You may recall that, in January, ExxonMobil filed a lawsuit against Arjuna Capital, LLC and Follow This, the two proponents of a climate-related shareholder proposal submitted to Exxon, seeking a declaratory judgment that it may exclude their proposal from its 2024 annual meeting proxy statement. Then, the two proponents notified Exxon that they had withdrawn their proposal. End of story? Hardly. In a status update filed in February, Exxon explained that it would not withdraw the complaint because it believed that there was still a critical live controversy for the Court to resolve. Arjuna and Follow This both moved to dismiss the case for lack of personal and subject matter jurisdiction. The Federal District Court for the Northern District of Texas has just issued its opinion: the Court dismissed the case against Follow This, an association organized in the Netherlands, for lack of personal jurisdiction, but the case against Arjuna survives on the basis of both subject matter and personal jurisdiction. Arjuna has now responded by letter. However, this conflict isn’t just about Exxon and two small activist shareholders. It has taken on much larger proportions: some business groups have joined with Exxon to bemoan the “hijacking” by special interest groups of Rule 14a-8 to “advance their preferred social policies” and “inundate public corporations with proposals designed to push ideological agendas.” Others have questioned whether, under the First Amendment, the SEC, through Rule 14a-8, has the right to compel companies to use their proxy statements to speak about contentious political issues. On the other side, some investors lament Exxon’s “aggressive tactics” that threaten to “diminish the role—and the rights—of every investor.” Stay tuned on this one.
Background. As discussed in this January PubCo post, Arjuna Capital, LLC and Follow This had submitted to Exxon a proposal asking Exxon to accelerate the reduction of GHG emissions in the medium term and to disclose new plans, targets and timetables for these reductions. Instead of following the standard SEC no-action process for exclusion of shareholder proposals, Exxon filed a complaint against the two proponents seeking a declaratory judgment that it may exclude their proposal from its 2024 annual meeting proxy statement. But perhaps there was more to it? Exxon said that it had taken this action in part because it viewed the SEC’s shareholder proposal process as a “flawed” system “that does not serve investors’ interests and has become ripe for abuse by activists with minimal shares and no interest in growing long-term shareholder value.” In the complaint, Exxon contended that the proponents didn’t want to improve Exxon’s “business performance or increase shareholder value. To the contrary, Defendants share a different goal—disrupting ExxonMobil’s investments and development of fossil fuel assets and causing ExxonMobil to change its business model, regardless of the benefits, costs, or the world’s needs.” In both cases, Exxon alleged, these activists have submitted multiple shareholder proposals over the years to “interfere with ExxonMobil’s business and to promote their own interests over those of ExxonMobil’s shareholders.” But, Exxon contended, “Congress did not intend for the proxy rules to be used in this way.” Exxon argued that the proposal was excludable on two bases—ordinary business (Rule 14a-8(i)(7)) and resubmission (Rule 14a-8(i)(12))—but elected to sidestep the standard SEC process presumably because of how Exxon perceives the SEC staff to be applying the shareholder proposal rules. According to Exxon, the “plain language of Rule 14a-8 supports excluding the 2024 Proposal, but current guidance by SEC staff about how to apply the rule can be at odds with the rule itself.” (See this PubCo post.)
Following the filing of the complaint, Bloomberg reports, the founder of Follow This said in a statement that, “[g]iven Exxon’s preference to fight a battle in court rather than allow shareholders the freedom of a vote at its annual meeting, we decided to withdraw the climate proposal….Now that we have withdrawn, the company has no reason to continue the lawsuit.”
But Exxon did not share that view. A spokesperson for Exxon told Reuters that it would continue with the lawsuit, stating that it “believe[s] there are still important issues for the court to resolve. There is no change to our plans, the suit is continuing.” Exxon’s CEO told CNBC in an interview that (based on my notes) the proponents “aren’t true investors.” They’re activists masquerading as investors, he said, using other people’s shares to bring proposals to the company that aren’t in the best interests of the company or its shareholders. In filing the litigation, Exxon believed that they just had to take a stand and make this issue explicit. This is the third time the proponents have filed this type of proposal, and it received only 11% support last time. Exxon, he said, was also trying to highlight that the SEC has reinterpreted the rules to make it easier for activists to include proposals in the proxy that diminish the company’s ability to run its business effectively. When asked what the problem was with just allowing a vote to go on, the CEO contended that many of the issues are complicated, but neither the complexity nor the impact on the company is conveyed in the proposals. As a result, there’s a huge cost to the company, both in responding and also in potentially serious unintended consequences. While Exxon believes that shareholders should have a voice and that the shareholder proposal system is basically good, Exxon also believes that the system has been abused; Exxon wants to refocus on legitimate concerns.
