Institutional Shareholder Services (ISS) is rebranding its corporate governance rating system on November 21, 2016. The “new” rating system, Governance QualityScore (QualityScore), was previously known as Governance QuickScore. Companies can verify and update the data used to determine their score by visiting ISS’s website. Data verification for covered companies began on October 31, 2016 and continues until November 11, 2016. From November 11, 2016 until November 21, 2016 companies will not be able to verify or update their data. However, following November 21, 2016, companies will be able to verify and update their data subject to certain blackout periods.

In addition, ISS announced new factors that will contribute to a company’s QualityScore in the U.S.

Board Structure

• Proportion of women on the board of directors;
• Non-executive directors on the board of directors for less than six years and other mechanisms designed to encourage director refreshment;
• Formal CEO and key executive officer succession plan;
• Material corporate governance failures; and
• Adequate response by the board of directors to low support for management proposals.

Compensation

• Employment of at least one metric that compares the company’s performance to a benchmark or peer group.

Audit & Risk Oversight

• Tenure of the company’s external auditor.

Shareholder Rights

• Exclusive venue / forum provisions in the company’s organizational documents;
• Fee shifting provisions in the company’s organizational documents;
• Representative claim limitations or other signification litigation rights limitations;
• Proxy access bylaw provisions, including ownership thresholds, duration thresholds, caps on shareholder nominees to fill board seats and aggregation limits on shareholders to form a nominating group;
• Ability of the board of directors to implement a classified board without shareholder approval;
• Ability of shareholders to amend the company’s bylaws; and
• Ability of the board of directors to materially modify the company’s capital structure without shareholder approval.

For more information on this or other issues that affect companies, please contact any of the authors of this Legal Alert or visit the Davis Graham website at www.davisgraham.com.

On August 8, 2016, environmental groups and supporters filed their Petition for Verification of Signatures for two oil and gas ballot initiatives with the Secretary of State and claimed to have enough signatures to add the initiatives to the November ballot.

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NASDAQ is adopting a rule applicable to its listed companies that will require those companies to publicly disclose compensation or other payments by third parties to board members or nominees in connection with that person’s candidacy or service as a director. Under the new rule, NASDAQ-listed companies must disclose the material terms of all third-party compensatory agreements or arrangements for nominees and directors in proxy statements filed on or after August 1, 2016.

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On June 14, 2016, the Securities and Exchange Commission (the “SEC”) issued an order increasing the net worth threshold for “qualified clients” as defined in Rule 205-3 under the Investment Advisers Act of 1940 (the “Advisers Act”).

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On May 17, 2016, in an attempt to rein in non-GAAP reporting by public companies, the Securities and Exchange Commission (SEC) issued new Compliance & Disclosure Interpretations (C&DIs) under Regulation G and Item 10(e) of Regulation S-K regarding the use of non-GAAP financial measures.

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On May 4, 2016, environmental groups (Plaintiffs) sued EPA, alleging that it has failed to review and revise regulations for the disposal, storage, transportation, and handling of oil and gas (O&G) wastes as required by the Resource Conservation and Recovery Act (RCRA).See Environmental Integrity Project et al. v. EPA, No. 1:16-cv-842 (D.D.C. May 4, 2016). This Legal Alert discusses key issues raised by the lawsuit–namely that: 1) despite Plaintiffs’ claims, EPA has consistently reviewed the exploration and production (E&P) waste regulatory regime for many years; 2) state-specific programs can improve the management of E&P wastes in a way that a blanket federal program cannot; and 3) although the regulation of E&P wastes is distinguishable from the regulation of coal ash, the latter appears to motivate the lawsuit. If the lawsuit proves successful in narrowing or eliminating the E&P exemption, impacts to the O&G industry would be disastrous, particularly given current commodity prices.

BACKGROUND

RCRA creates the framework for proper management of hazardous and non-hazardous waste (Subtitles C and D, respectively). Although EPA sets minimum technical standards for how disposal facilities should be designed and operated, states traditionally implement RCRA waste programs.

