Fracking After the Boom
June 29, 2013 4:20 AM   Subscribe

Chesapeake, the largest natural gas producer in Pennsylvania, is losing money. The current low price of gas will leave the company around $4 Billion in the red this year. Part of their response is to use a recent state Supreme Court ruling to justify charging landowners for the drilling and transportation expenses involved in extraction, reducing or eliminating all royalties. What was once a windfall to Pennsylvania communities is now becoming a burden, with Chesapeake now retroactively billing landowners for previous expenses. StateImpact Pennsylvania has written and recorded a thorough report on the issue.
posted by Toekneesan (79 comments total) 19 users marked this as a favorite

 
Christ, what assholes.
posted by Thorzdad at 4:24 AM on June 29, 2013 [7 favorites]


This is why a good contract lawyer is worth considerably more than their weight in gold.
posted by jaduncan at 4:43 AM on June 29, 2013 [6 favorites]


This is why a good contract lawyer is worth considerably more than their weight in gold.

Especially for the Amish:
Accordingly, extraction companies are buying up the rights to drill on private property with unprecedented speed. At stake are geysers of money. And in the thousands of cases in which the landowner is of the Amish faith, their business partner would never dream of taking them to court should things go awry. This, obviously, has enticed some companies to take advantage of Amish farmers—who are finally figuring out how to fight back.
WITF's StateImpact Pennsylvania project (link to archives) has been doing yeoman's work in covering fracking-related issues. Thanks, Toekneesan.
posted by MonkeyToes at 4:52 AM on June 29, 2013 [4 favorites]


So I asked myself "How long are these gas leases for, anyway? Could the landowners just revoke the lease?", did some searching, and found:
How lease agreements work

The basic lease agreement involves an initial bonus payment for signing the lease, royalty percentages to be paid if natural gas minerals are found and extracted from the property and a time frame within which the operator must begin operations. If natural gas production does occur, the lease is in effect for the life of the well, which could be 20 years or more.
What a great business arrangement for the corporations -- locking down a 20-years-to-life contract at terms that are agreeable enough during good times, and during the down times they have the legal resources to change how definitions are used to determine payments.
posted by ceribus peribus at 4:55 AM on June 29, 2013 [2 favorites]


This is why a good contract lawyer is worth considerably more than their weight in gold.

True. But when you have a lot of people with fairly small contracts, many of those people will not be able to afford a good lawyer. Obviously, they could band together in associations for greater strength, but this could also be handled by greater regulation, allowing the land owners to take advantaged of an association to which they already belong.
posted by GenjiandProust at 4:56 AM on June 29, 2013 [1 favorite]


Oh no, the landowners took a percentage of net (according to the court, anyway). Never do that, not with a film producer and definitely not with a gas fracking corporation.
posted by A Thousand Baited Hooks at 4:57 AM on June 29, 2013 [14 favorites]


True. But when you have a lot of people with fairly small contracts, many of those people will not be able to afford a good lawyer. Obviously, they could band together in associations for greater strength, but this could also be handled by greater regulation, allowing the land owners to take advantaged of an association to which they already belong.

Oh, for sure. I think this is a situation where statutory requirements for the contract terms would have made sense.
posted by jaduncan at 5:05 AM on June 29, 2013 [1 favorite]


It's not going to be handled by any regulation under the current Tea Party administration in Harrisburg.

One of the most interesting parts of the story for me is watching local Republicans react to the impact of their laissez faire approach:

County Commissioner Daryl Miller has been hearing a lot about it from his constituents.

“We’re getting phone calls. Our office is getting emails,” he says. “We’re getting approached personally on the street –in the post offices, convenience stores. Everywhere we go.”

Miller stresses he’s an “unapologetic” supporter of the gas industry. The Republican won’t single out a particular company, but agrees most don’t take out large deductions.

As a conservative, he’s a little uneasy about advocating for more government oversight. But he feels it’s needed.

“I think there needs to be light shed on what is taking place. What can we do to better look for out for the landowners in our communities?”

His fellow Republican commissioner Doug McLinko agrees.

“They’re going to be here for a long time,” says McLinko. “What’s with the greed? It’s incredible really.”

posted by Toekneesan at 5:05 AM on June 29, 2013 [15 favorites]


"What's with the greed?" could be asked about any corporation or wealthy individual anywhere. I have never understood it. Isn't being fatter than everyone else enough? Must you eat ALL the food?
posted by umberto at 5:20 AM on June 29, 2013 [14 favorites]


"What's with the greed?" could be asked about any corporation or wealthy individual anywhere.

The MetaFilter Brush, it is, indeed, very wide.
posted by HuronBob at 5:23 AM on June 29, 2013 [7 favorites]


Must you eat ALL the food?

Companies essentially have a legal duty to eat as much as possible at all times.
posted by jaduncan at 5:27 AM on June 29, 2013 [10 favorites]


Companies essentially have a legal duty to eat as much as possible at all times.



Ohh... And then when they have a massive, obesity induced heart attack they stick everyone else with the medical bill?
posted by cacofonie at 5:43 AM on June 29, 2013 [20 favorites]


Oh no, the landowners took a percentage of net (according to the court, anyway). Never do that, not with a film producer and definitely not with a gas fracking corporation.

As Freakazoid pointed out 15 years ago: "Always ask for a piece of the gross. The net is fantasy."

Freakazoid: Educational TV.
posted by Pope Guilty at 5:45 AM on June 29, 2013 [26 favorites]


Ohh... And then when they have a massive, obesity induced heart attack they stick everyone else with the medical bill?

