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Case 3-7
Exxon – XTO Merger
ExxonMobil Corporation (Exxon) is the world’s largest corporation in terms of revenue and one of the
largest in market capitalization. It had sales of $486 billion in 2011giving it the #1 position on Fortune 500
in that category. In recent years Exxon has expanded its operations into hydraulic fracking. By pumping
water, sand, and chemicals into a well at high pressure cracks develop in the stone where gas is trapped and
the process allows more of it to flow. There were more than 493,000 active natural-gas wells across 31
states in the U.S. in 2009, almost double the number in 1990. Around 90 percent have used fracking to get
more gas flowing, according to the drilling industry. By 2015 the United States will produce more oil from
unconventional methods like fracking than conventional means, according to a 2012 report from the
economic forecasting firm IHS Global Insight.
Nationwide, residents living near fracked gas wells have filed over 1,000 complaints regarding tainted
water, severe illnesses, livestock deaths, and fish kills. Fracking is controversial because the chemicals,
mixed with water, may find their way into aquifers which supply drinking water. Oil companies say that
fracking is safe and poses no threat to drinking water. Right now, few groups are calling for an outright ban
on fracking. However, shareholders want companies to issue full disclosure about individual fracking
operations and the chemicals used during the process. Some companies counter that they already abide by
environmental laws and regulations and that further disclosure is not necessary.
On June 24, 2010, Exxon completed a $41 billion merger with XTO Energy in large part to buy the
company’s hydraulic-fracking expertise and gain access to its 45 trillion cubic feet of gas. The terms of the
merger called for Exxon to issue 0.7098 common shares for each common share of XTO. The merger
augments Exxon’s total production of energy resources by increasing natural gas production to 50 percent
of the total and its reserves will go up 50% as well.
Breach of Fiduciary Duties
The merger was not without its critics in part because of the way the deal was structured and the role of
XTO’s management and board of directors. On December 17, 2009, the Shareholders Foundation, Inc.1
filed a lawsuit in Tarrant County (Texas) District Court on behalf of current investors in XTO Energy, who
purchased their XTO shares before December 14, 2009, over alleged breach of fiduciary duty by the board
of directors of XTO Energy.
The plaintiff alleged breaches of fiduciary duty by the board of directors of XTO Energy arising out of
their attempt to sell XTO Energy to Exxon Mobil. The plaintiff claims that the XTO management and
directors agreed to sell the company through “an unfair process” and that XTO Energy is worth more
because of likely future global warming regulations that could curtail carbon emissions.
Previous investigations by law firms examined the following: (1) whether the XTO Energy board of
directors breached their fiduciary duties to XTO shareholders by agreeing to sell XTO at an unfair price
thereby harming the company and its shareholders; (2) whether the directors of XTO may have breached
their fiduciary duties by not acting in XTO shareholders’ best interests; and (3) whether the company may
not have adequately shopped itself around before entering into this transaction and, pursuant to this
proposed transaction, Exxon Mobil may be underpaying for XTO thereby unlawfully harming XTO
shareholders. Exxon’s shares fell 4.3 percent to $69.69 after the announcement, while XTO shares jumped
more than 15 percent to $47.86 on the New York Stock Exchange.
Payments Made to Officers and Members of the Board of Directors of XTO
An important part of the merger agreement was payments made to officers and members of the board of
directors at XTO. Given the distaste for large payout packages to corporate insiders during the period of the
financial crisis in 2008–2009, there was some concern whether Congress would approval the merger. The
issue was the arrangements detailed in Exhibit 1. At the end of its investigation Congress approved the
merger although it raised concerns about disclosures to shareholders.
Exhibit 1
11The
Shareholders
Foundation, Inc., is an investor advocacy group that does research related to
shareholder
issues and
informs
investors
of
securities class
actions, settlements,
judg
ments, and other legal
related
news
to the stock/financial market. The group offers help, support, and
assistance
for every
shareholder, and
investors
find
answers
to their questions and equitable solutions to their problems.
Form 8-K Filing with the SEC on Officer/Board Member Payments
Consulting Agreements & Amendments to Share Grant Agreements
In connection with the Merger and pursuant to negotiations with Exxon Mobil, Messrs.
