July 25, 2014

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External Affairs: A Battle Brews Between Chevron and Shareholders

Activists push back against Chevron’s legal strategy attacking shareholder groups.

Submitted by: Francesca Rheannon

Posted: Jan 14, 2013 – 08:00 AM EST

Tags: chevron, corporate governance, esg, environment, activism, trillium asset management, fossil fuels, shell, ecuador, amazon

 
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By Francesca Rheannon

In what is being called an unprecedented move, fossil fuel giant Chevron Corporation [NYSE: CVX] is taking legal action against investors who have challenged the company to improve its environmental impact and corporate governance. It is subpoenaing all records going back to 2005 pertaining to “Chevron litigations and shareholder actions” in regard to an environmental suit in which it is embroiled. 

The records have been subpoenaed from, among others, Trillium Asset Management and Simon Billenness, an investor consultant who wrote a report critical of the company’s actions in the case.

Shareholder activists have always been a bit like David going up against a corporate Goliath. Winning resolutions is rare, so success is often measured in small increments: a few more percentage points of support gained one year to the next for resolutions seeking to improve the social, environmental and ethical governance of corporations.

Sometimes corporate boards come around; often they push back.

But until now, activists haven’t been targets of legal action by the company. Nor, generally, does the corporation whose shares they own accuse them of flagrant corruption. But that is the strategy Chevron is pursuing as it tries to beat back attempts to hold it to account for actions stemming from a suit brought by environmental and indigenous activists against it for widespread pollution of the Ecuadorian rainforest.

Background To The Conflict

The contamination occurred many years ago when Texaco went into the Ecuadorian Amazon to drill for oil. The ground and waterways that sustained the native tribes were poisoned. Cancer rates Chevron in the amazonsoared. It was before Chevron’s time, but when the company bought Texaco in 2001, it inherited the suit.

Much to the surprise of the oil giant and environmentalists alike, the plaintiffs won.

An Ecuadoran court has ordered Chevron to pay $19 billion to the plaintiffs and the U.S. Supreme Court has rejected Chevron’s bid to block enforcement of the ruling. For its part, the company has vowed to fight the judgment “’til hell freezes over and then fight it out on the ice,” in the words of one Chevron lawyer.

And now it seems that part of that strategy is to go after the records of activist investors, whether in a bid to intimidate them or to gain information to combat the suit (or both) is not clear. The company has also filed an ethics complaint in New York against New York State Comptroller Thomas DiNapoli, who had pressed the company to settle the Ecuadoran suit.

Stakes High For Chevron & Other Oil Companies

The stakes are high for both sides. While Chevron is the second most profitable company in the world (Exxon is first), with profits of nearly $27 billion in 2012, it likely wants to discourage environmental suits that may lead to stricter oversight from both shareholders and governments.

Other oil companies are nervously watching to see if it is a bellwether case. Shell Oil [NYSE: RDSA-A] is being sued by farmers in the Niger Delta for environmental destruction and native tribes in Canada are suing the Canadian government and companies to stop pollution from tar sands projects in Alberta. If Chevron is forced to give up assets to satisfy the judgment (a court in Argentina has already frozen $2 billion of Chevron’s assets,) it could be the chink in the armor making fossil fuel companies vulnerable to environmentalist victories in the courts.

Shareholder Activists Fear Chilling Effect 

On the other hand, shareholder activists have a lot to lose as well. Calling it “a brazen attack on shareholder rights,” Sonia Kowal, Director of Socially Responsible Investing at Zevin Asset Management, said in a press statement:

“We are deeply concerned about the extremely bad precedent this would set if the Courts allowed Chevron to successfully subpoena the documents of individuals or investors simply because they were critical of a company’s conduct and worked with other investors to challenge it. Chevron’s action would establish a new tool for companies to attack investors raising critical questions.”

