Shell's Big Legal Victory

Good morning.

Wall Street bonuses will, for the most part, no longer remind recipients of the "Beetlejuice" characters with shrunken heads. 

On Tuesday, compensation consulting firm Johnson Associates released projections that year-end bonuses will jump by as much as 35% this year — following two straight years of declines. Debt underwriters are expected to see the biggest bonus growth of the bunch, followed by equities underwriters and equities traders. Real estate bankers will likely see no change, while retail and commercial bankers may see a 5% decrease in bonus amounts. In case you haven't heard, the price of a lump of coal may soon be rising, so count your blessings.

Even though its fight was taking place in the Netherlands, where windmills happen to be plentiful, Shell knew it wasn't just tilting at them.

On Tuesday the oil giant managed to overturn a Dutch legal order made in 2021 that had mandated the company cut its emissions 45% from 2019 levels by 2030. It's a win for Shell which, like all fossil fuel companies, is increasingly the target of climate litigation. Specifically, it establishes a legal precedent that it's not really possible to put a number on one entity's contribution to climate change. But nuances in the court's judgment could lay legal snares for Shell further down the road.

Some Like it Hot

One of the difficulties with global warming from a legal perspective is that it's, well, global. One single entity isn't the sole cause, and Shell successfully appealed the 2021 decision by arguing that the size of its role could not be calculated; and besides if it were forced to reduce its emissions, other fossil fuel producers would simply step in to meet any left-behind demand. Dr Fergus Green, Associate Professor of Political Science at University College London, said the court's decision will have global repercussions.

While the ruling was undoubtedly good for Shell — which this summer backtracked on previous commitments to cut oil production and is enjoying a relatively breezy year compared with its oil-drilling peers — the court's decision wasn't an unmitigated win: 

• "Although the decision may at first glance appear like a setback for climate litigation, it reaffirms the key finding of the first instance judgment that the obligation to reduce greenhouse gas emissions in line with the Paris Agreement is not only an obligation for states but for private businesses as well," Laurence Doering, managing associate in the impact department of the law firm Mishcon de Reya, told The Daily Upside.
• Green highlighted that the ruling found companies' contribution to climate change can be viewed not only in terms of their activities, but also their investments. On top of this, the court affirmed that protection from climate change is a human right, a trend in climate litigation cases that raises the stakes for defendants such as Shell.

Empty Shell Victory: Maurits Dolmans, a senior counsel at law firm Cleary Gottlieb Steen & Hamilton who specializes in climate litigation, also posted on LinkedIn that Shell's was a "Pyrrhic victory." In an email to The Daily Upside, Dolmans said the biggest fly in the ointment is the fact that: "The court strongly hinted that Shell must not explore and develop new fields for which there is no carbon budget." According to Dolmans, the court couldn't base judgment on that part of its findings because the plaintiff, an NGO, had not made it part of the original claim — something future litigants may seize on.

Written by Isobel Asher Hamilton

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A treasure trove of genetic data may hold the key to a revolution in drug development, but it offers no clues for building a consumer business. 

On Tuesday, direct-to-consumer genetic testing firm 23andMe announced it would be shuttering its much-hyped drug development division — touted as not just the future of the company but of drug development — as well as cutting some 40% of its staff. There must have been markers of corporate health risk somewhere in the company's makeup.

Data Dump

23andMe may well be the quintessential 2010s-era tech-adjacent startup. Its core business — using saliva-collection kits to help consumers discover more about their DNA and connect with genetic relatives — is fun, novel, and completely unprofitable in part because it is immune to repeat business. To scale, 23andMe turned to two textbook remedies for struggling DTC businesses: evolving into a subscription model and attempting to monetize the massive dataset it had acquired.

The subscription model never took off. In March, it reported just 562,000 subscribers, down from 640,000 a year prior and way off from a projection of 2.9 million subscribers by 2024 floated when it went public via a SPAC merger in 2021. The company rocketed to a $5.8 billion valuation shortly after the public listing, but that has since fallen to just $150 million. In October, 23andMe engineered a reverse-stock split to keep its share price above $1.

Meanwhile, drug development is as painstakingly long as it is costly, even with a massive DNA dataset, and 23andMe has run out of runway:

• After reporting a net loss of $59 million on just $44 million in revenue, the company said it ended its most recent quarter with $127 million in cash, down from $256 million a year prior and way down from the big cash reserves it had once built up to fuel its drug development business.
• After once claiming it had identified 50 drug candidates, 23andMe had begun trials for just two candidates as of Tuesday, and said that it now would try to sell those assets.

Substantial Doubt: Tuesday marked the fifth round of layoffs since the start of 2023, when it had about 800 employees, and brings its total headcount to about 300. CEO Anne Wojcicki, who holds roughly half of the voting power, is attempting to take the company private. In September, seven board members resigned after Wojcicki presented a take-private plan that was not fully financed. In its latest filings, the company noted "substantial doubt about the company's ability to continue as a going concern." In the meantime, it continues to pay out a $30 million settlement to customers affected by a data breach.

Written by Brian Boyle

With more and more former conglomerates — GE, United Technologies, Kellogg's, DuPont and so on — splitting into parts, Honeywell has aimed to keep its disparate assembled family more or less together. 

But Elliott Investment Management says its breakup would mark the end of an error. The activist fund revealed Tuesday that it has taken a $5 billion stake in Honeywell and is advocating for splitting the company into an aerospace firm and an automation firm, claiming anything less will leave significant value on the table.

"Embrace Simplification"

It all comes down to the usual two words: shareholder value. Large conglomerates — predicated on scale and buzzwords like "integration" and "synergies" — can use the diversity of their business lines as a bulwark against risk exposure in individual markets. But they also turn into cumbersome bureaucracies with massive overhead: Management ends up operating at arm's length from customers and strategic decisions are made at a tortoise's pace.

That's why many investors have come around to the idea that it's better to break up. For example, shares of GE Vernova, which spun off from GE's energy division in April, have more than doubled in value since then. CEO Vimal Kapur has moved to simplify the company's portfolio into what he calls the "megatrends" of automation, the future of aviation, and energy transition. But Elliott believes that doesn't go far enough:

• "The time has come to embrace simplification," reads the letter. "We believe a separation could result in share price upside of 51-75% over the next two years — a remarkable improvement for any business, let alone a $150 billion industrial bellwether." Honeywell's shares were up 3.9% Tuesday, and its market cap at $152 billion.
• Overall this year, Honeywell shares have increased 12%, including Tuesday's jump, trailing the S&P 500's 26% rise. "Honeywell's struggle with complexity is neither unique nor surprising; it is endemic to the conglomerate operating model," said Elliott, pointing to GE, United Technologies, Alcoa, Danaher, Tyco, Ingersoll Rand and "countless others that have found success through simplification."

Play Nice: The underwhelming performance of Honeywell's shares suggests management, at the very least, will need to extend an olive branch. A spokesperson said Honeywell "appreciate[s] the perspectives of all our shareholders" and "look[s] forward to engaging with the firm to obtain their input."

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