Simpson, Hutton, Vennerberg, Baldwin, and Petrus (each an “Officer” and collectively, the
“Officers”) have agreed to waive their employment and change in control protections under
their existing arrangements with the Company and enter into consulting agreements with the
Company and Exxon Mobil which were executed on December 13, 2009, and will become
effective at the time of the Merger. Pursuant to their existing employment agreements (for
Messrs. Simpson, Hutton and Vennerberg) or the Third Amended and Restated Management
Group Employee Severance Protection Plan (for Messrs. Baldwin and Petrus), upon the
occurrence of a change in control transaction, which would include the Merger, each of the
Officers was entitled to receive a lump sum cash payment, within 45 days after the change in
control, generally equal to three times (2.5 times for Messrs. Baldwin and Petrus) the sum of
his (1) annual base salary, (2) annual cash bonus, and (3) for Mr. Simpson only, annual grant
of the Company’s common stock. Each Officer, other than Mr. Simpson, was also entitled to
receive a gross-up payment for any excise taxes imposed under Section 280G of the Internal
Revenue Code (“280G Excise Taxes”). In connection with entering into the Consulting
Agreements, each Officer generally agreed to (i) waive his right to receive a portion of the
Change in Control Payments; (ii) subject all or a portion of the remainder of his Change in
Control Payments, as retention payments, to the continued performance of consulting services
and continued compliance with agreed restrictive covenants (relating to confidentiality,
noncompetition, and nonsolicitation) and (iii) relinquish his right to any Gross-Up Payment
due.
The waiver of the existing arrangements and effectiveness of the new Consulting
Agreements among the Officers, the Company, and Exxon Mobil will be contingent on the
closing of the Merger. Under the Consulting Agreements, the Officers will retire as employees
of the Company upon completion of the Merger and continue to serve the Company thereafter
as consultants on a full time basis. The initial term of the Consulting Agreements will end,
unless earlier terminated, on the first anniversary of the Merger. The Consulting Agreements
are each renewable for an additional one-year period upon the mutual agreement of the Officer
and ExxonMobil, in consultation with the Company.
The Company will provide each Officer with an annual consulting fee equal to one-half of
the Officer’s current base salary. Each Officer will also be entitled to receive an annual cash
bonus equal to one-half of the Officer’s current base salary, generally subject to the Officer’s
continued service to the payment date (for reference, the Officers’ current base salaries are:
Simpson—$3,600,000; Hutton—$1,400,000; Vennerberg—$900,000; Baldwin—$500,000;
Petrus—$475,000). Also under the Consulting Agreements, ExxonMobil has agreed to provide
each Officer with a one-time grant of restricted ExxonMobil common stock or stock units
having a grant date fair market value equal to 100% of the Officer’s current base salary. -One-
half of the Restricted Equity will vest on the first anniversary of the Merger and one-half will
vest on either the second anniversary of the Merger, or, if the Initial Term is extended, on the
third anniversary of the Merger, in either case subject to service requirements and the Officer’s
continued compliance with the applicable restrictive covenants through the applicable vesting
date.
In lieu of the payment Mr. Simpson otherwise would have received in connection with the
Merger under his existing employment agreement, Mr. Simpson will receive a lump sum cash
payment within five days after the Merger in an amount equal to $10,800,000 (which equals
three times his current base salary). In addition, Mr. Simpson will be entitled to receive a
retention payment, payable in equal installments at six and twelve months after the Merger,
generally subject to Mr. Simpson’s continued performance of consulting services through the
payment date. Mr. Simpson’s retention payment, which relates to his annual grant of the
Company’s common stock, will equal up to $24,750,000.
In lieu of payments each of the Officers, other than Mr. Simpson, would have received in
connection with the Merger under either an existing employment agreement or the terms of the
Third Amended and Restated Management Group Employee Severance Protection Plan, each
of the Officers (other than Mr. Simpson and Mr. Petrus) will be entitled to receive a retention
payment, payable in equal installments at six and twelve months after the Merger, generally
subject to the Officer’s continued performance of consulting services to the payment date. The
payment for the Officers, which relates to the amount of the Change in Control Payments, will
equal an amount up to the following: Mr. Hutton, $10,913,662; Mr. Vennerberg, $6,172,817;
and Mr. Baldwin, $2,591,527. Mr. Petrus will not receive a retention payment.