Also see: Lehman Brothers.
posted by jaduncan at 5:48 AM on June 29, 2013 [1 favorite]


In a unanimous decision in Kilmer v. Elexco Land Services Inc., the court held that since the word royalty crook was not defined in the law, the industry could rely on its own interpretation, which allowed for subtracting the costs of moving the gas to market.
posted by Benny Andajetz at 5:54 AM on June 29, 2013 [1 favorite]


Really???

So the court decides that the parties have contracts where one of the terms is not defined. And, instead of mutually redefining the term or negating the contract, the solution is to let one side define it however they see fit?
posted by Benny Andajetz at 5:59 AM on June 29, 2013 [10 favorites]


From reading the opinion it looks more as if the question is of statutory interpretation, not contract interpretation. So it's not so much that the parties didn't define a term in a contract and one party gets to unilaterally impose its preferred term on the other, as it is that the parties disagree about how a particular statute applies to their arrangement. So this was a situation where the court had to figure out what definition to give a term in the applicable statute that the legislature didn't define.
posted by MoonOrb at 6:13 AM on June 29, 2013 [2 favorites]


the gas glut is the background for Obama's pivot towards the environment. the way the US is going to achieve those CO2 goals is by taking coal-powered electricity generating plants off-line and replacing their output with that from gas-powered plants and no one feels the change because the price of gas is so cheap.

Of course, when the supply and demand in the gas market equalizes and the price of gas starts to jump, the power companies aren't going to be bringing those coal-plants back on-line, because they were ancient to begin with and because the EPA will make it prohibitively expensive. So, you are going to be paying these folks royalty checks every month in your electricity bill.

Those little PA landowners thought they were going to get something for nothing when they let the gas companies onto their land... turns out they might get nothing for nothing. But, either way, you are going to be left holding the bill.
posted by ennui.bz at 6:15 AM on June 29, 2013 [3 favorites]


can I just say is that the way that Guv Tom Corbett has allowed the frackers to fuck over the people and natural beauty of this state has earned him the dubious distinction of Asshole of the Year? Now, I am sure you are saying to yourself, 'nah there are worse assholes what about Assad and Guv Rick Perry' and I will concede your point and say Guv Tom Corbett is the biggest asshole in the NE U.S. I mean, you could drive an aircraft carrier through the assholery of this Asshole.
posted by angrycat at 6:16 AM on June 29, 2013 [8 favorites]


When she and her husband retired here from Philadelphia five years ago, they didn’t realize the property had a gas lease. They also didn’t know there was a gas well on the other side of their hill, nor did they notice when it was drilled and fracked.

But Foelster says she did begin to notice when the royalty checks started coming in from Chesapeake. There was something missing.


That doesn't make sense. That they didn't know there was a gas lease on the property doesn't make sense at all, and then it jumps from there directly to her noticing something missing from royalty checks for something that she apparently didn't know was even there.

So the court decides that the parties have contracts where one of the terms is not defined. And, instead of mutually redefining the term or negating the contract, the solution is to let one side define it however they see fit?

No. The term 'royalties' was defined in some contracts to be post-deductions for certain costs, the statute would mean that any contract with royalties less than 12.5% is invalid but since the law (but not the contracts) doesn't define royalties to exclude any deductions it doesn't apply.
posted by atrazine at 6:34 AM on June 29, 2013 [1 favorite]


Angrycat is angry. But I can't disagree. Corbett sat on the Sandusky case for three years when he was AG. He has put out a welcome mat for frackers, not just on private land but on public land too. The Marcellus Shale Law he signed last year made it easier to build permanent infrastructure in parks and protected places, and it even went so far as to only allow the list of chemicals used in fracking to be made available to doctors in the case of an absolute emergency. It goes on to forbid the doctor from discussing any of them with the patient. At first the citizens of the commonwealth seemed persuaded this was all great, as wealth flowed into their communities, but if that's coming to an end, I expect community support to quickly evaporate. Hopefully with repercussions that will go all the way to Harrisburg.
posted by Toekneesan at 6:35 AM on June 29, 2013 [10 favorites]


Atrazine, at their age, it seems entirely possible that they are not responsible for their own finances and maybe their kids are. They know about it now possibly because they feel the pinch.
posted by Toekneesan at 6:41 AM on June 29, 2013 [2 favorites]


The Fun With Fracking never ends does it?
posted by Katjusa Roquette at 6:51 AM on June 29, 2013 [1 favorite]


That doesn't make sense. That they didn't know there was a gas lease on the property doesn't make sense at all, and then it jumps from there directly to her noticing something missing from royalty checks for something that she apparently didn't know was even there.

It's because the article wants you to be sympathetic to them. But they are just rentiers, at the bottom of a long chain of rentiers.
posted by ennui.bz at 6:55 AM on June 29, 2013


This is both anecdotal and a bit of a trailing indicator, but based on what I've heard, Chesapeake's still losing employees. As I understand, this has nothing to do with any lawsuits, internal concerns about fracking, or even residual loyalty to Aubrey McClendon - it's about the price of natural gas, and how long Chesapeake can stay afloat while the price is low. Not everyone's betting on a nationwide power plant switchover.

Then again, this doesn't help the PA residents at all. If Chesapeake falls, wouldn't the contracts be sold without the terms changing?

Also anecdotally : it's much less annoying to head to the local watering hole since Chesapeake started having problems. Back in '08, it was full of crazy braggarts screaming I'M BUYING THE BAR SHOTS! I WORK FOR CHESAPEAKE! AVE, MCCLENDON, BIBITURI TE SALUTANT! Now? Not so much.
posted by suckerpunch at 7:14 AM on June 29, 2013 [2 favorites]


Poisoned aquifers? Check.
3% of the methane leaking directly into the atmosphere? Check.
Charging people for the privilege of having their water and air poisoned? Check.

