Case 3:20-cv-02302-E Document 1 Filed 08/18/20 Page 1 of 158 PageID 1 UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS DALLAS DIVISION GAIL WALKOVER, Derivatively on Behalf of Exxon Corporation, Plaintiff, CASE NO. 3:20-cv-2302 v. JURY TRIAL DEMANDED DARREN W. WOODS, ANDREW P. SWIGER, DAVID S. ROSENTHAL, JEFFREY J. WOODBURY, STEVEN S. REINEMUND, MICHAEL J. BOSKIN, SAMUEL J. PALMISANO, KENNETH C. FRAZIER, URSULA M. BURNS, HENRIETTA H. FORE, WILLIAM C. WELDON, REX W. TILLERSON, WILLIAM W. GEORGE, LARRY R. FAULKNER, DOUGLAS R. OBERHELMAN, and PETER BRABECK-LETMATHE, Defendants VERIFIED STOCKHOLDER DERIVATIVE COMPLAINT FOR VIOLATIONS OF THE FEDERAL SECURITIES LAWS, BREACH OF FIDUCIARY DUTY, WASTE OF CORPORATE ASSETS AND UNJUST ENRICHMENT Case 3:20-cv-02302-E Document 1 Filed 08/18/20 Page 2 of 158 PageID 2 TABLE OF CONTENTS Page I. NATURE AND SUMMARY OF THE ACTION ................................................................. 1 II. JURISDICTION AND VENUE .......................................................................................... 14 III. THE PARTIES ..................................................................................................................... 15 A. Plaintiff .................................................................................................................... 15 B. Nominal Defendant .................................................................................................. 15 C. Individual Defendants .............................................................................................. 15 D. Relevant Non-Parties ............................................................................................... 22 IV. STATEMENT OF FACTS .................................................................................................. 22 A. Oil And Gas Industry Background .......................................................................... 22 B. Reporting Requirements For “Proved” Oil And Gas Reserves ............................... 25 C. CapitaliZed Oil And Gas Projects Impairments ....................................................... 27 D. Oil And Gas Pricing ................................................................................................. 28 E. Exxon’s Business Operations And Reserves ........................................................... 29 F. Crude Bitumen ......................................................................................................... 33 G. Natural Gas Expansion ............................................................................................ 37 H. Oil And Gas Prices Crashed in 2014 ....................................................................... 38 1. Exxon’s Competitors Took Massive Impairment Write-Downs ................. 40 2. Exxon Refused To Record Any Impairment Write-Downs ......................... 42 I. Exxon’s Use Of Proxy Cost Of Carbon ................................................................... 43 J. Rocky Mount Dry Gas Operations .......................................................................... 64 K. Canadian Bitumen Operations ................................................................................. 67 1. Canadian Bitumen Operations’ Average Minimum WCS Cash Breakeven Prices for 2015-2016 .................................................................................... 68 L. Exxon’s Kearl Operations ........................................................................................ 69 i Case 3:20-cv-02302-E Document 1 Filed 08/18/20 Page 3 of 158 PageID 3 M. Minimum Average WCS Price Required to Avoid De-Booking ............................ 71 N. Exxon’s $12 Billion March 2016 Debt Offering ..................................................... 72 O. In Response to Public Criticism, Exxon RecogniZes $2 Billion Impairment Charge ................................................................................................................................. 74 V. Defendants’ Misstatements And Omissions ........................................................................ 79 A. Defendants’ 2014 Misstatements And Omissions ................................................... 79 B. Defendants’ 2015 Misstatements and Omissions .................................................... 82 C. Defendants’ 2016 Misstatements And Omissions ................................................... 91 VI. Defendants’ Violations Of GAAP And SEC Accounting And Disclosure Rules .............. 115 A. Relevant GAAP And SEC Provisions ................................................................... 116 1. Materiality of Misstatements And Omissions: SEC Staff Accounting Bulletin No. 99 – Materiality ................................................................................... 116 2. ASC 360-10-35, Impairment or Disposal Of Long-Lived Assets .............. 118 3. Trigger Events ............................................................................................ 119 4. Impairment Testing And Loss Recognition ............................................... 119 5. Proved Reserve Accounting Overview: ASC 932, Extractive Industries: Oil And Gas And SEC Regulation S-X Rule 4-10 ........................................... 120 6. ASC 275 – Risks And Uncertainties .......................................................... 122 7. Certain Significant Estimates: ................................................................... 122 8. SEC Regulation S-K Item 303 – Management’s Discussion And Analysis ................................................................................................................... 123 B. Failure to Disclose The Canadian Bitumen Operations Were Operating At A Loss ............................................................................................................................... 124 C. Failure to Disclose Likelihood That The Kearl Operation Would Not Qualify As Proved Reserves At Year-End 2016 ....................................................................... 126 D. Failure to Disclose That Carbon “Proxy Cost” Was Not Used In Processes For The Canadian Bitumen Operations ............................................................................... 128 E. Failure to Incorporate A Carbon “Proxy Cost” Into Proved Reserves And Asset Impairment Calculations ........................................................................................ 129 ii Case 3:20-cv-02302-E Document 1 Filed 08/18/20 Page 4 of 158 PageID 4 F. Failure to Record An Asset Impairment Charge For Rocky Mountain Dry Gas Operations .............................................................................................................. 131 VII. DEFENDANTS BREACHED THEIR FIDUCIARY DUTIES ........................................ 134 A. Derivative Allegations ........................................................................................... 134 B. Fiduciary Duties ..................................................................................................... 135 C. Breaches of Fiduciary Duties ................................................................................. 136 VIII. The Board Acted In Bad Faith in Rejecting the Litigation Demand ................................. 137 IX. CONSPIRACY, AIDING AND ABETTING, AND CONCERTED ACTION ................ 143 X. DAMAGES TO EXXON .................................................................................................. 144 iii Case 3:20-cv-02302-E Document 1 Filed 08/18/20 Page 5 of 158 PageID 5 Plaintiff, by her attorneys, submits this Verified Shareholder Derivative Complaint for Violations of the Federal Securities Laws, Breach of Fiduciary Duty, Waste of Corporate Assets, and Unjust Enrichment. Plaintiff alleges the following on information and belief, except as to the allegations specifically pertaining to Plaintiff, which are based on personal knowledge. This complaint is also based on the investigation of Plaintiff’s counsel, which included, among other things, a review of public filings with the U.S. Securities and Exchange Commission (“SEC”), allegations contained in the complaint People of the State of New York v. Exxon Mobil Corporation, Index No. 452044/2018, Supreme Court of the State of New York, County of New York (the “NYAG Action”), and a review of news reports, press releases, and other publicly available sources. I. NATURE AND SUMMARY OF THE ACTION 1. Plaintiff brings this shareholder derivative action on behalf of Nominal Defendant Exxon Mobil Corporation (“Exxon” or the “Company”) to assert claims for breach of fiduciary duty and other violations against certain of Exxon’s current and former officers and directors. The Individual Defendants’ wrongful acts have caused hundreds of millions of dollars of damage to Exxon’s goodwill and business reputation, caused Exxon to incur millions of dollars of expenses in responding to numerous government investigations and defending numerous lawsuits, and has exposed the Company to billions of dollars of liability for violations of federal and state law. 2. As set forth in detail herein, the Individual Defendants have, for years, made material misrepresentations to the market and Exxon stockholders concerning the negative effect that climate change and anticipated climate change regulations have had and will have on Exxon’s business operations and financial performance. The Individual Defendants mislead the market and Exxon stockholders as to how Exxon accounted for the projected impact of climate