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Watkins v. Hamm

Court of Appeals of Oklahoma, Division II

July 31, 2017

WINSTON O. WATKINS, JR., and LABORERS DISTRICT COUNCIL CONSTRUCTION INDUSTRY PENSION FUND, on behalf of themselves and all others similarly situated, Plaintiffs/Appellants,
v.
HAROLD G. HAMM, JEFFREY B. HUME and WHEATLAND OIL, INC., Defendants/Appellees.

          Mandate Issued: 01/03/2018

         APPEAL FROM THE DISTRICT COURT OF OKLAHOMA COUNTY, OKLAHOMA HONORABLE ROGER H. STUART, TRIAL JUDGE

          Derrick L. Morton, NELSON TERRY MORTON DEWITT & PARUOLO, Edmond, Oklahoma, and J. Daniel Albert, Lee D. Rudy, Leah Heifetz, KESSLER TOPAZ MELTZER, & CHECK, LLP, Radnor, Pennsylvania, for Plaintiffs/Appellants

          Michael Burrage, WHITTEN BURRAGE, Oklahoma City, Oklahoma, and Jay P. Walters, GABLEGOTWALS, Oklahoma City, Oklahoma, for Defendants/Appellees

          JOHN F. FISCHER, PRESIDING JUDGE

         ¶1 The plaintiffs Winston O. Watkins, Jr., and Laborers District Council Construction Industry Pension Fund, on behalf of themselves and all others similarly situated, appeal a May 2, 2016 order granting defendants Harold G. Hamm's, Jeffrey B. Hume's, and Wheatland Oil, Inc.'s motion to dismiss their amended petition with prejudice. The plaintiffs' petition purports to assert a direct action on behalf of Continental Resources, Inc.'s, shareholders against Hamm, Hume and Wheatland regarding a transaction in which Continental acquired the assets of Wheatland. Oklahoma has not previously recognized a direct action by shareholders against corporate officers and directors. We decline to do so here.

         BACKGROUND

         ¶2 In this litigation, the plaintiffs challenge a 2012 transaction whereby Continental acquired one hundred percent of the assets of Wheatland. Pursuant to a preexisting contract with Continental, Wheatland had the right to participate in wells being drilled by Continental in certain areas. Wheatland had exercised that option in the past and owned a five percent working interest in certain wells. And, Continental was obligated to allow Wheatland to participate in future wells being drilled in Continental's lucrative Balkan Field. Harold Hamm, Continental's founder, Chairman of the Board and Chief Executive Officer, owned seventy-five percent of Wheatland and sixty-eight percent of Continental. Jeffery Hume, Continental's Vice-Chairman of Strategic Growth Initiatives, owned the other twenty-five percent of Wheatland as well as stock in Continental.

         ¶3 Hamm and Hume approached Continental about purchasing Wheatland's assets, including its contract right to participate in future wells. The Continental Board of Directors formed a Special Committee chaired by Mark Monroe, Continental's former President and Chief Operating Officer, to evaluate the transaction. After the analysis was complete, Continental filed a proxy statement with the Securities and Exchange Commission explaining the Wheatland transaction and soliciting the approval of Continental's stockholders to complete the acquisition. A majority of Continental's stockholders voted to approve the transaction, including eighty percent of the Company's disinterested minority stockholders, like the plaintiffs. As a result, Continental issued approximately $313 million of stock to Hamm and Hume in exchange for Wheatland's assets. Hamm's ownership percentage in Continental increased from 68.04% to 68.2%, and the interest of the minority stockholders decreased from 23.1% to 22.6%.

         ¶4 On July 18, 2012, the plaintiffs filed a direct and a derivative action against Continental and the Special Committee of Continental's Board of Directors, asserting breach of fiduciary duty, unjust enrichment, and aiding and abetting, as well as class action claims for breach of fiduciary duty and for aiding and abetting. The plaintiffs alleged that demand on Continental's Board of Directors was futile and therefore unnecessary. The plaintiffs alleged that the Wheatland acquisition was a conflicted insider transaction between Continental and its controlling stockholder, Hamm. The plaintiffs also alleged that Continental overpaid Hamm and Hume by at least $100 million in Continental stock, thereby diluting the minority stockholders' economic and voting interests in Continental.

         ¶5 The defendants moved to dismiss the petition pursuant to 12 O.S.2011 §§ 2012 (B)(6) and 2023.1. The defendants argued that the plaintiffs lacked standing to sue because they failed to make a pre-suit demand on Continental's Board of Directors or plead with particularity why such demand would have been futile. The defendants relied on section 2023.1 of the Oklahoma Pleading Code and Aronson v. Lewis, 473 A.2d 805 (Del. 1984). [1] The plaintiffs responded, arguing that in controlling-shareholder transactions, the transaction is subject to Oklahoma's "entire fairness" standard and not Delaware's "valid exercise of business judgment" standard. [2] The district court ultimately denied the defendants' motion on January 8, 2013, citing an order in Louisiana Municipal Police Employees Retirement System v. Continental Resources, Inc., arising out of the same transaction and filed in the Western District of Oklahoma, Case No. 12-CV-667. The district court stayed further proceedings in the case pending a ruling by the federal court on the defendants' motion to dismiss in the Louisiana Municipal Police case. On May 16, 2013, the federal court granted the defendants' motion and dismissed the action in its entirety.