With respect to E&P wastes, in 1980, Congress required that EPA promulgate regulations under RCRA Subtitle C or determine that such regulation was unwarranted. In 1988, EPA published its Regulatory Determination for Oil and Gas and Geothermal Exploration, Development, and Production Wastes (Regulatory Determination), 53 Fed. Reg. 25,446 (July 6, 1988). The Regulatory Determination concluded that regulation of E&P wastes as hazardous under Subtitle C was unwarranted because, among other things, existing state and federal programs were generally adequate. Id. The Regulatory Determination also included detailed lists of E&P wastes determined to be non-exempt and exempt, the latter including (but not limited to) drilling fluids, drill cuttings, produced water, and well stimulation fluids. Id. at 25453-54. Although E&P wastes are generally of lower toxicity than other RCRA-regulated hazardous wastes, the Regulatory Determination did not conclude that these wastes could never present a hazard to human health and the environment if improperly managed. Rather, EPA determined that the chemical constituents typically present in E&P wastes, combined with where E&P wastes are normally located and how they are managed, does not pose significant risk to human health and the environment warranting full Subtitle C regulation. EPA has issued numerous guidance documents further refining the scope and effect of the E&P waste exemption, always maintaining this core determination.

The Environmental Integrity Project lawsuit challenges this longstanding Regulatory Determination, placing the E&P waste exemption in substantial jeopardy. Specifically, Plaintiffs allege that EPA failed to timely review and revise the Subtitle D regulations for E&P wastes in accordance with Section 2002(b) of RCRA and further allege that EPA has not timely reviewed and revised the guidelines for state solid waste management plans in accordance with Section 4002(b) of RCRA.

PRACTICAL CONSIDERATIONS FOR O&G OPERATORS

Requirements for Review and Revision

Plaintiffs assert that RCRA requires EPA to review and revise the Subtitle D regulations for E&P wastes, as well as state solid waste management guidelines, every three years under Sections 2002(b) and 4002(b) of the Act, and that the last time EPA undertook such review and revision was in 1988 and 1981, respectively. While Section 2002(b) includes a reference to review and revision of regulations, that reference is specific to “each regulation promulgated under [RCRA],” and revision is only required “as necessary.” Similarly, Section 4002(b) requires that guidelines for state solid waste management plans be revised “as may be appropriate.” Thus, among other things, Plaintiffs must demonstrate the Regulatory Determination is a regulation, and, more importantly, that it is necessary to revise it and that it is appropriate to revise the state plan guidelines. Notably, Plaintiffs appear to be modelling their claims for regulatory revision on Appalachian Voices v. McCarthy, which resulted in a court-ordered deadline for EPA to review its RCRA regulations relating to coal ash disposal following a high-profile release. 989 F. Supp. 2d 30, 55 (D.C. Cir. 2013). In fact, plaintiffs in Appalachian Voices brought their claims under the same RCRA provisions as the Environmental Integrity Project Plaintiffs. Yet, the regulation of coal ash is much different than E&P waste, not only in terms of its history and the applicable regulatory regime, but also from an environmental-risk perspective.

Moreover, EPA has repeatedly reviewed and revised the E&P waste program since 1980. For example, EPA clarified the Regulatory Determination’s scope in 1993. 58 Fed. Reg. 15284 (March 22, 1993). In 2002, EPA solidified its interpretation and application of the E&P exemption, publishing an information booklet concerning the same. In March 2014, EPA reviewed the waste-related provisions of state statutes and regulations for O&G waste pits and storage tanks for multiple gas producing states. Further, EPA has tracked state, federal, and voluntary initiatives to develop and update legislation, regulations, and best management practices pertaining to E&P waste management.

State v. Federal Programs

The lawsuit assumes that any state “patchwork” of E&P waste regulations is problematic for the environment, resulting in the ability for O&G operators to “venue shop” for the least stringent regulatory controls. We question whether there is any empirical evidence to support such a claim. Moreover, state regulators have a wealth of knowledge and expertise in addressing state-specific issues that allows for programs tailored to each states’ unique geography, climate, ecology, and geology, all of which directly impact O&G drilling and production. Further, EPA is on-record in support of “individual, tailored regulations at the State and local level for the management of [E&P] wastes.” 53 Fed. Reg. at 25450 In fact, state implementation is integral to administration of many aspects of the federal RCRA program. For example, EPA generally delegates the primary responsibility of implementing RCRA’s waste programs to individual states, a process which promotes national consistency while also providing much-needed flexibility to states in implementing key aspects of the federal program.

CONCLUDING THOUGHTS

Despite EPA’s documented history of closely reviewing federal and state E&P waste practices and its support for state-specific implementation of RCRA’s requirements, the outcome of the lawsuit is unknown. More stringent regulatory requirements for E&P waste, or removal of the hazardous waste exemption altogether, could cause a severe economic impact on operators of all sizes and could strain or overrun the capacity of existing commercial waste facilities to handle the influx of E&P wastes.

