Delaware judge green-lights first step in three-way Freeport-McMoran merger
Dissident investors of Plains Exploration & Production Co. have failed to persuade a Delaware judge to stop a stockholder vote on joining a $9 billion three-way merger with precious minerals miner Freeport-McMoRan Copper & Gold and oil driller McMoRan Exploration Co.
Vice Chancellor John Noble on May 9 denied the shareholders’ motion for a preliminary injunction to stop the vote until the Plains directors shopped for a better price than the $50-a-share Freeport offer and disclosed more information about the sale process.
He said the shareholders failed to prove the Plains directors abdicated their duty to get the best price for the company by allegedly giving CEO James C. Flores free rein to negotiate a purported sweetheart deal with his friend and Freeport CEO James R Moffett.
The ruling effectively clears the way for a May 20 shareholder vote on whether oil and gas processor Plains should accept Freeport’s $6 billion offer.
The merger, and Freeport’s proposed acquisition of McMoRan Exploration, would form one of the world’s largest energy conglomerates, but it has spawned a three-front legal war with shareholders of all three companies who are unhappy with the deal.
Those battles are being fought in the Chancery Court since all three firms are incorporated in Delaware.
Vice Chancellor Noble’s ruling is a setback for the challengers because he decided the Plains directors could have gotten a fair price even if they didn’t follow many of the common steps of boards in a change-of-control situation, such as forming a special committee and comparison shopping.
The ruling also could affect future cases involving charges that directors had breached their duty in a sale situation.
“The decision will likely be relied on in the future to support the argument that neither a special committee nor a pre-market check is required,” Francis G.X. Pileggi, who edits a blog on Delaware corporate law, said in a phone interview.
But he noted that the ruling was “tethered to the facts of this case.”
“Seven out of eight board members were independent and not conflicted,” he said. “Those directors were also adequately involved in the negotiations and were very experienced in the oil and gas industry.”
In parallel lawsuits, shareholders of Plains and McMoRan Exploration had alleged they were shortchanged in the corporate ménage á trois because the insiders who control all three companies are getting benefits from the deal at the common shareholders’ expense. In re McMoRan Exploration Co. Stockholders Litig., No. 8132, cases consolidated (Del. Ch. Jan. 25, 2013); In re Plains Exploration & Prod. Co. S’holder Litig., No. 8090, cases consolidated (Del. Ch. Jan. 25, 2013).
The suits say the Plains and McMoRan directors breached their duty to get the best price for the companies.
Each set of plaintiffs then filed a motion for a preliminary injunction that would stop the acquisition by Freeport.
Meanwhile, Freeport’s own shareholders have sued its officers and directors, claiming they’re wasting assets by paying too much for the two companies, which were once subsidiaries. In re Freeport-McMoRan Copper & Gold Derivative Litig., No. 8145, cases consolidated (Del. Ch. Jan. 25, 2013).
In support of their injunction motion the Plains plaintiffs argued that the directors who arranged the deal never checked the market to find out what the company was actually worth. They then compounded that problem by agreeing to deal-protection provisions that kept them from soliciting other bidders or getting the best price for the company, the shareholders said.
But in his ruling, Vice Chancellor Noble said it was key that the majority of the Plains directors were completely independent and well-versed in the oil and gas industry.
He said that although the plaintiffs paint the merger as a deal between corporate buddies, they fail to explain why seven independent directors “would disregard their fiduciary duties … to help Flores achieve his self-self interested objectives.”
As to the alleged failure to shop for the best price, the judge said that when the board members have an adequate body of reliable evidence with which to evaluate the fairness of the price they receive, there is no bright-line rule that requires them to do a market check.
In a May 9 press release, Plains said the judge found that the plaintiffs “have not established a reasonable probability of success on the merits of their claim that the Plains board of directors breached its fiduciary duties in connection with the merger.”
The plaintiffs’ attorneys had not responded to requests for comments at press time.
In re Plains Exploration & Production Co. Shareholder Litigation, No. 8090-VCN, memorandum opinion issued (Del. Ch. May 9, 2013).