An Analysis of the Financial and Operational Risks to Chevron Corporation from Aguinda V. ChevronTexaco (May 2012)

From the Executive Summary of this report:

  • Chevron is facing significant financial and operational risks stemming from enforcement of an $18 billion adverse judgment in Ecuador.   On March 12, 2012, an Ecuadorian appellate court declared the $18 billion judgment for the company’s contamination of soil and water final and enforceable, giving the plaintiffs the right for the first time to collect on the judgment.  Chevron itself has admitted in a sworn legal statement that the company is at risk of “irreparable injury to [its] business reputation and business relationships” that “would not be remediable by money damages” from potential enforcement of the Ecuadorian court judgment.
  • The enormous breadth of Chevron’s global business operations makes the company particularly vulnerable to enforcement.  There are many jurisdictions around the world in which the plaintiffs could seek court recognition and enforcement of the judgment, including many where Chevron has substantial reserves and that are strategic importance.
  • Chevron’s defenses to enforcement actions have greatly narrowed. The U.S. Second Circuit vacated in its entirety a preliminary injunction from a U.S. District Court that purported to bar the Ecuadorian plaintiffs from enforcing the judgment against Chevron’s assets anywhere in the world.  The Ecuadorian courts have rejected awards by an arbitral panel seeking a halt to enforcement of the $18 billion judgment against Chevron.
  • Shareholders of Chevron are increasingly demanding more transparency of the risks and an alternative to the company’s litigation strategy.  In May, 2011, shareholders of Chevron – representing $156 billion of assets under management – called upon Chevron “to fully disclose to shareholders the risks to its operations and business from the potential enforcement of the Aguinda verdict” and “reevaluate whether endless litigation in the Aguinda case is the best strategy for the Company and its shareholders…”  Separately, Trillium Asset Management formally requested the Securities and Exchange Commission “to review whether Chevron has appropriately disclosed to shareholders the scope and magnitude of the financial and operational risk” from the judgment.
  • Chevron shareholders are demanding better corporate governance. Citing management’s handling of the case in Ecuador, shareholders are questioning Chevron’s generous executive compensation packages and have proposed overhauls of the company’s corporate governance.  Despite losing the landmark $18 billion judgment in Ecuador, Chevron awarded its General Counsel R. Hewitt Pate a 75% raise in 2012 to a staggering $7.8 million salary and even went so far as to praise “his outstanding management of Ecuador” ahead of the company’s annual “say on pay” vote.    In 2010 and 2011, a significantly large percentage of Chevron’s shareholders supported a resolution calling for the appointment of a director with expertise in environmental liabilities.  In addition to re-filing this resolution, shareholders have filed two additional new resolutions for Chevron’s 2012 annual meeting calling for corporate governance reforms, one asking that Chevron separate the positions of Chief Executive Officer and Chair of the Board and the other asking that Chevron lower the thresholds for calling a special meeting of shareholders.

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Chevron Shareholders Still Wary of Risks From $11 Billion Ecuador Judgment

Chevron shareholders remain wary of the risks from an $11 billion judgment against the company in Ecuador. They also continue to be critical of Chevron management’s mishandling of the case.

At Chevron’s annual shareholder meeting in May, a significant number of Chevron shareholders expressed criticism of management. Shareholders voted 378,540,311 shares in support of a resolution that cited management’s mishandling of the case in Ecuador and called for tighter shareholder oversight.

Put simply, Chevron management lost the confidence of shareholders holding nearly one third of its shares, valued at almost $38 billion.

In a solicitation to shareholders filed at the U.S. Securities and Exchange Commission, the resolution proponent, Newground Social Investment was severely critical of Chevron management.

Proponents believe that Chevron’s management has materially mishandled legal matters brought against the company by communities in Ecuador – in ways that increased liabilities for the matter, currently amounting to $9.5 billion. Moreover, proponents are concerned about the adequacy of the company’s disclosure of those risks to shareholders. Finally, proponents are deeply troubled that the company has harassed longstanding shareholders who questioned the company’s approach to these issues….