Attorneys at Davis Graham & Stubbs LLP are experienced in the regulation of hazardous and non-hazardous wastes, particularly those associated with O&G exploration and production. Please contact the authors of this Legal Alert with questions on RCRA, E&P waste management, or impacts of the Environmental Integrity Project lawsuit on O&G operations and management.

On Monday, May 2, 2016, the Colorado Supreme Court issued decisions in two cases involving local bans on hydraulic fracturing or fracking in City of Longmont v. Colorado Oil and Gas Association, 2016 CO 29, ___ P.3d ___ (Longmont) and City of Fort Collins v. Colorado Oil and Gas Association, 2016 CO 28, ___ P.3d ___ (Fort Collins). In both cases, the court unanimously held that the bans were pre-empted by the state’s pervasive regulation of this activity. In doing so, the court re-affirmed the validity of its preemption analysis in Bd. of Cty. Comm’rs v. Bowen/Edwards Assocs., Inc., 830 P.2d 1045 (Colo. 1992) and Voss v. Lundvall Bros., Inc., 830 P.2d 1061 (Colo. 1992) with certain clarifications, confirmed that local governments cannot prohibit hydraulic fracturing for any appreciable period of time and suggested that these issues should usually be decided through summary judgment.

An Affirmation of Prior Case Law

The two seminal Colorado cases addressing conflicts between state and local requirements for oil and gas development are the companion cases, Bowen/Edwards and Voss. The Supreme Court’s rulings in Longmont and Fort Collins further cement the legal foundation of the Bowen/Edwards and Voss cases.

In Bowen/Edwards, the Colorado Supreme Court ruled that the Oil and Gas Conservation Act does not preempt all local land use regulation of oil and gas development, but may operationally preempt certain requirements. 830 P.2d at 1056-59. Such operational preemption occurs when a local regulation materially impedes or destroys the state interest. Id. at 1059. The court suggested that this determination should be made after trial-type proceedings, that is, “on an ad-hoc basis under a fully developed evidentiary record.” Id. at 1060. However, the court also suggested that operational conflicts would arise if the local government imposed technical conditions on the drilling or pumping of wells contrary to those required by the state. See id.

In Voss, the court ruled that a total ban on drilling was impermissible because it would conflict with the state’s interest under the Conservation Act in the efficient production and development of oil and gas resources. 830 P.2d at 1066-68. But the court also recognized that local regulation is permissible “if such regulations do not frustrate and can be harmonized with the development and production of oil and gas in a manner consistent with the stated goals” of the Conservation Act. Id. at 1068.

Two subsequent decisions by the Colorado Court of Appeals further define the parameters of preemption in this context, Town of Frederick v. N. Am. Res. Co., 60 P.3d 758 (Colo. Ct. App. 2002) and Bd. of Cty. Comm’rs v. BDS Int., LLC, 159 P.3d 773 (Colo. Ct. App. 2006).

In Town of Frederick, the court ruled that local requirements regarding well setbacks, noise abatement, visual impact, and penalties were preempted because they differed from state regulations, but upheld provisions regarding permitting, roads, and emergency response as consistent with the state’s requirements. 60 P.3d at 764-66. In BDS, the court ruled that local requirements imposing fines, financial guarantees, and records access were preempted because they were inconsistent with state regulations, but held that an evidentiary hearing would be necessary to determine the validity of other requirements involving water quality, soil erosion, wildlife, vegetation, livestock, cultural resources, geologic hazards, wildfire protection, recreation, and permit duration. 159 P.3d at 779-82.

Finally, two recent Colorado Supreme Court decisions had applied the preemption analysis delineated in Bowen/Edwards and Voss in other contexts. In Colo. Mining Ass’n v. Bd. of Cty. Comm’rs, 199 P.3d 718, 723-24, 730 (Colo. 2009), the court extensively relied upon Bowen/Edwards and Voss in determining that state law preempted a county from prohibiting the use of certain chemicals for mineral processing operations. In Webb v. City of Black Hawk, 295 P.3d 480, 489-93 (Colo. 2013), the court applied reasoning similar to Voss in holding that state law preempted a city from banning bicycles from certain streets.

