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Persistent Plaintiffs' Merger Challenge Wins $17.5 Million Settlement
Minority Says It Alone Was Injured by
Stock-for-Debt Deal
Persistent Plaintiffs' Merger Challenge Wins $17.5 Million Settlement
Persistent plaintiffs whose challenge to a 1998 merger of two Gulf Coast gas and oil companies survived numerous dismissal motions and Hurricane Katrina have won a $17.5 million settlement that needs only an official approval from a Delaware state court judge at an upcoming hearing.
The disputed deal joined Louisiana-based companies Freeport McMoran Sulphur and McMoran Oil & Gas Co. into McMoran Exploration Co. Shareholders of both predecessor companies got stock in the new company at a ratio that left Freeport with 39 percent of the new company and McMoran with 61 percent.
Dissident shareholders who said they were shortchanged in that transaction filed a suit in the Delaware Chancery Court, charging breach of duty against the directors of the merging companies. The case was repeatedly dismissed by the Chancery Court and then reinstated by the state Supreme Court.
Most recently, the high court revived the suit and ruled that even though a two-man independent committee of directors gave the deal its blessing, that did not sanitize the decision of a conflicted board of directors.
The high court ruled that if the special committee did not have any power in the merger decision, then the board's approval did not merit the protection of the business-judgment rule, which imposes personal liability only if the directors made an obviously self-dealing or uninformed decision.
After a new round of discovery and briefing, the suit survived a new motion to dismiss it from Chancery Court last June. Settlement negotiations began shortly thereafter but often broke off and were interrupted by the devastation of Hurricane Katrina in the Gulf Coast, where the defendant companies operated.
In the proposed settlement, the defendants have agreed to pay $17.5 million and the plaintiffs' attorney fees in an amount equaling up to one-third of the settlement amount, or about $5.8 million.
In support of the settlement, the plaintiffs noted that although they believe the claims to be meritorious, the defendants have asserted numerous defenses and there is a risk that the charges could not be proven. Therefore, the offered amount is reasonable, the shareholders say.
The defendants conceded that the amount of attorney fees, which would come out of the settlement, is within reasonable limits, and they agreed not to oppose that application or a request for expenses and interest in addition to the fee amount.
The settlement proposal has attracted no opposition and is scheduled to be approved at a hearing April 20.
Lead counsel for the plaintiffs are Pamela Tikellis and Robert Kriner Jr. of Chimicles & Tikellis in Wilmington, Del. Other counsel are Norman Monhait of Rosenthal Monhait Gross & Goddess in Wilmington and Goodkind, Labaton, Rudoff & Sucharow in New York.
McMoran Oil is represented by Lewis Lazarus of Morris James Hitchens & Williams in Wilmington and by Robert Bieck Jr., David Radlauer and Amy Glovinsky of Jones, Walker, Waechter, Poitevent, Carrere & Denegre in New Orleans.
Freeport and certain directors and officers are represented by Alan Stone of Morris Nichols Arsht & Tunnell in Wilmington and by Dennis Glazer, John Clarke Jr. and Florence Crisp of David, Polk & Wardwell in New York.
Other directors are represented by Allen Terrell Jr. of Richards, Layton & Finger in Wilmington and by Terence Murphy, Michael Rice and James Karen of Jones Day in Dallas.
In re Freeport McMoran Sulphur Inc. Shareholder Litigation, No. 16729, settlement hearing scheduled (Del. Ch. Apr. 20, 2006).
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Minority Says It Alone Was Injured by Stock-for-Debt Deal
The minority shareholders of SinglePoint Financial were the only ones hurt by a stock-for-debt payment deal that left the controlling stockholder of the failing Internet and software company with most of the pie, the plaintiff investors have argued to the Delaware Supreme Court in a bid to revive their lawsuit.
Oral argument is slated for April 26
In an appeal brief the minority shareholders argue that the state Chancery Court wrongly allowed former CEO Paul Rossette to in effect pull the company out from under them.
They claim that by using the self-dealing transaction to increase his holding from a bare majority to a 93 percent share, Rossette acquired — at the expense of the minority — a much larger piece of the company to sell when SinglePoint was later merged with Cofiniti Inc.
If the plaintiffs can convince the high court that they suffered an injury that was not inflicted on the entire company, then they can maintain an individual, rather than derivative, suit against Rossette.
Rossette says the suit is derivative and died with the company in a merger.
In an October ruling the Delaware Chancery Court said that when Rossette forced the sale of SinglePoint to Cofiniti, the plaintiffs lost their standing as shareholders to maintain their derivative breach-of-duty charges against him, as SinglePoint no longer existed.
Vice Chancellor John Noble dismissed the charges based on his view that the claims were derivative (alleging on behalf of the company that all shareholders were injured) as opposed to direct, where only an individual or group is allegedly injured.
However, in a Nov. 21 ruling on the plaintiffs' motion for an interlocutory appeal, the judge said that, even though other issues remained in the minority shareholders' suit, he would make an exception to a general rule against allowing appeals before a final ruling has been issued in the case.
On appeal, the minority shareholders argue that since they were the only ones injured by Rossette's fire-sale-priced stock transaction, the suit was not derivative.
In addition, the say the transaction was a breach of duty because it was engineered solely to deprive the minority shareholders of their interest in the company and their ability to press their lawsuit.
In his answering brief Rossette says he had been the primary financial backer for SinglePoint while it struggled as a start-up software developer. Under the terms of the loans he made to the company, he could under some circumstances convert the debt into shares of SinglePoint.
In their reply brief the minority plaintiffs contend that SinglePoint was not harmed because it was insolvent at the time and its stock was worthless on the open market, so it could not have taken the disputed shares and sold them outright.
However, those shares were valuable to Rossette because the more he had, the larger the percentage of the total offer from Cofiniti he could claim.
Conversely, as Rossette's share increased, the minority's share shrank, the plaintiffs contend.
"Absent the ability to assert a direct claim the minority stockholders thus would be left with no remedy for the very real harm they suffered," they say.
The plaintiffs are represented by David Jenkins and Michele Gott of Smith, Katzenstein & Furlow and by John Reed of Edwards Angell Palmer & Dodge, both in Wilmington, Del.
The defendants are represented by Raymond DiCamillo of Richards, Layton & Finger in Wilmington.
Gentile et al. v. Rossette et al., No. 573-2005, oral argument scheduled (Del. Apr. 26, 2006).