Man. Fuck natural gas.
posted by Sys Rq at 7:31 AM on June 29, 2013 [8 favorites]


I am a CPA and have worked with small producer oil and gas exploration and production companies for about 13 years. I can't comment on potential accounting fraud committed by Chesapeake. However, the definition of a royalty interest per my copy of the "Oil and Gas Law" by Thomson & West supports the lease:

"a royalty is a share of production free of the costs of production. A royalty is paid even if producing is a money-losing venture, and a royalty interest pays no production costs."

There is difference between production and marketing costs. In a nutshell, production costs include those expenditures that get the oil and gas to the surface. Marketing costs include those costs from the wellhead to the market. Royalties are also subject to severance taxes.

In my experience, I don't remember ever seeing marketing costs plus severance taxes exceeding gross revenue. Working interest owners pick up the drilling and production costs plus their share of marketing and severance taxes.

The Foelsters may not be receiving a check, but they aren't writing checks for production costs either, which the working interest owners are.
posted by Mojojojo at 7:33 AM on June 29, 2013 [7 favorites]


Chesapeake isn't well liked in the industry itself. A lot of the majors were left smarting when they got in ahead and snapped up a bunch of licences ahead of the curve, meaning the majors had to settle for crumbs. Chesapeake is selling at bargain basement rates because they're getting revenge and refuse to buy. Expect gas prices to rise in a couple of years as the market stabilises. Royalties should rise again then. What they're doing to lease owners is not good practice and gives an industry with PR issues yet one more reason to be hated.
posted by arcticseal at 7:42 AM on June 29, 2013 [7 favorites]


Speaking of fracking, Gasland 2 premieres July 8 on HBO.
posted by hippybear at 7:49 AM on June 29, 2013 [4 favorites]


"What's with the greed?" could be asked about any corporation or wealthy individual anywhere. I have never understood it. Isn't being fatter than everyone else enough? Must you eat ALL the food?

"I am an evil herbivore. I will eat all the leaves on this tree. Other giraffes... may starve."
posted by Foosnark at 7:57 AM on June 29, 2013 [3 favorites]


Yes, as through this world I've wandered
I've seen lots of funny men;
Some will rob you with a six-gun,
And some with a fountain pen.

Woody Guthrie, Pretty Boy Floyd.
posted by bukvich at 8:03 AM on June 29, 2013 [9 favorites]


Companies essentially have a legal duty to eat as much as possible at all times.

This dumb comment is always dragged out in any discussion of corporate behavior. It is not true. There is no such legal obligation.
posted by JackFlash at 8:16 AM on June 29, 2013 [11 favorites]


The yellow on Pittsburgh sports teams represents the banana republic nature of the state.

What's impressive to me is that even with the fracking boom, PA is next to last in the country in job creation. Between this and stuff like selling the state lottery to the British, even my tea-party-ish relatives are done with Corbett.
posted by dirigibleman at 8:35 AM on June 29, 2013 [5 favorites]


Camelot have a track record of dodgy deals with the UK lottery, avoid.
posted by arcticseal at 8:42 AM on June 29, 2013


Protip: if a corporation is signing an agreement with you, you are definitely losing out on the deal.
posted by odinsdream at 9:08 AM on June 29, 2013 [2 favorites]


The yellow on Pittsburgh sports teams represents the banana republic nature of the state.

Hey, that's not really fair. Pittsburgh's a little liberal bubble out here in a vast sea of conservative nutballs like Corbett and Metcalfe.
posted by octothorpe at 9:15 AM on June 29, 2013 [1 favorite]


I have few words. Corporations must be stopped. For the sake of the Republic.
posted by IvoShandor at 9:18 AM on June 29, 2013


privatized profit, socialized risk. Ugh.
posted by annsunny at 9:36 AM on June 29, 2013 [6 favorites]


Oh no, the 5th generation descendents of 19th century farmers with huge idle land-holdings didn't read the contracts they signed, and might not get the windfall profits they expected? Wow. To have that problem! (Hint - I read contracts before I sign them, much to the annoyance of many a cell phone sales clerk and just about everyone involved at the closing of my home; and if it involves more than a few grand, I have my lawyer read them too).

Or...

odinsdream : Protip: if a corporation is signing an agreement with you, you are definitely losing out on the deal.

This.

Though in fairness, you and I most likely don't have the ability to make use of natural gas deposits locked in shale 8000ft below the ground. So pretty much any offer to get it out and give us a cut amounts to a good deal, as long as we make sure to protect our own interests first and foremost.


JackFlash : This dumb comment is always dragged out in any discussion of corporate behavior. It is not true. There is no such legal obligation.

They have an explicit duty to maximize shareholder value. Executive boards regularly find themselves on the wrong end of a shareholder lawsuit (though more often than not, the equivalent of a securities "ambulance chaser" class action) for making any decision other than the one that will maximize profits.


Sys Rq : Poisoned aquifers? Check.

This is a disposal problem, not a fracking problem.

Aquifers sit practically just below the surface, compared to where the gas comes from. Realistically, the fracking fluid doesn't "leak" from the well into aquifers thousands of feet higher - It escapes from wherever the drilling companies dispose of it once 90% of what goes down squirts back up the pipe.

The solution to this doesn't involve giving up the cheapest, cleanest source of nonrenewable energy we have available to us today. We simply need better controls over how the assholes doing the actual drilling dispose of their waste. Yes, that will reduce their profit, and make the gas cost a bit more. But yes, both drilling and safe drinking water can coexist.
posted by pla at 9:37 AM on June 29, 2013 [9 favorites]


This dumb comment is always dragged out in any discussion of corporate behavior. It is not true. There is no such legal obligation.