City of Longmont v. Colorado Oil and Gas Association

In November 2012, Longmont voters approved Ballot Measure 300, which added Article XVI to Longmont’s home-rule charter. Article XVI prohibited hydraulic fracturing and the storage of hydraulic fracturing waste. Soon thereafter, COGA filed a lawsuit against Longmont seeking to invalidate Article XVI on the basis of preemption, arguing that hydraulic fracturing and the storage and transportation of hydraulic fracturing waste are matters of statewide concern. The Colorado Oil and Gas Conservation Commission and TOP Operating Company joined the lawsuit as plaintiffs, and several citizen groups intervened as defendants. The district court granted summary judgement to the plaintiffs, holding that the Conservation Act preempts Article XVI. Longmont then appealed the district court’s order to the Colorado Court of Appeals, which transferred the case to the Colorado Supreme Court.

Writing for a unanimous court, Justice Gabriel held that Longmont’s ban on hydraulic fracturing and the storage of associated waste is preempted because it operationally conflicts with the state’s statutory and regulatory oversight of this activity. See Longmont, ¶¶ 3 & 54. Justice Gabriel also suggests that these issues should usually be decided on summary judgment, explaining that “in virtually all cases, this analysis will involve a facial evaluation of the respective regulatory schemes, not a factual inquiry as to the effect of those schemes ‘on the ground.’” Id, ¶ 15.

For a home rule city like Longmont, the court must first decide whether a matter is of statewide, local or mixed state and local concern. This is determined by examining four factors: 1) the need for statewide uniformity of regulation, 2) the extraterritorial impact of the local regulation, 3) whether state or local government traditionally regulated the matter, and 4) whether the Colorado Constitution commits the matter to either state or local regulation. See Longmont, ¶ 20. The court found that the uniform statewide regulation and extraterritorial impacts of the fracking ban weigh in favor of the state, while Longmont has traditionally exercised zoning authority over land where oil and gas development occurs; accordingly, the court found that hydraulic fracturing is of mixed state and local concern. See id. at ¶ 31.

Next, the court turned to the issue of whether the local regulation conflicts with or is preempted by state law. Colorado case law recognizes three forms of preemption: express, implied, and operational conflict preemption. See Bowen/Edwards, 830 P.2d at 1056–57. The court concluded that neither express nor implied preemption applied. See Longmont, ¶¶ 44 & 45. In reaching this conclusion, the court rejected arguments that the state’s dominant interest in oil and gas development justified implied preemption and that the state has the exclusive authority to regulate the technical aspects of oil and gas operations. See id. at ¶ 47. The court agreed, however, that operational conflict preemption applies because the fracking ban would materially impede or destroy the state’s interest in the efficient and responsible development oil and gas. See id. at ¶ 53. This interest includes “a strong interest in the uniform regulation of fracking” as demonstrated by the state’s “pervasive rules and regulations, which evince state control over numerous aspects of fracking.” Id.

Citizen intervenors had posed a novel argument that the inalienable rights granted to citizens under article II, section 3 of the Colorado Constitution precludes the preemption of the fracking ban because it protects citizen rights. See Longmont, ¶ 57. The court dismissed this argument, stating that it would allow local regulations that promote citizen rights to always supersede state law and render the home-rule provision of the Colorado Constitution superfluous Id. at ¶ 59. The court found no authority for the adoption of such a concept under Colorado law.

City of Fort Collins v. Colorado Oil and Gas Association

Similar to the hydraulic fracturing ban in Longmont, Fort Collins voters approved a five year moratorium on hydraulic fracturing and the storage of hydraulic fracturing waste in November 2013. In response, COGA filed a lawsuit against Fort Collins seeking a declaratory judgment that state law preempts the moratorium. As in Longmont, the district court granted summary judgement to COGA, holding that the five year moratorium is preempted by the Conservation Act. Fort Collins appealed the district court’s order to the Colorado Court of Appeals, which transferred the case to the Colorado Supreme Court.

Justice Gabriel again wrote for a unanimous Supreme Court. Using the same preemption analysis applied in Longmont, the court concluded that the Fort Collins hydraulic fracturing moratorium involves a matter of mixed state and local concern. See Fort Collins, ¶ 16. It next determined that the moratorium operationally conflicts with the Conservation Act by “rendering the state’s statutory and regulatory scheme superfluous, at least for a lengthy period of time, because it prevents operators . . . from fracking until 2018.” Id. at ¶ 30. The court rejected Fort Collins’ arguments that a moratorium is different than a ban because fracking is a non-essential phase of production and a moratorium is only a temporary time out. The court noted that virtually all oil and gas wells in Colorado are fracked, and that the moratorium interferes with the state’s goal of permitting oil and gas pools to produce up to their maximum efficient rate of production, subject to the prevention of waste and consistent with the protection of public health, safety, and welfare. See id. at ¶ 33. It also explained that unlike moratoria that have been upheld in other contexts, the Fort Collins moratorium changes rather than maintains the status quo and covers a lengthy time period. See id. at ¶ 34. The court also emphasized that the moratorium is a prohibition and not a regulation and that it impedes the state’s interest in hydraulic fracturing. See id. at ¶ 37. The court expressed no view, however, on “the propriety of a moratorium of materially shorter duration.” Id. at ¶ 40.

