In re Plains Exploration & Production Co. S’holder Litig., Consol. C.A. No. 8090-VCN (Del. Ch. May 9, 2013) (Noble)
In this opinion, the Court of Chancery denied the motion of stockholders of Plains Exploration & Production Company (“Plains”) to enjoin preliminarily the proposed merger (the “Merger”) between Plains and Freeport-McMoRan Copper & Gold Inc. (“Freeport”) on the grounds that Plains’ board of directors (the “Board”) breached its fiduciary duties by allegedly failing to (1) obtain the best sales price available for Plains from Freeport and (2) provide adequate disclosures in the definitive proxy (the “Proxy”) so that Plains’ stockholders could make a fully informed vote on the Merger.
On December 5, 2012, Plains and Freeport entered into a merger agreement (the “Merger Agreement”) under which Plains’ stockholders will receive, for each share of Plains common stock, 0.6531 shares of Freeport common stock (the “Exchange Ratio”) and $25 in cash. The Merger consideration was initially $50 per share, but since the Merger was announced, the market price of Freeport’s stock has declined significantly. In a separate transaction, Freeport is to acquire McMoRan Exploration Co. (“McMoRan”)—of which Plains owns 31.3% of the outstanding shares—for per-share consideration of $14.75 cash and 1.15 units of a royalty trust that will hold a 5% overriding royalty interest in future production of certain McMoRan ultra-deep exploration properties.
In early 2012, James Flores, Plains’ CEO and Chairman, and James Moffett, Freeport’s Chairman, had initial discussions about a potential combination of Plains, Freeport, and McMoRan. Flores informed the Plains Board in April of these preliminary conversations. The Board notified Barclays PLC (“Barclays”), Plains’ long-time advisor, of Freeport’s expressed interest. More discussions were held in late April, and, in early May, Barclays gave a presentation to the Board about a potential combination. By late May, Freeport and McMoRan each had appointed special committees to consider the potential transactions. Plains did not form a special committee. The Plains Board considered the possible combination over the summer, and never sought any other potential acquirers or potential business combinations. The Board had determined to either pursue Freeport’s expression of interest or continue as a stand-alone company.
On September 12, 2012, Plains, without notifying Freeport, agreed to acquire various oil and gas properties in the Gulf of Mexico for more than $6 billion (the “Gulf of Mexico Transaction”). The transaction was to be financed largely by debt. Upon learning of the transaction, Freeport offered to assist with financing the acquisition, but Plains rejected the offer. Flores then informed Freeport’s special committee that Plains was terminating discussions with Freeport so that it could focus on its newly acquired properties. Not discouraged, Freeport’s special committee asked Flores to attend a previously scheduled meeting and make a presentation on the Gulf of Mexico Transaction. Thereafter, Freeport continued to pursue a merger and, although Flores had called off such a transaction, he nonetheless reengaged in discussions with Freeport’s special committee in late October.
On November 1, 2012, Freeport offered $47 per share for Plains, half in stock and half in cash. Freeport indicated its desire to retain Plains’ management to ensure the future success of its existing operations. In considering the offer, the Board received a preliminary financial analysis from Barclays, which opined that a price around $50 per share would be fair. The Board responded with a counteroffer of $55 per share, with one-third in cash and two-thirds in Freeport common stock. Flores also attempted to seek an equity “kicker” through a royalty trust. Barclays proposed the possibility of using a collar to protect against any drop in Freeport’s stock price, but this option was not implemented by the Board. Freeport made a counteroffer of $49 per share, in equal amounts cash and stock. Freeport was unwilling to offer more than half the merger consideration in its stock. At numerous times throughout November, the Board met with management and its financial and legal advisors to discuss the potential merger. Eventually, the parties agreed to a price of $50 per share, with Plains’ stockholders having the right to elect stock or cash, subject to pro-ration. Once the price was agreed to, Flores and the rest of Plains’ management met with Freeport’s special committee to discuss their roles in the combined company. Flores was to serve as CEO of Freeport’s oil and gas operations. Flores also agreed to take all of his Plains’ restricted stock units in Freeport stock subject to a three-year lockup.
