You remember that, in January, ExxonMobil filed a lawsuit against Arjuna Capital, LLC and Follow This, 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? On February 1, Exxon filed a notice of withdrawal of its request for an expedited briefing schedule for its summary judgment motion in the case. Why? Because the two proponents had notified Exxon that they had withdrawn their proposal. End of story? Not necessarily. Exxon told Reuters that it would not withdraw the complaint, maintaining that there were still critical issues for the Court. And in a Court filing yesterday, Exxon explained why it believed that there was still a live controversy for the Court to resolve. How the Court responds remains to be seen. But regardless of what the Court decides, the withdrawal of the proposal in response to the litigation may well encourage other companies, similarly faced with unwelcome proposals, to bypass the SEC's standard shareholder proposal process and follow the go straight-to-court strategy.

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."

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 apparently, Exxon does 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, they also believe that the system has been abused; Exxon wants to refocus on legitimate concerns.

The federal judge to whom the case has been assigned issued an Order on Friday instructing Exxon "to file a status update to the Court on or before Monday, February 5, 2024, as to what outstanding claims or issues are before the Court in this action." In the Order, the Court indicated that its understanding is that "this action was brought to litigate the very issue that Plaintiff now says is resolved: Defendants['] proposal for the annual shareholder meeting....[A]s it stands now, the Court struggles to see what the ongoing case or controversy is in this matter given the only relief sought from the Court was a declaration that Exxon may exclude Defendants['] proposal from its annual shareholder meeting."

Yesterday, Exxon filed a status update pursuant to the Court's Order. 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 argues, 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.

How will this matter be resolved? Will the Court find that the case is now moot? Require the defendants to respond to the complaint? Stay tuned.

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