In a prior post, I noted that among the implications of the international trade sanctions is the possibility that companies affected by sanctions could face D&O claims. Among the risks the sanctions program presents is the possibility that a company dealing with sanctions-related issues could face a follow-on securities lawsuit, as investors seek to hold the company and its senior officials liable for share prices declines following disclosure of sanctions-related issues.
In the Seadrill Limited Securities Litigation, a securities class action lawsuit pending in the Southern District of New York, investors sued the company, a subsidiary, and certain of its directors and officers, for the company’s elimination of its dividend and loss of significant business with a Russian oil company subject to international sanctions following Russia’s invasion and annexation of Crimea. On June 20, 2016, in an interesting opinion (here), Southern District of New York Lorna Schofield granted the defendants’ motion to dismiss the Seadrill case. Due to the case’s factual circumstances, the opinion makes for some interesting reading. In any event, the case represents an important example of the possibilities for D&O claims arising from sanctions-related issues.
Seadrill Limited is a Bermuda company with executive offices in the U.K. and Norway. Seadrill owns and operates sea-based oil drill rigs that it contracts out to oil exploration and development companies. A Seadrill subsidiary, North Atlantic Drilling Limited (NADL, a Bermuda company with executive offices in Norway) specializes in operating oil rigs in harsh environments. On July 29, 2014, Seadrill and NADL entered into a series of agreements with Rosneft OAO, an oil company that is majority owned by the Russian government.
The July 29 Rosneft Deal arose in the midst of an ongoing series of events in Ukraine and involving Russia, and that resulted in a series of sanctions-related enactments against Russian and Russian individuals and companies by the U.S., E.U., and Norway.
In February and March 2014, Russia invaded the Crimean peninsula. Russia annexed Crimea and began supplying arms to Ukranian separatists in Ukraine’s Donbass region. In August 2014, Russia invaded the region. Western governments responded by imposing sanctions on Russia. The first sanctions imposed by the U.S. involved the prohibition for U.S. persons from dealing with Specially Designated Persons (SDN). On April 28, 2014, the President of Rosneft was added to the list of SDNs. On July 16, 2014, the E.U. and the U.S. announced additional sanctions against Russia. Among other things, the sanctions prohibited U.S. persons from providing new financing to certain Russian firms, including Rosneft.
On July 17, 2014, Russian-backed Ukranian separatists or Russian nationals shot down Malaysian Airlines Flight 17. On July 29, 2014, the E.U. announced that it would issue sanctions targeting entire sectors and would aim to curtail Russian access to sensitive technologies. The press release stated that the sanctions would be published July 31, 2014 and take effect the next day. Seadrill, NADL, and Roseneft had announced their oil rig deal on July 29, 2014.
On July 30, 2014, Norway announced that it would join any sanctions imposed by the E.U. or the U.S. On July 31, the EU published sanctions regulations requiring advanced approval for the sale or supply of certain technologies for use in Russia. On August 1, 2014, the U.S. announced additional rules regarding the sale or supply of certain technologies to Russia. On August 14, Norway announced that it would adopt sanctions mirroring the E.U.’s sanctions. Norway’s sanctions required parties to obtain prior authorization to export products to be used in deepwater oil exploration and production. NADL first sought authorization under the August 15 Norwegian sanctions on October 14, 2014.
In September and October 2014, the U.S., E.U. and Norway adopted additional sanctions against Russia and its oil and gas industry. On September 12, 2014, the U.S. expanded sanctions to prohibit the provision of goods, services, or technology to Rosneft in support of deepwater or Arctic projects. On October 10, 2014, Norway enacted sanctions that mirrored the September 12, 2014 U.S. sanctions.
On November 7, 2014, NADL announced that it, Seadrill, and Rosneft had mutually agreed to delay the Rosneft Deal until the end of May 2015. On November 26, 2014, NADL announced that it had suspended tis quarterly cash dividend for the third quarter. On March 13, 2015, NADL announced that Rosneft had terminated a portion of the Rosneft deal contract. NADL removed $1.0 billion of anticipated revenue from its backlog. NADL subsequently announced that the termination date of the Rosneft deal had been extended until May 31, 2017, and on April 21, 2015, NADL and Seadrill removed the remaining amounts of anticipated revenue from the rig contracts from their backlog.
In December 2014, plaintiff Seadrill shareholders filed the first of several securities class action lawsuit complaints against Seadrill, NADL, and certain of the companies’ directors and officers. The plaintiffs alleged that various statements in August and September 2014 were false and misleading because they failed to disclose that Defendants had privately expressed concern about the viability of the Rosneft Deal due to the sanctions and failed to disclose that NADL has not yet requested an exemption from sanctions imposed by the Norwegian government. The plaintiffs also alleged the defendants failed to disclose that as a result of the international sanctions, the Rosneft Deal was at risk of being terminated, and if it were terminated Seadrill likely would be unable to pay its dividend.
The defendants filed motions to dismiss.