Under pre-existing Amended and Restated Agreements with the Company, each of the
Officers was entitled to certain additional lump sum cash payments in the event of a change in
control transaction, which would include the Merger. On December 13, 2009, the Grant
Agreements were amended to provide that the lump sum cash payments due thereunder in
connection with the Merger will be made in the form of shares of the Company’s common
stock immediately prior to completion of the Merger. The number of Shares is as follows: Mr.
Simpson, 833,333 Shares; Mr. Hutton, 687,500 Shares; Mr. Vennerberg, 583,333 Shares; Mr.
Baldwin, 166,667 Shares; and Mr. Petrus 156,250 Shares.
Each Officer has agreed pursuant to the terms of the Consulting Agreements and the Grant
Agreement amendments that, instead of receiving a Gross-Up Payment for any 280G Excise
Taxes that might apply to the amounts the Officer is entitled to receive in connection with the
Merger, the combined amount of the Shares and the retention payment will be subject to an
added reduction, if necessary, so that the total value of this combined amount, when added to
the value of other equity awards granted to the Officer which are vesting in connection with
the Merger and, for Mr. Simpson, his lump sum payment, does not exceed 90% of the amount
that could be provided to the Officer without the imposition of 280G Excise Taxes.
Upon termination of an Officer’s services as a consultant either by the Company without
“Cause” or by the Officer with “Good Reason” (each as defined in the Consulting
Agreements) or upon an Officer’s death or disability, the Officer will be entitled to receive (1)
a lump sum cash payment equal to the unpaid portion of the Consulting Fee, and the
Completion Bonus for the current term, and the unpaid portion of the retention payment and
(2) in the case of all Officers other than Mr. Simpson, accelerated vesting of any unvested
equity awards which were granted prior to the Merger.
SEC Financial Disclosures Rule
In 2011, shareholders of Exxon voted not to require company officials to disclose more information
about fracking, although 30 percent of the shareholders voted to increase disclosures indicating some
concern whether investors receive sufficient information for their decision-making needs.
The SEC requires that publicly-traded companies release and provide for the free exchange of all
material facts that are relevant to their ongoing business operations. From an ethical perspective, the
general need in business transactions is for both parties to tell the whole truth about any material issue
pertaining to the transaction.
The SEC requires full disclosure from public companies that wish to be publicly traded on the major U.S.
exchanges. By enforcing this rule, the SEC attempts to instill confidence in investors that the financial
marketplace is efficient and transparent so that individual investors can take part in it for material profit.
The rule is often referred to as providing “full and fair disclosure.”
Waiver of Rights under Outside Directors Severance Plan
The Outside Directors Severance Plan provides that, upon a change in control, each nonemployee director
will receive a lump sum cash payment equal to three times the sum of the annual cash retainer and value of
the company’s common stock most recently granted to the nonemployee director. In February 2009, each
nonemployee director received a grant of 4,166 fully vested shares of the company’s common stock. The
nonemployee directors received an annual cash retainer of $180,000 in respect of services performed in
2009.
On December 13, 2009, each nonemployee member of the company’s board of directors voluntarily
waived his right to receive the payments that otherwise would have become payable to him upon the
completion of the merger under XTO Energy. Absent such a waiver, based on the closing price of the
company’s common stock on December 1, 2009 ($42.93), each nonemployee director was entitled to
receive a lump sum cash payment of approximately $1,000,000 upon completion of the merger.
Questions
1. The lawsuit filed by the Shareholders Foundation alleged that the board of directors of
XTO breached its fiduciary duties. What are the fiduciary duties of the board? Identify
the duties allegedly violated in the XTO case. Do you think the board acted in
accordance with a shareholder or stewardship perspective?
The board of directors is elected to act in the best interests of the corporation and owe a fiduciary duty to
the corporation and its shareholders. The fiduciary duty entails operating with loyalty to the shareholders’
interests and exercising due care in board decision-making. The alleged breach of fiduciary duty includes
XTO management and directors agreeing to sell the company through an “unfair process;” underselling the
company when it is worth more than the selling price; not acting in the best interests of the shareholders;
2. Much has been said during the recent financial crisis about top executive salaries being
way too large, especially in those companies receiving a government bailout. The Obama
administration sought to rein them in through threats of taxation or other forms of
“moral suasion.” Do you believe the government has an ethical right to intervene in a
company’s executive compensation program? Support your answer with reference to
ethical reasoning. Review Exhibit 1. Do you believe that the agreement in the Form 8-K
about payments to officers and board members raises any ethical issues? What is the
role of the business judgment in such decision?