Concluding Thoughts

The Longmont and Fort Collins decisions uphold Colorado’s longstanding preemption approach and clarify the proper analysis to be applied to determine whether state law preempts local regulation of oil and gas development. The court’s holdings confirm that local governments cannot prohibit hydraulic fracturing for a period of five years or longer, finding such bans materially impede or destroy the state’s interest in the efficient and responsible development oil and gas. The holdings also appear to encourage the resolution of these issues on summary judgment, which promises a faster and less costly process than the evidentiary proceedings contemplated in Bowen/Edwards. Whether these decisions will have a beneficial effect on future legislative and ballot battles over these issues remains to be seen.

The U.S. Forest Service is developing national policy to address mitigation of adverse impacts in National Forests and Grasslands and is seeking public input on this policy. This effort reflects the agency’s attempt to implement a November 3, 2015 Presidential Memorandum, “Mitigating Impacts on Natural Resources from Development and Encouraging Related Private Investment.” This memorandum directed all federal agencies, within 180 days of its issuance, to “adopt a clear and consistent approach for avoidance and minimization of, and compensatory mitigation for, the impacts of their activities and the projects they approve.”

On April 6, 2016, the Forest Service held a webinar and released a white paper titled “Seeking Recommendations in Formulating Agency Policy on Mitigating Adverse Impacts on National Forests and Grasslands.” In the webinar and white paper, the Forest Service explained that its forthcoming mitigation policy will consist of a “brief” regulation that establishes “clear goals” for the use of mitigation on National Forest System lands. Its policy will also consist of a “detailed set of directives” in the Forest Service Manual and Handbook that clarify the methods and tools of mitigation. The Forest Service anticipates it will publish a draft regulation for public review and comment in June 2016 and a final regulation in October 2017. The agency will release draft directives for public review and comment in late 2016 or early 2017 and will finalize the directives by November 2017.

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On February 25, 2016, the Bureau of Land Management (BLM) published proposed revisions to its resource management planning regulations, last revised in 2005. The proposed revisions fundamentally shift the land use management planning process from more local resource management planning to a sweeping landscape-scale approach that may make more difficult the analysis and consideration of local conditions, issues, and impacts. This Client Alert describes those proposed revisions and their potential impact on the resource management planning process.

BACKGROUND

Since May 2014, BLM has sought input on changing its land use planning process under the Federal Land Policy and Management Act (FLPMA)–specifically developing and updating Resource Management Plans (RMPs). Dubbed Planning 2.0, this initiative focuses on increased public involvement and use of current data and technology in making planning decisions.

BLM has proposed to overhaul its planning regulations in a manner that will fundamentally change the land use planning process potentially giving less deference to local concerns, impacts, and conditions to favor a new and broader landscape-scale approach that can lead to “one-size-fits all” requirements that may be impractical or even detrimental to particular local conditions. Some of the key proposed changes include:

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If you somehow missed the new Department of Transportation (DOT) Pipeline and Hazardous Materials Transportation Administration (PHMSA) requirements for unrefined petroleum product sampling plans (49 C.F.R. § 173.41, effective July 7, 2015), you are not alone (I stand with you!). First, there are a number of PHMSA rulemakings in varying stages of completion including, a broad new rule, not yet in effect, to apply new DOT requirements to petroleum gathering lines not previously regulated. Second, the new sampling plan requirement, when published in May of 2015, was largely either overlooked entirely or misunderstood to apply to only operators of rail terminals. However, the breadth of the new regulation is now becoming clear to operators large and small as PHMSA inspectors and trade and industry groups are beginning to spread the word about the requirements. Producers who ship unrefined petroleum products by rail, highway, air, or water must now, like refiners of petroleum products, develop and implement sampling plans for their unrefined petroleum products to meet the new regulation.

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