Activist investors fret over Exxon lawsuit
• Oil firm’s action over resolutions process worries shareholders
Investors that use shareholder resolutions to pressure companies on environmental and social issues say they are worried that an ExxonMobil lawsuit bypassing the US securities regulator could undermine their influence.
Under appointees of President Joe Biden, the Securities and Exchange Commission (SEC) has made it more difficult for companies to prevent these resolutions from moving to a shareholder vote by appealing to the regulator.
Exxon sidestepped the SEC and filed a lawsuit earlier this month against two shareholders that had put forward a resolution calling on the oil major to set new targets for reducing some of its greenhouse gas emissions.
Exxon accused the investors in its lawsuit of abusing the process by putting forward resolutions to advance their agenda of diminishing its fossil fuels business, rather than grow shareholder value. It said 90% of its shareholders voted down a similar proposal last year.
The top US oil producer is seeking a ruling by March 19 and last week asked the judge to fast-track the case. Its proxy statement needs to be filed by April 11, in time for its annual shareholder meeting in May.
“We’re concerned this action could have a chilling effect, particularly on small investors who don’t have the resources to battle Exxon or other companies in the courts,” said Josh Zinner, CEO of the Interfaith Centre on Corporate Responsibility. The centre represents religious investors and other socially-aware asset managers.
NOT BINDING
Most shareholder resolutions are not legally binding on a company, even when a majority of investors vote for them. But companies often heed those that win support, even short of a majority, to show they are responsive to investors’ concerns.
Amy Borrus, executive director of the Council of Institutional Investors, whose members include big pension funds and asset managers, said the resolutions play an important role in allowing investors to express their views to a company’s management, board and other investors.
She added that if Exxon succeeds, others may also take their chances in court. Various companies and trade groups have complained that an SEC policy change in 2021 tipped the scales against them. The SEC made it more difficult for companies to argue that a resolution should be blocked because it micromanages operations. This emboldened activist shareholders and the number of resolutions jumped as a result. There were 889 proposals filed during the 2023 proxy season, the third consecutive annual increase and the highest number of submissions since 2016, according to data compiled by law firm Gibson, Dunn & Crutcher.
Overall, fewer companies have been asking the SEC to throw out shareholder resolutions. Mark Uyeda, one of the five SEC commissioners who vote on rule changes, said the agency’s current approach may have discouraged some companies from turning to the SEC for help.
“Companies could always go to court on shareholder proposals, but historically viewed the SEC as a fair arbiter. This perception may have changed due to recent policy changes,” Uyeda, a Republican who became SEC commissioner in 2022, said. He did not directly comment on Exxon’s lawsuit.
There are currently two Republican and three Democratic commissioners, and Uyeda was expressing only his views. A SEC spokesperson declined to comment.
Another pending rule change proposed under SEC chair Gary Gensler could further lower the bar for resolutions.
An Exxon spokesperson said the SEC’s application of the rules does not serve investors’ interests. “We simply want the rules already in place to be enforced to prevent increasing abuse of the system,” he said, adding that the company’s lawsuit was limited to the specific resolution on greenhouse gas emissions and that the company is engaging with proponents of other shareholder resolutions.
It is far from certain that the resolution that Exxon is contesting would succeed in a vote.
Netherlands-based environmental activist group Follow This, one of the resolution’s sponsors, won 10%-30% support for similar resolutions in 2023 at other big oil majors including Chevron, TotalEnergies, Shell and BP.
Follow This founder Mark van Baal accused Exxon “of being afraid of its shareholders”.
A handful of companies successfully used lawsuits to throw out shareholder resolutions from 2010-14. But those prevailed on technical grounds, such as whether the resolutions’ sponsor met stock ownership requirements.
Corporate lobbying groups hope courts will this time go farther. The National Association of Manufacturers has separately asked the New Orleans-based 5th US Circuit Court of Appeals to rule that the SEC has no authority to force companies to include shareholder proposals on their ballots. The 5th Circuit’s conservative majority has often blocked Biden’s policies and it is where Exxon also filed its lawsuit.
ACTION COULD HAVE A CHILLING EFFECT ON SMALL INVESTORS WHO CANNOT BATTLE EXXON OR OTHER COMPANIES IN THE COURTS