DONALD L. BLANKENSHIP, Plaintiff,
ALPHA APPALACHIA HOLDINGS, INC., f/k/a MASSEY ENERGY COMPANY, a Delaware corporation, and ALPHA NATURAL RESOURCES, INC., a Delaware corporation, Defendants.
Date Submitted: May 14, 2015
Daniel B. Rath, K. Tyler O'Connell and Travis J. Ferguson of LANDIS RATH & COBB LLP, Wilmington, Delaware; Graeme W. Bush and Andrew N. Goldfarb of ZUCKERMAN SPAEDER LLP, Washington, D.C.; Attorneys for Plaintiff.
Donald J. Wolfe, Jr., Matthew E. Fischer and Jacqueline A. Rogers of POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Mitchell A. Lowenthal, Lev L. Dassin, Victor L. Hou and Marla A. Decker of CLEARY GOTTLIEB STEEN & HAMILTON LLP, New York, New York; William S. Ohlemeyer of BOIES, SCHILLER & FLEXNER LLP, Armonk, New York; Attorneys for Defendants.
This advancement action involves some unusual facts but an all too common scenario: the termination of mandatory advancement to a former director and officer when trial is approaching and it is needed most.
Plaintiff Donald L. Blankenship is the former Chief Executive Officer and Chairman of Massey Energy Company, which is now known as Alpha Appalachia Holdings, Inc. ("Massey"). Blankenship held those positions when there was a tragic explosion at a Massey subsidiary's coal mine in West Virginia in April 2010, killing 29 miners. In June 2011, after Blankenship had retired from Massey, Alpha Natural Resources, Inc. ("Alpha") acquired Massey. For several years after the explosion, Massey and Alpha (together, the "Defendants") honored Blankenship's rights to advancement and paid his legal expenses relating to various civil proceedings and a federal criminal investigation that had been launched as a result of the explosion.
On November 13, 2014, the United States Attorney for the Southern District of West Virginia obtained a four-count criminal indictment against Blankenship. Blankenship is presently scheduled to go to trial on July 13, 2015.
In the wake of the indictment, Alpha stopped paying Blankenship's legal fees. Alpha management, with approval from Alpha's board of directors, then initiated a process to review the company's indemnification and advancement obligations to Blankenship. Alpha focused on an unusual undertaking Blankenship had signed in April 2011 (the "Undertaking"), which states, in relevant part, that Massey's indemnification and advancement obligations to Blankenship are "contingent upon [certain] factual representations and undertakings, " including a representation that, in performing his duties as a director and officer of Massey, Blankenship "had no reasonable cause to believe that [his] conduct was ever unlawful." In late January 2015, after a process described below, Philip Cavatoni, an Alpha officer and Massey director, determined that Blankenship had breached that representation (the "Determination"). Based on the Determination, Alpha asserts that Blankenship is no longer entitled to advancement of any of his legal expenses from Massey.
On February 5, 2015, Blankenship filed this action seeking advancement of his unpaid legal expenses under, among other sources, the terms of Massey's October 2010 Amended and Restated Certificate of Incorporation (the "Charter") and an Agreement and Plan of Merger between Massey and Alpha (the "Merger Agreement"). Most of these unpaid legal expenses were incurred in connection with the criminal proceeding to which Blankenship was made a party in November 2014 as a result of the indictment.
In this post-trial opinion, I conclude that the Undertaking cannot reasonably be interpreted in the manner advocated by Defendants and that the Determination thus did not provide a valid basis for Defendants to terminate Blankenship's advancement rights under Massey's Charter. I also conclude that Blankenship is entitled to advancement from Alpha as well as Massey for the legal expenses he has incurred in connection with the criminal proceeding under the unambiguous terms of the Merger Agreement.
These are the facts as I find them based on the documentary evidence and testimony of record.
A. The Parties
Plaintiff Donald L. Blankenship is the former Chief Executive Officer and Chairman of the board of directors of Massey Energy Company.
Defendant Alpha Appalachia Holdings, Inc., formerly known as Massey Energy Company, is a Delaware corporation engaged in the coal mining business. Massey is currently a wholly owned subsidiary of Alpha Natural Resources, Inc.
Defendant Alpha Natural Resources, Inc., a Delaware corporation based in Linthicum Heights, Maryland, also is in the coal mining business.
B. The Explosion at Massey's Upper Big Branch Mine
In April 2010, an explosion occurred at the Upper Big Branch ("UBB") mine operated by Performance Coal Company ("Performance"), a Massey subsidiary, killing 29 miners. Shortly after the UBB explosion, the United States Attorney's Office for the Southern District of West Virginia (the "U.S. Attorney") commenced an investigation into the underlying facts and circumstances of the explosion.
C. Blankenship Engages Zuckerman Spaeder LLP
In June 2010, William W. Taylor, III, a partner at the law firm of Zuckerman Spaeder LLP ("Zuckerman Spaeder"), sent a letter to Blankenship (the "Engagement Letter") to confirm the terms and conditions under which Zuckerman Spaeder would "represent [him] in connection with investigations resulting from the Upper Big Branch mine explosion, and related matters if requested to undertake them." According to Taylor, the Engagement Letter is part of Zuckerman Spaeder's standard practice with clients, "particularly when there will be third-party defendant payment by a company or some other third-party defendant for an individual client."
