Activist shareholder proposals are put on trial in the United States. ExxonMobil has sued two of its investors that had recently proposed a nonbinding resolution urging Exxon to reduce its greenhouse gas emissions, and to include Scope 3 emissions in its measurements.
Follow This’ and Arjuna Capital’s Shareholder Resolution
The resolution had been filed in December 2023 by Arjuna Capital, an impact investment fund and certified Benefit Corporation (B Corp). The resolution was supported by Follow This, a Dutch investor activist group.
Currently, Exxon “aims to achieve net zero Scope 1 and 2 greenhouse gas emissions from its operated assets by 2050.” This means that the significant Scope 3 emissions caused by the burning of the oil and gas are excluded from this target.
ExxonMobil’s Legal Arguments
Exxon is seeking a declaratory judgment to exclude the shareholder proposal from its proxy statement under Rule 14a-8 of the Securities Exchange Act of 1934, so that the proposal will not be subject to a vote during its 29 May shareholders’ meeting.
Exxon’s complaint alleges that the resolution would “micromanage” the company, and therefore would interfere with the day-to-day operations of the company, a power reserved to its board of directors (e.g. the ordinary business ground). Moreover, it is also alleged that the resolution is substantially similar to previous proposals submitted in 2022 and 2023 (e.g. the resubmission ground).
It is Exxon’s first time seeking to exclude a shareholder proposal. The complaint was filed in a U.S. District Court for the Northern District of Texas.
The SEC’s New Rules
In November 2021, the Securities Exchange Commission, the U.S. financial regulator, had changed the rules on exclusion of shareholder proposals from the proxy statements through its Staff Legal Bulletin No. 14L (SBL 14L).
Under SBL 14L, a proposal cannot be excluded if the proposal raises issues of societal impact transcending the company’s ordinary business. Exclusion should also not be granted if a proposal is suggesting targets or timelines, as long as they leave it up to management as to how to achieve such goals.
Regarding the resubmission ground, prior to SBL 14L’s implementation, a proposal could be excluded if it addresses “substantially the same subject matter” as a previous proposal, if the previous proposal received less than the required voting threshold. SBL 14L’s amendments changed this requirement to “substantially duplicates”, which is a higher standard.
Shareholder Value in Climate Change
According to Natasha Lamb, co-founder of Arjuna, it has “a fundamental right and duty to voice concern over climate risk, its impact on the global economy and shareholder value”.
There is significant academic evidence that investor activism can indeed help companies increase shareholder value. For example, Eun-Hee Kim (George Washington University) and Thomas Lyon (University of Michigan) found that “institutional investor activism towards climate change can increase shareholder value when the external business environment becomes more climate conscious”.
According to a study titled “ESG and Financial Performance: Uncovering the relationship by aggregating evidence from 1,000-plus studies published between 2015-2020”, it can be determined that many studies show a correlation between company performance on SG metrics and increased shareholder value.
As such there is significant evidence that the proposal in question potentially will increase shareholder value for the company.
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