Cases that disagree with you:

Dodge v. Ford Motor Co. 170 N.W. 668 (Mich. 1919)
"A business corporation is organized and carried on primarily for the profit of the stockholders. The powers of the directors are to be employed for that end. The discretion of directors is to be exercised in the choice of means to attain that end, and does not extend to a change in the end itself, to the reduction of profits, or to the nondistribution of profits among stockholders in order to devote them to other purposes. [...] it is not within the lawful powers of a board of directors to shape and conduct the affairs of a corporation for the merely incidental benefit of shareholders and for the primary purpose of benefiting others."
Katz v. Oak Indus., Inc., 508 A.2d 873, 879 (Del. Ch. 1986)
(since, you know, Delaware law may have quite the impact these days)
"It is the obligation of directors to attempt, within the law, to maximize the long-run interests of the corporation's stockholders; that they may sometimes do so “at the expense” of others (even assuming that a transaction which one may refuse to enter into can meaningfully be said to be at his expense) does not for that reason constitute a breach of duty. It seems likely that corporate restructurings designed to maximize shareholder values may in some instances have the effect of requiring bondholders to bear greater risk of loss and thus in effect transfer economic value from bondholders to stockholders. But if courts are to provide protection against such enhanced risk, they will require either legislative direction to do so or the negotiation of indenture provisions designed to afford such protection."
It is clear here that the benefit of the stockholders is primary.

Long v. Norwood Hills Corporation, 380 SW 2d 451 (1964):
Plaintiff cites many authorities to show that the ultimate object of every ordinary trading corporation is the pecuniary gain of its stockholders and that it is for this purpose the capital has been advanced. In support of this rule plaintiff cites In re First National Safe Deposit Company, 351 Mo. 423, 173 S.W.2d 403; Ashton v. Penfield, 233 Mo. 391, 135 S.W. 938; Dodge v. Ford Motor Co., 204 Mich. 459, 170 N.W. 668, 3 A.L.R. 413; Miner v. Belle Isle Ice Co., 93 Mich. 97, 53 N.W. 218, 17 L.R.A. 412, and other authorities. All of these cases involve either banking, commercial or manufacturing corporations and in most of them alleged misappropriation of the assets of the corporation or misconduct of the majority stockholders or boards of directors have been alleged. Neither defendant nor this court has any quarrel with plaintiff insofar as these authorities and the rules announced therein are concerned. We find little help from these cases in determining what profit or gain, if any, should be achieved in the management of a private country club by the majority stockholders and the defendant's board of directors. In further support of his first point plaintiff cites many cases, wherein it has been held that the majority stockholders of the defendant are trustees for plaintiff and other minority stockholders and as such are obliged to exert an honest, conscientious effort to achieve pecuniary gain for all its stockholders. No useful purpose would be served in citing these cases and analyzing their holdings. We have studied them and analyzed them and, here again, we have no quarrel with plaintiff insofar as the rules of law stated therein govern the actions of majority stockholders and the boards of directors of corporations.
A. P. Smith Manufacturing Co. v. Barlow is often cited against this, as it states that:

"modern conditions require that corporations acknowledge and discharge social as well as private responsibilities as members of the communities within which they operate", but it should be noted that even in Barlow the court states that it is a matter of possible long term interest to the shareholders to make charitable donations.

Another commonly cited case is Shlensky v. Wrigley, 237 N.E.2d 776, 780 (Ill. App. Ct. 1968), but here the question of if the Wrigley lights should be turned on for night games was again not held to be merely a matter of immediate profit but the long term interest of the business. Since debate on this existed, the business judgment rule applied. This case is unsurprisingly pretty much the high mark of the business judgment rule, since it would allow almost everything to be exempt from judicial review.

The opposite argument can be read in depth in Elhage's excellent piece in the NYU Law Review, but it's notable that even Elhage does not claim that the primary duty of the corporation isn't profit maximisation but instead argues that there is not an affirmative duty to other stakeholders and some freedom to operate in their favour. This is the strong form of the counterargument, too.

Elhage's stance goes against Bainbridge in Corporation Law and Economics, Clark in Corporate Law, Dooley in Fundamentals of Corporation Law, and the ABA Committee on Corporate Laws.

If you think this is a dumb argument, you will be arguing against several of the major writers in US corporate law and the cases listed above. Please explain your grounds for disagreeing with them, and why you think that the above is a dumb argument.
posted by jaduncan at 9:45 AM on June 29, 2013 [13 favorites]


pla:

The question of leakage from the wells are a side issue, although they are a real thing. By their very nature, when the well is drilled, the drill goes down through the aquifer, through whatever other toxic materials are in the ground below the aquifer, and then back up through it, leaving deposits of previously buried materials.

Also, methane itself that is no longer trapped under the shale rock travels upward through the dirt. That's a natural consequence of fracking. And when you factor in escaped methane (it's around 8%), which is a really nasty greenhouse gas, fracked natural gas is actually worse for climate change purposes than burning coal.
posted by graymouser at 9:51 AM on June 29, 2013 [7 favorites]


They have an explicit duty to maximize shareholder value.

This is an oft believed myth. It's not true. It's just a management trend that started in the 80's, with basically no legal basis.
It is widely believed that corporate law forced Ben & Jerry’s directors to accept Unilever’s rich offer and sell the company. This perception reflects the erroneous view that corporate directors must always act to maximize shareholder value. The best and arguably only support for this view is from Dodge v. Ford, a 1919 decision from the Michigan Supreme Court. That court opined that a “business corporation is organized and carried on primarily for the profit of the stockholders.”

