[PDF]CA17322, Great Neck Capital Appreciation Partners v. Lay, ...
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IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
GREAT NECK CAPITAL APPRECIATION
- against -
KENNETH L. LAY, MARK G. PAPA,
FORREST E. HOGLUND, KEN L.
HARRISON, JEFFREY K. SKILLING,
JAMES V. DERRICK, JR., JOHN H.
DUNCAN, FRED C. ACKMAN, RICHARD
A. CAUSEY, EDWARD RANDALL, III,
FRANK G. WISNER, and ENRON CORP.,
- and -
ENRON OIL & GAS COMPANY,
C O M P L A I N T r
Plaintiff alleges upon personal knowledge as to its own
acts and upon information and belief as to all other matters, as
Plaintiff brings this action derivatively on behalf
of Enron Oil & Gas Company ("EOG" or the "Company") for injunctive
and other appropriate relief in connection with a fundamentally
unfair transaction whereby Enron Corp. ("Enron" or "ENE"),
Company's majority stockholder, will exchange 62.27 million shares
of EOG's common stock which Enron owns for EOG's assets and
businesses in China and India and $600 million in cash to be
contributed by EOG to one of EOG's India subsidiaries that will be
transferred to Enron (the "Transaction").
Plaintiff is the owner of shares of EOG common
Plaintiff has owned BOG shares at all times material
Defendant Enron is a corporation
existing under the laws of the State of Delaware
in the exploration for and production of natural
duly organized and
. Enron is engaged
gas and crude oil;
transportation of natural gas through pipelines; generation and
transmission of electricity; and the development and operation of
power plants, pipelines and other energy related assets.
currently owns 82.27 million shares or 54% of EOG's outstanding
Through its ability to elect all of EOG's directors, Enron
controls the management and policies of the Company.
EOG is a
organized and existing under the laws of the State of Delaware.
The Company is engaged in the exploration for, and the development,
production and marketing of, natural gas and crude oil primarily in
major producing basins in the United States, as well as in Canada,
Trinidad and India. EOG is named as a nominal defendant herein
solely in a derivative capacity, and this action is brought on its
behalf; no claims are asserted against it.
Defendant Kenneth L. Lay ("Lay") is and has been a
director of the Company since 1985.
Lay is and has been Chairman
of the Board and Chief Executive Officer ("CEO") of Enron for over
President, CEO and a director of the Company in Sep'tember 1998,
President and Chief Operating Officer ("COO") in September 1997,
President in December 1996 and was President North America
Operations from February 1994 to September 1998. From May 1986
through January 1994,
Papa served as Senior Vice President-
Operations. Papa joined Belco Petroleum Corporation, a predecessor
of the Company, in 1981.
Defendant Ken L. Harriso:n ("Harrison") is and has
served as a director of the Company since 1997.
Harrison has also
served as Vice Chairman of the Board of Enron since ,July 1, 1997
and, since 1987, has served as Chairman of the Board and CEO of
Portland General Electric Company ( "PG,E" ) , an electric utility
company, and has served, since its inception in 1996, as Chairman
of Enron Communications, Inc., both subsidiaries of Enron.
Defendant Forrest G. Hoglund ("Hoglund") is and has
served as Chairman of the Board of the Company since September
1987, and served as CEO from September 1987 until September 1998.
From May 1990 until December 1996, he also served as President of
Defendant Jeffrey K. Skilling ("Skilling") is and
has served as a director of EOG since 1997.
Skilling has served as
President and COO of Enron since January 1, 1997. From June 1995
until December 1996, Skilling served as CEO and Managing Director
of Enron Capital SC Trade Resources Corp. ("ECT") , a wholly-owned
subsidiary of Enron. From August 1990 until June 1995, Skilling
served ECT in a variety of senior managerial positions.
is also a director of Enron.
Defendant James 'V. Derrick, Jr. ("Derrick") is and
has been a director of the Company since 1997.
Derrick has served
as Senior Vice President and General Counsel of Enron since June
Defendant John H. Duncan ("Duncan") is and has been
a director of the Company since 1998.
Duncan also serves as a
director of Enron.
Defendant Richard A. Causey ("Causey") is and has
been a director of the Company since 1998.
Causey is Senior Vice
President and Chief Accounting, Information and Administrative
Officer of Enron.
Prior to his current position, Causey was
Managing Director of ECT.
Defendants Fred C. Ackman, Edward Randall, III, and
Frank G. Wisner are directors of Company.
obligations of fidelity, loyalty, good faith and due care, and were
and are required to act in furtherance of its best interests and
not favor Enron in dealings between Enron and EOG.
By reason of its dominant position as the majority
stockholder of EOG and its ability to control the business and
corporate affairs of EOG, Enron owes EOG fiduciary duties of
fairness and trust, and was and is obligated to refrain from using
its dominant position over EOG to enrich itself at the expense of
CLAIM FOR RELIEF_
On July 20, 1999, EOG and Enron announced that the
two companies had agreed to the Transaction whereby Enron will
exchange 62.27 million of its 82.27 million shares of EOG common
stock for EOG's China and India operations (the "Exchange") . In
connection with the Exchange, EOG will contribute $600 million in
cash to one of EOG's India subsidiaries that will be transferred to
The Transaction is not the result of arm/s-length
negotiations but was fixed arbitrarily by defendants as part of
their unlawful plan and scheme to permit Enron to obtain EOG's
valuable China and India operations at the expense of EOG and its
experiencing explosive growth while the Company's other operations
have been lackluster.