In its status update filed with the Court, Exxon explained that it filed the litigation “because year after year Defendants submit shareholder proposals under the federal securities laws to advance their personal agenda at the expense of ExxonMobil’s shareholders. And there is no good reason to believe they will stop.” They own nominal shares, Exxon claimed, to pursue their “Goldilocks Trojan Horse” strategy, under which they have submitted fourteen proposals in the past eleven years. But, Exxon contended, the SEC permits these proposals to go forward under its current interpretation of the rules—an interpretation “that is inconsistent with the regulations and encourages Defendants and other activist organizations to submit shareholder proposals designed to disrupt the ordinary business operations of public companies and harm their shareholders. The SEC explains, however, that its guidance is informal and has no legal force or effect, and it further states that it cannot decide the merits of a company’s position regarding a shareholder proposal. Only a court can.”
As a result, Exxon said, it sought a declaration from the Court that it could properly exclude the proposal under the ordinary business or resubmission exclusions. Although the two proponents then withdrew the proposal and “said they will not resubmit it in future years,” Exxon believes that they could still “attempt to submit, on their own or in coordination with others, future proposals that address substantially the same subject matter.” Their withdrawal, Exxon maintained, “does not provide ExxonMobil complete relief this year, and their promise not to resubmit the 2024 Proposal in the future is meaningless because ExxonMobil has no assurance that Defendants will not submit a slightly modified but substantively identical proposal.” Exxon argued that the defendants have not conceded that the proposal may be properly excluded under the two exclusions, and, as a result, Exxon needed a Court ruling on the application of the exclusions to adequately resolve the matter.
The defendants, Exxon contended, “cannot automatically moot a case simply by ending its unlawful conduct once sued”; that would simply allow the defendants to begin the conduct again later. Rather, Exxon argued, defendants have the burden of showing that their behavior is unlikely to recur. However, defendants will not be able to carry that burden, Exxon claimed, “because they have a lengthy history of repeatedly targeting ExxonMobil with improper shareholders proposals.” In this case, the proponents have maintained that the proposal is “proper under the rules and have not disavowed the ‘Goldilocks Trojan Horse’ strategy.” Accordingly, Exxon contended, the dispute remained and Exxon was asking the Court to settle the legality of the proposal. Notably, both the Chamber of Commerce and the Business Roundtable filed an amicus brief in support of Exxon.
Arjuna and Follow This moved to dismiss for lack of both personal and subject matter jurisdiction, claiming that the case was moot, given that the proposal had been withdrawn and Arjuna and Follow This had agreed not to resubmit the proposal or present it at any future Exxon shareholder meeting. As a result, they contended, there was no “case” or “controversy” as required by the Constitution. Exxon’s true intention, they asserted, was “to challenge how the SEC interprets and applies its own proxy proposal rules, without actually confronting the SEC itself. Exxon may prefer litigating against parties like Arjuna and Follow This—who have fewer resources and whom Exxon can unfairly malign in its Complaint—over seeking a routine ‘no-action’ letter from the SEC.” Further, they maintained that “Exxon has failed to show this Court has personal jurisdiction over the defendants. Exxon is advancing the novel position that it can haul its shareholders into court anywhere in the United States merely for exercising their shareholder rights to submit a proxy proposal, even if the shareholders have no contact with Exxon’s chosen jurisdiction.” Nothing in the Exchange Act, they concluded, “supports Exxon’s position that shareholders can be sued anywhere in the country merely for exercising their shareholder rights.”
The opinion. In framing the issue, the Court clues you in on the result right from the get-go. The Court begins by describing that, while Rule 14a-8 was “intended to increase shareholder participation, the amendments had unintended consequences. True, Rule 14a-8 gives diminutive shareholders a voice in corporate governance. However, it also gives activist shareholders a platform to push their agendas—often with little regard to their proposal’s implications for other shareholders’ portfolios.” Corporations can exclude some proposals, the Court continued, relying on categorical exceptions in Rule 14a-8, but that’s a narrow set of options to take on the activists’ “substantial platform.”
According to the Court, Arjuna and Follow This, using their “Trojan Horse” strategy, submitted proposals to Exxon, which they claimed would create shareholder value, but the Court inferred, were primarily designed to fight climate change. The Court characterized this approach as “vexing for corporations” that is assisted by, in Exxon’s view, “a flawed shareholder proposal and proxy voting process.” And shareholders have rejected these proposals on several occasions. This proxy season, rather than following the typical no-action process, “Exxon had enough,” the Court observed, and sued the proponents. As noted above, the proponents then withdrew their proposal and promised not to refile in the future.
As noted above, the Court found for Exxon with regard to subject matter jurisdiction and for Arjuna, with respect to personal jurisdiction. The Court found for Follow This with respect to personal jurisdiction. The burden was on Exxon to prove jurisdiction. The two defendants contended that, with respect to subject matter jurisdiction, Exxon’s claim was moot. They had withdrawn the proposal and promised not to refile; therefore, there was no live case or controversy. The idea proffered by Exxon that, in the future, shareholders could submit proposals with substantially the same subject matter was just speculation.
The Court held that Exxon had the “winning argument,” citing precedent that “a defendant’s voluntary cessation of a challenged practice does not deprive a federal court of its power to determine the legality of the practice.” According to the Court, the “voluntary-cessation doctrine requires more than platitudes to render a case moot; it requires proof that the offending conduct will not recur….If Defendants can evade suit by dropping their proposal, Exxon will never have its questions answered….Thus, to moot Exxon’s claim, Defendants must show that it is ‘absolutely clear’ the relevant conduct ‘could not reasonably be expected to recur.’”
