Courting Shareholder Proposals: ExxonMobil Sidesteps SEC and Sues to Block Scope 3 Shareholder Proposal
ExxonMobil (“Exxon”) filed a complaint in the U.S. District Court for the Northern District of Texas on Sunday, January 21, 2024, seeking a declaratory judgment to exclude a shareholder proposal from its proxy statement pursuant to Rule 14a-8 of the Securities Exchange Act of 1934 (“Rule 14a-8”) and not present the proposal for a vote at its 2024 annual shareholder meeting. The shareholder proposal, submitted in December by Arjuna Capital and Follow This, requests that Exxon “go beyond current plans, further accelerating the pace of emission reductions in the medium-term” and set Scope 3 greenhouse gas (“GHG”) emissions reduction targets. The complaint seeks to exclude the shareholder proposal on grounds that it deals with matters relating to Exxon’s ordinary business operations and is substantially similar to proposals that were submitted in 2022 and 2023 but failed to garner sufficient shareholder support to be resubmitted pursuant to Rule 14a-8.
February 2024 Update
On February 1, 2024, Exxon filed notice that Arjuna Capital and Follow This had withdrawn their shareholder proposal requesting that Exxon set Scope 3 GHG emissions reduction targets, and, in response, Exxon withdrew its motion to expedite summary judgment. Exxon previously filed the motion in an effort to obtain a judgment before it was required to file its proxy statement. Despite withdrawing its motion however, Exxon has not dropped the lawsuit, noting in a statement that it “believe[s] there are still important issues for the court to resolve.”
While Follow This and Arjuna Capital have yet to disclose the exact reasons for withdrawing their proposal, Exxon’s strategy of taking its fight to exclude the shareholder proposal to court and circumventing the SEC’s Rule 14a-8 no-action request process appears to have worked for now. The quick withdrawal by Follow This and Arjuna Capital in the face of Exxon’s lawsuit may reflect an unwillingness or inability of smaller activist groups to fight for their proposals in court, which is a significantly more costly exercise than participating in the Securities and Exchange Commission’s (“SEC”) relatively low-cost Rule 14a-8 no-action process.
The facts of the Exxon suit against Arjuna Capital and Follow may be distinguishable from those of other companies that may be considering using this strategy to exclude shareholder proposals from their proxy statements. These facts include the relatively small size of these proponents and that these proponents have publicly stated that they are primarily interested in investing in companies like Exxon to curtail fossil fuels rather than seek economic return. Corporations facing shareholder proposals this year should closely evaluate the relative strength of any similar legal approach, and in certain cases, consider whether this might be a playbook to emulate.
We will continue to closely monitor these developments. Please reach out to Vinson & Elkins to discuss these developments and how they may impact your company.
Exxon claimed in its complaint that shareholder proposals and the proxy voting process have become targets for abuse by activist investors with minimal shares and no interest in growing long-term shareholder value. Exxon further highlighted the fact that the two defendant-proponents asserted in public statements that they do not seek to enhance the value of the corporate issuer, but rather aim to curtail its fossil-fuel business operations, and the proponents only take stakes in Exxon and similar companies in order to bring these types of shareholder proposals, which are at odds with the interests of other shareholders.1
Notably, Exxon opted to take its fight against the shareholder proposal straight to court rather than filing a Rule 14a-8 no-action request with the SEC. Companies typically seek to exclude shareholder proposals by arguing to the SEC Staff that certain exclusions under Rule 14a-8 are applicable to the proposal or proponent. However, bypassing the SEC’s no-action process and going to court for approval to exclude a proposal is not unheard of: a number of companies sought declaratory judgments to permit them to exclude shareholder proposals submitted by shareholder proposal frequent flyer John Chevedden a decade ago with mixed results.2 This approach runs the risk of the issue becoming moot before the court reaches a decision — although Exxon asks the court for a declaration by March 19, 2024, there are approximately two months between when Exxon filed suit and when it must begin finalizing its proxy materials, and it is unclear how long legal proceedings will play out.
Exxon’s lawsuit comes at a time when the SEC has been far less likely to concur with companies that seek to exclude shareholder proposals: in 2021, the SEC issued Staff Legal Bulletin No. 14L, which significantly broadened the agency’s interpretation of “ordinary business” and “economic relevance,” and as a result, made it more difficult for companies to exclude shareholder proposals on those grounds. In making the changes, SEC Chairman Gary Gensler stated that “the right to put proposals in front of other shareholders for a vote is an important part of the securities laws.” The volume of shareholder proposals in proxy statements has consequently ballooned in recent years, including notable increases in shareholder proposals concerning both pro- and anti-environmental, social and governance (“ESG”) topics.
However, despite being submitted and making it into proxies in record numbers, proposals regarding ESG matters generally saw a decline in support last year due to a number of factors, including anti-ESG sentiment, uncertainty in economic climate and geopolitical factors, and proposal over-prescriptiveness. In fact, Follow This submitted similar proposals to adopt medium-term reduction targets for Scope 3 GHG emissions to all of the largest Western oil and gas majors, including Chevron, TotalEnergies, Shell and BP, for inclusion in their 2022 and 2023 proxy statements, and all such proposals failed to receive enough shareholder support to pass. It therefore seems that the shareholder proposal in question would be unlikely to garner majority support even if included in Exxon’s proxy statement and voted on at Exxon’s 2024 annual shareholder meeting.
Exxon is seeking relief by March 19, 2024, in time for its proxy statement, which will need to be filed by April 11, 2024. It should be noted that one of the key facts in Exxon’s complaint was the illusory nature of these proponent’s interest in enhancing shareholder value, alleging that Arjuna Capital and Follow This are in fact activists who only purchase shares in order to bring shareholder proposals, but otherwise have no real economic interest in the company. V&E notes that, irrespective of the outcome of this case, corporate issuers that are facing shareholder proposals from larger investors that have a longer or more robust track record of holdings at the applicable company may find the arguments set forth in this claim to be distinguishable from their particular circumstances. V&E will continue to monitor this case and the shareholder proposal landscape generally as the 2024 proxy season unfolds. Please contact V&E to discuss these developments and their implications.
1 Exxon’s complaint notes that Arjuna’s mission is to “shrink” energy companies and holds just enough shares in energy companies to submit proposals. Similarly, the complaint alleges that Follow This solicits donations with the purpose of buying shares in energy companies to establish the requisite ownership amount to submit shareholder proposals.
2 In 2010, Apache Corporation (“Apache”) skipped the normal SEC no-action channels and sought a declaratory judgment from the U.S. District Court for the Southern District of Texas to exclude a shareholder proposal from John Chevedden. Apache’s then-novel strategy paid off, and it was granted relief. KBR, Waste Connections, Inc., and Express Scripts Holding Co. all followed suit and sought declaratory judgments from U.S. District Courts in 2011, 2013, and 2014, respectively, to exclude John Chevedden shareholder proposals, with each receiving favorable rulings. However, the tides turned in 2014, when various U.S. District Courts dismissed lawsuits filed by EMC Corp., Omnicom Group, Inc., and Chipotle Mexican Grill, Inc., each seeking to exclude John Chevedden proposals, finding that the claims lacked subject matter jurisdiction for failing to demonstrate the existence of a case or controversy because John Chevedden represented little, if any, legal threat to the companies.
This information is provided by Vinson & Elkins LLP for educational and informational purposes only and is not intended, nor should it be construed, as legal advice.