The litigation challenges a transaction between Continental Resources, Inc. and Harold Hamm, the company’s billionaire founder and majority shareholder, whereby Continental bought petroleum assets from Mr. Hamm for $340 million. Plaintiffs Laborers District Council Construction Industry Pension Fund and Winston O. Watkins allege that Hamm caused the company to overpay for these assets.
The assets purchased by Continental in the disputed deal were originally part of Continental’s interest in the Bakken shale formation in Montana and North Dakota. Hamm and another Continental officer, Jeffrey Hume, purchased these assets in 2002, by entering into a “participation agreement” under which they paid Continental for a share of the expenditures chargeable to the assets. However, the development of the Wheatland assets cost much more than they generated in revenues, and Hamm and Hume decided to sell them back to Continental. They first expressed an interest in the sale in November 2010, but Continental’s board of directors officially sat on the proposal for a year (while engaging in informal negotiations that allowed Hamm and Hume to lay the groundwork for an extremely favorable transaction). The delay allowed board member Mark Monroe, Continental’s former COO, to serve as chairman of the committee of “independent” directors who would “negotiate” with Hamm and Hume, because he would then be three years’ removed from his management position at the Company and thus purportedly “independent” under NYSE rules. As chairman of the committee, Monroe negotiated the transaction on behalf of Continental on his own directly with Hume, agreeing to a price of $340 million to be paid in Continental common stock, even though Continental’s own financial advisor valued the assets between $167 and $255 million. This was an unfair price reached through an unfair process that benefited Hamm and Hume at the expense of Continental’s minority shareholders. Accordingly, plaintiffs brought class action and derivative claims alleging that Continental’s directors breached their fiduciary duties to the minority shareholders and to the company.
Defendants moved to dismiss the litigation, contending that Plaintiffs needed to have made a pre-suit “demand” on the board before bringing derivative claims on behalf of Continental. KTMC convinced the state court that because Hamm, as Continental’s majority shareholder, stood on both sides of the deal, the Court had to review the transaction under Oklahoma’s strict “intrinsic fairness” standard, which places the burden of proving the deal’s fairness on the controller. Defendants’ motion to dismiss was thus denied. Nearly a year later, after the Delaware Chancery Court issued its defendant-friendly MFW decision,1 Defendants renewed their motions to dismiss, which were again denied. Defendants then begrudgingly began producing nonpublic discovery materials.
Apparently unhappy with their efforts to get the litigation dismissed in court, defendants, along with several other large Oklahoma companies, turned their sights on the Oklahoma legislature. Acting with these other companies and their paid lobbyists, defendants proposed a modification to Oklahoma’s civil procedure rules to require that a “non-prevailing party” in a derivative action pay the “prevailing” party’s attorneys’ fees. The legislature passed this amendment, and it was signed into law by Governor Mary Fallon on May 23, 2014.
While the words “prevailing party” appear to apply equally to both shareholder-plaintiffs and corporate defendants, the statute was hardly neutral. Oklahoma law already entitled successful derivative plaintiffs to recover their attorneys’ fees, so the amendments’ real purpose and effect is to give corporate defendants the right to recover attorneys’ fees from shareholders. Since corporate defendants are indemnified by their companies and covered by directors’ and officers’ insurance, this law puts shareholder-plaintiffs, who are actually suing only on behalf of the company and not in their own names, in the position of being the only parties in a derivative case with exposure to personal liability. While the Delaware Supreme Court recently ruled that non-stock corporations may adopt such fee shifting provisions in their bylaws,2 these amendments legislatively apply a “loser pays” rule to all Oklahoma corporations, drastically affecting the rights of shareholders of corporations in the state. The Continental defendants’ purpose in passing the amendments, of course, was to pressure the plaintiffs into withdrawing their derivative claims challenging the Wheatland action, and to insulate themselves from shareholder derivative litigation in the future by effectively eliminating all future derivative litigation in Oklahoma.
KTMC promptly sought judicial review of the new statute by filing a separate “declaratory judgment” action. This new action sought a ruling that the new Oklahoma statute was unconstitutional, and that it should not be retroactively applied to Plaintiffs’ ongoing litigation. Specifically, Plaintiffs asked the court to hold that in a derivative action, a shareholder “prevails” when it defeats a motion to dismiss, and thus stands in the shoes of the company. A shareholder-plaintiff in a derivative action only seeks to benefit the company (not itself) by pursuing such an action. It thus makes little sense, and advances no legitimate public policy, for such a shareholder to bear the risk of paying millions in defendants’ fees if the company, which it seeks to benefit, loses at trial. Defendants moved to dismiss the declaratory judgment action, arguing that because Plaintiffs might never be liable for defendants’ fees, that the action was unripe. On August 22, 2014, the Oklahoma state judge assigned to the declaratory judgment action agreed, and dismissed the lawsuit.
Unfortunately, Plaintiffs now face the choice of continuing with what we believe to be meritorious derivative litigation, but risking the possibility of paying millions in fees if we are deemed not to have “prevailed,” or walking away from these claims. For this reason, fee-shifting in representative litigation will dissuade any rational shareholder from participating in such an action, and KTMC cannot in good faith recommend that any shareholder assume such a risk of liability. Luckily, in drafting the Continental complaint, KTMC included a class claim along with our main derivative claims. The new Oklahoma statute does not shift fees in class actions, so KTMC is likely going to move forward with this single class claim, while abandoning meritorious derivative claims that stood to benefit the company and all of its minority shareholders. We eagerly await the next chapter in this hard-fought litigation.
1In re MFW S’holders Litig., 67 A.3d 496 (Del. Ch. 2013).
2ATP Tour v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014).