Dodge v. Ford is an anomaly, as other courts have not followed its view of shareholder primacy. In the blunt words of respected Cornell Law School corporate law professor Lynn Stout, “shareholder wealth maximization is not a modern legal principle.”14 Other state courts have recognized this, including New Jersey’s Supreme Court, which stated that “modern conditions require that corporations acknowledge and discharge social as well as private responsibilities as members of the community within which they operate.”

Most state legislatures have resisted the tenets of Dodge v. Ford by enacting statutes that expressly authorize corporate directors to look beyond shareholder wealth maximization. Vermont enacted one, nicknamed “the Ben & Jerry’s law,” after the company had successfully lobbied Vermont’s legislature. Vermont’s “other constituency” statute, as these laws are called, is illustrative: It provides that when directors make decisions they may consider such matters as “the interests of the corporation’s employees, suppliers, creditors, and customers; the economy of the state, region, and nation; [and] community and societal considerations, including those of any community in which any offices or facilities of the corporation are located.” State statutes also give corporations wide latitude to donate profits to charities.

In practice, courts are deferential to board decision making. Under a doctrine called the business judgment rule, unless the directors have a conflict of interest, nearly all board business decisions are beyond judicial review. If there is a potential benefit to shareholders, the courts will not interfere.
It's been repeatedly shown that this practise, of always focusing on maximising short term share price, i.e. taking actions to please the market, is less profitable for the business and current shareholders than taking a longer view towards company profitability including taking account of externalities that affect the customer base, research and development, retaining skilled staff etc etc.

'Shareholder value' is a myopic, stupid thing to care about that has no legal basis and is merely an excuse for sociopathic and destructive actions by management, and the sooner we convince companies that it's doing them directly more harm than good, let alone the damage it's doing to our culture, politics and environment, the better we'll all be.
posted by ArkhanJG at 10:00 AM on June 29, 2013 [16 favorites]


But yes, both drilling and safe drinking water can coexist.

Well, the entire history of petroleum extraction kinda argues against that. If the true costs were factored in, maybe. But then nobody could afford the finished product.
posted by Benny Andajetz at 10:02 AM on June 29, 2013 [3 favorites]


In practice, courts are deferential to board decision making. Under a doctrine called the business judgment rule, unless the directors have a conflict of interest, nearly all board business decisions are beyond judicial review. If there is a potential benefit to shareholders, the courts will not interfere.

As I said, it's a matter of maximising long run value and the business judgment rule. If you make the claim that it is against the interests of the shareholders to do something but you will do so anyway, it is unlikely that the resulting civil claims will go well for you.

I've also cited you a recent Delaware case, so I'm not entirely sure why the author claims that the only precedent is Dodge v. Ford Motor Co. The two pieces you have linked are quite slanted, and far inferior in quality to the counterargument by Elhage that I've already linked to.
posted by jaduncan at 10:08 AM on June 29, 2013 [2 favorites]


Missed your comment on preview Jaduncan -

"It is the obligation of directors to attempt, within the law, to maximize the long-run interests of the corporation's stockholders

and as such are obliged to exert an honest, conscientious effort to achieve pecuniary gain for all its stockholders.

This is as long, long way from 'shareholder value', which is purely about maximising current stock price, specifically so that investors will get the maximum return from their investment, by selling shares, in the short term compared to alternatives.

Of course directors have to run the business properly, on behalf of their owners the shareholders. They have to have an eye towards profitability, as well as long-term sustainability. Any board that deliberately damages the company with no visible possible advantage to shareholders is at risk of being deposed. But they are NOT required to take short term decisions that directly harm the world around them and their own business chasing the current stock price maximisation. If anything, your points argue the exact opposite of what you think they do.
posted by ArkhanJG at 10:08 AM on June 29, 2013


pla: "The solution to this doesn't involve giving up the cheapest, cleanest source of nonrenewable energy we have available to us today."

Final score:
    1 pla
    0 Straw Man
graymouser: "By their very nature, when the well is drilled, the drill goes down through the aquifer, through whatever other toxic materials are in the ground below the aquifer, and then back up through it, leaving deposits of previously buried materials."

Also: concrete well casings have failed before, and will fail in the future. We do need stronger regulation of things on the waste water disposal end, but we also need stronger regulation of the well construction process, frequent mandatory inspections, and compulsory sharing of well safety data.
posted by tonycpsu at 10:09 AM on June 29, 2013 [3 favorites]


This is as long, long way from 'shareholder value', which is purely about maximising current stock price, specifically so that investors will get the maximum return from their investment, by selling shares, in the short term compared to alternatives.

Yes, I think we're agreeing with each other. You'll note that I've highlighted long run value and explicitly gone into how the business judgment test requires a debatable long-run value increase rather than short term value increase in the initial comment and directly mentioned the Wrigley case where this was made clear.

("Another commonly cited case is Shlensky v. Wrigley, 237 N.E.2d 776, 780 (Ill. App. Ct. 1968), but here the question of if the Wrigley lights should be turned on for night games was again not held to be merely a matter of immediate profit but the long term interest of the business. Since debate on this existed, the business judgment rule applied. This case is unsurprisingly pretty much the high mark of the business judgment rule, since it would allow almost everything to be exempt from judicial review.")

This would be in agreement with the claim that Ben and Jerry were not required to sell, if they thought that the longer term interests of the stockholders would have been benefited by not doing so.

I agree that short-run focus isn't required under the business judgment test. It's likely to be required by the shareholders, and it's their right to dump the board.
posted by jaduncan at 10:13 AM on June 29, 2013


Yeah, tonycpsu, when I've talked with folks from Protecting Our Waters (who I support and who do great work, both informational and activist, around this issue) about it in the past, they basically have zero faith in well casings. It's not like concrete going miles into the ground is going to be airtight and water-tight at any point in the process.
posted by graymouser at 10:15 AM on June 29, 2013


Please explain your grounds for disagreeing with them, and why you think that the above is a dumb argument.

