Texas Appellate Court Affirms Transocean Deepwater Horizon Derivative Suit Dismissal: An Interesting Angle on Corporate Inversion Transactions?

Texas Appellate Court Affirms Transocean Deepwater Horizon Derivative Suit Dismissal: An Interesting Angle on Corporate Inversion Transactions?

 In a July 24, 2014 opinion (here), an intermediate Texas appellate court, applying Texas law, affirmed the trial court’s dismissal on forum non conveniens grounds of the Deepwater Horizon disaster-related shareholder derivative suit filed against Switzerland-domiciled Transocean Limited [an enhanced version of this opinion is available to lexis.com subscribers]. The court’s ruling is interesting in and of itself, but it may be even more interesting in light of the recent efforts of a number of U.S. companies to relocate their headquarters and tax domicile overseas through the increasingly controversial transaction known as a corporate inversion (for more background about which refer here).

Transocean had been founded as a U.S. company but it had after many decades of doing business in the U.S. moved its domicile overseas. It is now headquartered in Switzerland. In the shareholder derivative suit, the trial court dismissed the case, concluding that Switzerland was the more convenient forum for the plaintiff’s derivative claims. The appellate court concluded that the trial court had not abused its discretion in dismissing the case on forum non conveniens grounds.

If the Texas courts’ rulings in the Transocean Deepwater Horizon derivative suit are any indication, the many U.S. companies now moving their headquarters overseas through inversion transactions may not only realize significant taxation benefits but they may also succeed in reducing their susceptibility to shareholder derivative litigation in U.S. courts.

Background

Transocean owned and operated the Deepwater Horizon drilling rig, located in the Gulf of Mexico. In April 2010, the rig exploded and ultimately sunk, resulting in the deaths of eleven workers as well as in a massive oil spill.

Transocean was founded in 1953 as a Delaware corporation headquartered in Houston. In 1999, the company became a Cayman Islands corporation, and in 2008 it reincorporated in Switzerland. Its stock continues to trade on American exchanges as well as on Swiss exchanges. The company’s U.S. subsidiary, which is headquartered in Houston, has thousands of U.S. employees. Of the parent company’s twelve directors, five live in Texas, three live in other U.S. states, one lives in Canada, and three in Europe. Only one of the European directors resides in Switzerland.

Margaret Richardson, a California resident, filed a derivative lawsuit against the Transocean board in Harris County (Texas) District Court. She alleged that the directors’ actions had harmed the company by causing it to incur substantial costs, liability and reputational harm. She alleged that the directors had been aware or should have been aware of the history of safety, maintenance and regulatory compliance issues – both for the company as a whole and with respect to the Deepwater Horizon rig – yet failed to take corrective actions, while making false statements to shareholders about the company’s safety and compliance record. The plaintiff asserted causes of action for breach of fiduciary duty, unjust enrichment and waste of corporate assets. The parties agree that because Transocean is a Swiss company, Swiss law applies to Richardson’s claims.

The defendants moved to dismiss the plaintiff’s action on forum non conveniens grounds. They stressed the difficulties the trial court would face in applying Swiss corporate law. The trial court granted the motion to dismiss and the plaintiff appealed.

The July 24 Opinion 

On July 24, 2014, in an opinion by Justice Michael Massengale, a three-judge panel of the Court of Appeals of the First District of Texas affirmed the trial court’s ruling, concluding that the trial court judge had not abused her discretion in granting the defendants’ motion to dismiss on forum non conveniens grounds.

In contending that the trial court judge had abused her discretion in dismissing the suit, Richardson had emphasized Transocean’s American origins; the substantial presence of its American subsidiary; the American residence of several of the company’s directors; and the significant human, economic and environmental costs to Texas from the Deepwater Horizon disaster. She argued that Transocean’s connections to Switzerland are “primarily tenuous corporate fictions,” while the activities of the company’s U.S. subsidiary affected the lives of thousands of Texans.

In assessing whether or not the trial court judge had abused her discretion, the appellate court assessed whether the trial court had considered all of the relevant private and public interest factors and whether the trial court’s balance of the factors was reasonable.

