Exxon Case Dismissal Leaves Path for More Suits to Toss ESG Bids

A federal judge’s decision to dismiss an Exxon Mobil Corp. lawsuit against activist investors preserves the option for other companies to pursue the same novel route to keep environmental, social and governance-related shareholder proposals off annual meeting ballots.

A Texas federal judge tossed the lawsuit on Monday that sought to stop shareholder activist Arjuna Capital from pressing the oil giant to speed up its greenhouse gas emissions reductions.

The lawsuit prompted Arjuna to drop the climate proposal before Exxon’s annual meeting in May. The oil giant had remained concerned that the shareholders could resubmit a substantially similar proposal in the future through other activists.

The court did not address the issue of whether companies must face shareholder bids like Arjuna’s climate proposal. That means more such litigation is likely, case watchers said.

The dismissal of the case “is a procedural one,” said Lawrence Cunningham, special counsel at Mayer Brown, adding that “other companies will likely sue instead of seeking action from the SEC.”

The judge had previously allowed the case to move ahead, agreeing with Exxon that Arjuna could still put forward similar efforts even after it nixed its proposal. But the case was thrown out after Arjuna pledged not to bring the bid or a similar proposal again.

Other activists “will be more careful of what they propose” in response, said Cunningham, who advises companies on corporate governance.

Exxon’s lawsuit against its shareholders was unusual because companies typically ask the US Securities and Exchange Commission to block such proposals from going to an investor vote rather than heading straight for the courts.

The novel suit alarmed the investor activist community over its potential to chill shareholder efforts pushing companies on ESG issues.

“The judge did not weigh in on the bigger picture, so I fully expect further similar challenges,” said Heidi Welsh, executive director at the Sustainable Investments Institute, a non-profit that conducts research on shareholder activism.

That doesn’t mean shareholder activism efforts are necessarily going to slow, Welsh said.

“I think shareholders—particularly the largest ones who ‘own the market’ and must think about systemic risk—are going to keep going with shareholder engagement,” she said.

The Fifth Circuit is reviewing a similar case that will decide the SEC’s influence over which shareholder proposals make it onto companies’ investor ballots.

Going to Court

Natasha Lamb, Arjuna Capital’s chief investment officer, said Tuesday that she was pleased with the court’s decision in the Exxon case.

“Climate change presents real headwinds to the oil and gas industry, and deflection will not change that simple fact,” Lamb said. “Investors understand these risks and are looking to their companies to engage with them on measured approaches to risk mitigation, not engage in litigation.”

Exxon’s complaint, filed in the US District Court for the Northern District of Texas, said the shareholder proposal asked it “to change its day-to-day business by altering the mix of—or even eliminating—certain of the products that it sells.”

After the case was dismissed, Exxon said its lawsuit “put a spotlight on the abuse of the shareholder-access system.”

“It’s important to remember that the defendant’s first and second attempts to make our case against them moot were rejected by the court,” the company said. “In ruling now that there is no continuing controversy, the court has made absolutely clear that Arjuna cannot continue abusing the process.”

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.

Exxon has been critical of the SEC’s process and said that proposals like the one from Arjuna “are obviously not in investors’ best interests.”

Exxon still faced some climate-related shareholder proposals at its annual meeting that did not pass, including a bid on plastics production and another on how energy transitions will impact workers.

Top business trade groups backed Exxon’s suit, and told the court earlier this year that it was necessary to stop shareholder activists that “inundate public corporations with proposals designed to push ideological agendas.”

The Amsterdam-based Follow This, which originally brought the shareholder proposal with Arjuna, was dismissed as a defendant in the case before the judge threw out the lawsuit. Pulling its proposal with Arjuna was “the toughest decision” in its organization’s history, Follow This founder Mark van Baal said.

“If allowed to continue, this case could have had a detrimental effect on shareholder proposals focused on climate,” van Baal said.

The case is Exxon Mobil Corporation v. Arjuna Capital, N.D. Tex., No. 24-cv-00069, 6/17/24