The June 20, 2016 Opinion
On June 20, 2016, Southern District of New York Judge Lorna Schofield granted the defendants’ motion to dismiss. In granting the dismissal, Judge Schofield noted that “this is not a case of hidden liabilities or misdeeds, that when disclosed, caused a company to falter and its stock price to fall. Instead, the Complaint fundamentally alleges a failure to warn sufficiently of sanctions targeted specifically to Rosneft, that were not within Defendants’ control and about which they had no special insight or information.” Because, Judge Schofield said, the complaint “alleges no actionable misstatement or omission, and alleges no fraudulent intent, the Complaint is dismissed.”
With respect to the plaintiffs’ allegation that the defendants had failed to disclose that NADL and Seadrill had not yet applied for an exemption from the Norwegian sanctions, Judge Schofield found that the specific statements on which the plaintiffs relied “do not suggest that Seadrill had already applied for, much less obtained authorization.” Judge Schofield found that the remaining statements on which the plaintiff relied were forward-looking statements containing sufficient precautionary language to bring the statements within the PSLRA’s safe harbor, and that the plaintiffs had not alleged facts sufficient to suggest that the defendants had actual knowledge that their statements were false when made.
With respect to the plaintiffs’ allegations that the defendants had failed to disclose private concerns about the viability of the Rosneft deals, Judge Schofield found that the primary statements on which the plaintiffs relied in support of this allegation were “sufficiently vague and equivocal that no reasonable investor could be misled into thinking that sanctions posed no risks to the Rosneft deal or Defendants’ business.” Judge Scofield further concluded that the defendants had disclosed the risks that the sanctions posed in several statements. These statements, Judge Schofield concluded, “undermine the assertion that the undisclosed concerns about the sanction’s impact rendered the challenged statements false and misleading.”
With respect to one specific statement on which the plaintiffs’ sought to rely – a published statement by one Seadrill executive that “we’re not very worried” – Judge Schofield said “a reasonable investor would not put much weight on a three-word quote in a news article, where reporters and editors controlled what statements would be included and excluded, what words would be quoted or paraphrased, all in an environment of rapidly changing and escalating sanctions from U.S. and foreign regulators.”
With respect to the plaintiffs’ allegations that the defendants had failed to disclose that the sanction regime and its effects could result in the elimination of Seadrill’s dividend, Judge Schofield found that the August 2014 statements on which the plaintiffs sought to rely were not actionable because they were accurate when made, and that the complaint does not allege otherwise. Indeed, Seadrill paid its scheduled dividend in September 2014. Only in November 2014, after the sanctions regime had escalated and had been specifically amended to target Rosneft, did Seadrilll suspend the dividend. Judge Schofield said that the dividend statements prior to that time were “inactionable statements of corporate optimism.”
Finally, Judge Schofield concluded that the plaintiffs had not sufficiently alleged scienter, finding that “the Complaint’s allegations do not support a cogent inference of scienter that is at least as compelling as any opposing inference,” and noting further that “the more compelling inference is that Defendants were reacting to an uncertain and rapidly changing environment and attempting to understand the implications of each successive set of sanctions.”
Among the many reasons this case is interesting is that the basic allegations involved a fascinating set of geopolitical circumstances. The corporate defendants were trying to pursue a potentially lucrative business arrangement at the same time that a rapidly evolving set of circumstances was emerging in one of the world’s most complicated trouble spots. One can raise concerns about the fact that the defendants were even considering doing business with Rosneft, but the fact is that both the existence of the Rosneft deal and the problems associated with the Ukraine situation and resulting sanctions regime were well-publicized.
This is not a company that was, say, manufacturing cardboard boxes in Indiana. This company was engaged in a situation with lots of risks, and as Judge Schofield noted, the risks were not hidden. Plaintiffs contend the defendants should have done more to warn investors about the risks to the company. Judge Schofield concluded otherwise.
While I think the decision is interesting in and of itself – it is a rare case that is so fraught with headline-level geopolitical ramifications – it is also interesting as a reminder of the ways in which the international sanction regime can lead to D&O related claims. Interestingly, Seadrill found itself involved in a sanctions-related lawsuit even though the company itself was not subject to sanctions or the subject of a sanctions enforcement action. Rather, Seadrill’s involvement in the lawsuit is due to the fact that it was doing business with a company that was subject to sanctions.
Although the plaintiffs in this case were not successful (at last in the district court), there is nothing about the outcome of this case at the district court level that would deter plaintiffs in future cases from filing follow-on civil suits after companies experience problems resulting from the international sanctions regime. I expect that we will see many future sanctions-related follow-on civil cases.
I think it is worth noting that we are heading into an era of even greater international uncertainty. The Brexit vote is just the first of what could be a series of potentially significant developments. As a result, many companies will find themselves obliged to do business in unpredictable circumstances, as the defendants in this case did here. There are a number of implications arising from the coming time of uncertainty and international tension. Among other things, the uncertainty itself could represent a circumstance involving an increased risk of D&O-related claims. We live in dangerous times.
Special thanks to a loyal reader for sending me a copy of Judge Schofield’s opinion in the Seadrill case.