Zevin Asset Management was a co-filer with the Needmor Fund of a new chevron and shareholdersshareholder resolution filed in January 2013 responding to Chevron’s subpoena action. The resolution is asking for the Chevron board to conduct a review of Chevron’s legal strategy in the case, including the subpoenas, the ethics complaint against DiNapoli and the “public relations campaign” the filers are charging is being waged against them.

Some idea of intensity of the company’s ire can be gathered from a recent press release concerning the ethics charge against DiNapoli, as well as their response to CSRwire:

U.S. trial lawyers, in an effort to force Chevron to settle a fraudulent lawsuit, enlisted a network of not-for-profits and so-called concerned shareholders who were seemingly acting independently and in the interest of public good. We now know -- through discovery -- that Trillium and Mr. Billenness, amongst others, where not acting independently and in the interest of their investors. Rather, they have been an extension of the plaintiffs’ lawyers’ pressure campaign.

In an email to CSRwire, Billenness termed Chevron’s charges “character assassination to try to silence the legitimate concerns of its own shareholders.”

Sonia Kowal called it “patently absurd,” adding that “there is no doubt that we are acting in the best interests of our client shareholders in trying to understand and address the potential consequences Chevron’s actions in Ecuador.”

The Chevron Case and Risk To Investor Value

The fight between the activists and the company is being fought out on the terrain of risk to investor value. While the company clearly sees the environmental suit as a risk to its value, the activists see Chevron’s intractable strategy vis-à-vis the suit as a long-term risk to investors. (They also, of course, see it as a risk to the health of the environment.)

Billenness’ report raised investor risk stemming from the company’s lack of transparency as a central question. He told CSRwire that he uncovered a discrepancy between what Chevron had been saying in sworn testimony in Federal Court about the impact of the lawsuit and judgment and what it then reported in its filings to the SEC.

Particularly, I point out a piece of testimony by the Chevron deputy comptroller, Rex Mitchell, in which he said that Chevron would suffer "significant irreparable damage to its business relationships" from any enforcement of the Ecuadorian judgment of $19 billion. Yet, if you look at Chevron's SEC filings, it paints a very different picture. And I felt the discrepancy between the two was unacceptable from a shareholder perspective because Chevron is saying one thing in sworn testimony in Federal Court and another thing in SEC filings.

Billenness used the report as evidence for a resolution he presented for the United Universalist Association and other Chevron investors at the company’s 2011 annual meeting. The resolution called for “more transparency of the risks and an alternative to the company’s litigation strategy” around the Ecuador case. When Billenness introduced the resolution at the meeting, he posed a question the Board was undoubtedly loath to hear:

Did the board sign off on false and misleading financial statements? Or did the sworn testimony represent perjury? I don’t know, but the board needs to set the record straight and soon.

Implications for Shareholder Activism

Will Chevron’s subpoenas actually intimidate shareholders into silence? Clearly, activists view the Chevron cleanup in ecuadorcompany’s actions as a threat to their efforts, ones that must be met head-on. One expert surmised that they are “deeply concerned about the extremely bad governance precedent that would be set if courts allowed Chevron to successfully subpoena the emails and files of investors simply because they were concerned about the company’s conduct.”

But if the company’s intention was to intimidate investor activists, so far the tactic is not working. Billenness told CSRwire, “I think across the board it's stiffened people's resolve.”

He pointed out that the subpoenas arrived just as Trillium and UUA were in the process of re-filing the three shareholder resolutions they had brought to a vote at the 2011 annual meeting. Then the Needmor Funds (through their manager, Walden Asset Management) filed the new resolution in January questioning the company’s legal strategy, as mentioned above. Other co-filers have joined the battle.

Others in the investor community agree with Billenness. “If anything this action has generated new energy by investors who are stepping up to challenge [Chevron],” one fund manager told CSRwire.

One thing is certain: Chevron may be the immovable object in this fight (so far) but shareholder activists are responding to the company with irresistible force.

The opinions, beliefs and viewpoints expressed by CSRwire contributors do not necessarily reflect the opinions, beliefs and viewpoints of CSRwire.

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