Using utilitarianism one could argue that the greatest good could be achieved by having the government set
all salaries. However, that quickly abandons the free market concept of executive compensation and adopts
Exhibit I shows that the top executives and management of XTO are being handsomely rewarded in the
merger with Exxon. The rewards seem to be egoistically towards the top executive to the harm of the
3. One aspect of being an ethical corporation is to operate in a socially responsible way. The
Corporate Social Responsibility Initiative at Harvard University2 defines corporate social
responsibility strategically. “Corporate social responsibility encompasses not only what
companies do with their profits, but also how they make them. It goes beyond philanthropy
and compliance and addresses how companies manage their economic, social, and
environmental impacts, as well as their relationships in all key spheres of influence: the
workplace, the marketplace, the supply chain, the community, and the public policy realm.”
The ethics of fracking is an issue raised in a number of articles and in the blog of one of the
authors of this book. According to Mintz3, “From an ethical perspective we might look at the
harms and benefits of fracking. In other words, do the potential dangers of fracking,
including contamination of water supplies, outweigh the potential benefits of producing
badly needed oil and gas resources at a time when our national security may be in jeopardy
because of our continued reliance on unreliable sources of energy? Is U.S. energy
independence more important than the potential for harm to those affected by fracking
procedures? Do jobs and economic growth trump health and safety concerns?”
Fracking, which is short for ‘hydraulic fracturing,’ refers to a method of recovering oil and gas from shale
rock. Here is how it works. An oil company would drill down and then push under great pressure liquids
sideways into oil and gas-rich shale rock. Millions of gallons of water, mixed with brine or chemicals, is
2 www.hks.harvard.edu/m-rcbg/CSRI/init_define.html.
3 www.ethicssage.com/2011/12/the-ethics-of-fracking.html
According to the Interstate Oil and Gas Compact Commission, 90 percent of all oil and gas wells in the
Fracking is controversial because the chemicals, mixed with water, may find their way into aquifers which
supply drinking water. Oil companies say that fracking is safe and poses no threat to drinking water. Right
now, few groups are calling for an outright ban on fracking. However, shareholders want companies to
Shareholders of two large gas producers — ExxonMobil, and Chevron - voted not to require company
officials to disclose more information about fracking. Exxon and Chevron had urged shareholders to vote
The public has a right to be concerned about fracking. In 2010 thousands of gallons of fracking fluid
spilled following an accident at a natural gas well in Pennsylvania. The well blew near the surface, spilling
The EPA found that compounds likely associated with fracking chemicals had been detected in the
groundwater beneath Pavillion, a small community in central Wyoming where residents say their well
water reeks of chemicals. The fracking occurred below the level of the drinking water aquifer and close to
There are those who support fracking including landowners who have the most to lose if royalties stop
flowing because of restrictions on fracking. Some landowners — such as a group with more than 10,000
There can be no doubt that additional studies are needed, more tests must be done, and the industry should
be better regulated. In the meantime, why not release all available information to the public about safety
Energy decisions abound where safety versus economic benefits are pitted against each other. We have
been debating the issue for years with respect to offshore oil drilling and now the debate focuses on
The bottom line on these issues, including practices such as fracking that has transformed the U.S. energy
industry, is that energy independence comes at a cost. Increasingly, we as Americans, will be faced with
tradeoff-decisions between sacrificing some health and safety concerns in the name of providing economic
4. Evaluate the ethics of fracking from a moral reasoning perspective using the methods
discussed in this chapter. Going forward, do you believe fracking should continue without
regulation? Why or why not?
Much of this question is closely tied to the answer above. First, a short list of stakeholders in the issue of
fracking include the environment, property owners, users of energy, taxpayers, regulators, investors, energy
companies, and drilling companies. Using rights theory the property owners, users of energy, taxpayers,
regulators, and investors need to understand and have full disclosure of the chemicals, long-term and short-
term consequences, costs and benefits of fracking. The energy and drilling companies have an obligation to