And that, in the view of the Court, they failed to do. For example, the Court was persuaded by, among other things, Exxon’s argument that nothing in the letter agreeing not to resubmit the proposal “would prevent Defendants from tweaking non-substantive parts of the proposal and firing away once more.” The Defendants’ letter promising not to refile was just a “toothless… unilateral promise, not an enforceable contract.” Although the Defendants contended that Exxon’s concerns were “vague and imagined scenarios,” the Court was unwilling to fault Exxon “for distrusting organizations devoted to shareholder activism….. Rather, the company’s position is a rational response to entities categorically opposed to Big Oil.” Arjuna’s letter foreclosed “only a carbon-copy resubmission.” Accordingly, it was not “absolutely clear” that the proposal would not resurface in some substantially similar form later. In the end, the Court maintained, “Exxon wins because it isn’t required to take Defendants at their word.” As a result, the Court concluded, the letter “does not escape Exxon’s voluntary-cessation arguments. True, a declaratory judgment would inform Exxon of its rights vis-à-vis other proposals not at issue. But it would primarily inform Exxon of its rights should the 2024 Proposal resurrect.” Consequently, the opinion would not be merely advisory.
For personal jurisdiction, Defendants claimed that Exxon failed to plead jurisdiction under the Exchange Act or Texas’s long-arm statute. The Court held that there was no personal jurisdiction under the Exchange Act argument, but found that the Texas long-arm statute created personal jurisdiction for Arjuna, although not for Follow This. Briefly, according to the Court, jurisdiction under the Exchange Act would apply if Exxon was seeking “to (1) enforce a liability or duty under the Act or (2) enjoin a violation of the Act.” Because Exxon was seeking a declaratory judgment, the Court found that “[i]t does neither.”
The Texas long-arm statute was a different story. Here, to determine if there was personal jurisdiction, the Court was required to conduct a minimum-contacts inquiry. The inquiry involved three questions: “First, did the defendant ‘purposefully direct’ activity to the state or ‘purposefully avail itself’ of the state’s privileges?… Second, does the case ‘arise out of or result from’ the forum-directed activity?…Third, all else equal, is it ‘fair and reasonable’ to exercise jurisdiction?” The Court found that the first two tests were satisfied: the Defendants submitted multiple shareholder proposals to Exxon in Texas and the cause of action arose from those proposals. Fair and reasonable? Not so easy. After assessing the burdens and interests of the various parties and the State, the Court found that, “[o]n balance, these suggest personal jurisdiction is appropriate over Arjuna, but not over Follow This.” For one, Texas is a “long[] way from Amsterdam.” That is, although “Arjuna’s misfortunes may be a simple function of geography, the fact remains that it is more unfair/unreasonable for Follow This to litigate here than it is for Arjuna.” And “while the nomenclature’s importance is unclear, Arjuna was the 2024 Proposal’s ‘lead filer,’ while Follow This was a co-filer.” Further, since the declaratory judgment could “be resolved without hearings and with minimal travel burden, Exxon’s interest in litigating here likely outweighs Defendants’ interests in not….If either Defendant has a plausible case otherwise, it’s Follow This.” In addition, given the importance of Exxon to the State’s economy, Texas had a strong interest in retaining the case. And, “Exxon can still get the declaratory relief it seeks without Follow This.” Accordingly, the Court held that it had subject-matter jurisdiction over this lawsuit and personal jurisdiction over Arjuna, but not Follow This.
Following the decision. Reuters reports that, in response to the Court’s ruling, the founder of Follow This stated that it was “an unwarranted and cynical attack on shareholder rights in the world’s leading capital market.” The CEO of CalPERS expressed “disappoint[ment], but not surprise[]….Exxon’s dangerous legal gambit, if successful, would undermine shareholder rights and allow corporate leaders to stifle the ideas of investors with impunity.”
After the decision was rendered, Arjuna submitted a letter to Exxon. In the letter, Arjuna maintains that the Exxon’s lawsuit “represents an assault on the system of shareholder democracy which has served both investors and companies well for decades. Exxon’s insistence on continuing the lawsuit even after Arjuna withdrew the proposal and promised not to refile it is consistent with a strategy to silence all shareholders who may attempt to raise similar concerns.” Contrary to statements made by Exxon, Arjuna claims, its “mission and business is to grow shareholder value.” Arjuna continues that it “cannot alone bear the brunt of Exxon’s war on shareholder rights. For that reason, Arjuna is accepting the Court’s invitation, made in its recent ruling, to provide clarity through a ‘broader stipulation’ that Arjuna will not submit the proposal, or anything similar to the proposal, for consideration by Exxon shareholders in the future. Thus, Arjuna hereby unconditionally and irrevocably covenants to refrain henceforth from submitting any proposal for consideration by Exxon shareholders relating to GHG or climate change.” From the perspective of Exxon, will that do it? What about from the perspective of the Court? The Court has now ordered Exxon to file expedited briefing explaining “any contentions they have regarding their standing after Arjuna’s letter.”
