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High River Limited Partnership v. Occidental Petroleum Corp.

Court of Chancery of Delaware

November 14, 2019


          Submitted: September 20, 2019

          Stephen E. Jenkins, Esquire, Richard D. Heins, Esquire and Aaron P. Sayers, Esquire of Ashby & Geddes, Wilmington, Delaware, Attorneys for Plaintiffs.

          Gregory P. Williams, Esquire, John D. Hendershot, Esquire, Kevin M. Regan, Esquire and Andrew Milam, Esquire of Richards, Layton & Finger, P.A., Wilmington, Delaware and Kevin J. Orsini, Esquire and Benjamin Gruenstein, Esquire of Cravath, Swaine & Moore LLP, New York, New York, Attorneys for Defendant.



         On May 9, 2019, Defendant, Occidental Petroleum Corporation (or the "Company"), entered into a merger agreement with Anadarko Petroleum Corporation. As the transaction essentially involved a merger of equals, Occidental had to fund a substantial portion of the $55 billion acquisition price with outside financing. Occidental raised approximately $10 billion through a sale of preferred stock to Berkshire Hathaway, Inc., and another $8.8 billion through a presale of Anadarko's African assets to Total S.A. ("Total").

         Plaintiffs, High River Limited Partnership, Icahn Partners Master Fund LP and Icahn Partners LP (collectively "the Icahn Parties"), are all affiliates of Carl C. Icahn ("Icahn"), a prominent activist investor. They began buying Occidental stock on May 2, 2019, after Occidental's offer to buy Anadarko and its sale of preferred stock to Berkshire were announced. The Icahn Parties eventually invested upwards of $1.5 billion in Occidental stock. They are currently mounting a proxy fight to replace members of Occidental's board of directors (the "Board") with a new slate of directors they have proposed to Occidental's stockholders.

         Plaintiffs sent a demand letter to Occidental on May 21, 2019 (the "Demand"), seeking to inspect books and records related to: (1) the Occidental-Anadarko merger; (2) Occidental's decision to be a buyer, not a seller, when market conditions for a sale of the Company appeared to be favorable; and (3) provisions of Occidental's governance documents detailing the threshold for calling a special meeting of the stockholders. On May 28, Occidental replied that it was "considering the demand." Two days later, Plaintiffs filed this action under 8 Del. C. § 220 ("Section 220") seeking to inspect the same documents it had requested in its Demand.

         Although they make a cursory argument about the need to investigate corporate wrongdoing or mismanagement, Plaintiffs freely admit their primary purpose for demanding to inspect books and records is to aid them in their proxy contest. They urge the Court to recognize a new, or at least expanded, rule that would allow a stockholder to inspect books and records relating to targeted, board-level business decisions that are questionable, but not actionable, when the stockholder states and then demonstrates that his purpose is to communicate with other stockholders in furtherance of a potential, bona fide proxy contest.

         The law regarding whether a stockholder's desire to communicate with other stockholders is a proper purpose to justify inspection is, at best, murky. It may well be that, in the right case, this court might endorse a rule that would allow a stockholder to receive books and records relating to questionable, but not actionable, board-level decisions so that he can communicate with other stockholders in aid of a potential proxy contest. After carefully considering the evidence and the arguments of counsel, however, I am satisfied this is not that "right case." Accordingly, judgment will be entered for Defendant.

         I. BACKGROUND

         I have drawn the facts from the parties' pre-trial stipulation, evidence admitted at trial and those matters of which the Court may take judicial notice.[1] A half-day trial was held on September 20, 2019, and oral argument followed the closing of the evidence. The trial record consists of 53 joint trial exhibits, 72 pages of trial testimony and one lodged deposition. The following facts were proven by a preponderance of the competent evidence.[2]

         A. The Parties and Relevant Non-Parties

         Plaintiffs, High River, Icahn Partners Master Fund LP and Icahn Partners LP are all affiliates of Carl Icahn.[3] They collectively own approximately 26 million shares of Occidental stock with a market value of $1.16 billion.[4]

         Defendant, Occidental, is a Delaware Corporation with headquarters in Houston, Texas.[5] It is a large petroleum and chemicals corporation with extensive operations in the Permian Basin in West Texas and Eastern New Mexico.[6]

         Non-party, Anadarko, was a petroleum and chemicals corporation that had extensive drilling operations in the Permian Basin.[7]

         Non-party, Nicholas Graziano, is a portfolio manager at Icahn Capital, an Icahn controlled entity.[8] The Icahn Parties began investing in Occidental at Graziano's suggestion.[9] Graziano was the sole witness at trial.

