On June 17, the Texas federal court judge presiding over Exxon's litigation against activist investor Arjuna Capital dismissed Exxon's complaint after Arjuna doubled down on its pledge not to assert further climate-related shareholder proposals.
The judge concluded that Exxon no longer had standing to challenge the excludability of Arjuna's earlier proposal, as Arjuna had not only withdrawn the proposal, but also "unconditionally and irrevocably" promised to "refrain henceforth from submitting any proposal for consideration by Exxon shareholders relating to GHG or climate change."
Exxon argued it still had standing, because this promise left Arjuna wiggle room to work "behind the scenes" with other activists to submit similar proposals. The judge disagreed, finding such hypotheses to be too speculative to create a true "case or controversy" for a jurisdictional basis. Without such jurisdiction, the court was constitutionally required to dismiss the case as moot, rather than provide Exxon what would amount to an impermissible "advisory opinion" on excludability.
The June 17 decision marks a fairly straightforward application of basic jurisdictional requirements for federal courts. More interesting, though, are the unanswered questions about what comes next in the ongoing battle over activist shareholder proposals. In particular:
- Whether Exxon or other issuers can get relief from what they believe to be the SEC staff's overly permissive reading of its rules on excludability of proposals raising climate and social issues; and
- Whether activist submission of these proposals will be chilled by the threat of being sued in an action like Exxon's.
From Exxon's perspective, being rid of the Arjuna proposal at this year's annual meeting was clearly not the sole goal of the litigation. As the Texas judge inferred, Exxon also sought a judicial interpretation of the SEC's rules on the excludability of such proposals. Exxon and many others assert that the SEC staff has lately interpreted the exclusion bases too narrowly, thus allowing too many proposals to be put in front of company shareholders.
Here's the rub for frustrated companies: there is no clear path for direct judicial review of the SEC staff's conclusions on the excludability of activist proposals. When the Commission issues a final rulemaking or a final order in an enforcement action, affected parties can file federal court actions seeking judicial review of the Commission's actions. But SEC staff decisions on the excludability of individual shareholder proposals are neither of these things.
In responding to company inquiries regarding exclusion of proposals, the staff takes pains to specify that its views have no formal legal effect and don't reflect an order of the Commission – they are simply the opinion of the SEC staff lawyers on whether they would recommend an enforcement action against the company for violating the SEC proxy rules if the proposal were not presented to shareholders. This expedient has the benefit of allowing the staff to respond to a large volume of company requests relatively quickly. But it leaves companies without the ability to seek an immediate second opinion from a court on the staff's interpretation of the rules.
Instead, companies receiving an unfavorable response from the staff on excludability risk an SEC enforcement action if they don't abide by the staff's views on including the proposal in the proxy. While this could ultimately result in the elusive judicial review after the administrative proceedings play out, that's a high-price path that companies understandably don't choose to take. While the SEC staff opinions have no formal effect as legal precedent, they are in practice treated like precedent – and cited by the staff like precedent in later opinions – which companies typically feel obliged to follow.
So Exxon tried another approach, suing the activist shareholder instead of the SEC, in hopes of creating some new precedent via a fresh interpretation by the Texas judge of the SEC's rules on excluding proposals. Arjuna was able to short-circuit this effort by withdrawing the proposal and promising not to submit any more like it to Exxon – thereby saving itself the large expense of effectively defending the SEC staff's rule interpretations in the Texas court. In dismissing the case, the judge expressed some sympathy for Exxon's bind, though his hands were tied by the jurisdictional requirements.
Should we expect to see more litigation like Exxon's, as corporate frustration mounts over the volume of activist shareholder proposals, especially on climate and social issues? While Exxon's action successfully quashed the Arjuna proposal, there are good reasons to doubt that a flood of similar cases will be filed. Asserting such litigation is hardly costless. In addition to legal expense, Exxon faced significant public criticism from institutional investors and others for conduct they described as a corporate effort to squelch shareholder engagement. Proxy advisors ISS and Glass Lewis criticized the suit, with the latter recommending that shareholders vote against the reelection of Exxon's lead independent investor.
Plus, the shareholder voting results show that proposals on climate and social issues – especially those that are more prescriptive and intrusive regarding company operations – simply don't win much shareholder support when they are included on the proxy for consideration. Consistent with the reality that ESG-focused investors exercise their proxy votes on climate and social issues (as with all issues) in pursuit of enhanced financial returns, shareholder proposals viewed by investors as too prescriptive or intrusive to be value-enhancing are regularly voted down by large margins. Therefore, one can imagine that many companies in Exxon's position would decide not to undertake the costs of litigation to fight shareholder proposals that appear quite unlikely to succeed in any event.
That said, from the perspective of an activist shareholder considering submitting a proposal, the threat of being sued in an Exxon-style litigation is real. Even after Arjuna's proposal was withdrawn, its legal team had to engage in multiple rounds of briefing to get the case dismissed.
These very real legals costs may well not be covered under the terms of typical commercial liability insurance policies. So while we may not see a large number of future Exxon-style actions, the remaining threat of being named in even one could certainly cause an activist investor to think twice about submitting proposals.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.