In re McMoRan Exploration Co. Stockholder Litigation
Submitted: October 11, 2013
The Plaintiffs, former shareholders of McMoRan Exploration Company ("MMR"), challenged its acquisition by Defendant Freeport-McMoRan Copper & Gold, Inc. ("Freeport"). A settlement was negotiated and approved. The only remaining issue is an award to Plaintiffs of their attorneys' fees and expenses.
Although numerous factors inform the Court's exercise of discretion in awarding attorneys' fees,  the benefit achieved by the Plaintiffs for the shareholder class is the most significant. The parties debate the value of the benefits achieved and, in some instances, whether they are fairly and fully attributable to the efforts of Plaintiffs' attorneys.
Before turning to an assessment of the benefits obtained, the Court first considers those other factors that have been identified to guide its exercise of discretion in awarding attorneys' fees. A very brief review will suffice.
Plaintiffs' counsel are well-qualified and experienced in matters of this nature. The fee was contingent. This case was somewhat more complex than many merger cases because of the multiple transactions and the atypical consideration. The number of different benefits achieved serves to highlight the relative complexity of the settlement negotiations. The litigation moved in fits and starts through no fault of Plaintiffs' counsel; the Defendants encountered several obstacles to a prompt conclusion of their proposed transactions. Nonetheless, Plaintiffs' counsel committed significant time and effort to the cause; of course, some of that effort did not generate positive results.
The work, much of it performed on an expedited schedule, included a dozen depositions, several motions, briefing of a preliminary injunction that was never fully pursued, and a number of conferences with the Court. Briefing was complicated by a number of proxy revisions. The Plaintiffs devoted roughly 5, 700 hours of attorney time to the effort. The Plaintiffs incurred expenses of almost $320, 000, including more than $200, 000 in expert fees.
The Plaintiffs did not cause or obtain an increase in the nominal consideration received by class members: $14.75 per share and 1.15 units of the Gulf Coast Ultra Deep Royalty Trust (the "Trust") which held a royalty interest related to production from some of MMR's then-existing exploration properties.
The Plaintiffs decided not to pursue their price and process claims. Instead, they secured additional disclosures,  obtained a contractual commitment that, in general terms, required the use of best efforts to obtain a listing of the Trust units on a recognized and accepted national market. The Plaintiffs also take credit for revisions in the Trust agreement governing the Trust units and for restricting the scope of a proposed amendment of MMR's certificate so that Freeport would only be exempt from a super majority vote requirement with respect to its merger with MMR. Thus, if the merger did not occur, Freeport would return to being subject to the super majority vote requirement.
The fee debate centers on the listing provision. Although Defendants contend that listing was always intended, the listing provision initially in the merger agreement was waived, and the class had no contractual right to insist upon listing efforts. The Defendants may be correct that listing could not have been achieved within the time frame in which the transaction would close and thus the waiver was necessary to facilitate the transaction. Nevertheless, without the efforts of Plaintiffs, it appears that there would not have been any contractual protection. That contractual protection, above a mere intent, provided value to the shareholders. The difficulty is quantifying that value.
Listing generally increases liquidity. Listing on a "better" exchange will generally increase liquidity even further. Liquidity generally increases the value of an investment; conversely, the lack of liquidity is generally viewed as depressing the value of an investment. Even if these generalizations are applicable, the question of—to what extent would liquidity of the Trust units increase value— remains.
The parties each retained an expert to assist in this analytical process. Unfortunately, the methodology of each expert in these circumstances does not offer much comfort. The points which they make are valid to an extent, and, as one would expect, would lead the Court to different conclusions. Ultimately, however, neither provides a reliable quantification.
The Defendants' expert relied upon an event study analysis. When the contractual changes requiring best efforts to obtain a listing were announced, MMR's stock price did not increase. Similarly, when the listing provision was removed from the merger agreement, the price of MMR stock did not decline.
It is argued that the market reaction (or non-reaction) shows the absence of value that may fairly be attributed to a contractual listing requirement. That is a plausible reading of investor response. Unfortunately, it is not the only possibility. First, it is not clear that the market was aware (as least within a short time period) of the listing changes. Widespread and accurate disclosure of the event is important if one is to assess the validity of an event study. Second, the event study is based on MMR stock (and not the pricing of the Trust units), and MMR disseminated a substantial amount of information, such as financial reports, updates on production from its Ultra Deep properties, and its ...