According to news
reports, on June 1, 2011, Alpha Natural Resources completed its $7.1
billion acquisition of Massey Energy Company. The deal went forward despite
last minute efforts by groups of Massey shareholders proceeding in West
Virginia and Delaware courts to try to enjoin the transaction on the grounds
that the merger did not properly value the pending derivative claims against
the company's board, resulting in Alpha being able to acquire Massey without
taking into account the fair economic value of the derivative claims.
The courts in both West Virginia and Delaware rejected
the preliminary injunction motions. Delaware Vice Chancellor Leo E. Strine Jr.'s 81-page
May 31, 2011 opinion (here) refusing
to enjoin the merger makes for some extraordinarily interesting reading, as
Susan Beck notes in her June 1, 2011 Am Law Litigation Daily article
about the decision (here).
All of these events relate back to the April 5,
2010 disaster in Massey's Upper Big Branch Mine in Montcoal, West Virginia,
in which 29 miners were killed. In the wake of the disaster, the company's
share price declined, and the company struggled to deal with the fallout and
scrutiny from the tragedy. These events set up a lengthy process that resulted
in Alpha's agreement to acquire Massey. During this process, Massey forced out
its long-standing CEO, Don Blankenship.
Another thing that happened in the wake of the disaster
("inevitably," Vice Chancellor Strine noted) is that Massey shareholders filed
derivative suits seeking to ensure that to the extent Massey was harmed by the
obligation to pay fines, judgments to the deceased miners' families and lost
cash flow from the damaged mine, the companies directors and officers should be
held responsible for failing to make sure that Massey complied with mine safety
regulations.
In addition to damages, the derivative plaintiffs sought
a preliminary injunction against the merger, arguing among other things that
the merger was at attempt by the board to evade its responsibilities for the
harm to the company by means of a sale to Alpha.
In his May 31 opinion, Vice Chancellor Strine denied the
plaintiffs' motion for a preliminary injunction, holding that it is "highly
doubtful" that the shareholders would be able to show that Massey's board had
sought to sell the company "solely, or even in a material way" to escape
liability for the shareholder claims. He also said that to delay the deal would
"threaten more harm to Massey shareholders than its potential benefits to
them," reasoning that Massey's shareholders ought to be able to vote for
against the merger on their own.
There are a host of interesting things about Vice
Chancellor Strine's highly readable 81-page opinion. Among them, in no
particular order, are the following.
First, Vice Chancellor notes that it is "undisputed"
"regrettable" "concerning" and "might even be characterized as a breach of the
duty of care" that in connection with its consideration of the proposed Alpha
merger the Massey board "failed to address the value" of the derivative claims,
as the duties of a board in negotiating the sale of company is to consider and
get full consideration of "all of the corporation's material assets." However,
he added, that "does not much help the plaintiffs obtain an injunction," as the
record "does not support the inference that the Derivative Claims are material
in comparison to the overall value of Massey as an entity."
Second, as part of reaching the preceding conclusion,
Vice Chancellor Strine noted that "the record does not persuade me that the
Merger would, after trial, likely prove to be economically unfair to the Massey
shareholders," citing a number of considerations. In particular, with respect
to the question whether or not the failure to separately negotiate value
reflecting the derivative claims, Strine noted numerous difficulties the claims
face, including the difficulty of showing that the defendants "acted with
a wrongful state of mind, particularly given the exculpatory provision in
Massey's charter"; the possibility that "insurance proceeds may not be
available to pay any judgment"; the questionable ability of even the wealthy
board members to satisfy any judgment; and the fact that most of the individual
defendants are independent directors whose "motivation to tolerate unsafe
practices for the sake of profits would be tempered." The value of the
derivative claims might represent at most an opportunity for the company to
recoup some of the costs for the disaster - and for that reason "it is unlikely
that Alpha viewed these Claims as an asset at all, but merely as having some
potential to reduce the gravity of the Disaster Fall-Out Alpha was inheriting."
Third, though the Massey board itself might have been
unclear on what the merger's completion would mean for the derivative claims,
Stine himself is very clear that the claims survive the merger (given his
determination that the merger was not motivated primarily to avert the
derivative suit liability). But with the merger's completion, Alpha, as
Massey's successor in interest, controls the claims, putting the derivative
plaintiffs in the position of having to prove demand excusal, and thus "receive
leave to proceed in a double derivative action on behalf of Alpha" - an outcome
Strine says "is not one an objective mind ought to consider probable" given
that Alpha's board has no exposure to the claims but "myriad of rational
business reasons why Alpha may later decide that prosecuting these Claims does
or does not make sense for Alpha."
Nevertheless, Strine also notes that it is not a foregone
conclusion that Alpha would not itself decide to pursue claims against the
former fiduciaries of Massey. The fact is, as Strine notes, "Alpha will have to
make a difficult business calculation about the extent to which it goes after
Massey's former management," and its board will have to answer to Alpha's own
shareholders on their decision whether or not to pursue such claims. As Strine
notes, "it is not clear why Alpha would not seek to offset the costs to itself
of those violations by suing previous management if by doing so it had a
realistic chance of obtaining some meaningful recovery." That does not
necessarily mean that Alpha will be able to effect a recovery commensurate with
this costs (See the "second" item above and the "seventh" item below).
