Biblical Oil Firm First to Mandate Arbitration Since SEC Shift

The first company to take the SEC up on its pivot toward mandatory arbitration of securities claims is a Dallas-based firm that uses Bible verses to search for oil deposits in Israel.

Zion Oil & Gas Inc. adopted the mandatory arbitration clause last week, about 10 weeks after the Securities and Exchange Commission reversed a longtime policy that had effectively banned provisions like it. SEC Chair Paul Atkins announced the shift in September as part of a broader push to “make IPOs” great again” by reducing securities litigation and shareholder activism.

Zion, which amended its bylaws Dec. 1, is the only company so far to embrace the SEC’s new stance, according to a Bloomberg Law review of SEC records. A spokesperson said the agency couldn’t confirm that information independently of its filings database. Zion didn’t immediately respond to a request for comment.

The company described its mission in a scripture-heavy “vision statement” filed with the SEC in 2006 as fostering Israeli energy independence through a “Biblical treasure hunt.” Oilfields in neighboring countries “are the blessings and posterity which G-d had promised Abraham also for his son Ishmael,” whose descendants became Arabs, according to the filing.

The founder of Zion—which markets its securities to retail investors through televangelist broadcasts—was “ordained by G-d” to find fossil fuel reserves in Israel, according to that 2006 document. “We searched the Bible and found numerous occasions where, I believe, the Bible” makes “direct reference to the existence of OIL in Israel,” the SEC filing said.

Uncertainty

With major companies including Tesla Inc. bending over backwards to curtail investor lawsuits—including by going to war with Delaware over its shareholder protections—the low uptake is a bit surprising, according to University of Colorado professor Ann Lipton.

“I expected that Tesla would be the first mover” after its previous dramatic maneuvers to avoid shareholder claims, Lipton said.

The company relocated to Texas, adopted a bylaw requiring a 3% stake to bring most investor suits, and awarded Elon Musk a $1 trillion pay package after a Delaware Chancery Court judge voided his $56 billion compensation last year. That decision is currently on appeal.

Although Musk has urged a corporate exodus, the pace of “DExits” remains a trickle, as many business leaders and attorneys show caution toward competing states—such as Texas and Nevada—with less mature corporate ecosystems. The roughly 30 firms that have left Delaware include TripAdvisor Inc., Dropbox Inc., Andreessen Horowitz, Coinbase Global Inc., and Zion, which reincorporated in Texas.

The tepid interest in mandatory arbitration reflects similar anxieties about an “opaque” and unfamiliar process, according to Southern Methodist University law professor Carliss Chatman.

“Even with the SEC’s policy shift, most public companies see mandatory arbitration of securities claims as destabilizing rather than protective,” Chatman said by email. “The fact that only a small, idiosyncratic issuer has adopted such a clause tells us that companies serious about reducing litigation risk continue to prefer predictable judicial oversight.”

Mass Arbitration Fears

Besides general aversion to legal unpredictability, there are several related reasons mainstream businesses have been hesitant to test the new regulatory waters, said Morrison & Foerster LLP partner Ryan Adams, a former SEC attorney.

For one thing, businesses tend to value the safety of crowds, according to Adams, who said being the first to test an unproven legal system involves risks that outweigh the “incremental benefits” of arbitration. He also pointed to market mechanisms that could punish firms for alienating shareholders overwhelmingly opposed to mandatory arbitration.

“Large companies, even the more aggressive ones, usually act slowly,” Adams said. “They don’t like to rile up their investors.”

They’re likely taking a wait-and-see approach as they cast a wary eye toward the consumer and employment litigation sectors, which have seen plaintiffs’ firms respond to widespread arbitration requirements by initiating mass proceedings that can be even more irksome and costly than traditional class actions, according to Lipton.

“If plaintiffs’ firms can organize mass consumer arbitrations, think what they’ll do with mass institutional investors,” she said.

Past Cases

Zion has faced five securities lawsuits, all filed in 2018, according to Bloomberg Law data. Four of the cases were consolidated and dismissed by a federal judge in Dallas. The fifth was voluntarily dropped.

The company’s brief amended bylaw states that it “includes a mandatory arbitration provision for claims under the federal and state securities laws of shareholder claims.” It vests jurisdiction over threshold disputes in Texas’ new business court.

Zion “almost certainly wasn’t getting appropriate legal counsel,” Lipton said. “You can tell that from the way it’s drafted.”