On December 4, 2012, the Board formally met to discuss the final $50 offer price and the terms of the Merger Agreement, which contained deal protections including a no-solicitation clause with a fiduciary out, matching rights, and a 3% termination fee. The following day, the Board met to approve the Merger Agreement. Barclays again opined that the $50 per share price was fair. The McMoRan merger agreement was signed the same day.
Stockholders of Plains filed suit to enjoin the Merger, alleging that Flores was conflicted, that the Board abdicated its duties (and that it should have formed a special committee), and that the Board breached its Revlon duties by, among other things, failing to (1) shop the company, (2) seek a go-shop period, and (3) conduct a pre- or post-signing market check. Plaintiffs further asserted that the Proxy was materially deficient because it failed to disclose the unlevered free cash flows that Barclays used in its discounted cash flow (“DCF”) analysis. Plaintiffs also contended that there were other misleading and inadequate disclosures in connection with the methodologies and inputs that Barclays used.
The Court denied Plaintiffs’ motion for a preliminary injunction, holding that they lacked a reasonable probability of success on the merits of their claims. The Court first explained that the Board engaged in a reasonable negotiation and decision-making process, notwithstanding its decisions to not form a special committee and to allow Flores to run the negotiations; the Court reasoned, first, that seven of the eight directors on the Board were indisputably disinterested and independent, and, second, that Flores was properly overseen by the Board and his significant ownership of Plains stock aligned his interests with those of the stockholders generally.
The Court next rejected Plaintiffs’ argument that the Board breached its fiduciary duties by not shopping Plains, explaining that the Board had sufficient expertise, experience, and information from which it could make an appropriate decision. The Court also noted that the deal protections to which the Board agreed were not onerous and would not unduly impede a topping bid. The Court also observed that, in the months since the Merger was announced, no competing bid has come along, and “for good reason” in light of the 40% premium to Plains’ pre-Merger announcement closing price.
Next, the Court rejected Plaintiffs’ argument that the Board should have negotiated for a collar or a royalty trust, explaining that these decisions were within the business judgment of the Board. The Court stated that while the Board’s decision not to ask for a collar may have been, in hindsight, a poor decision in light of Freeport’s subsequent stock price decline, that did not make it an unreasonable decision. For similar reasons, the Court found that the Board’s failure to secure an equity “kicker” did not support a Revlon claim, noting too that the mix of cash and stock will allow Plains’ stockholders to share in the upside potential of the combined company.
The Court also determined that Plaintiffs’ disclosure claims were insufficient to support injunctive relief. The Court found that the Proxy disclosed a fair summary of Barclays’ work. The Court held that unlevered free cash flow numbers did not need to be disclosed because (1) other cash flow data were disclosed, (2) Plains never provided unlevered free cash flows to Barclays, and (3) Plaintiffs failed to explain how such information would affect a reasonable stockholder’s vote. The Court found that Plains’ EBITDAX (earnings before interest, taxes, depreciation, amortization, and exploration) did not need to be disclosed because this information would not significantly alter the total mix of information when management’s EBITDA projections were disclosed. The Court rejected Plaintiffs’ complaint that the Proxy did not disclose how Barclays determined the discount rates it used in its DCF and net asset value analyses, reasoning that these were immaterial disclosures. The Court also rejected Plaintiffs’ criticisms of the methodologies and inputs used by Barclays, stating that these were merely “quibbles” with Barclays’ work and cannot be the basis of a disclosure claim.
The Court rejected Plaintiffs’ disclosure claims concerning the negotiation process, viewing them as immaterial and of the “tell me more” or “why?” variety. The Court also rejected Plaintiffs’ request for more disclosure regarding (1) Flores’ alleged conflict of interest, (2) the purported conflict of interest of Freeport’s banker, JPMorgan, which had worked for Plains on the Gulf of Mexico Transaction, and (3) Barclays’ alleged conflict, as it owned Freeport stock. The Court found that the Proxy fully disclosed Flores’ alleged conflict and Barclays’ stock holdings in Freeport, and failed to see the materiality of JPMorgan’s putative conflict.
Finally, the Court rejected Plaintiffs’ request that the shareholder vote be delayed so that the drilling results relating to a particular oil well could be released and factored into shareholders’ voting decisions, finding this argument to be pure speculation.