We recently wrote about a Complaint (the Complaint) brought by the State of New York against ExxonMobil Corporation relating to alleged climate change disclosure securities fraud. In December 2019, the Supreme Court of the State of New York dismissed the State of New York’s allegations (People of the State of New York v. Exxon Mobil Corporation, 452044/2018). This post briefly discusses the dismissal and its implications.
In 2013, ExxonMobil received various inquiries and shareholder proposals requesting more information about how it factored climate change risks and regulations into its business decisions. In exchange for the withdrawal of two shareholder proposals, ExxonMobil agreed to publish two reports with additional information about the manner in which ExxonMobil handles regulatory changes with respect to emissions of greenhouse gases.
The reports were published in 2014. The State of New York alleged that, through the reports and other statements, ExxonMobil made various material written and oral misrepresentations and omissions that tended to mislead the public about ExxonMobil’s plans with respect to the risks of climate change regulation. The key allegation was that ExxonMobil engaged in a “longstanding fraudulent scheme” that was “sanctioned at the highest levels of the company”, “effect[ively] erect[ing] a Potemkin village to create the illusion that it had fully considered the risks of climate change regulation and had factored those risks into its business operations”.
The Court dismissed the Complaint on December 10, 2019, holding that the State of New York had failed to prove by a preponderance of evidence that ExxonMobil made any material misrepresentations about how it managed the financial risks of climate change and related regulatory developments.
In particular, the Court:
- Rejected the State of New York’s contention that reasonable investors would attach material significance to the fact that ExxonMobil internally determines when it is appropriate to apply the cost of greenhouse gas emissions with respect to specific projects;
- Found that there was no allegation and no proof that anything ExxonMobil was alleged to have done or failed to do affected ExxonMobil’s balance sheet, income statement or any other financial disclosure;
- Found that the State of New York’s case was largely premised on projections of proxy costs and greenhouse gas emissions costs in 2030 and 2040, and “[n]o reasonable investor during the period from 2013 to 2016 would make investment decisions based on speculative assumptions of costs that may be incurred 20+ or 30+ years in the future with respect to unidentified future projects”; and
- Held that ExxonMobil’s disclosures with respect to climate change regulation were not intended to enable investors to conduct meaningful economic analyses of ExxonMobil’s internal planning assumptions, and no reasonable investor would have viewed “speculative assumptions about hypothetical regulatory costs projected decades into the future as significantly altering the total mix of information” made available to the public.
Market participants can expect to face a range of proceedings relating to their approach to climate change and environmental regulation styled as securities claims. The dismissal in New York v. Exxon Mobil suggests that courts will apply existing securities law analyses to such claims. As the Court noted, “this is a securities fraud case, not a climate change case”.
The case also reinforces the importance of material climate change-related risk disclosure. As we recently wrote, the Canadian Securities Administrators (CSA) has released a Staff Notice on such disclosure and identified specific issues and questions corporations should consider when preparing the risk sections in their MD&As and AIFs.
The author would like to thank Samantha Black, articling student, for her contributions to this article.