Among the private interest factors, the appellate court considered the accessibility of the evidence and witnesses. Although the Deepwater Horizon disaster took place in the Gulf of Mexico, the actions of the directors at issue in the plaintiffs’ derivative lawsuit “predominately took place in Switzerland.” Accordingly, the appellate court said, while there may be circumstances that favor a Texas forum, “the trial court reasonably could have concluded based on other facts presented – most notably that this case concerns acts of corporate governance by the board of directors of a Swiss corporation that holds it meetings in Switzerland – that the balance of private-interest factors favored litigation in Switzerland.”

The appellate court also concluded that the appellate record did not show that the trial court judge abused her discretion in weighing the public interest factors. The appellate court seemed to be particularly concerned with the problems associated with applying the law of Switzerland, a trilingual country and a civil-law jurisdiction with a code-based jurisprudence. The trial court said that given that Richardson’s suit “concerns the internal affairs of a Swiss corporation” and that the plaintiff had failed to show that the stockholders had a particular connection with Texas, and given  “the challenges of applying Swiss law in a complex, unsettled area,” the trial court “could reasonably have concluded that the public interest factors favored litigation in Switzerland.”

Discussion

The Texas courts’ consideration of these forum non conveniens issues very much reflected the specific circumstance presented, particularly the perceived difficulties for Texas courts in applying Swiss law. A different set of circumstances might well have produced a different outcome, notwithstanding the fact that the defendant company in a shareholder derivative suit is domiciled outside the U.S. Indeed, as discussed here, in at least one of the many other lawsuits that the Deepwater Horizon disaster produced, the Southern District of Texas refused to dismiss at least some of the common law damages claims of BP shareholders on forum non conveniens ground, even though English law governed the shareholders’ claims. Clearly, the mere fact of a defendant company’s non-U.S. domicile is not a universal safeguard against all U.S.-based shareholder litigation.

Just the same, the most salient factor in the Texas courts’ consideration of these issues was the fact that Transocean was headquartered outside the U.S and that as a result the law of company’s domicile governed the shareholder claimant’s derivative lawsuit. These same considerations resulted in the dismissal on forum non conveniens grounds of the Deepwater Horizon disaster-related shareholders’ derivative lawsuit that had been filed against the board of BP; in January 2013, the Fifth Circuit affirmed the district court’s dismissal of the BP derivative lawsuit, as discussed here.

These dismissals of purported shareholders’ derivative lawsuits on forum non conveniens grounds are of course interesting in and of themselves, for what they say about the relative insusceptibility of non-U.S. domiciled companies to U.S.-based derivative litigation.

But I find these dismissals, particularly the dismissal of the Transcocean lawsuit, even more interesting in light of the recent wave of corporate inversion transactions, in which U.S.-based companies merge with non-U.S. companies and then move their corporate headquarters to the target company’s location. The primary motivation for these transactions is tax-related, as the lower corporate tax rates applicable in many non-U.S. jurisdictions can result in a substantial tax savings for the acquiring company.

The Transocean case shows that in addition to the intended tax benefits, a company’s move to a foreign domicile through a corporate inversion transaction may also reduce the susceptibility of the company’s board to certain types of shareholder litigation.

Transocean itself had started as a U.S. company and had maintained a U.S. headquarters for over four decades. Even though the company’s U.S. subsidiary maintained substantial operations and employed thousands of workers in the U.S., because the company was based outside the U.S. and because its significant board activities took place outside the U.S., the courts of its home jurisdiction were held to be a more convenient forum than a U.S. court for a shareholder derivative lawsuit. Because shareholder litigation is far less well-established outside the U.S., the company’s board, as a result of the company’s non-U.S. domicile, arguably faces a much reduced exposure to these kinds of shareholder suits than as a U.S.-based company.

There may be many substantial tax-related reasons for companies to engage in the type of corporate inversion transaction that is all the rage these days. (I suspect that tax considerations were behind Transocean’s overseas move as well, but the appellate court’s opinion is silent about the reasons for the company’s move.) But along with the tax considerations there may be additional benefits as well – that is, that the potential liability exposures of the acquiring company may be reduced by taken on the non-U.S. domicile of the target company.

As noted above in connection with the BP shareholder common law damages claims, the fact that a company is based outside the U.S. is not an all-purpose defense against all U.S.-based shareholder suits. Nevertheless, the Transocean example shows that a company’s move to a non-U.S. headquarters can reduce the potential liability exposures of the company’s board, at least with respect to shareholder derivative litigation.  

 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.

For more information about LexisNexis products and solutions, please connect with us through our corporate site.