ExxonMobil Corporation v. activist shareholders: the corporate governance of climate change strategy

The 2024 litigation commenced by ExxonMobil Corporation against two activists about the scope of shareholder proposals highlights important questions in the increasingly contested issue of the corporate governance of climate change strategy: (i) who, as between shareholders and the board, sets climate change strategy; and (ii) given the purpose of corporations, are there limits on the kinds of strategy a shareholder can validly propose?

Background: the shareholder proposal and Exxon’s litigation

Arjuna Capital (a U.S. investment adviser, acting on behalf of two clients) and Follow This (a Netherlands-based organization), submitted a precatory climate-related shareholder proposal for consideration and voting at Exxon’s 2024 annual shareholders meeting:

Resolved: Shareholders support the Company, by an advisory vote, to go beyond current plans, further accelerating the pace of emission reductions in the medium-term for its greenhouse gas (GHG) emissions across Scope 1, 2 and 3, and to summarize new plans, targets, and timetables¹.

Exxon opposed the inclusion of the proposal in its meeting disclosure, principally on “ordinary business operations” grounds—under Securities and Exchange Commission Rule 14a-8, a shareholder proposal needn’t be included in an issuer’s meeting disclosure “[i]f the proposal deals with a matter relating to the company’s ordinary business operations”. Since 2021, this exception has been interpreted by the SEC such that a proposal that implicates business operations but raises issues with a broad societal impact may be viewed as transcending ordinary business operations.

Typically, objections to the inclusion of shareholder proposals are dealt with by applying to the SEC for a “no action” letter. In the case of the Arjuna/Follow This proposal, Exxon instead went to court to the District Court in the Northern District of Texas and sought a declaration that it was not required to include the proposal in its meeting disclosure.

In the face of the litigation, the shareholders withdrew their proposal. However, Exxon persisted in its litigation, leading to two hearings and the eventual dismissal of the complaint in two orders: (i) the court found it lacked jurisdiction over Follow This; and (ii) after Arjuna undertook not to re-submit similar proposals in the future, the court found that the case against it was moot.

Exxon’s strategy for dealing with the activists attracted support and criticism, with a focus on the proper role and subject matter of shareholder proposals in corporate decision-making.

Exxon’s argument: a circumscribed role for shareholder proposals

Exxon’s argument in its complaint was that the proposal offended corporate law norms in two respects. First, it reflected a view of the purpose of the corporation inconsistent with the principle that the corporation operates to create value for shareholders. Second, the proposal assumed for shareholders the role of decision-maker with respect to climate change policy. Exxon pleaded on these two arguments:

The 2024 Proposal does not seek to improve ExxonMobil’s economic performance to create shareholder value. Like the previous proposals, it is designed instead to serve [the proponents’] agenda to “shrink” the very company in which they are investing by constraining and micromanaging ExxonMobil’s ordinary business operations.

This sweeping intrusion into ExxonMobil’s ordinary business operations is designed to substitute Defendants’ preferences for the judgment of ExxonMobil’s management and board in determining how best to operate the company in an efficient and environmentally conscious way.

...the 2024 Proposal seeks to usurp the role of management and the board to impose Defendants’ personal policy preferences through a shareholder proposal process that was not designed or intended for such use².

Because of the dismissal of the action, these arguments have not been tested on their merits but they reflect a position that, as a normative matter, shareholder proposals should have a circumscribed role in the corporate governance of climate change.

For and against the Exxon litigation

The U.S. Chamber of Commerce and the Business Roundtable jointly sought intervenor status to support Exxon, making similar arguments in their intervention brief about the role of shareholder proposals in decision-making. They argued as follows:

Each year, public corporations are inundated with proposals from a limited set of special interest activist shareholders pushing social and political agendas that are divorced from shareholder value—and often designed in a way that would undermine the corporation’s success.

Black letter corporate law provides that directors, rather than shareholders, manage the business and affairs of the corporation³.

Some commentators, however, saw the litigation by Exxon as an aggressive and unhelpful attempt to thwart the use of shareholder proposals as a technique for monitoring management, undermining an important aspect of corporate governance. A ProMarket comment by Colleen Honigsberg and Robert Jackson noted:

...investors have little incentive to monitor and engage with corporate management, and the shareholder proposal process provides a backdrop for bargaining between investors and managers. The benefits of those bargains accrue to all investors. But Exxon’s lawsuit suggests that investors thinking of bringing a shareholder proposal could bear the considerable costs of being sued by the company – costs that could stop the proposal bargaining process before it has even begun⁴.

On this view, limiting the role of shareholder proposals in the manner sought by Exxon, and suing shareholders, will disincentivize the use of proposals and deprive shareholders of the benefits of the proposal mechanism within corporate governance.

The Canadian context

In Canada, the validity of shareholder proposals and the decision to include or exclude them is a matter of corporate law, and shareholders have the onus when complaining to a court about a corporation excluding a proposal from meeting disclosure. The statutory bases available for excluding proposals vary across Canadian incorporation statutes. Until 2001, the Canada Business Corporations Act allowed a proposal to be excluded if it was “primarily for the purpose of promoting general economic, political, racial, religious, social or similar causes”. That basis for rejecting a proposal was removed from the CBCA (and other federal incorporation statutes, like the Bank Act) in 2001 amendments. The Business Corporations Act (Ontario) does not include anything similar to what was removed from the CBCA in 2001, although the Business Corporations Act (Alberta) does contain the pre-2001 CBCA language.

Historically, Canada has seen a small number of disputes about rejected shareholder proposals, with proposals in older cases on apartheid and environmental issues ruled excludable by courts while others on compensation practices were ruled valid. Given the stakeholder model of corporate law in Canada, it could now be challenging for a corporation to exclude as invalid a proposal such as the Arjuna/Follow This proposal or rely on the arguments made by Exxon, especially for a corporation governed by federal law or the OBCA. That is so even though, as one scholar has noted, in Canada shareholder proposals are generally precatory and, under Canadian corporate law, “[a] corporation’s shareholders … do not have any formal managerial role. Since the power to manage is vested in the board, the directors cannot be compelled to act upon a shareholder resolution which falls within their managerial mandate”. As such, the author argued, “[i]n a corporation with publicly held shares, it is sensible that the shareholders, as a collective body, do not have a significant managerial role”⁵.

What’s next?

Whether through shareholder proposals, derivative litigation or other corporate law mechanisms, activists can be expected to use corporate law, and to challenge it, in order to accelerate or alter climate change strategy within business organizations. While the shareholder proposal litigation ended, the questions it raises have not been answered; Exxon’s fight with its shareholders shows one kind of response to contests over the corporate governance of climate change in a debate that will continue to develop.