On June 17th, U.S. District Judge Mark T. Pittman dismissed Exxon’s lawsuit challenging a shareholder proposal by Arjuna Capital. The proposal addressed Exxon’s greenhouse gas emissions and the company’s alleged connection to climate change. While initial headlines on the lawsuit’s dismissal might suggest a victory for shareholder activism, a closer examination reveals a more nuanced reality.
What is Shareholder Activism?
Shareholder activism refers to shareholders exercising the rights attached to their shares to influence corporate behaviour. It encompasses various approaches, from engaging in dialogues with companies to proposing resolutions at shareholders’ meetings that advocate for specific changes in corporate policies or practices.
In recent years, shareholder activism has increasingly focused on environmental, social, and government (ESG) issues. According to ProxyPreview, the 2023 proxy season saw more than 542 shareholder resolutions raising ESG issues. Climate change was one of the topics that experienced the biggest increase in numbers, compared to previous years. Climate-oriented shareholder resolutions traditionally dealt with requests for disclosures or the management of climate risks, but now aim to directly influence corporate actions towards mitigating climate impacts.
Among the influential organisations in the shareholder activism space is Follow This, a Dutch non-profit organisation dedicated to transforming corporate behaviour from within. Uniting with other shareholders in fossil fuel companies, Follow This employs a strategy dubbed the ‘Goldilocks Trojan Horse’. It collaborates with other shareholders to propose resolutions aligned with the Paris Agreement targets. These resolutions urge fossil fuel companies to halt new investments in oil and gas exploration, arguing such measures are necessary to effectively combat climate change.
Exxon’s Lawsuit Against Shareholder Activism
In December 2023, Arjuna Capital submitted a proposal for consideration at Exxon’s 2024 shareholder meeting, which reads as follows: “Shareholders support the Company, by an advisory vote, to go beyond current plans, further accelerating the pace of emission reductions in the medium-term for its greenhouse gas (GHG) emissions across Scope 1, 2, and 3, and to summarize new plans, targets, and timetables” (the “2024 Proposal”). Follow This soon joined in the proposal as a co-filer.
In response to the proposal, Exxon filed a lawsuit against both Arjuna Capital and Follow This in January 2024. According to Exxon, this shareholders’ proposal is almost the same as previous proposals submitted during previous years, which had already been rejected by voting shareholders. In fact, during the 2023 general meeting of shareholders, the proposal was rejected by 89.5% of the voting shareholders. Exxon also claims the 2024 Proposal fails to provide any economic benefit to the company, nor does it create shareholder value.
Exxon’s complaint was filed pursuant to Rule 14a-8 of the United States Securities Exchange Act of 1934. Rule 14a-8 sets out the framework under which a shareholder in a public company can request for a proposal to be included in the company’s proxy statement. A proxy statement is a document provided to shareholders in advance of a shareholders’ meeting, which includes details on matters to be voted on. Rule 14a-8 also provides grounds under which shareholder proposals may be excluded from inclusion on the proxy statement.
Exxon argued that the 2024 Proposal is excludable for two reasons. Primarily because it “deals with a matter relating to the company’s ordinary business operations” (excludable under Rule 14a-8(i)(7)). By putting the 2024 Proposal forward, Exxon argues, Arjuna Capital and Follow This are intending to replace the management’s expertise and business judgment “with [their] preferred approach for reducing GHG emissions at an accelerated pace in artificial isolation”. This argument is made especially with regard to the 2024 Proposal’s inclusion of Scope 3 emissions. Moreover, Exxon claims that the 2024 Proposal is excludable because it addresses substantially the same topics as the 2023 and 2022 proposals that had been rejected (excludable under Rule 14a-8(i)(12)).
Dismissal of Exxon’s Lawsuit
Following Exxon’s complaint, Arjuna Capital and Follow This withdrew the 2024 Proposal. Regardless, Exxon told Reuters it would continue with the lawsuit, initially stating that important legal issues were left outstanding for a judge to decide upon. In a more recent statement explaining their lawsuit, Exxon’s Chairman and CEO, Darren Woods, said: “Our lawsuit put a spotlight on the widespread abuse of the shareholder proxy submission process.”
With Exxon refusing to drop the case, proceedings against the two organisations continued. Both Arjuna Capital and Follow This filed motions to dismiss, but only Follow This succeeded because of jurisdiction matters. Arjuna Capital failed to demonstrate that by withdrawing the 2024 Proposal, its “offending conduct” would not recur.
