In re Exxon Mobil Corp. Securities Litigation

• Decision Date: 27 August 2007
• Docket Number: No. 05-4571.,05-4571.
• Citation: 500 F.3d 189
• Parties: In re EXXON MOBIL CORP. SECURITIES LITIGATION. Ohio Public Employees Retirement Fund, State Teachers Retirement Fund of Ohio and Antonio N. Martins, * Appellants. * Pursuant to Rule 12(a), F.R.A.P.
• Court: U.S. Court of Appeals — Third Circuit

500 F.3d 189

In re EXXON MOBIL CORP. SECURITIES LITIGATION.

Ohio Public Employees Retirement Fund, State Teachers Retirement Fund of Ohio and Antonio N. Martins, * Appellants.

* Pursuant to Rule 12(a), F.R.A.P.

No. 05-4571.

United States Court of Appeals, Third Circuit.

Argued January 8, 2007.

Filed: August 27, 2007.

[500 F.3d 190]

Daniel B. Allanoff, Esquire, Meredith, Cohen, Greenfogel & Skirnick, Philadelphia, PA, Erin K. Flory, Esquire, Steve W. Berman, Esquire, Hagen, Berman, Sobol & Shapiro, Seattle, WA, John C. Murdock, Esquire (Argued), Murdock, Goldenberg, Schneider & Groh, Cincinnati, OH, for Appellants.

James W. Quinn, Esquire, Joseph S. Allerhand, Esquire, John A. Neuwirth, Esquire, Weil, Gotshal & Manges, New York, NY, Paul F. Carvelli, Esquire, McCusker, Anselmi, Rosen, Carvelli & Walsh, Chatham, NJ, Gregory S. Coleman, Esquire (Argued), Marc S. Tabolsky, Esquire, Yetter & Warden, L.L.P., Austin, TX, for Appellees.

Before: McKEE, AMBRO, and FISHER, Circuit Judges.

OPINION OF THE COURT

AMBRO, Circuit Judge.

By most accounts, the merger between Exxon and Mobil has been quite successful. Shareholders in the new ExxonMobil have benefitted from a tremendous increase in stock price since the companies' merger in 1999. But the plaintiffs here, former shareholders of Mobil, want more. They allege that a misrepresentation by Exxon made in the course of the merger negotiations and ensuing votes caused them to receive fewer shares in the combined corporation than they otherwise were entitled. We will never know the merits of this allegation though, for we agree with the District Court that this lawsuit is not timely under the relevant statutes.

I. Allegations in the Complaint¹

Quite unlike the prevailing price of oil as we consider this case, world oil prices in the late 1990s, as measured in constant dollars, were near historic lows. At least partly in response to that market condition, Exxon Corporation and Mobil Corporation — already giants in the oil industry — announced plans on December 1, 1998, to merge into the world's largest oil company, ExxonMobil Corporation. The merger was to take the form of a stock-for-stock exchange whereby, in relevant detail, each share of Mobil stock would be exchanged for 1.32015 shares of ExxonMobil, thus giving former Mobil shareholders about 30% ownership in the new company. Shareholders of both companies voted on and approved the stock-for-stock merger on May 27, 1999, and the Federal Trade Commission blessed it some six months later. The merger took effect (i.e., shares in the old companies were exchanged for new shares in ExxonMobil) on November 30, 1999.

Prior to the companies' respective shareholder votes, on March 26, 1999, Exxon filed its required Securities and Exchange Commission (SEC) Form 10-K for the year ending the previous December 31. That filing, in turn, was incorporated by reference in the proxy statement issued by both Exxon and Mobil in anticipation of the merger votes. Plaintiffs assert that Exxon's Form 10-K— and, therefore, the proxy statement — was false or misleading. And though their eight-part, three-count, 261-paragraph complaint (canvassing, inter alia, the history of Exxon Corporation, the science and technology of oil drilling, and the "objectives, concepts, and principles" of modern accounting methods) is prolix, the basic theory of plaintiffs' case can be simply stated.²

Because oil prices in the late 1990s were so low, certain oil reserves owned by Exxon had become uneconomical to tap. That is, the cost of extracting a barrel of oil from some of its deposits exceeded the revenue that could be generated from the sale of that barrel. According to Generally Accepted Accounting Principles ("GAAP") promulgated by the Financial Accounting Standards Board ("FASB"), uneconomical assets, like some of Exxon's oil reserves, require specific accounting treatment. In March 1995, FASB issued Statement of Financial Accounting Standard No. 121 ("SFAS 121"), which generally requires that if ever a long-term asset's expected future cash flow is less than its book value, the asset should be classified as "impaired" and its fair value be recognized as a revenue loss for the accounting period in which the asset becomes impaired. Once a company characterizes an asset as impaired, it is irreversible. That is, even if an asset were to become unimpaired, the previously recognized accounting loss cannot be reversed — either in that accounting period or nunc pro tunc — until the asset is actually sold.

