Source: https://www.scribd.com/doc/43672042/Milberg-Complaint
Timestamp: 2017-09-22 02:44:21
Document Index: 646595916

Matched Legal Cases: ['§ 17', '§ 17', '§ 17', 'art:\n1', '§ 21', '§ 21']

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caseNo.\O-1 LNoLj
§ INTERNATIONAL BROTHERHOOD OF § ELECTRICAL WORKERS LOCAL 164§
ENSION FUND, derivatively on behalf 0 §
EXCO RESOURCES, INC., §
Nominal Defendant. § §
DOUGLAS H. MILLER, STEPHEN F. SMITH, JEFFREY D. BENJAMIN, INCENT J. CEBULA, EARL E. ELLIS, B.
AMES FORD, MARK F. MULHERN, T.
BOONE PICKENS, JEFFREY S. SEROTA, and ROBERT 1. STILLWELL,
EXCO RESOURCES, INC.,
ALLASCOUNTY,TEXAS
'[W
-~&~JUDICIAL DISTRICT
SHAREHOLDER DERIVATIVE PETITION FOR BREACH OF FIDUCIARY DUTIES
Plaintiff, for its Derivative Petition for Breach of Fiduciary Duty, alleges upon personal knowledge as to itself and its own acts, and upon information and belief derived from, inter alia, a review of documents filed with the Securities and Exchange Commission ("SEC") and publicly available news sources, such as newspaper articles, as to all other matters, as follows:
1. This dispute involves complicated issues due to the fact that it is a derivative
action and requires that discovery be conducted on an expedited basis. Therefore, plaintiff intends that discovery will be conducted under a level 3 discovery control plan, as will be set by the Court. Tex. R. Civ. P. 190.4.
2. This is a shareholder derivative action brought by plaintiff, a stockholder of
EXCO Resources, Inc. ("EXCO" or the "Company"), on behalf of the Company against the Board of Directors (the "Board") and certain officers, arising out of their breaches of fiduciary duties by the Company's Chairman of the Board and Chief Executive Officer ("CEO") Douglas H. Miller ("Miller"), in connection with the proposed buyout offer of EXCO (the "Proposed Transaction"). The Proposed Transaction is the result of an unfair process and includes an unfair price that values the Company at $20.50 per/share at the announcement offer, November 1,2010, or $4.36 billion total. This amount is significantly below the Company's estimate of $25.43 per share to $36.94 per share.
3. EXCO is an oil and natural gas exploration and production company. The
Company develops onshore properties in North America and controls about I trillion cubic feet of proven gas reserves. Like most oil and gas companies, EXCO has struggled recently with low natural gas prices. The shares, however, still traded as high as $22.52 this year.
4. On November 1, 2010, EXCO publicly announced that it had received an offer to
be acquired by Miller in an all cash transaction of $20.50 per a share ($4.36 billion total), supported by director T. Boone Pickens, Oaktree and Ares, who together constitute about 30% of the EXCO shares.
5. Plaintiff brings this derivative action to enjoin the proposed acquisition of the
publicly owned shares of EXCO common stock by Miller and three other major EXCO shareholders including director Pickens, Oaktree Capital Management LP ("Oaktree"), which is represented on the Board by director B. James Ford, and Ares Management LLC ("'Ares"), represented on the Board by director Jeffrey S. Serota. Director Vincent Cebula, who is the former Managing Director of Oaktree, likely retains an interest in Oaktree and has interlocking personal relationships with Oaktree management, including Ford, Cebula's co-director on the EXCO board. Moreover, director Stillwell is the general counsel ofBP Capital LP, an entity that has EXCO director Pickens (one of the parties trying to buy EXCO) as its Chairman, CFO, and founder. Accordingly, at least six of EXCO's ten directors are interested in the Proposed Transaction and cannot evaluate it objectively.
6. On November 4, 2010, EXCO announced that it had formed a special committee
comprised of directors Vincent Cebula and Mark Mulhern to evaluate and determine whether to accept Miller's offer. The committee, however, is not independent because, as noted above, defendant director Cebula is conflicted. The Board's creation of this conflicted committee is itself a breach of fiduciary duties.
7. In response to the Miller's offer, Moody's downgraded its rating of EXCO to
"Developing," noting that the evaluation process could become a distraction to the Company's management, which may drive down operating performance. The Moody's analyst also said that
the financing for Proposed Transaction will likely increase debt, which will negatively effect the Company's credit. Standard & Poor's revised its corporate credit rating to "BB-" on the news.