Well I'm not going to say it's dumb! But I do have a subtle but important disagreement, on these grounds:

The above cited cases establish that corporations must prioritise the long term pecuniary interests of their shareholders. This very different from the more general statement that they should hold the pecuniary interests of stockholders paramount.

The original statement that we're arguing about is that corporations have an obligation to 'eat as much as they can'. Now, obviously, this could mean that they have an obligation to make as much money as possible, but I think that most people think of it as having an obligation to make as much money as possible in the short term: to lie, cheat, steal and scam their way to short term profits for their stockholders. But short term pecuniary interest is very different from long term interest.

There are many examples of things that boost short term revenue at the expense of long term revenue. There are even things that hurt short and long term revenue, but boost short term stock price. According to a widely-held folk theory of how the law works, companies have no choice but to go for the short term solution, but as Katz v. Oak Indus., Inc., the law generally holds that 'long-run' interests are paramount.

I would argue that US law thus tends towards a legal fiction that stock holders are essentially the eternal owners of the company, and that the transfer of ownership in stock is a much less important consideration. Thus the board must maximise good business sense (including honest dealing and building good relationships with partners) at the expense of things that would boost momentary stock price or dividends.

I would further argue that the law more-or-less has to work this way, as the alternative would be a legal nonsense. Imagine if short term dividend outlays were the goal: every time a new CEO came on board, they would be legally obligated to sell off all the corporation's assets and give piles of money to stock holders. Or it might be possible to sue them for signing mutually advantageous deals with business partners or for investing in infrastructure that will only pay off in future months or years.

The law recognises that the pecuniary interests of stock holders are often served by stability, public utility and social responsibility.
posted by Dreadnought at 10:17 AM on June 29, 2013 [3 favorites]


The original statement that we're arguing about is that corporations have an obligation to 'eat as much as they can'. Now, obviously, this could mean that they have an obligation to make as much money as possible, but I think that most people think of it as having an obligation to make as much money as possible in the short term: to lie, cheat, steal and scam their way to short term profits for their stockholders. But short term pecuniary interest is very different from long term interest.

Sure. But those people are wrong.
posted by jaduncan at 10:19 AM on June 29, 2013 [1 favorite]


Yes, we've rather overlapped comments a bit, and I think we're agreeing by argument! My specific beef is that 'shareholder value' has become the dominant toxic trend in corporate management - i.e. increasing market cap at all costs - when there's no real basis for companies to have to do so, and if anything are arguably required to take the longer term view towards profitability, which has plenty of room for ethical behaviour towards their staff and surrounding environment they operate in.
posted by ArkhanJG at 10:19 AM on June 29, 2013


I think the argument that you're making is more that the shareholder value argument has become misinterpreted as short term, when the caselaw suggests that the pecuniary value must be a long term focus. This makes sense, or Amazon's years of losses would be a breach of pecuniary duty given that they could have focussed on short term profit rather than long-term planning.

To be clear, my claim is that shareholder value increase is indeed the requirement, but that shareholders have made the claim that this is a focus on making quarterly targets. They are entitled to choose a board to do this, but that isn't the legal requirement. As such, a claim that short term rather than long term value increase is wrong, since it's perfectly possible to have a company such as Amazon (or Google, come to that) that focuses on strategic positioning and long term value over short term profits as a matter of business judgment that is exempt from judicial review.

If people wish to make the argument that maximising shareholder value increase is not required in a for-profit (absent special company articles), they are wrong. It is however equally wrong to argue that this means a focus on the next quarter/year/decade, and the claim that it is isn't supported in the law.
posted by jaduncan at 10:27 AM on June 29, 2013


Put a different way: the reason that disagreement exists is because of the conflation of the words "shareholder value" with "short-run shareholder value" when people are making the argument.
posted by jaduncan at 10:30 AM on June 29, 2013


So we all agree. How nice.

But let me extend the argument in the following speculative direction: where short- and long-term stock holder interest are in conflict, might it be possible for the law to hold that a corporate board is obliged to act against the interests of their current stock holders and in favour of stock holders from The Future, who don't yet exist?
posted by Dreadnought at 10:30 AM on June 29, 2013


might it be possible for the law to hold that a corporate board is obliged to act against the interests of their current stock holders and in favour of stock holders from The Future, who don't yet exist?

Not absent a change in the law, because a) it's a matter of business judgment and b) nobody has standing.

If we were in The Future at the time of the action, and the actions had already been taken but were incompetent/illegal and impacted the current value, you'd have a case for damages since you'd be in the class damaged. Think Enron or Worldcom, for example.
posted by jaduncan at 10:34 AM on June 29, 2013 [1 favorite]


Yet more simple-minded BS. There is no legally binding obligation "to maximize shareholder value". I won't get into the basic contradiction in the term by pointing out that there is no way of defining shareholder value. Which shareholders? Short term and long term shareholders can have conflicting requirements of maximizing value, let alone taxable and non-taxable shareholders, diversified vs undiversified investors, risk tolerant or risk averse. So there is no legal basis for maximizing shareholder value because there is no way to define it.

The shareholder value myth, and it is just a myth, only became paramount in the 1970s with people like Milton Friedman and other neoliberals. Maximizing shareholder value is simply a philosophical management choice, not a legal obligation. The only legal obligations for management are "duty of care" and "duty of loyalty." There is not a duty of value maximization.

Duty of care means that the managers must make informed business decisions, based on relevant data or consulting specialists like lawyers and tax accountants. Making careless decisions without due diligence would be a violation of the duty of care.

