WINNING A PROXY FIGHT BEFORE IT STARTS
The law of unintended consequences, often cited, but not very well defined, holds that the actions of a person, organization or governmental entity almost always have effects that are unanticipated, and sometimes detrimental, to the interests of those who initiated them. Exxon Mobil Corporation, the largest US energy company, may be in the process of learning that lesson.
Arjuna Capital is a US climate activist firm, and Follow This is a Dutch shareholder activist group. Their avowed purpose is to stop climate change, not make a profit. The two bought enough Exxon shares, a “nominal” number according to Exxon, to submit a proposal to the company to be voted on by shareholders at their annual meeting.
Exxon viewed the activists as its tormentors. The two had submitted fourteen proposals for the consideration of shareholders over eleven years. The latest one, intended for a vote at the 2024 meeting, would have the company set Scope 3 targets to reduce emissions. Scope 3 greenhouse gas emissions are indirect emissions that result from all of the steps a company takes to create its finished products. This was the third such proposal on the same subject Arjuna and Follow This had made to Exxon. It was, for the company, the final straw.
Such proposals are not totally out of the mainstream. In fact, of the five Western oil majors, Exxon is the only one which has not approved Scope targets. But the proposals are not binding and, in reality, don’t actually require that the companies take any specific action.
Corporate challenges to shareholder proposals have customarily come pursuant to SEC Rule 14a-8,[i] Since 1947, no-action letters under the rule have allowed SEC staff to regulate shareholder votes. Once you get such a letter, you can be sure that SEC staff will not recommend that the agency take action against you.
Believing the SEC staff to be too solicitous of climate activists who submit proposals, Exxon did not follow the procedure. Instead, it filed a 26-page Complaint in the United States District Court for the Northern District of Texas,[ii] claiming that the activists had no interest in enhancing shareholder value, aimed to disrupt Exxon’s ordinary business operations and should not be able to submit the same proposal year after year. Exxon asserted, Ordinary Business Exclusion of SEC Rule 14a-8,[iii] which protects companies from proposals which seek to micromanage them, and the Resubmission Exclusion.[iv]
In its Complaint, Exxon asked for a single form of relief: that the court declare that Exxon may properly exclude the climate activists’ proposal from its soon to be released proxy statement and not present it for a shareholder vote.
The reaction of Arjuna and Follow This was swift. Accusing Exxon of “intimidation and bullying,” they withdrew their proposal and pledged never to submit it again. It’s pretty clear they were simply not in a position to bankroll a defense of Exxon’s suit.
By this point, Exxon had achieved precisely what it sought in the litigation—withdrawal of the proposal—and something it hadn’t asked for—that the activists not bring up the same proposal for a vote at future meetings. Most of us would now consider the case to be “moot,” even if we don’t know exactly what mootness means.
The Case or Controversy Clause of the United States Constitution[v] defines certain jurisdictional limits (others are statutory) of the federal judiciary. It prohibits courts from issuing advisory opinions based on hypothetical facts, and from hearing cases that are unripe—meaning a controversy has not as yet arisen—or moot—meaning the controversy has already been resolved.
Once Arjuna and Follow This had announced that they were withdrawing the Scope 3 proposal, the judge overseeing the case soon recognized there didn’t appear to be anything left to decide and entered an order in which he said, “As it stands now the Court struggles to see what the ongoing case or controversy is in this matter given the only relief sought from the Court was a declaration that Exxon may exclude Defendants’ proposal from its annual shareholder meeting.” He directed that the company explain which issues were still before the court.
Exxon’s explanation was essentially a rehash of the claims in its Complaint. It doesn’t seem very convincing, especially in the light of the fact that, not only had Exxon succeeded in eliminating from its proxy statement the proposal the company found so offensive, its sole stated goal in the case, the activists promised not to submit it in the future, an outcome Exxon did not seek, and likely could not have achieved, in the litigation.
Now that it has won, Exxon appears to be reaching for more—namely, a ruling from the court it can wield against future disfavored shareholder proposals.
Exxon’s indignation and overall conduct are not explainable by any commonly accepted standard. It wasn’t going to lose the election. The vast majority of the company’s shareholders own the stock because of its value as an investment (Exxon paid out $14.9 billion in dividends and bought back $17.4 billion of its own shares in 2023) or indirectly because it’s a component of an index (as of one year ago, Vanguard alone owned nearly 370 million shares, or almost 9%, of the outstanding Exxon stock).
So Exxon investors, both retail and institutional, aren’t going to have much interest in using their share ownership as a tool to combat climate change. In fact, similar proposals garnered the approval of 28% of Exxon’s shareholders in 2022 and only 10% in 2023. And aren’t these resounding victories the company has scored in proxy fights a better answer to those Exxon claims don’t have the best interests of the company and its stockholders in mind? And the proposal, even if approved, would be non-binding. The company’s business conduct would in any event remain unchanged.
The litigation Exxon instituted has been widely covered in the media and closely scrutinized. It has succeeded in providing free publicity to Arjuna and Follow This and to their cause, attention they’ve not had before. That’s one unintended consequence of the action. Another is that trying to intimidate organizations which pose no conceivable threat to the company is not a good look.
[i] 17 C.F.R. s. 240.14a-8.
[ii] Exxon Mobil Corp. v. Arjuna Capital, Docket No. 4:24-cv-00069-P (filed Jan. 21, 2024 N.D. Tex.).
[iii] 17 C.F.R. s. 240.14a-8(i)(7).
[iv] 17 C.F.R. s. 240.14a-8(i)(12).
[v] U.S. Const., Article III, Section 2, Clause 1.
