Oil and gas major says it turned to court in bid to ‘stop abuse’ of shareholder proposal process

European asset owners are unimpressed by ExxonMobil’s decision to turn to the courts to try to block a climate shareholder resolution from going to the vote at its annual general meeting (AGM) this year and have said that they will consider what actions to take in response.

This week Reuters reported that the oil and gas major is asking a judge in Texas to rule that a shareholder resolution filed by Arjuna Capital and Follow This should not make it onto the agenda of its AGM in May.

The pair’s proposed resolution calls on ExxonMobil to accelerate the pace of emission reductions in the medium-term across Scopes 1, 2 and 3, and to “summarise new plans, targets, and timetables”.

If the proposal makes it onto the ballot at ExxonMobil this year it will be the third such time the company has faced such a request. In 2022 a Follow This resolution garnered 28% of votes; in 2023 this fell to 11%.

ExxonMobil is not the only oil and gas major being targeted by a Scope 3-focussed shareholder resolution involving Follow This this year. The Dutch group has gathered the support of more than 20 major institutional investors as co-filers of a resolution at Shell.

Faith Ward at Brunel Pension Partnership

Faith Ward at Brunel Pension Partnership

Those investors include Brunel Pension Partnership and London CIV in the UK, and Ethos in Switzerland. At Brunel, chief responsible investment officer Faith Ward said Exxon’s move was “both highly unusual and unnecessary given the existing powers of the SEC [Securities and Exchange Commission]”.

“Whilst we do not currently have any directly votable shares in Exxon, we have previously supported actions, including voting against all board elections in 2019 and supporting Engine No1 proposals in 2021, to demonstrate our shareholder dissatisfaction at Exxon’s progress on climate change,” she said.

“It is an important shareholder right to be able to escalate legitimate areas of concern, without fear of retaliation, and allow other shareholders the opportunity to support, or not. We are considering our next steps and will be speaking to our peers in the coming weeks,” Faith added.

At Ethos, which is co-filing the Shell resolution on behalf of Swiss pension funds, chief executive officer Vincent Kaufmann told IPE the news about the lawsuit was “very worrying regarding the willingness of Exxon to tackle the issue seriously”.

“The only positive thing is that it shows that progressive investors have a strong potential impact and the company tries more and more tactics to avoid their influence,” he added.

Vincent Kaufmann at Ethos

Vincent Kaufmann at Ethos

“We are still evaluating the different possibilities, but such a message should prompt investors which are sensitive to the climate question to escalate and refuse the re-election of certain board members, at least the chairman and CEO, the lead director and the chair of the sustainability committee,” Kaufmann noted.

At London CIV, a UK local authority pension pool, chief sustainability officer Jacqueline Jackson said it was committed to its decarbonisation goal – net zero by 2040 – and believed that climate change represents a real and mounting risk to its portfolio.

“We would hope Exxon will come to embrace shareholder engagement and lead the industry towards responsible transition,” she said.

‘Broken process’

ExxonMobil said the lawsuit is about a broken down shareholder proposal process “that allows proponents to advance their agendas through a flood of proposals [and] does not serve the interests of investors”.

“We are simply asking the court to apply the SEC’s proxy rules as written to stop this abuse and eliminate the significant resources required to address them,” it stated.

The SEC reviews all shareholder resolutions that are filed with companies. It has in the past sided with ExxonMobil when the company asked to be allowed to omit a shareholder climate resolution from the AGM agenda, but Exxon’s lawsuit comes at a time when the regulator has been far less likely to concur with companies that seek to exclude shareholder proposals.

“In 2021, the SEC issued Staff Legal Bulletin No. 14L, which significantly broadened the agency’s interpretation of ‘ordinary business’ and ‘economic relevance’, and as a result, made it more difficult for companies to exclude shareholder proposals on those grounds,” said lawyers at Vinson & Elkins in the US.

“In making the changes, SEC chairman Gary Gensler stated that ‘the right to put proposals in front of other shareholders for a vote is an important part of the securities laws’,” they added. “The volume of shareholder proposals in proxy statements has consequently ballooned in recent years, including notable increases in shareholder proposals concerning both pro- and anti-ESG topics.”

This trend is also noted by Lindsey Stewart, director of investment stewardship research at Morningstar, to highlight that although it is unusual to see a company take legal action to prevent a shareholder proposal appearing on the proxy card, “perhaps it isn’t that surprising”.

“For one thing, there’s a rapidly growing volume of ESG shareholder proposals in the US, and while a significant minority achieve meaningful shareholder support, many are perceived by companies and asset managers as inappropriately specific in their asks,” he said.

“ExxonMobil is also a frequent target for such proposals – 22 such proposals have been voted on at Exxon in the past three years, 10 of which were in 2023,” he said.

The number of shareholder resolutions proposed at US companies grew by 18% in the 2023 proxy year to a total of 616, and by 16% in 2022, according to Morningstar research.

Risks and rights

Sarah Wilson, Minerva Analytics

Sarah Wilson at Minerva Analytics

For Sarah Wilson, CEO of proxy voting agency Minerva Analytics, ExxonMobil has demonstrated “banana republic” behaviour. She said arguments that applaud Exxon’s move for giving shareholders a taste of their own medicine miss the point.

“Exxon doesn’t want these shareholder resolutions at all,” she said. “It’s irrelevant whether or not it’s an interference in management, shareholders take enormous risks and they have a right to a voice and to put shareholder resolutions forward.”

She added: “It also appears to elude some companies that in many jurisdictions asset owners have a legal obligation to consider environmental factors.”

However, Wilson said Exxon’s lawsuit was “about taking a pop at the SEC as much as it is about taking a pop at shareholders”.

In its court filing, Exxon said the SEC rule on requesting shareholder resolutions supports excluding the Follow This-Arjuna Capital proposal, but that the related guidance “can be at odds with the rule itself” and that “activist organisations rely on it to pursue their personal preferences at the expense of shareholders”.

According to the Vinson & Elkins lawyers, the approach Exxon has taken to try to block the proposal – bypassing the SEC process and going to court – runs the risk of the issue becoming moot before the court reaches a decision.

“[A]lthough Exxon asks the court for a declaration by 19 March 2024, there are approximately two months between when Exxon filed suit and when it must begin finalising its proxy materials, and it is unclear how long legal proceedings will play out.”

Exxon’s 2024 AGM is scheduled for 29 May.

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