In what is one of the largest shareholder derivative lawsuit settlements ever, the parties to the various FirstEnergy bribery-related derivative lawsuits have reached an agreement to settle the actions for a payment of $180 million and the company’s agreement to adopt a number of corporate governance reforms. The settlement amount is to be funded by D&O insurance. The settlement agreement is subject to court approval. First Energy’s February 10, 2022 announcement of the settlement can be found here. The parties’ February 10, 2022 settlement term sheet can be found here.
FirstEnergy is an electrical utility based in Ohio. FirstEnergy operates two aging nuclear plants that have proven to be enormously expensive to maintain. According to allegations raised in subsequent criminal proceedings, FirstEnergy successfully sought to have legislation passed by the Ohio legislature intended to bailout the company for the costs of maintaining its aging power generation facilities. It is alleged in the criminal proceedings that FirstEnergy was able to have this legislation passed by making massive payments, totaling as much as $60 million, to the political campaign of Larry Householder, the Speaker of the Ohio House of Representatives, and to support other House candidates. According to a statement by the U.S. Attorney for the Southern District of Ohio, referring to the bribery allegations, “this is likely the largest bribery, money laundering scheme ever perpetrated against the people of the state of Ohio.”
In the criminal proceedings, prosecutors allege that FirstEnergy first bankrolled Householder’s 2018 election, and then bankrolled an effort led by Householder to pass House Bill 6, the $1.3 billion bill subsidizing the two troubled FirstEnergy nuclear power plants, and then also financed a campaign to defeat a 2019 referendum to repeal the bill.
Following the revelation of the news surrounding the bribery scheme, a number of different civil actions were commenced against the company and its board. As I noted at the time, among the lawsuits was a securities class action lawsuit against the company and certain of its directors and officers in the Southern District of Ohio. The securities lawsuit remains pending.
In addition to the securities lawsuit, shareholder plaintiffs filed several shareholder derivative lawsuits against certain current and former directors and officers of the company, as well as against the company as nominal defendants. Separate derivative suits were filed in the Northern District of Ohio; the Southern District of Ohio; and the Ohio Court of Common Pleas in Summit County, Ohio. The plaintiffs in these actions allege that the individual defendants (or at least some of them) actively participated in the bribery scheme; allowed the company to make massive illegal payments; and covered up the scheme in violation of Ohio and federal law.
The consolidated complaint in the Southern District of Ohio action (a copy of which can be found here), alleges that the defendant directors and officers breached their fiduciary duties; that the defendant officers received unjust enrichment; and that all of the defendants participated in corporate waste.
From the information available in court documents, it appears that the company appointed a special litigation committee to investigate the plaintiffs’ allegations. It also appears that the parties to the proceeding participated in mediation.
On February 10, 2022, the company announced that the company, acting through the Special Litigation Committee of its board of directors, had agreed to a settlement term sheet to resolve the claims in the various derivative lawsuits. The settlement involved, among other things, the company’s agreement to adopt certain specified corporate governance reforms, as well as the payment of $180 million. According to the company’s statement, the settlement fund is “to be paid by insurance after court approval, less any court-ordered attorney’s fees awarded to plaintiffs.”
The corporate governance reforms to which the company agreed include, among other things, that six members of the company’s board will not stand for re-election in 2022; that a special committee of the board will initiate “a review process of the current executive team”; that the board will oversee the company’s lobbying and political activities; that a committee of independent directors will oversee the implementation and third-party audits of the Board-approved action plans; that the company will implement enhanced disclosure to shareholders of political and lobbying activities; and that the company will align financial incentives for senior executives with proactive compliance with legal and ethical obligations.
The Settlement Term Sheet specifies that “within twenty (20) business days of entry of an order preliminarily approving the Settlement, Defendants shall cause their insurers to pay $180,000,000 … into an escrow account.” The settlement amount, less costs and attorneys’ fees, will be paid to the company within ten days of the settlement’s effective date (as that term is defined in the term sheet).
As I noted at the outset, this settlement is one of the largest shareholder derivative lawsuit settlements ever, as reflected on the list I have been maintaining on this site of the largest derivative settlements (here). Depending on which settlements you count, and how you value certain of the nominally larger settlements, this settlement appears to be at least the seventh largest derivative settlement. Since at least one of the nominally larger settlements was not approved by the court, the FirstEnergy settlement arguably is at least the sixth largest derivative settlement.
One thing that is striking about the list of largest derivative settlements is how many of the largest settlements happened in just the last few years. This fact is in a sense not surprising because the settlement of shareholder derivative suits through payment of large cash amounts is relatively recent phenomenon. There used to be a time, not that long ago actually, when settlement of derivative suits involved an agreement to adopt corporate therapeutics and agreement to pay the plaintiffs’ attorneys’ fees. It has only been the last few years that it has become commonplace for derivative suit settlements to also involve large cash payments. As this settlement itself demonstrates, these settlements can be massive, large even by the scale of securities class action lawsuit settlements.
One very interesting characteristic of these settlements is not just that they are large, but that frequently they are funded entirely by D&O insurers. That was not only the case in connection with this settlement, but, to pick another recent example, the recent $237.5 million Boeing 737 Max Crash derivative settlement (discussed here) was also funded entirely by insurance. These settlements represent a massive new source of claim severity for D&O insurers. These increasingly frequent jumbo derivative settlements also represent a significant exposure in particular for Excess Side A insurers.
In addition to all of my other reactions to the news of this settlement, I also have a range of reactions to this settlement (and to the underlying circumstances) as a resident of and voter in the state of Ohio. The underlying bribery and corruption allegations represent only one of several sets of recent circumstances that have made Ohio look like a third-world country. Trust me, you don’t want me to get started on this topic.