Questions For Boards Who Might Consider Suing Shareholders

Lawyer working in the office. Law and justice.
ExxonMobil’s board may have withstood the threat of being removed by a shareholder vote, but the recent case highlights the importance of thinking through all the possible ramifications.

Now that ExxonMobil’s board of director nominees have withstood the threat of being removed by a shareholder vote because some institutional investors expressed unhappiness with the company’s decision to sue two small shareholders who put forth climate resolutions it disagreed with, what’s the fallout?

Will suing shareholders solve the dispute? 

The way corporate boards choose to deal with shareholder resolutions has become a topic of boardroom discussion since ExxonMobil sued Arjuna Capital and Follow This in January for advancing shareholder resolutions that asked the oil giant to accelerate its emissions targets aimed at reducing climate change.

ExxonMobil’s decision to take its disagreements about resolutions filed by shareholders to the court system has the potential to damage the spirit of cooperation that exists between boards and their shareholders. If more boards decide to sue when shareholders file hotly disputed resolutions instead of dealing with them through regulatory procedures or active engagement, they may be placing key business decisions in the hands of judges. While a judge decided that ExxonMobil could continue its lawsuit against its investors in this case, turning to the court system didn’t solve its problems with climate change.

There are still shareholders that want the oil company to do more to deal with greenhouse gas emission and reliance on fossil fuels. Prior to its annual meeting, the nation’s largest public pension fund, California Public Employees’ Retirement System (CalPERS), said it would vote against the entire ExxonMobil slate of board nominees, and The New York State Common Retirement Fund said it would vote against 10 of 12 nominees.  Other investors also urged shareholders to vote against the slate of ExxonMobil nominees. While this vote went well, there is a risk that sentiment against the ExxonMobil board members who were just elected could grow. A statement from CalPERS CEO Marcie Frost and president Theresa Taylor, reported by Politico, demonstrates investor concerns: “If successful, the legal action could diminish the role—and the rights—of every investor in improving a company’s bottom line.”

In disputes with shareholders, courts don’t always guarantee a favorable decision, and lawsuits come with legal costs and reputational risks. Corporate directors will need to carefully weigh the pros and cons of suing their shareholders, whom they are sworn to work for.

Will the lawsuits raise more questions than it’s worth?

When a board sues its shareholders, it will likely attract unwanted publicity. The board will have to explain why it took that step, and perhaps answer other questions as well. In this case, ExxonMobil was asked to explain why it is continuing the lawsuit even though the activists withdrew their proposals. Additional questions invite additional risk to board members and the company.

ExxonMobil has defended itself, saying the lawsuit was a reaction to abuse of the shareholder proposal process, claiming that activist investors “advance their agendas through a flood of proposals.” However, others haven’t viewed it quite that way.

Reuters reports that proxy advisor Glass Lewis said ExxonMobil’s “unusual and aggressive tactics in this matter could threaten to deter both investors’ willingness to submit and ability to vote on materially relevant issues.”

Is the lawsuit worth having proxy advisory firms spouting negative comments about the company? Is it worth having major investors advocating voting against board members during elections? Is it worth risking the company’s reputation with customers, clients and communities it serves? Each board will have to determine those answers. ExxonMobil’s board likely won the support of most shareholders by answering those questions with superior stock performance. 

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