Exxon Mobil’s Lawsuit Against Climate Activist Shareholders: Why File in the District Court of Texas?

On January 21, 2024, Exxon Mobil Corp filed a complaint in the U.S. District Court for the Northern District of Texas seeking to prevent climate activist shareholders, Arjuna Capital and Follow This, from presenting a proposal on environmental policy changes at Exxon’s 2024 shareholder meeting. This is the first time Exxon is seeking to exclude a shareholder proposal through court rather than through the Securities Exchange Commission’s (SEC) Staff. 

 

 

During the Trump administration, corporations like Exxon were able to keep similar proposals from being brought to the shareholder annual meeting through rule 17 CFR section § 240.14a-8. Under this rule, companies can file a “no action request” to exclude shareholder proposals by arguing to the SEC Staff that certain exclusions under 14a-8 apply to the proposal. In effect, this rule allowed companies to block certain proposals from the annual shareholder’s proxy statement because they “micromanaged” operations and were not economically relevant. When a proposal is removed from a proxy statement, it will not be voted on at the shareholder meeting.

 

However, in 2021, recent changes within the SEC have made it more difficult to block proposals under rule 14a-8. During the Biden administration, the rule change shifted and recognized that shareholder proposals that detail or seek to promote timeframes or methods, “do not per se constitute micromanagement” and are not per se excluded under the rule. This change led to 889 resolutions filed with the SEC in 2023, the highest number of resolutions filed since 2016. A resolution is what a company seeks through the SEC when trying to block a proposal from its shareholders. With the outcome of such resolutions favoring the shareholders, Exxon has filed a similar complaint in federal court.

 

 

Arjuna Capital and Follow This are two shareholder activists who are proposing that Exxon sets new scope 3 targets which would reduce emissions produced by users of its oil and gas. Exxon currently aims to reach net zero by 2050 for Scope 1 and Scope 2 target emissions, which refer to the pollution from its production processes and the energy it consumes. Exxon is one of five western oil major companies that does not have Scope 3 targets. The two shareholders have proposed this same resolution in the past and had little success, garnering 28% approval in 2022 and 10% approval in 2023. 

 

Rather than requesting relief under rule 14a-8 from the SEC staff, Exxon has chosen to sue the two shareholders in federal court because the shareholder investments in the company’s stocks are pushing agendas rather than increasing stockholder value. Exxon seeks fast-tracked relief from the court on March 19, 2024, due to their April 11, 2024, proxy statement deadline.  

 

 

Exxon’s bypassing of the SEC’s no-action process and going to court for approval to exclude these shareholders’ proposals is not the first time a company has pursued this form of relief. In 2010, Apache Corporation sought a declaratory judgment from the U.S. District Court for the Southern District of Texas to exclude a shareholder proposal from John Chevedden and it was granted relief. However, in 2014, similar companies that sought this relief were met with dismissal for lack of subject matter jurisdiction because they were unable to show any case or controversy existed. Exxon filed this suit two months prior to the finalization of their proxy meeting deadline in April, which means that their complaint is subject to becoming moot. 

 

The 5th circuit has a reputation for blocking many of Biden’s policies, making a favorable verdict for Exxon likely to occur. Exxon’s potential success in Texas has many concerned with the future rights of shareholders and the implications it could have on securities law. For instance, a successful verdict could diminish shareholder rights that extend to both liberal and conservative shareholders who often present various proposals on social and climate issues. These rights include the ability to bring proposals to other shareholders and allow them the opportunity to vote on these proposals. Furthermore, it could undermine the power of the SEC by allowing businesses like Exxon the ability to bypass the federal agency and find resolutions from federal courts.