Exxon Bypasses SEC, Seeks Court Order to Block ESG Shareholder Proposal

As companies contemplate how best to respond to the rising number of environmental, social and governance (ESG) proposals from activist shareholders, Exxon Mobil has employed an unusual strategy to avoid such a vote. The oil giant is sidestepping the Securities and Exchange Commission’s no-action letter process and instead taking some of its shareholders to court.

In a complaint filed in federal court in Texas on January 21, Exxon accused investors Arjuna Capital of Massachusetts and Follow This of Amsterdam of being “driven by an extreme agenda” and becoming shareholders solely to campaign for change through proposals that are “calculated to diminish the company’s existing business.” Follow This and Arjuna Capital’s proposal requested that Exxon accelerate its plans to reduce carbon emissions and expand the scope of emissions it measures to include its suppliers and customers. Exxon argued that the proposal does not seek to improve the company’s economic performance or create shareholder value. According to the oil company, the pair actually designed the measure to “shrink the very company in which they are investing by constraining and micromanaging” ordinary business operations.

Companies seeking to avoid holding a vote on a shareholder proposal typically submit a request to the SEC for a “no-action letter.” Such a letter all but ensures SEC staff members will not recommend that the agency take enforcement action based on the facts in the request. However, under the Biden administration, the SEC has allowed more ESG-related proposals to reach a shareholder vote.

Exxon’s lawsuit could be seen as an attempt to make an end-run to the courts to avoid regulatory headaches. The complaint requested a “declaration” from the court by March 19 supporting Exxon’s decision to exclude the proposal. The company also said it had planned to exclude the proposal from the ballot at its annual meeting on May 29 anyway because federal securities law allows companies to discard petitions that “deal with matters relating to the company’s ordinary business operations” and because SEC staff guidance is informal and subject to interpretation.

This is the latest in a larger trend of corporate and conservative interests seeking to elevate the authority of the courts at the expense of agencies. For example, the Supreme Court just heard a case that is challenging the famous “Chevron doctrine,” which requires courts to give deference to certain agency decisions. And the National Association of Manufacturers, an influential manufacturing lobbying group, tried a frontal assault in an effort to establish that the SEC had no authority to compel companies to publish shareholder proposals.

Companies have, in fact, tried this strategy before. Cydney Posner of Cooley LLP documented examples in 2014 of companies going to court to challenge pesky proposals submitted by a corporate gadfly. Ten years later, could we see courts morph into the primary venue for sorting out investor proposals?

Probably not. After all, note that Exxon is not completely abandoning the no-action letter process. It recently filed several no-action letter requests with the SEC on other shareholder proposals. Nonetheless, this dramatic strategic maneuver warrants close attention.