The parties to the Freeport-McMorRan Copper & Gold, Inc. Derivative Litigation have finalized an agreement to settle the consolidated litigation pending in the Delaware Chancery Court in exchange for a payment of $137.5 million and for the company’s agreement to adopt certain corporate governance reforms. The settlement represents the third largest derivative lawsuit settlement ever. It will largely be funded by D&O insurance. The settlement has what the plaintiffs’ lawyer called an “unprecedented provision” for the settlement proceeds (less attorneys fees and costs) to be paid the company’s shareholders in the form of a special dividend. The settlement, which was previewed in an earlier post (here), is subject to court approval.
The parties’ Stipulation and Settlement Agreement can be found here. Liz Hoffman’s January 15, 2015 Wall Street Journal article describing the settlement can be found here. A January 15, 2015 press release from one of the plaintiffs’ law firms about the settlement can be found here.
If approved, the settlement will resolve allegations by Freeport’s shareholders that the company overpaid when it bought McMoRan Exploration and Plains Exploration & Production companies for a combined $9 billion. The shareholders had alleged that the Freeport board had conflicts of interest while negotiating the company’s summer 2013 purchase of McMoRan and Plains, owing to overlapping boards and ownership of the three companies involved. A copy of the plaintiffs’ amended complaint can be found here.
According to the parties’ settlement stipulation, the $137.5 million settlement will be funded by a $115 million payment from the company’s D&O insurers plus another $22.5 million from Freeport itself. The specific carriers involved in funding the settlement are not identified by name in the settlement stipulation.
The settlement stipulation also provides that the settlement is “conditioned upon the Freeport Board resolving to declare a special dividend” of the settlement amount less attorneys’ fees (in an amount to be determined by the court) and costs.
The various “Corporate Governance Enhancements” to which the parties agreed as part of the settlement are detailed here.
The settlement does not resolve the plaintiffs’ claims against Credit Suisse. Interestingly, the settlement agreement specifies that the settlement is conditioned upon the provision of a “complete waiver of any and all rights the D&O Carriers had, have, may have or will have to subrogation as to any amounts that may be recovered on Freeport’s behalf from Credit Suisse or any third party in the prosecution of claims” related to the transactions at issue. Presumably the carriers are well aware of this requirement and agreed to it in principle in advance.
As detailed in my list of the largest derivative lawsuit settlements (here), this settlement represents the third largest shareholder derivative lawsuit settlement ever, eclipsed only by the $139 million News Corp. settlement (here), and the $275 million Activision settlement (here).
The settlement’s provision for the special dividend payment to the company’s shareholders is interesting. One of the defining characteristics of shareholder derivative litigation as opposed to direct shareholder litigation is that in a derivative lawsuit the claimants assert the company’s own claims and seek a recovery from the defendants on behalf of the company itself, by comparison to a direct lawsuit in which the claimants assert their own claims and seek a recovery on their own behalf. However, in this derivative lawsuit settlement, the settlement proceeds net of fees and costs are to be funneled to the shareholders in the form of a settlement dividend, producing a result that in the end is tantamount to the kind of outcome typically sought in a direct action.
The plaintiffs’ lawyers’ press release to which I linked above quotes one of the attorneys as saying “We are pleased to be able to provide the shareholders of Freeport a significant monetary recovery.” That is not an unexpected kind of thing for a plaintiff lawyer to say upon settling a shareholder suit, it is just an unusual thing to be said after the settlement of a derivative lawsuit. More typically there would be a reference to producing shareholder value, which is a different message that saying a settlement is providing shareholders a “significant monetary recovery.” I am sure I am not the only one that thinks that the dividend feature of this settlement arguably blurs the lines between a derivative lawsuit and a direct action.
Alison Frankel has an interesting January 15, 2015 post on her On the Case blog (here) about this aspect of the Freeport settlement, which includes an examination of the question whether a derivative lawsuit settlement with a feature like this to facilitate payment to shareholders might become a new model.
When I first heard about this settlement, I wasn’t sure what to think about the special dividend feature, and I had concerns that many insurance carriers might have qualms about having their insurance proceeds fund a dividend payment to their policyholder’s shareholders. But if you think of the dividend payment as simply a means for providing the proceeds of the settlement to the shareholders, it arguably is no different than the distribution of a class action settlement through more conventional class action litigation mechanisms. Just the same, I would expect carriers to have a certain wariness about getting dragged into funding shareholder dividends.
The payment of the settlement proceeds to the shareholders in the form of a special dividend raises an interesting insurance coverage question. Typically, it is contended that a shareholder derivative lawsuit settlement is not indemnifiable, because of the circularity problem involved with having the company indemnify the defendant for his or her payment to the company. For that reason, derivative lawsuit settlements generally are considered to trigger the Side A coverage under a D&O insurance policy, providing insurance for claims that cannot be indemnified whether due to insolvency or legal prohibition.
However, if the derivative lawsuit settlement payment is to be made to or at least for the direct benefit of the shareholders, the circularity problem drops out, and the settlement arguably is indemnifiable. If that were to be the case, the settlement would trigger the Side B coverage for indemnifiable claims. This matters because many companies carry significantly more Side A insurance than traditional insurance including Side B coverage. I am not sure whether any of these questions directly affected this settlement, but I could see it raising concerns in future cases where the parties tried to emulate this settlement and include a requirement for the settlement proceeds to be paid to shareholders in the form of a special dividend.
It is interesting to note that the derivative lawsuit involved here initially filed as merger objection lawsuits, although they continued on after the merger transactions closed. The phenomenon of merger objection litigation has been something of a hobby horse issue for litigation reformers in recent years, owing to the fact that almost every M&A transaction these days attract lawsuits and that many of the merger objection suits result in settlements that consists on nothing more than the defendant company’s agreement to additional disclosures about the transaction and the agreement to pay the plaintiffs’ attorneys’ fees. However, this case represents an example of the unusual merger objection case that results in a significant cash settlement. And even more unusually, the settlement proceeds here are to be paid directly to the shareholders. It would be difficult for critics of shareholder litigation to argue, as is often said of merger objection lawsuits, that these suits did not produce anything of value for shareholders.
Special thanks to a loyal reader for providing me a link to a news article about the settlement. Thanks also to another loyal reader for providing me with copies of the settlement papers.