Exxon Suit Should Prod SEC to Tighten Shareholder Proposal Rules

ExxonMobil Corp. recently attracted significant attention after suing two climate activists who sent a shareholder proposal asking that the company set stringent targets to slash its greenhouse gas emissions and those of its customers.

If implemented, the proposal would effectively place a hard limit on the company’s growth and ability to deliver returns for its shareholders, a clear misuse of a process intended to give shareholders a voice on important issues that affect their economic interests.

However, shortly after being confronted with the prospect of having a court of law—instead of the Securities and Exchange Commission—review whether their proposal was legal, the activists, Arjuna Capital and Follow This, decided to withdraw. Their action is likely tacit acknowledgment that the proposal ran afoul of the SEC’s rules governing shareholder proposals.

While this episode may appear to be an Exxon-specific issue, it’s a sign of a bigger problem: how the SEC has allowed the misuse of shareholder proposals by a few individuals and groups with private agendas despite their own rules. Activists now routinely use the process to promote political causes, regardless of how they affect the company’s shareholders or its bottom line.

In the past, companies could rely on the SEC to act as a neutral referee and apply its rules to let companies exclude such proposals. But Exxon lost trust in the SEC, fearing that it wouldn’t get a fair hearing under its current leadership. That is why Exxon isn’t dropping their lawsuit, as they explained: “We believe there are still important issues for the court to resolve.”

Specifically, the SEC’s rules seek to screen out proposals that are illegal, irrelevant, or inappropriate. For example, shareholders must own a minimum amount of stock for a certain time to file proposals. Companies can exclude proposals that interfere with their daily operations or that have been voted down repeatedly.

These filters are necessary because political proposals are cheap publicity tools for activists, but costly and burdensome for companies and other shareholders. They create distraction, expense, and litigation risk. They also pressure boards to make decisions that may harm the company or its shareholders.

The Exxon case is a perfect example. The activists have filed a shareholder proposal that Exxon’s owners have rejected twice before. Rather than help Exxon, the proposal would force the company to abandon its core business and invest in new ones, overriding its management’s judgment on product mix or research and development.

But two years ago, the SEC reinterpreted their rules in a way that has eroded confidence in the agency. Specifically, its staff said it would no longer let companies exclude proposals as irrelevant if they raised a socially significant issue—such as abortion, guns, race, or climate.

This weakening of the filter led to a surge in political proposals and a drop in the SEC’s willingness to exclude them. Other shareholders show little interest and average support for political proposals fell by half and only 3% won a majority. Tellingly, most political shareholder proposals come from a handful of activists.

The SEC’s leadership has also proposed to weaken the filters even more. For instance, it wants to make it easier for political activists to resubmit rejected proposals by changing the wording slightly from year to year.

Given this situation, it’s important for the court to affirm Exxon’s opinion and push the commission to properly enforce their rules. Expect other companies to follow. This may immediately restore some rationality to the shareholder proposal process.

If that happens, activist groups will have to shift resources to the many other ways to pursue their goals, without abusing the SEC’s rule. They can campaign, lobby, advertise, or use social media. They can also invest in or divest from companies they like or dislike.

Congress created the SEC with a single simple mandate: to protect investors—not facilitate political debate. Contemporary pressures have distracted it from that role. The Exxon lawsuit is likely to restore its priorities, but the effects on the SEC’s reputation are harder to predict.

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

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Lawrence Cunningham is special counsel at Mayer Brown and professor emeritus at George Washington University, but the views expressed above are his own.

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