Exxonmobil’s Legal Battle With Shareholder Activists, Arjuna Capital And Follow This: A Watershed Moment In ESG Shareholder Activism? – Shareholders

In an unprecedented legal move, ExxonMobil has instituted a
lawsuit against two shareholder activists, alleging that their
proposed resolution seeks to unduly interfere with the
company’s day-to-day operations. Notably, Exxon points out that
a similar proposal failed to gain significant support last year,
securing less than 10% backing.

Introduction

This legal confrontation not only pits one of the world’s
largest oil and gas companies against activist investors but also
raises fundamental questions about the trajectory of ESG activism
itself. Does this legal battle signify a landmark turning point in
the evolving landscape of corporate accountability and
sustainability advocacy?

The ExxonMobil Case

On 22 January 2024, ExxonMobil Corporation
(“Exxon“) filed a lawsuit with the
United States district court against Arjuna Capital and Follow This
(“Shareholder Activists“) to seek a
declaratory order which would prevent the Shareholder Activists,
who do not own any direct shares, from tabling a climate related
shareholder proposal tabled in terms of SEC Rule 14a-8 (which is similar to section
65(3) of the Companies Act (South Africa)), which urges
Exxon to establish targets for Scope 3 emissions reduction (carbon
emissions generated indirectly), aiming to address the carbon
footprint stemming from its oil and gas consumers.

Although Exxon has set net zero objectives for its Scope 1 and
Scope 2 emissions by 2050, which encompass emissions from its
production operations and energy usage, it notably lacks such
targets for Scope 3 emissions, which account for indirectly
generated carbon emissions. This sets it apart from the approach
adopted by the four other leading oil majors in the industry.

While the Shareholder Activists have, in the interim, withdrawn
the shareholder proposal, Exxon has indicated that it will continue
to pursue the lawsuit. The aim of which is to get clarity in the
form of legal precedent on circumstances were Shareholder Activists
are abusing the corporate process by consistently levelling demands
that are aligned with their personal agendas and are designed to
undermine the company’s current operations – a practice
seen as exploiting SEC Regulations. These personal agendas can be
deduced from the mission statements of the various NPC’s: with
Arjuna Capital’s mission being to “shrink“
energy companies, and its chief investment officer was found to be
“manifestly biased” against Exxon by a New York
court. Notably, Exxon points out that a similar proposal failed to
gain significant support in the previous years, securing less than
10% backing. Even though these proposals have been consistently
rejected by Exxon shareholders, it is an expensive and
time-consuming process which is usually at odds with investors who
seek to receive a return on their investment.

The relief sought will only provide Exxon with a relief to
exclude the proposal from its 2024 proxy statement to be presented
at its 2024 annual general meeting. Exxon has requested that the
relief be provided by 19 March 2024, however, we have not had sight
of the outcome of this lawsuit, as yet.

Potential implications of the judgment

Overall, the lawsuit has the potential to shape the future
landscape of corporate accountability, shareholder activism, and
sustainability practices, with far-reaching implications for
companies, investors, and society as a whole across the globe.

The outcome of this lawsuit could establish a legal precedent
regarding the rights of shareholders to propose certain resolutions
and the extent to which companies can challenge such proposals.
Depending on the ruling, it may influence future shareholder
activism efforts and the dynamics between corporations and their
investors.

The public nature of the lawsuit could impact market perception
of Exxon and other companies involved in similar disputes.
Investors, consumers, and other stakeholders may reassess their
relationships with these companies based on their handling of ESG
issues and shareholder activism. A similar impact could hold true
for Shareholder Activists who acquire minority stakes in companies
solely to be able to table climate change proposals.

Depending on the outcome and public reaction to the lawsuit,
regulators may consider implementing or revising regulations
related to shareholder rights, ESG reporting, and corporate
accountability. This could lead to changes in disclosure
requirements and processes to curb abuse.

Key Takeaways

Shareholder activism has certainly had a positive impact and
encouraged corporations to pay close attention to ESG
considerations in their reporting and their investing. However, the
repeated requests to table climate change proposals, which for the
most part, can only be satisfactorily dealt with if responded to
exactly as requested by Shareholder Activists, has set a dangerous
precedent where activists are able to subordinate the rights and
interests of other shareholders of a company to achieve their ESG
goals.

We foresee the implications of this legal confrontation
extending beyond the courtroom, resonating throughout the corporate
world and investment community. The outcome of this lawsuit has the
potential to set a precedent for how companies, including South
Africa companies and regulators, navigate shareholder activism and
address sustainability concerns in the future.

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