         ¶6 On June 20, 2013, the plaintiffs in this case filed a motion to lift the stay. The defendants also filed a motion to lift the stay and further requested that the court dismiss the action. By order entered on September 30, 2013, the district court granted the plaintiffs' motion to lift the stay. In addition, the court denied the defendants' motion to dismiss with regards to the derivative action, finding the current status of the law required application of the "entire fairness" standard in controlling shareholder transactions. The court, however, granted the defendants' motion to dismiss with regard to the class action claim based on alleged misleading proxy statements, finding this theory of recovery had been asserted and fully adjudicated in the federal court litigation.

         ¶7 On June 5, 2014, the defendants filed a motion for reconsideration in light of a recent Delaware Supreme Court case, Kahn v. M&F Worldwide Corporation., 88 A.3d 635 (Del. 2014), which upheld the business judgment standard as the applicable standard of review in controlling shareholder transactions. The defendants requested that the trial court review the adequacy of the plaintiffs' demand-futility allegations in the derivative claim pursuant to Aronson. After additional briefing, the plaintiffs ultimately sought to dismiss their derivative claims without prejudice. By order entered on March 6, 2015, the district court permitted the plaintiffs to dismiss their derivative claims without prejudice. [3]

         ¶8 Subsequently, the defendants moved to dismiss the plaintiffs' remaining class action and breach of fiduciary duty claims. After a hearing on that motion, the district court permitted the plaintiffs to amend their petition, which they filed on December 1, 2015. The amended petition asserted a direct action on behalf of Continental's minority shareholders for breach of fiduciary duty based on the alleged unlawful dilution of their shares as a result of the Wheatland transaction.

         ¶9 The defendants filed a motion to dismiss the plaintiffs' amended petition and/or to strike dismissed claims. The defendants asserted that Oklahoma does not recognize a direct cause of action against corporate officers and directors, that the plaintiffs were barred from attempting to re-plead the disclosure claims previously dismissed, and that the transaction's approval by the independent Special Committee and a majority vote of the minority shareholders reinstated the business judgment presumption, requiring dismissal on the pleadings. The plaintiffs responded, arguing that the district court should follow Oklahoma's "intrinsic fairness" test, which requires those asserting the validity of the challenged transaction to prove, with evidence, that a challenged transaction is intrinsically fair. Relying on Oklahoma law, the plaintiffs argued that dismissal was inappropriate at this stage of the proceedings because the intrinsic fairness issue had not been resolved. See Warren v. Cent. Bankcorporation, Inc., 1987 OK 14, 741 P.2d 846, and Beard v. Love, 2007 OK CIV APP 118, 173 P.3d 796. The district court granted the defendants' motion to dismiss, finding that the plaintiffs had failed to state a claim upon which relief may be granted because their claim must be pursued as a derivative action.

         STANDARD OF REVIEW

         ¶10 The purpose of a motion to dismiss for failure to state a claim is to test the law that governs the claim rather than the facts asserted in support of that claim. Kirby v. Jean's Plumbing Heat & Air, 2009 OK 65, ¶ 5, 222 P.3d 21 (citing Conley v. Gibson, 355 U.S. 41, 78 S.Ct. 99 (1957)); Groce v. Foster, 1994 OK 88, ¶ 12, 880 P.2d 902. "On review of an order dismissing a petition all allegations in the petition are taken as true." Gens v. Casady Sch., 2008 OK 5, ¶ 8, 177 P.3d 565. Appellate review of a motion to dismiss involves a de novo consideration of whether the petition is legally sufficient. Indiana Nat'l Bank v. Dep't of Human Servs., 1994 OK 98, ¶ 2, 880 P.2d 371. De novo review involves a plenary, independent, and non-deferential examination of the district court's rulings of law. In re Estate of Bell-Levine, 2012 OK 112, ¶ 5, 293 P.3d 964.

         ANALYSIS

         ¶11 The sole issue in this appeal is whether Oklahoma recognizes a direct action by shareholders against corporate officers and directors based on the facts alleged in the plaintiffs' amended petition. Oklahoma's corporate law is derived from the corporate law of Delaware. Woolf v. Universal Fidelity Life Ins. Co., 1992 OK CIV APP 129, ¶ 6, 849 P.2d 1093. Delaware law recognizes a direct action against corporate officers and directors in certain circumstances. Gentile v. Rossette, 906 A.2d 91 (Del. 2006). "It is a settled rule that when one state adopts a statute from another, it is presumed to adopt the construction placed upon the statute by the highest court of the other state." Bank of the Lakes v. First State Bank, 1985 OK 81, ¶ 9, 708 P.2d 1089. However, Oklahoma has not previously recognized a direct action by shareholders. The only statutory action authorized is the stockholders' derivative action. 18 O.S.Supp. 2014 § 1126. See Beard v. Love, 2007 OK CIV APP 118, ¶ 19, 173 P.3d 796 ("The rights of shareholders to redress wrongs against the corporation resulting from the acts or omissions of its officers and directors are derivative.") (citing Weston v. ...


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