The Engagement Letter sets forth Massey's commitment to pay Blankenship's legal fees on a timely basis, as follows:
Massey Energy Company agrees to pay all fees and expenses incurred within thirty days of the date of any invoice. Any outstanding balances that are not paid when due will accrue a service charge at the rate of twelve (12) percent per annum (one percent (1%) per month) from the due date until paid, in order to offset the costs of carrying any overdue amount.
The Engagement Letter does not refer to Blankenship's indemnification rights under Massey's Charter or to the need for an undertaking to obtain advancement of his legal fees.
Blankenship and Shane Harvey, then-General Counsel of Massey, both signed the Engagement Letter as "SEEN and AGREED." Before executing the document, Blankenship asked Harvey if it was "OK" to sign it. Blankenship put no pressure on Harvey to decide whether the Engagement Letter was acceptable.
Taylor testified that the Engagement Letter reflects Massey's unconditional promise to pay Blankenship's legal fees. Blankenship, by contrast, acknowledged that he did not think that the Engagement Letter "enhanced" his advancement rights.
D. Blankenship Retires from Massey
On December 3, 2010, Blankenship entered into a Retirement Agreement with Massey by which he would retire as CEO and Chairman effective December 31, 2010. The retirement was "not entirely voluntary." Paragraph 12 of the Retirement Agreement, entitled "Indemnity Obligations, " sets forth Massey's agreement to maintain its then-existing indemnification and advancement obligations to Blankenship:
The Company [i.e., Massey] agrees to maintain and adhere to all its obligations to indemnify you and advance your legal fees in accordance with the terms and conditions set forth in the Company's Certificate of Incorporation and any written indemnity agreements existing and in force as of your Retirement Date, or as otherwise imposed by law, for so long as those agreements or legal obligations require.
Taylor, who represented Blankenship in connection with his retirement from Massey and negotiated the Retirement Agreement, testified that the language in Paragraph 12 likely was in the draft when he received it and was not controversial. He also believed the phrase "written indemnity agreements" referred to the Engagement Letter. Admiral Bobby R. Inman, Massey's lead independent director at the time, executed the Retirement Agreement on behalf of Massey.
E. Massey Enters Into a Merger Agreement with Alpha
In approximately May 2010, after the UBB explosion, Alpha began to explore a potential acquisition of Massey. Alpha retained Cleary Gottlieb Steen & Hamilton LLP ("Cleary Gottlieb") as its legal advisor in connection with that transaction. Cleary Gottlieb remained Alpha's outside counsel throughout that process and in connection with the events that gave rise to this action.
On January 28, 2011, Massey and Alpha entered into the Merger Agreement, under which Alpha would acquire Massey in a cash-and-stock transaction. Section 5.05 of the Merger Agreement sets forth the respective obligations of Massey and Alpha to the defined "Indemnified Parties, " which include Blankenship as a former director and officer of Massey.
The merger was the subject of a preliminary injunction application in In re Massey Energy Co. Derivative and Class Action Litigation. In brief, Massey stockholders argued that the board did not obtain adequate value from Alpha for certain derivative claims relating to the company's mine safety policies and procedures. As discussed below, the Court considered Alpha's indemnification obligations to Blankenship under the Merger Agreement as part of its analysis. Ultimately, for reasons not relevant to this action, then-Vice Chancellor Strine denied the preliminary injunction motion, and the case remains pending before the Court.
On June 1, 2011, Alpha completed its acquisition of Massey, which is now a wholly owned subsidiary of Alpha.
F. The Undertaking
On June 14, 2010, about six months before his retirement, Blankenship executed an undertaking to obtain advancement from Massey of his legal expenses incurred in connection with legal proceedings relating to Massey's compliance with environmental and safety regulations. The June 2010 undertaking is not at issue in this action.
On March 29, 2011, after the Merger Agreement was signed but before the transaction closed, Stephanie Ojeda, Senior Corporate Counsel of Massey, sent a new proposed undertaking (as defined above, the "Undertaking") to Taylor at Zuckerman Spaeder. In a cover letter, Ojeda explained that Massey remained committed to its indemnification obligations to Blankenship (and other employees of Massey) and that the enclosed Undertaking "clarifies" the relationship between Massey and Blankenship:
In light of the impending merger, I write to address the legal representation you are providing to employees of Massey and its affiliated entities in relation to ongoing government investigations of the April 5, 2010 accident at Upper Big Branch. The Company remains committed to providing appropriate assistance with the legal defense of its individual employees in connection with those investigations and, accordingly, will continue to do so after the merger with Alpha is finalized.
In the meantime, I ask that each represented individual sign the attached undertaking, which clarifies the relationship between Massey and your client(s) with respect to their legal representation in this matter and payment therefor. Please review the attached undertaking with your client(s) and return the signed form(s) to my attention.
I appreciate your service on behalf of Massey's valued members. Please contact me at [redacted] if you have any questions regarding this letter or the attached undertaking.