Fourth, Strine has some choice words to say about the
Cravath law firm, which is not only acting as the board's counsel in the derivative
lawsuit, but also counseled the board on how it ought to consider the
derivative suit in connection with the proposed merger. Strine characterized
the law firm as being an "awkward source for advice" on this issue, and given
the Cravath firm's recommendation that the board not consider the existence of
the derivative claims at all, "one cannot conclude that the Massey Board was
presented with a reasoned analysis of the 'value' of the Derivative
Claims." Strine also faulted Cravath for insufficiently explaining to the
board what a survival of derivative claims means in the context of a merger.
(Susan Beck's Am Law Litigation Daily article linked above has more on
this particular topic.)
Fifth, using language that is both noteworthy and
striking, Strine went out of his way to excoriate former Massey CEO Don Blankenship,
quoting descriptions of him as "autocratic" and describing him as having an
"adversarial relationship" with the UAW and a "combative approach" to the
federal mining regulator. He noted that Massey's managers and employees
understood that "if you wished to stay or get ahead at Massey under
Blankenship, then the priority of profits over safety is one not to be
questioned." He also noted that in 2009, after President Obama's election and a
change in leadership at the mining regulator, and after Massey had sustained a
number of losses in legal proceedings, Blankenship's attitude toward regulators
"deteriorated very sharply."
Sixth, Strine makes it clear that he believes the real
victims here are the deceased coal miners and their families - and in that
regard, Strine is not prepared to let the shareholders off the hook. As he
points out in a biting 1,071-word footnote (number 185), Massey's shareholders
not only had an annual opportunity to elect directors, but they "continued to
invest in a company they say was well known to treat its workers and the
environment poorly." Indeed, "to the extent Massey kept costs lower and exposed
miners to excess dangers, Massey's stockholders enjoyed the short-term benefits
in the form of higher profits." The very practices of which the plaintiff
shareholders now complain might rationally have been expected to act as a
"goad" to shareholders to "give more weight to legal compliance and risk
management in making investment decisions." In the end, Strine notes, the "most
sympathetic victims here were not shareholders, they were Massey's workers and
the families" and other constituencies who suffered while the company prospered
and shareholders benefitted.
Seventh, readers of this blog will be interested in some
parenthetical comments Strine has to make about D&O insurance. In noting
the difficulties Alpha would have in collecting on any judgment entered in the
derivative case, he notes that even if the derivative claims were to settle for
the full amount of the D&O insurance, the total amount of coverage
available is $95 million - not a "trifle," but also not material in the context
a merger valued over $ 7 billion. Also, Strine notes, showing that he has a
keen appreciation for the D&O insurance market's dark reality, "anyone who
has dealt with coverage questions and insurance carriers would also tell you
that a scenario in which the D&O insurers in the 'tower' would easily pay
out anywhere near the full amount of the policy in a quick and low-cost way to
Alpha is more the stuff of dreams than of real life."
Eighth , it may not be entirely relevant to Vice
Chancellor Strine's decision or to the fact that the Alpha acquisition went
forward as planned, but it is probably worth noting that among Massey's former
independent directors is another individual whose name has been in the news for
entirely different reasons this week - that is, among the independent Massey
directors named as defendants in the derivative litigation is Ohio State
University President E.
Gordon Gee. According to Wikipedia,
Gee served on Massey's board from 2000 until 2009 (that is, he resigned before
the Big Branch Mines disaster, but during many of the prior safety and
environmental problems the company faced.)
Now that the merger has been completed, the ball shifts
to Alpha's board to consider whether or not to pursue direct claims against the
former Massey directors and officers. While Alpha might as Strine notes have
substantial business reasons for wanting to close the book on the past and
moving forward, the fact is that Alpha also inherited the wrongful death and
regulatory claims that were pending against Massey. As much as Alpha might want
to move on for business reasons, that may not be an available option.
To the extent Alpha must pay settlements, fines, and
judgments, it will have to consider whether or not to pursue claims against the
former Massey fiduciaries to try to recoup these costs. And in making that
determination, the Alpha board will also have to consider its fiduciary duties
to its own shareholders (some of whom now are former Massey shareholders.) I
don't know where any of this ultimately will lead, but the insurers in that $95
million insurance tower (whoever they may be, I have no idea) may find it
prudent to wait a while before deciding whether or not to take down their
reserves on this particular claim.
Special thanks to a loyal reader for providing me with a
copy of Judge Strine's opinion.
Yeah, I Really Hate it When the Guy in Front
of Me Reclines His Seat Back, Too: On a May 29, 2011 United
Airlines flight from Washington Dulles Airport to Ghana, one of the passengers
decided to lower his seat back - which set in process a sequence of events that
started with a scuffle on the plane and ended with Air Force F-16 fighter jets
being scrambled. Because no one could make this up, you really have to read the
Washington Post story (here)
for yourself.
Just something to think about next time before reclining
your seat back, O.K.?
Read
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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