         Non-party, Berkshire, is a conglomerate controlled by its Chairman and CEO Warren Buffet.[10] Berkshire operates as a holding company whose primary business is making major capital investments in other companies.[11]

         Non-party, Total, is a French oil and gas producer with significant investments in Africa.[12]

         Non-party, Chevron Corporation, is a "major" American oil and gas producer.[13] In 2018, its operating revenues were $158.9 billion.[14]

         B. Occidental Acquires Anadarko

         On April 12, 2019, Chevron announced it had reached an agreement to acquire Anadarko for approximately $65 per share.[15] Prior to Chevron's bid, Anadarko's stock was trading in the mid-$40s.[16] Most of the merger consideration was to be paid in Chevron stock.[17] As a much larger company, Chevron was able to structure its offer with a heavy dose of its stock without triggering fears that the bid would significantly depress its stock price.[18]

         Occidental had previously made a bid for Anadarko at a higher price, but the bid was rejected.[19] On April 24, 2019, Occidental proposed to acquire Anadarko for $76 per share.[20] Anadarko stockholders would receive $38 cash and 0.6094 shares of Occidental stock for each share of Anadarko stock.[21] On May 5, Occidental revised its proposal to $59 per share cash and 0.2939 shares of Occidental stock per share of Anadarko.[22]

         After Chevron did not exercise its matching rights, on May 9, Anadarko terminated the Chevron Merger Agreement and paid the $1 billion termination fee owed to Chevron under that agreement.[23] Occidental and Anadarko then entered into a Merger Agreement whereby Occidental would acquire Anadarko for a notional price of $76 per share on the terms of Occidental's May 5 offer. The final $38 billion deal price at closing reflected a $72.34 per share value.[24] Before Occidental's bid was made public, Occidental's market capitalization was only slightly larger than Anadarko's.[25] Because shares issued as part of the offer constituted less than 20% of Occidental's float, a vote of the Occidental stockholders was not required to approve the transaction.[26]

         C. Occidental Finances the Acquisition

         As noted, a significant portion of the merger consideration was to be in cash. Accordingly, Occidental needed financing to fund the transaction. On April 30, 2019, Occidental announced it had raised $10 billion in an offering of preferred shares to Berkshire.[27] The preferred shares pay an annual cash dividend of 8% and are senior to Occidental's common stock, but junior to its debt securities.[28] Rather than paying a cash dividend, Occidental has the option to make dividend payments in additional preferred shares at a rate of 9%.[29] At the time the sale to Berkshire was announced, Occidental's debt was yielding between 3% and 4% and its common stock was yielding approximately 5%.[30]

         Berkshire also acquired warrants to purchase 80 million common shares of Occidental stock with an exercise price of $62.50 per share.[31] If converted, these shares would represent approximately 10% of Occidental's outstanding stock.[32]Using the Black-Scholes option pricing method, Plaintiffs value these warrants at $1.2 billion.[33] Plaintiffs argue Berkshire fleeced Occidental because Occidental could have found much cheaper financing elsewhere had it bothered to look.[34]In response, Occidental points to evidence that very few, if any, other lenders could have promptly agreed to provide such a large block of financing with no syndication contingencies or demand risks.[35]

         Five days after the preferred stock sale, Occidental agreed to pre-sell Anadarko's Africa assets to Total for $8.8 billion.[36] The proceeds of the sale were applied to cover a part of the cash consideration for the Anadarko acquisition and to "fast-track[ ] the divestiture plan previously described by Occidental, delivering on the majority of the $10 to $15 billion of planned asset sales."[37] Plaintiffs contend the fire sale price of $8.8 billion was woefully inadequate.[38] Occidental later issued $13 billion of new debt yielding 3% as further financing for the Anadarko purchase.[39]

         D. Plaintiffs' Consent Solicitation

         On June 26, 2019, Plaintiffs and other Icahn associated entities filed preliminary proxy materials. They attempted to obtain requests from the record holders of 20% of Occidental's common stock-the threshold by which they could require the Occidental Board to set a record date for a consent solicitation.[40] The Icahn Parties intend to solicit written consents to elect four directors nominated by Icahn entities, change Occidental's bylaws and effect other changes to Occidental's consent solicitation process.[41] Occidental is vigorously contesting all of the Icahn Parties' proposals.[42]

         E. Procedural History

         On May 21, 2019, Plaintiffs sent their Demand to Occidental seeking to inspect certain books and records related to the Anadarko merger and provisions of Occidental's governance documents.[43] On May 28, Occidental responded that it was "considering the demand."[44] Plaintiffs filed their Verified Complaint two days later.[45]