Other than this cover letter, there are no written communications in the record concerning the meaning of the Undertaking.
The provision at the end of the first paragraph of the Undertaking states that Massey's indemnification and advancement obligations are "contingent upon" three enumerated "factual representations and undertakings." I refer to that provision as the "Contingency Provision." The legal effect of the factual representation in the second enumerated paragraph is a critical issue in this case. I refer to that representation as the "Reasonable Cause Representation." The last paragraph of the Undertaking states explicitly that Massey shall not be obligated to advance further expenses to Blankenship in two specified circumstances. I refer to that provision as the "Termination Provision." The entire text of the Undertaking is quoted below:
I, Donald L. Blankenship, have retained counsel to represent me in connection with a federal criminal grand jury investigation conducted by the Office of the United States Attorney for the Southern District of West Virginia and agents of the Federal Bureau of Investigation and Federal Mine Safety and Health Administration, as well as in connection with any concurrent or other proceedings relating to Performance Coal Company ("Performance"), Massey Energy Company ("Massey"), Massey Coal Services, Inc. ("MCS"), and any affiliates or certain officers, employees or other persons associated with these entities. It is my understanding that Massey will indemnify me and/or advance on my behalf the fees and costs associated with this representation, contingent upon the following factual representations and undertakings, which I hereby make and declare to be true [as defined above, the "Contingency Provision"]:
1. In the performance of my actions as an officer, director, employee, or consultant of Massey and/or any of its affiliates and subsidiaries, including but not limited to MCS, I acted in good faith and in a manner that I reasonably believed to be consistent with the best interests of Massey and its affiliates and subsidiaries;
2. In the performance of my actions as an officer, director, employee, and consultant of Massey and/or any of its affiliates and subsidiaries, including but not limited to MCS, I had no reasonable cause to believe that my conduct was ever unlawful [as defined above, the "Reasonable Cause Representation"]; and
3. If it shall ultimately be determined that I am not entitled to the indemnification described above and in any applicable Agreement for Indemnification, consistent with governing laws, I hereby agree to repay Massey any sums that Massey has expended on my behalf for indemnification or advancement.
I further understand that, in any event, Massey, Performance, and/or MCS shall not be obligated to indemnify me or advance further fees and costs on my behalf if: (i) I should enter a plea of guilty, or be found guilty by a court or jury, on any criminal charge related to my actions as an officer, director, employee, and consultant of Massey and/or any of its affiliates and subsidiaries, including but not limited to MCS, or otherwise relating to the subject matter of the above-described criminal investigation; or (ii) Massey, Performance, and/or MCS otherwise determines that I am not entitled to indemnification under governing laws [as defined above, the "Termination Provision"].
The Undertaking refers to two entities (Performance and MCS) in addition to Massey that were not mentioned in the June 2010 undertaking. Before his retirement, Blankenship held various positions at Performance and MCS, both of which are West Virginia corporations.
Massey drafted the Undertaking. Taylor, on behalf of Blankenship, did not have any discussions with Ojeda or anyone else at Massey about the Undertaking, nor did he suggest any changes to the document. Ojeda, who did not appear at trial, testified in deposition that she understood the Undertaking to be "just confirmation of a duty or obligation with respect to indemnifying and advancing fees. The obligation had already been established[.]" When asked what she meant by "the obligation had already been established, " Ojeda explained, "That the company [i.e., Massey] had already agreed to indemnify and advance fees, and it [i.e., the Undertaking] was just a restatement of that, after the announcement of the merger agreement."
Taylor likely discussed the Undertaking with another partner at his firm, but he did not "conduct an elaborate legal analysis" even though he acknowledged at trial that the Undertaking was unlike any he has seen in his four decades of practice. Zuckerman Spaeder's billing records reflect that about one hour of attorney time in total was devoted to reviewing the Undertaking. Afterwards, Taylor offered advice to Blankenship about it, most likely via a letter dated April 11, 2011. Taylor testified that, although he could not recall specifically what he thought at the time, he was "confident that [he] did not believe that [the Undertaking] modified or changed Mr. Blankenship's rights to advancement in any respect" and that he "would not have acquiesced in [Blankenship's] signing it had [he] believed that."
Blankenship was sure that he and Taylor would have communicated about the Undertaking before he signed it, but he could not recall any specific conversations they may have had. Blankenship further testified that, when he received the Undertaking, no one at Massey had ever informed him that he was in breach of the Retirement Agreement or that Massey wanted to modify any provision of the Retirement Agreement,  Section 12 of which (quoted above) required Massey to maintain its then-existing indemnification and advancement obligations to Blankenship.
On April 12, 2011, Blankenship executed the Undertaking. By letter dated April 21, 2011, the executed Undertaking was sent to Massey.
G. Massey and Alpha Advance Blankenship's Legal Fees
As it had before the merger, Zuckerman Spaeder continued to submit invoices for its representation of Blankenship to Massey after the merger. In 2012, likely at the request of someone at Massey, Zuckerman Spaeder began submitting invoices to Alpha.When this change happened is not clear. Taylor did not pay attention to who paid ...