Duty of loyalty means making decisions based on benefit to the company rather than self-serving. For example, failure to present a buyout offer to the shareholders because the managers will lose their jobs could be a violation of loyalty. Choosing to lease property that the managers personally owned might be consider self-serving.

Shareholders can choose to remove a manager whose management philosophy differs from their own, but that is merely a disagreement over style, not law. For example, one manager could choose to keep a money losing factory in operation in the best interests of all stakeholders, including customers, employees and shareholders. Another may decide that best interests are shutting down the factory. Neither is a violation of the law.

The doctrine of "maximizing shareholder value" is a philosophical invention, not a legal requirement. Yet the myth is constantly repeated.
posted by JackFlash at 10:36 AM on June 29, 2013 [4 favorites]


Put a different way: the reason that disagreement exists is because of the conflation of the words "shareholder value" with "short-run shareholder value" when people are making the argument.

Yes, I think that's basically it. I would note that 'shareholder value' is a management buzzword (buzzphrase?) that in practise does mean maximising short-term gains in dividends and stock price (compared to the more traditional holistic view) that was popularised particularly by Jack Welch at General Electric.

Its stated goal was to ensure that shareholders and management's interest would align; rather than executives taking advantage of mute shareholders to serve themselves, they would work to return as much company wealth as possible to shareholders, as measured by quarterly targets and stock price.

In practise of course, since executives of large corporates are usually rewarded with large piles of stock, and only stay for a few years, they work to maximise their cashing out price by spiking the stock price in the short term, and who gives a damn about the long term future of the business, shareholders, customers or environment.

I tend to use the phrase 'maximising corporate profitability' to reflect long-term thinking, as shareholder value is pretty much irrevocably tainted by the short term buzzword guys.
posted by ArkhanJG at 10:45 AM on June 29, 2013 [1 favorite]


I tend to use the phrase 'maximising corporate profitability' to reflect long-term thinking, as shareholder value is pretty much irrevocably tainted by the short term buzzword guys.

IMHO this was pretty much the intention of that messaging (especially in politics and with unpopular business decisions), which is why the conflation frustrates me. It's co-opting a legal term, and is close to a misrepresentation of all the cases listed above. The 'we legally had to do it' claim isn't actually true most of the time, but sounds better than 'this hatchet job is why the shareholders selected me'.
posted by jaduncan at 10:51 AM on June 29, 2013 [1 favorite]


Thanks, jaduncan, for a very helpful answer. Can I ask a further question, though?

We see lots of examples of people saying (as JackFlash points out) "I'd love to be honest and responsible, but I have a legal obligation to maximise short-term stock-spiking". Given the way the rulings have worked out, might it be possible for corporate directors to say "I'm sorry, I'd love to be the cheating jerk you appointed me to be, but that would leave me open to lawsuits from your successors when we get to The Future"?
posted by Dreadnought at 10:54 AM on June 29, 2013


"I'd love to be honest and responsible, but I have a legal obligation to maximise short-term stock-spiking." This is flatly untrue.

Business judgment. The shareholders believe it's better to do the nominally bad thing, the director believes it's better not to (and has a duty not to break laws, so this may be covered by your 'cheating jerk' actions). The director is probably just replaced by either the board or via AGM/EGM. All the shareholders have to demonstrate is that it wasn't actually illegal.

See The Fiduciary Duty to Engage in Profit Sacrificing Legal Compliance (p. 756) in the paper I linked above for the long version of this, but the short version is that if it's merely a matter of ethics rather than law it's perfectly fine to dump the director but not to sue them. It has to be a breach of duty, not just differing business judgment.
posted by jaduncan at 11:02 AM on June 29, 2013 [2 favorites]


Speaking of fracking, Gasland 2 vimeo premieres July 8 on HBO.

The Daily Show: "Gasland Part II" director Josh Fox talks fracking, flammable water, and the perils of natural gas.
posted by homunculus at 12:10 PM on June 29, 2013 [2 favorites]


The doctrine of "maximizing shareholder value" is a philosophical invention, not a legal requirement. Yet the myth is constantly repeated.

Have any cases involving that reached the Supreme Court? And what are the odds that if/when one does reach the current Supreme Court, it won't become a legal requirement? For all intents and purposes, the mythology of Milton Friedman is as much the Law of the Land as the dreams of Thomas Jefferson.
posted by oneswellfoop at 12:59 PM on June 29, 2013


... the cheapest, cleanest source of nonrenewable energy we have available to us today.

Not true. First, when the widespread methane leakage is taken into account (something like 5% of wells leak immediately, 50% over the life of the well), the effect of greenhouse gas emissions is no better, and likely worse, than coal:
While it is true that less carbon dioxide is emitted from burning natural gas than from burning coal per unit of energy generated, the combustion emissions are only part of story and the comparison is quite misleading.
Second, the groundwater contamination and ecosystem devastation of on the order 100,000 wells in PA is not included in any cost estimate. It is also laughable in this era of nearly complete corporate capture of regulatory agencies to say that what we need are better regulations. Not. Gonna. Happen. The technology must be assessed in the context of the actual sociopolitical context it will be used, not some unicorn version.

The extraction industries produce energy that is only "cheap" relative to renewables (and perhaps even advanced-cycle nukes) because they externalize the shit out of their true costs. The taxpayers, of course, will end up picking up the tab while living in a wrecked landscape.