         Plaintiffs demand to inspect any documents: (1) provided to the Board about the Berkshire preferred stock transaction; (2) provided to the Board about the sale of Anadarko's assets to Total; (3) provided to the Board regarding the effect fluctuating oil and gas prices would have on Occidental, including projections and forecasts; (4) provided to the Board concerning any consideration given to selling Occidental's assets, or the Company as a whole; and (5) concerning whether the Board intends to comply with the stockholder proposal, adopted at Occidental's annual meeting, that seeks to lower the threshold to call a special meeting from 25% stockholder approval to 15%.[46]

         II. ANALYSIS

         Section 220 is an "important part of the corporate governance landscape in Delaware[, ]" but "it would invite mischief to open corporate management to indiscriminate fishing expeditions."[47] In order to inspect books and records under Section 220, therefore, a plaintiff must have a proper purpose.[48] In the typical case where a stockholder seeks to inspect books and records to investigate corporate wrongdoing, the stockholder must demonstrate a credible basis to suspect that mismanagement or wrongdoing has occurred before the corporation will be compelled to allow inspection.[49] When a plaintiff has demonstrated a credible basis to suspect wrongdoing, this court has allowed the plaintiff to use acquired books and records to mount a proxy contest.[50] But neither the parties nor the Court have found any Delaware decision where Chancery has compelled a company to allow inspection of books and records when the stockholder's only stated purpose for inspection is a desire to communicate with other stockholders in furtherance of a potential proxy contest.[51]

         A. Proper Purpose

         By the time of trial, Plaintiffs had proffered two purposes in support of their inspection demand. First, they maintained that their intent to mount a proxy contest following the Anadarko acquisition, and related Berkshire preferred stock offering and Total asset sale, is a proper purpose that justifies inspection of board-level documents relating to those transactions in order to enhance the quality of their communications with fellow stockholders.[52] Recognizing this presents a novel application of Section 220, they argue in the alternative that they have established a credible basis to infer corporate mismanagement or wrongdoing.[53] I address the proffered mismanagement/wrongdoing purpose first since that purpose fits crisply within existing Section 220 jurisprudence. Finding that purpose unsupported by the trial record, I turn to Plaintiffs' argument that their desire to communicate with stockholders regarding the Anadarko transaction (and related transactions) justifies an order compelling the Company to allow inspection of substantial transaction-related documents.

         1. Plaintiffs Have Failed to Demonstrate a Credible Basis to Infer Mismanagement

         While "credible basis" is the lowest burden of proof recognized in our law, it still requires a plaintiff to provide some evidence of wrongdoing.[54] Mere disagreement with a business decision is not enough.[55] Plaintiffs have not met that low burden here. They have not alleged, much less proven, that the Occidental Board was conflicted, disloyal or in some way interested in the transactions at issue. They also do not allege, nor have they proven, that the Occidental Board acted in bad faith.[56]

         Instead, Plaintiffs' allegations of mismanagement appear to be nothing more than disagreements with how Occidental's directors exercised their business judgment. They think the Anadarko purchase, Berkshire preferred stock sale and Total asset sale were bad deals.[57] But disagreeing with a board's business judgment, without more, is not enough to provide a credible basis to infer mismanagement.[58]Plaintiffs' disagreements with the Board's deal making prowess do not establish a credible basis to infer mismanagement or wrongdoing.[59]

         2. Plaintiffs' Proposed Proxy Fight Standard

         Perhaps recognizing the weakness of their mismanagement argument, Plaintiffs ask this Court to recognize a new rule entitling stockholders to inspect documents under Section 220 if they can show a credible basis that the information sought would be material in the prosecution of a proxy contest.[60] According to Plaintiffs, our case law focuses on the contours of the inspection right in the context of investigating mismanagement because those are the cases where Section 220 is most frequently invoked.[61] They point to a number of additional "proper purposes" Delaware courts have identified, and urge this Court to add their proposed proxy contest rule to the list.[62]

         Plaintiffs rely on two cases to support the propriety of their proffered purpose. The first, Tactron, Inc. v. KDI Corporation, [63] involved an inspection demand where stockholders sought books and records that would provide logistical assistance in mounting a proxy contest, specifically:

information relating to record dates, quorums, number of directors, amendments, procedures for the solicitation of written consents of stockholders and other provisions in connection with the solicitation of written consents or proxies for the execution of written consents from the holders of the outstanding voting securities of KDI to be used to ...

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