June 2, 2011 1:58 PM
In Massey Energy Ruling, Strine Questions Cravath's 'Awkward' Role in Merger Talks
Posted by Susan Beck
From The Litigation Daily
Delaware vice-chancellor Leo Strine is a judge who knows how to tell a story.
In his latest work, Strine addresses the pending $7.1 billion acquisition of Massey Energy by Alpha Natural Resources. On the surface the case is about a derivative suit that plaintiffs lawyers filed against Massey's officers and directors alleging that they allowed the company's controversial former CEO Don Blankenship to ruin the company through reckless disregard for worker safety and the law. (Last year 29 miners died in a massive explosion at a Massey mine in West Virginia.)
The plaintiffs lawyers, led by Grant & Eisenhofer and Bernstein Litowitz Berger & Grossmann, tried to enjoin a shareholder vote on the Alpha deal on the grounds that Massey's officers and directors breached their fiduciary duties by failing to get as much as $1.4 billion more in the purchase price for the value of these derivative claims. In other words, the officer and director defendants, when they negotiated the deal, should have said to Alpha: "Look, you should pay more because the company has some whopping good claims against us, which are assets of Massey," according to the plaintiffs theory.
Strine refused to enjoin the deal, stating that it appeared that the defendants had negotiated a fair price for Massey on the open market. He noted that the plaintiffs still had options to pursue their derivative claims, including the remote chance that Alpha Resources might decide to sue the Massey defendants. Massey's shareholders overwhelmingly approved the acquisition on Wednesday.
It was a conclusion that might have required just 15-20 pages of explanation. But Strine used 81 pages to expound on a variety of topics, including Blankenship's questionable ethics, a 1,300-word footnote on the meaning of a decision in a Countrywide derivative case, the relative plight of Massey's shareholders compared to the families of the dead miners, and the fact that the word "fulsome" is often mistakenly used as a positive adjective.
Most interesting to us, however, was Strine's unprompted comments questioning the role that Cravath, Swaine & Moore played in this deal. Although the plaintiffs did not raise this issue, Strine questioned why Cravath simultaneously represented the defendants in the derivative suit and advised the board on how to evaluate the derivative claims in the context of Alpha's offer. Strine noted that Cravath advised the directors not to consider these claims in their deliberations, so that they could evaluate the merger without taking into account how they might be affected as defendants.
Strine faulted this approach. "The reality is that Cravath was the same law firm that was representing the Massey Board in defense of the Derivative Claims," Strine wrote. "It was therefore an awkward source of advice for the Board in considering what consideration, if any, to give to the Derivative Claims in negotiating the Merger. No doubt the better practice would have been for the Advisory Committee to have had its own independent counsel, Weil Gotshal, provide the Board with advice on this subject." (The Advisory Committee consisted of two new independent directors who were charged with evaluating whether Massey should pursue derivative claims arising from the mine explosion.)"It appears that counsel for the Board was so influenced by the fact that a majority of the Board were defendants in the Derivative Claims that counsel essentially told the Board not to give any weight to the pendency of those Claims in determining whether to do a deal with Alpha," Strine wrote. "As a result, one cannot conclude that the Massey Board was presented with a reasoned analysis of the 'value' of the Derivative Claims." Strine also suggested that Cravath didn't do a good job of explaining to the board what a survival of derivative claims means in the context of a merger.Despite his misgivings about the process, Strine concluded it was not marred enough to block a shareholder vote. "Although it would have been better for the Board to have received clearer advice from a more independent source, the Board’s ultimate decision about whether to sign the Merger Agreement does not seem to have been influenced in any material manner by a desire to limit the Board’s exposure to the Derivative Claims...Contrary to what the plaintiffs say, I do not draw the inference that the Board rushed into the arms of Alpha in order to end the Derivative Claims."
Cravath partner Stuart Gold, who represented the Massey outside directors in this litigation, declined to comment. Mitchell Lowenthal of Cleary, Gottlieb, Steen & Hamilton, who represented Alpha Resources, also declined to comment.
Plaintiffs lawyer Stuart Grant of Grant & Eisenhofer said: "I'm deeply disappointed by the decision. I think it sends a message that if you're a director and you drive a company into the ground through malfeasance, all you have to do is sell the company and escape liability. It's bad for shareholders and it's a bad decision for Delaware." Grant said the plaintiffs would continue to pursue the damage action against the officers and directors.
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