…It is our belief that instead of negotiating an expedient, fair, and comprehensive settlement with the affected communities in Ecuador, Chevron management pursued a costly, risky, and ultimately unsuccessful legal strategy that involved material missteps. Although the Company has engaged in various legal efforts to try to negate the Ecuador judgment, the proliferation of circumstances and locations where the Ecuador judgment may be enforced increases the likelihood of a large eventual loss as a result of the case.

In the past year, Chevron’s management has suffered additional court setbacks and made strategic blunders in the case that heighten the risks to shareholders.

Chevron continues to lose legal ground to the Ecuadoran villagers as they seek to collect on their $11 billion judgement against the company.  To collect the $11 billion judgment, the Ecuadorian villagers have filed judgment enforcement actions targeting Chevron assets in Canada, Brazil, and Argentina. In September 2015, the Supreme Court of Canada unanimously ruled that the Ecuadorian plaintiffs may proceed to enforce the $11 billion judgment against Chevron’s Canadian assets. This figure represents more than 73% of the value of Chevron’s total assets in Canada. In addition, time is not on Chevron’s side.  Interest on the underlying judgment is increasing Chevron’s liability by an estimated $275 million per year.

Meanwhile Chevron’s efforts to put pressure on the Ecuadoran government may spectacularly backfire. Chevron has been awarded $96 million plus compound interest by the Permanent Court of Arbitration in the Hague due to Ecuador’s breach of its contractual obligations to Texaco. On June 6, 2016, the United States Supreme Court refused to hear Ecuador’s appeal of that ruling. What turns this good news into bad for the company is that the $96 million judgment against Ecuador is now an asset of Chevron’s in Ecuador.

The Ecuadoran courts have already awarded what remained of Chevron’s assets in the country to the plaintiffs as part of their collection on their $11 billion judgment. If the plaintiffs were to collect even a few million dollars of the $96 million judgment, they would have the money necessary to launch further collections against Chevron’s assets around the world. As Marco Simons, Legal Director of EarthRights International, noted in a prescient blog five years ago:

[T]he plaintiffs only need to win once or a few times, while Chevron needs to win everywhere.  Even if Chevron wins twenty cases, just one loss could cost the company hundreds of millions or billions of dollars.

Chevron also faces a possible overturning or rollback of its judgment against the plaintiffs and their lawyers in its RICO suit. A recent U.S. Supreme Court decision sharply curtailed the use of the RICO statute in a case against RJR Nabisco over cigarette smuggling in Europe, according to a new legal filing by Gupta/Wessler.

Deepak Gupta, who represents U.S. attorney Steven Donziger, made the submission to the United States Court of Appeals for the Second Circuit asserting that the RJR decision “further limits private RICO actions by requiring proof of a quantifiable, redressable and domestic injury – something Chevron has steadfastly refused to identify,” Gupta said. The RJR decision also made clear that the RICO statute could not be used to attack a final judgment from a foreign court, as Chevron has tried to do in the Ecuador case, Gupta added in the letter.

Chevron’s playbook in the Ecuador case of downplaying the risks to shareholders and savagely attacking its critics may well be unravelling.  As Katie Redford, Director of EarthRights International, noted in her recent blog “The New Corporate Playbook, Or What To Do When Environmentalists Stand In Your Way:”

Companies are no longer satisfied with evading their liability for human and environmental harms. Of course, they continue their tried and true tactics of denial, cover ups and fraud, but with the additional goal of silencing their critics, they are counter-attacking, mounting a sophisticated and well-funded campaign to target, sue, surveil, and harass the activists, lawyers, and NGOs that expose their harms. They have powerful allies in Congress and in the media that aid them in their efforts to intimidate, distract and sap the resources of organizations that are already out-resourced in what can only be described as David and Goliath struggles.

There is probably no other case where a company has pursued this playbook so vigorously as Chevron has done in the Ecuador oil pollution case. Chevron even subpoenaed its own shareholders who voiced their concerns.

However, shareholders have continued to voice their concerns over Chevron management’s mishandling of the Ecuador case.  The continued high vote for resolutions critical of management demonstrate that a large number of Chevron’s own shareholders lack confidence in the company’s ability to withstand the fall-out from losing the Ecuador lawsuit without significant damage to shareholder value.

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