Arjuna Capital then followed up with a letter to Exxon, in which it explains that its intention is to maximise shareholder value, contrary to what Exxon claims. Arjuna Capital also highlights that shareholder proposals cannot force a company’s hand in any way, since they are advisory in nature. Regardless, Arjuna Capita stated that it “will not submit the proposal, or anything similar to the proposal, for consideration by Exxon shareholders in the future”. Thus, to address the court’s argument that nothing would stop Arjuna Capital from “reoffending”, it is promising not to submit any more proposals on GHG or climate change.
Despite Exxon doubling down and refusing to agree with Arjuna Capital’s withdrawal of the 2024 Proposal, District Judge Mark T. Pittman sided with Arjuna Capital. Albeit seemingly reluctantly, Judge Pittman agrees that Arjuna Capital’s final commitment not to resubmit the 2024 Proposal or to submit any similar proposals is sufficient to ensure that there no longer is any dispute to litigate over. In order for a court to intervene, an ongoing dispute is required.
Judge Pittman confirms that the case cannot proceed due to Arjuna Capital’s latest withdrawal. Despite repeatedly implying that things would have been different had it not been for the law getting in the way (See: “Nothing says ‘dedication to the cause’ like dropping a proposal at the first hint of litigation” or “Arjuna rolled the dice. And while the Court sympathizes with Exxon’s predicament, its hands are tied by the Constitution”), Judge Pittman refers to legal precedent set in a trademark lawsuit against Nike. Nike had repeatedly sued Already, LLC for trademark violations. After an Already, LLC countersuit, Nike agreed to no longer pursue litigation in a wording very similar to that used by Arjuna Capital in its letter to Exxon.
With the precedent firmly in place and Arjuna Capital mirroring Nike’s wording, Judge Pittman agrees that Exxon cannot further pursue its claim.
Looking Ahead: Implications for Shareholder Activism
After Exxon’s complaint was dismissed, both parties in the dispute claimed itself somewhat victorious. However, in reality, neither side has achieved a clear-cut success.
According to Exxon, the key takeaway here is that “[t]he court has made absolutely clear that Arjuna cannot continue abusing the process”. Yet, Follow This’ founder Mark van Baal said, “The dismissal of Exxon’s lawsuit against shareholders is a victory for all investors who want to safeguard the long-term future of US oil and gas companies and the global economy in view of the climate crisis”. He also points out that the dismissal means that the court was not given the opportunity to establish a legal precedent unfavourable to activist shareholders.
Representatives of both Arjuna Capital and Follow This have said that they decided to withdraw the 2024 Proposal to prevent the establishment of an adverse legal precedent (here and here).
We thus still lack legal clarity on proxy proposals by activist shareholders, leaving the issue unresolved and open to future disputes. What the 6-month litigation has shown, is that a fossil fuel giant can successfully show its legal and financial muscle without much repercussion.
At the same time, even Judge Pittman expressed in his judgment that “Exxon’s position was too attenuated to confer standing … That’s because hypotheses about the actions of other entities with whom Arjuna is ideologically aligned are ‘conjectural’ and ‘hypothetical’”). In other words, had Arjuna Capital not tried to get the complaint dismissed, it is not definitive that Exxon would have succeeded in its claims. Exxon also came under fire from multiple sides. According to Courthouse News, there were obvious signs of fall-out during the company’s most recent annual shareholder meeting. Several shareholders expressed their discontent over Exxon’s lawsuit, which they deemed an “attack on shareholder democracy”.
The timely withdrawal of the 2024 Proposal by Arjuna Capital and Follow This has ensured that there is no legal precedent preventing organisations such as theirs from exercising their shareholder rights. Simultaneously, companies like Exxon may continue leveraging their substantial resources to counter shareholder activism. However, activist shareholders will undoubtedly persist in their efforts to hold corporations accountable to the full extent of their rights.
It is likely that we could potentially see more legal battles on this topic. These need not to be viewed completely negatively, but they will require collaboration among shareholder activists and pooling of resources and arguments. The recent litigation has also highlighted the significance of watching out for excludable grounds, such as whether proposals concerning Scope 3 emissions genuinely pertain to day-to-day management, as argued by Exxon.
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