According to the Company's Form 10K for the fiscal
year ending December 31, 1998,
filed with the Securities and
Exchange Commission on March 18, 1999 (the "10"") r EOG's Net
Operating Revenues for India in 1998 were $72,826,000, compared to
$35,332,000 for 1997, an increase of more than 100%. In
comparison, the Company's United States operations' Net Operating
Revenue decreased over the same period.
The net proven reserves for the India operation has
also increased substantially year after year, furthe:r reflecting
the explosive growth of the India operation.
For the years ending
1997 and 1998, the India operation had net proven
reserves of 75,000, 199,600, 471,600, and 824,600 respectively. At
year end 1998 net proven reserves in India represented 25% of the
Company's total reserves.
Additionally, the Company has a $93 million net
operating loss carryforward for tax purposes that is limited to
Enron Oil & Gas India Ltd., and its earnings are expected to exceed
the carryforward amount before the carryforward period expires.
Accordingly, the Company is losing a valuable tax carryforward
By the Transaction,
Enron is taking strategic
from EOG at
stockholders. According to Lay, Enron's Chairman and CEO, who also
serves as a director of EOG, "[tlhe China and India operations
provide valuable supplies to meet growing energy demand in these
regions and are very strategic to our international activities."
Moreover, the Transaction follows Enron's public
announcement in December 1998 that it had received an unsolicited
indication of interest from a third party with respect to exploring
a possible transaction pursuant to which the third party would
acquire Enron's shares of the Company, and offer to acquire the
publicly owned shares of common stock of the Company. According to
Reuters, Enron was negotiating the sale of EOG with the third party
until talks broke down in May.
By entering into the Transaction, Enron and the
Individual Defendants are breaching their fiduciary duties of good
faith and loyalty.
Such actions cannot be reconciled with any
legitimate exercise of business judgment, nor are they reflective
of any good faith fulfillment of the directors' responsibility to
act in the best interests of the Company and its stockholders, and
to safeguard against conflicts of interest or self-dealing.
The proposed Transaction is not the product of
entire fairness, either in process or in price, and is not in the
best interests of EOG and its public stockholders.
The process used by Enron and the
Defendants was flawed by, among other things, conflicts of interest
and unfair dealing in the negotiation and structure of the proposed
The terms of the pro:posed Transaction were not
arrived at through arm's-length bargaining.
Enron officers and
directors stood on both sides of the Transaction, and either
directly negotiated, or participated in the negotiations of, the
Though the E:OG Board formed a special committee
in connection with the proposed Transaction, the special Committee
lacked independence because of the controlling influence of Enron
and its representatives on the EOG Board. As noted above, six of
directors (Lay, Harrison, Skilling, Derrick, Duncan, and
Causey) serve as officers/directors of EZnron and two others (Papa
and Hoglund) are officers of EOG. Consequently, these directors
lack the requisite independence necessary to consider the propriety
of the proposed Transaction.
The economic and financial terms of the proposed
Transaction are unfair to the Company and its public stockholders
for at least the following reasons:
especially the assets in
India, that are the subject of the proposed Transaction represent
explosive growth opportunities for the Company.
EOG is keeping are mature,
lack the explosive growth
in India and China,
and have reported flat to
In addition to the present and f.uture growth
prospects in India, EOG must contribute $600 million to its India
subsidiary before transferring the assets to Enron.
In order to pay the $600 million, EOG expects
to issue additional equity and borrow funds through a senior credit
Enron is receiving the India operation with
apparently, unencumbered by any debt or liabilities.
approximately $1,055 billion. Thus, including the $600 million
contribution by EOG, the value of the India operations which Enron
will enjoy is more than $1.65 Billion.
In contrast, Enron will
transfer EOG shares to EOG with a market value of $1.2 Billion and
the shares will not generate revenues or resources which EOG can
employ in its remaining operations.
Any demand on the directors of EOG to institute this
action would be a futile and useless act because:
Enron is the beneficiary of the wrongs complained
As alleged herein, at least eight of the eleven Board members
are officers and/or directors of Enron or its affiliates or are
employees of EOG and beholden to Enron for their livelihood. As
stated by the Company in its form 10-K filed with the SEC on March
1999: "Enron Corp. owns a ma:jority of the outstanding shares of
common stock of the Company.
T:hrough its ability to elect all of
the directors of the Company, Enron Corp. generally has the ability
to control matters relating to the management and policies of the
Company, including determination with respect to acquisition or
disposition of Company assets . . ."
Therefore, the (directors of
EOG suffer from conflicts of interest by reason of their fiduciary
duties owed to Enron and their loyalty to it.
As a consequence, the directors have an inherent
bias against bringing or vigorously prosecuting this action.
WHEREFORE, plaintiff prays for judgment and relief as
Preliminarily and permanently enjoining the
If the Transaction is consummated, rescinding
the same or awarding rescissory damages to EOG;
Awarding EOG compensatory damages in an amount
to be proved at trial;
Awarding plaintiff the costs and disbursements
of prosecuting this action, including reasonable attorneys' and
experts' fees; and
Granting such other and further relief as may
be just and appropriate.
ROSENTHAL, MONHAIT, GROSS &
GODDESS, P.A. ,-"
P,O. Box 1070
Wilmington, DE 19899-1070
Attorneys for Plaintiff
WECHSLER HARWOOD HALEBIAN
& FEFFER LLP
488 Madison Avenue
New York, New York 10022