In response to my post Exxon's Lawsuit Against Activist Shareholders Continues, a friend and fellow corporate law academic sent along an interesting comment:
You think ExxonMobil's attempts to limit what kinds of proposals shareholders can put in management's proxy are good. But are they as good for Exxon as the cost TO Exxon? That is, would a purely profit-maximizing ExxonMobil pursue the case? Presumably they would pay all the cost while only reaping a small portion of the benefit...
In response, I wrote that:
I am reminded of a couple of cases from my case book. Hoddeson v. Koos Bros., 47 N.J.Super. 224, 135 A.2d 702 (App.Div.1957). Koos Bros. went to trial over a $168.50 dispute. And then fought the case on appeal. The casebook then poses the question: “This is one of several cases in this text in which parties vigorously litigated disputes involving seemingly trivial amounts. Why on earth would Koos Bros. have gone to such lengths and expense?”
See also National Biscuit Company v. Stroud, 249 N.C. 467, 106 S.E.2d 692 (1959). National litigated a $171.04 bill all the way up to the North Carolina Supreme Court.
In 1954, according to a study by the Department of Commerce, the average income of lawyers in the United States was $10,220, more than twice as much as the average family income of the time. Slightly more than a quarter of these lawyers made less than $5,000 a year, and 18 percent earned $15,000 a year or more. The majority, almost two-thirds, earned between $5,000 and $10,000 yearly. So the fee likely exceeded the amount in dispute. So it seems to make no economic sense. So why did they do it? Granted, they may desire to set a precedent that benefits them, but most of the benefit would go to other businesses. As such, they bear all the costs of setting the precedent and reap only a small portion of the benefits. We puzzle some about that it in class, usually unsatisfactorily.
It seems to me not implausible that corporate executives are not always rational actors functioning on strict cost-benefit analyses. Perhaps Exxon management is simply fed up with climate activists trying to shut down their business. After all, they have had to put up with the Little Engine hedge fund fight and annual climate-related shareholder proposals.
Alternatively, the economics of the decision may be analogous to that of hedge fund activism. If a hedge fund succeeds in compelling a target company to make changes that raise the stock price, most of the gains flow to other shareholders who are freeriding on the activist. Yet, the activist makes enough money to justify the expense. Maybe Exxon thinks the costs to it of the shareholder proposal regime—including opportunity and reputational ones—justify setting a precedent.
Or maybe Exxon management thinks there will be non-pecuniary benefits to winning, such as the gratitude of public company CEOs everywhere.