing a shareholder push for greater climate impact targets for three consecutive years. Sunday it went a step further in fighting the pressure by suing activist shareholders Arjuna Capital and Follow This in federal court, hoping to kill the proposal.

Some legal observers described the move as possibly the first time that a company has sued an activist investor over a shareholder proposal before initially filing an objection with the Securities and Exchange Commission, which routinely weighs in on whether companies should have to face certain investor bids.

The lawsuit comes at the onset of another contentious proxy season over corporate climate goals, risks and disclosures. If a federal judge weighs in on broader environmental and social issues in the Exxon case, shareholder activism lawyers and researchers say, more companies could turn to the courts to beat back proposals on sensitive issues from climate risk to abortion access to gun sales.

“It’s unusual, and it’s hard to predict, but I could see if one company has reached this conclusion I wouldn’t be surprised if others reach a similar one,” said Lawrence Cunningham, special counsel at Mayer Brown.

Environmental Risk

The complaint, filed in the US District Court for the Northern District of Texas, said the proposal from Arjuna and Follow This is asking Exxon “to change its day-to-day business by altering the mix of—or even eliminating—certain of the products that it sells.”

The shareholder proposal asks that the company “accelerate the pace of emission reductions in the medium-term” for its greenhouse gas emissions across Scopes 1, 2, and 3, which encompass both direct and indirect emissions. The proposal filed for this proxy season is similar to bids the activist investors have filed in the past two years, neither of which passed.

“Investors face economy-wide risks from climate change,” said Natasha Lamb, a managing partner at Arjuna Capital. “We have a fundamental right and duty to voice concern over climate risk, its impacts on the global economy and shareholder value.”

Companies mainly try to go through another route to thwart investor bids: the SEC. Shareholder proposals can be scrapped under an SEC rule when the bids relate to a company’s “ordinary business operations” or substantially the same subject matter as recent proposals that went to a vote. The SEC opened the door for more environmental and social proposals in 2021 when the regulator said it would take a broader approach to what proposals merit a shareholder vote when a bid has a broader societal impact.

The SEC has received 36% more requests from companies looking to block shareholder proposals from annual meeting voting materials so far this proxy season compared to last, said Michael Seaman, chief counsel of the SEC’s Division of Corporation Finance, at a Northwestern University securities conference on Monday.

Exxon’s complaint noted that shareholder proposals submitted in 2023 were 18% higher than in 2021, and the number of proposals that were voted on at annual shareholder meetings rose by 40% during that time. Proposals focused on environmental and social issues increased by 52% between 2021 and 2023, the complaint said. Even so, support has waned overall for environmental and social proposals since 2021, according to data from Broadridge’s ProxyPulse.

Climate Wars

It’s logical for Exxon to ask a federal court to weigh in on the proposal to hopefully shut it down for good, law professors said.

“A court decision is in some ways a more direct vehicle,” said Jill Fisch, a professor of business law at the University of Pennsylvania’s law school, noting that, “in this whole debate about ESG,” Exxon likely hopes to have the courts weigh in on environmental, social and governance issues more broadly. Exxon would have a lot to gain from a favorable court decision considering that it’s one of the main corporate targets of environmental activists, Fisch said.

Exxon said in the complaint that its shareholders know it is “actively engaged in emission reduction work.” The company referenced its goal of achieving net-zero for Scope 1 and Scope 2 greenhouse gas emissions by 2050, adding that company officials believe Scope 3 to be “an insufficient metric.” Scope 1 refers to direct corporate emissions, while Scope 2 means indirect emissions such as electricity, and Scope 3 includes indirect emissions throughout a company’s supply chain and when customers use a product.

Exxon said it requires relief from the court by March 19 before it plans to put out its proxy statement for the May 29 shareholder meeting.

The oil giant argued in the complaint that the shareholder proposal “seeks to usurp the role of management and the board to impose Defendants’ personal policy preferences through a shareholder proposal process that was not designed or intended for such use.”

The lawsuit hinges on the premise that shareholders aren’t entitled to manage the business and affairs of a company, said Cunningham, noting that shareholders elect board members to make those decisions. “If you don’t like what they’re doing, you’ve got to throw them out,” he said. Cunningham made a similar point last year while testifying before the House Financial Services Committee during the Republican-led “ESG month.”

Others disagree. Heidi Welsh, executive director at the Sustainable Investments Institute, a non-profit that conducts research on shareholder activism, said the lawsuit is “essentially saying investors shouldn’t have the opportunity to weigh in on issues that clearly have material impact on its business: what to do about climate change and its contribution to it.”

She added: “I always ask, ‘Why is less input from investors and less information about their views in response to criticism of a company better for companies and the capital markets as a whole? How does this help the free market respond to obvious risks and opportunities?’”

—With assistance from Andrea Vittorio

The case is Exxon Mobil Corporation v. Arjuna Capital, N.D. Tex., No. 4:24-cv-00069, 1/21/24