Exxon did not follow the impairment procedure mandated by SFAS 121. Instead, as candidly stated in its Form 10-K, Exxon's policy was to undertake "disciplined regular review" of its assets. This "aggressive asset management program," in its estimation, would provide "a very efficient capital base." Consistent with these statements, Exxon did not recognize any of its oil reserves as impaired and, therefore, did not report the accounting losses that such a recognition would have required. In contrast, every other major oil company recognized impaired assets and their resulting effect on net income during the same time-frame. The size of these writedowns on revenue at other oil companies in 1998 ranged from $78 million to $3.52 billion.

Using these figures as reference points, plaintiffs estimate that Exxon should have recognized 1998 impairments losses of between $3.37 billion and $5.37 billion. This, of course, would have reduced Exxon's net income by the same amount and, consequently, affected its share price. The resulting lower share price, in turn, would have led Mobil to demand a higher exchange rate (i.e., more shares of ExxonMobil) in its merger with Exxon. The evidence of this, plaintiffs say, is that one of the means by which the two companies decided that each share of Mobil stock would be exchanged for 1.32015 shares of Exxon stock was by consulting a "price/earnings analysis" performed by the investment banking firm Goldman Sachs. Earnings in Exxon's case would have been lower had it recognized the asset impairments. Given the size of the impairments that plaintiffs allege Exxon should have taken, Mobil shareholders would have received an additional 2.3-9% stake in ExxonMobil. This corresponds with damages to those shareholders estimated in the complaint to total between $4.6 billion and $18 billion.

None of these allegations, however, suggests that Exxon fraudulently issued its 1998 Form 10-K, which plaintiffs are required to do to make out a valid securities fraud claim. For this, plaintiffs allege other facts. First, they suggest that the timing of Exxon's decision not to recognize its impaired oil reserves is suspicious — in the midst of merger negotiations and votes (both of which would likely turn out more favorable to Exxon the higher its earnings appeared). Second, plaintiffs cite the claims of a confidential witness who held various financial analyst positions in Exxon's accounting department and first came forward in 2003. In 1995, when SFAS 121 was first issued, the witness had calculated that its effect on Exxon's financial reports would be to require at least a $700 million write-down in earnings. When the witness reported these calculations to supervisors, they purportedly responded that Exxon's Chairman and CEO Lee R. Raymond instead had decreed that SFAS 121 would have "no impact" on Exxon's financial reports. The witness, claiming that Exxon has a "military-like culture," interpreted Raymond's statement to be tantamount to "marching orders for [the] Executive Staff, i.e., they now had to justify . . . `no impact.'" Later, the witness was also told not to conduct any further impairment analyses.

Third, even if Exxon were allowed to ignore SFAS 121 and follow its own "disciplined, regular review" of its assets as part of an "aggressive asset management program," plaintiffs allege that Exxon's claim that it did not need to recognize any of its assets as impaired under its own program did not comport with its contemporaneous public statements. If Exxon had performed a bona fide analysis of any sort and determined that its oil reserves were not impaired, then it would necessarily have to expect that oil prices would rebound from their 1998 levels. As Exxon told the SEC in an investigation relating to this very issue, "the corporation does not view temporarily low oil prices as a trigger event for conducting the impairment tests." Plaintiffs, however, cite numerous public statements from Exxon officials (including congressional testimony by Raymond) that they allege indicate that Exxon in fact did not view 1998 oil prices to be temporarily low — or, at the very least, that Exxon was unsure whether prices would rebound. See, e.g., Compl. ¶ 199 (quoting Raymond's congressional testimony: "The only thing I can tell you about the price for the next two years is we don't have a clue. . . .").

Plaintiffs filed a three-count complaint in the U.S. District Court for the District of New Jersey against Exxon and Raymond for alleged violations of (1) § 14(a) of the Securities Exchange Act, 15 U.S.C. § 78n(a), and SEC Rule 14a-9 promulgated thereunder (filing a false or misleading proxy statement);³ (2) § 10(b) of the Securities Exchange Act, 15 U.S.C. § 78j(b), and SEC Rule 10b-5 promulgated thereunder (securities fraud);⁴ and (3) § 20(a) of the Securities Exchange Act, 15 U.S.C. § 78t(a) (derivative liability for Raymond).⁵ The District Court granted Exxon's motion to dismiss because it ruled that both the § 14(a) and § 10(b) claims were barred by the statute of limitations and, in any event, the § 10(b) claim was not properly pleaded. Plaintiffs appeal each of these rulings, but we need only address the timeliness issues.

II. Discussion

The Securities Exchange Act did not explicitly provide a private right of action for claims under either § 10(b) or § 14(a). As early as 1946, though, courts had begun to recognize implied...