Oh, and by the way: most of this gas is going to be shipped abroad, not used to make us "energy independent". So the US and Canadian taxpayers will subsidize the extraction corporations' money-making operation with China, both directly by paying for infrastracture, and down the road by paying for, and living with, increased climate and environmental damage.
posted by mondo dentro at 1:01 PM on June 29, 2013 [5 favorites]


I believe we have entered a virtuous cycle where fossil-fuels production will decline. As per capita energy consumption falls from increased efficiency, regulatory risks to co2 power plants rise and the costs to develop alternative energy continues to drop it will be increasingly difficult to finance oil and gas development projects. Fewer projects means less available natural gas and oil, which in turn will make it less attractive as a fuel source for future plants.
posted by humanfont at 1:27 PM on June 29, 2013


The shareholder value myth, and it is just a myth, only became paramount in the 1970s with people like Milton Friedman and other neoliberals. Maximizing shareholder value is simply a philosophical management choice, not a legal obligation.

I think the issue here is that regardless of whether it is a myth or an accurate understanding of the legal and fiduciary obligations, or even just a solipsistically favorable interpretation, it is widely believed to be and many company directors are committed to this philosophy above any other responsibilities. As long as that is true, then the statement by jaduncan describes reality.
posted by dhartung at 4:58 PM on June 29, 2013 [1 favorite]


Many company directors are committed to this philosophy above any other responsibilities. As long as that is true, then the statement by jaduncan describes reality.

No, it does not describe reality. There is a difference between a philosophical choice and a legal requirement and that is the reality. The motivation for describing it as a legal mandate is to immediately pre-empt any conversation about why corporate managers behave as they do -- that is, gee there's nothing to be done, they are required by law to act like sociopaths. By copping into the reality excuse you are simply perpetuating the myth. The truth is that managers use the phony legal mandate as an excuse for all sorts of atrocious behavior. The reality is that they are playing you for a fool if you buy into that.
posted by JackFlash at 6:17 PM on June 29, 2013 [2 favorites]



If people wish to make the argument that maximising shareholder value increase is not required in a for-profit (absent special company articles), they are wrong


maybe in some theoretical sense, but the business judgment rule effectively guts that obligation or renders it unenforceable in all but the most egregious cases. in the instant case, the drilling corps could certainly negotiate contracts more favorable to the land owners and could act with more care when drilling and operating their wells. they most certainly are not obliged to wreck the earth and swindle the naive (assuming ex arguendo that they are!)
posted by jpe at 7:40 PM on June 29, 2013


The truth is that managers use the phony legal mandate as an excuse for all sorts of atrocious behavior. The reality is that they are playing you for a fool if you buy into that.

The very fact that you have to argue that your decision is in the interests of the shareholders in some way does make clear that the legal duty exists. Does it say that you have to persue short term profit? No, as Wrigley makes clear. You are therefore correct that it's not a viable excuse, but wrong that it doesn't exist.
posted by jaduncan at 12:08 AM on June 30, 2013


By copping into the reality excuse you are simply perpetuating the myth.

I think you still misunderstand. There is a difference how this looks from the inside and the outside. From the inside, yes, your arguments have merit. From the outside, it often appears as if corporations act as though they have no other responsibility. This is not being "fooled" or accepting a "myth", it is a description of a behavioral mechanism, and you are severely missing the point of that.

Drivers have all sorts of legal responsibilities, but the concept of driving defensively is that you behave as if all of the other drivers on the road are going to kill you. It does not mean you have been "fooled" into accepting that drivers are all, in fact, murderous freaks who face no consequences for their actions. It is simply a useful model.
posted by dhartung at 12:39 AM on June 30, 2013 [1 favorite]


Your dishonest and amoral business practices that put people's health at risk were for long-term profits, not short? Carry on then.

I understand the argument being made that it's better in the long run for a company to behave ethically, but in this specific case it doesn't look like there's any repercussions for not doing so. There's a comment on the story itself stating that it looks like what Chesapeake is doing here is billing the landowners for the cost of bringing the gas to market (which they're allowed to do) but they're actually the carrier, and they're billing the landowners at rates far above market. They're poisoning groundwater while ripping off landowners but their stock price isn't going down and the board isn't complaining so it's likely to continue.
posted by Challahtronix at 3:30 AM on June 30, 2013 [1 favorite]


Also: concrete well casings have failed before, and will fail in the future.

I am not a petroleum engineer, but it's concrete and steel, not just concrete.
Let's be honest here.

Yes, casings crack and cement jobs can be poorly done by cowboys, so that might be where your problems lie.

As for leasing: US titles drive everyone insane.
posted by Mezentian at 4:02 AM on June 30, 2013


Drill, baby, drill!

...

Wait, what?
posted by nowhere man at 7:43 AM on June 30, 2013


In California: Fracking near Shafter raises questions about drilling practices
posted by homunculus at 9:58 AM on June 30, 2013


The doctrine of "maximizing shareholder value" is a philosophical invention, not a legal requirement. Yet the myth is constantly repeated.

Wow. Forbes Magazine calls Milton Friedman's economic theories "dumb". Of course, that's only because they don't dare call them evil.
posted by oneswellfoop at 7:29 PM on July 1, 2013


Gasland II premieres tonight on HBO

Living on 'Gasland:' Q&A with Documentary Filmmaker Josh Fox
posted by homunculus at 9:10 PM on July 8, 2013


Cuadrilla announces major fracking expansion in UK
posted by Sys Rq at 9:17 PM on July 8, 2013


Josh Fox on Gasland Part 2, the Fracking-Earthquake Link & the Natural Gas Industry’s Use of PSYOPs
posted by homunculus at 9:50 AM on July 12, 2013


EPA to Allow Consumption of Toxic Fracking Wastewater by Wildlife and Livestock
posted by homunculus at 1:41 PM on July 17, 2013


I'm sure the animals will be overjoyed to be "allowed" to consume toxic wastewater.
posted by Sys Rq at 9:15 AM on July 18, 2013


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