8. On November 2, 2010, the day after the announcement of the Proposed
Transaction, EXCO announced its 2010 third quarter results which included: adjusted net income of $0.16 per share; a 45% oil and natural gas production increase from last year; $131 million in oil and natural gas reserves compared to $125 million in 2009, Adjusted EBITDA of $116 million, 20% increase in throughput in its jointly-owned midstream entity TOOT and net proceeds of $724 million from its Senior Notes offering in September.
9. The Proposed Transaction is the result of a flawed process designed to deliver the
Company to CEO Miller and other insiders, at the expense of its public shareholders. As part of the Proposed Transaction, Miller has secured for himself and the Company's other executives continued employment and a promise that it will operate consistently with its current operations. In other words, the only main difference will be that public shareholders will have been forced out.
10. Consequently, both the value to EXCO and its public shareholders contemplated
in the Proposed Transaction and the process by which the transaction is to be consummated are fundamentally unfair. Defendants' conduct constitutes a breach of their fiduciary duties owed to EXCO and its public shareholders, and a violation of applicable legal standards governing the Defendants' conduct.
11. The Defendants were and are engaged in a course of conduct that evinces their
failure to (a) evaluate with requisite due care and diligence the benefits to the Company; (b) undertake an adequate evaluation of the Company's worth as a potential acquisition candidate; (c) take adequate steps to enhance EXCO's value and/or attractiveness as an acquisition
candidate; (d) effectively expose EXCD to the marketplace in an effort to create an open auction for the Company; and (e) act independently so that the interests of the Company would be protected. Instead, Defendants can be expected to acquiesce to Miller's and his supporters' offer and may chill or block any other potential offers for EXCO, which will violate their fiduciary duties and will not perform a sufficient sale process to maximize the Company's value.
12. Plaintiff, on behalf of nominal defendant EXCO, seeks to enjoin Defendants from
taking any steps to consummate the Proposed Transaction or, in the event the Proposed Transaction is consummated, recover damages resulting from the Director Defendants' violations of their fiduciary duties ofloyalty, good faith, due care, and full and fair disclosure.
13. This Court has jurisdiction over EXCO because the Company conducts its
business in Texas and is incorporated in Texas. EXCO's principal place of business is 12377 Merit Drive, Suite 1700, Dallas, Texas 75251.
14. This Court has jurisdiction over each defendant named herein because each
defendant is either a corporation that conducts business in and maintains operations in Dallas County, or is an individual who has sufficient minimum contacts with Texas so as to render the exercise of jurisdiction by the Texas courts permissible under Tex. Civ. P. & Rem. Code § 17.041 et seq. and traditional notions of fair play and substantial justice. Moreover, this Court has jurisdiction over the defendants in this action and because their wrongful conduct challenged in this Complaint was directed at, and intended to have its primary effect in, this State.
15. Venue is proper in this Court because one or more of the defendants either resides
in or maintains executive offices in this County, a substantial portion of the transactions and wrongs complained of herein, including the defendants' primary participation in the wrongful
acts detailed herein and aiding and abetting the Director Defendants' breaches of their fiduciary duties owed to EXCO shareholders occurred in Dallas County, and defendants have received substantial compensation in Dallas County by doing business here and engaging in numerous activities that had an effect in this County.
16. Plaintiff, International Brotherhood of Electrical Workers Local 164 Pension
Fund, has been an owner of shares of nominal defendant EXCO common stock at all relevant times described herein.
17. Nominal defendant EXCO is a Texas oil and natural gas company. EXCO
primarily operates in East Texas, North Louisiana, Appalachia and the Permian. EXCO can be served at 12377 Merit Drive, Suite 1700, LB 83, Dallas, Texas 75251.
18. Defendant Miller has been the Chairman of the Board and CEO since December
1997. According to the most recent proxy solicitation to Company shareholders, "[s]ince [Miller] is responsible for, and familiar with, our day-to-day operations and implementation of our overall strategy, his insights into our performance and into the industry are crucial to board discussions and to our success." Miller currently owns about 2.15% of the Company's shares. Prior to joining EXCO, Miller was Chairman of the Board of Directors and CEO of Coda Energy, Inc. ("Coda") from October 1989 until November 1997 and served as a director of Coda from 1987 to 1997. Miller can be served at 12377 Merit Drive, Suite 1700, LB 83, Dallas, Texas 75251.
19. Defendant Stephen F. Smith ("Smith") has been Vice Chairman of the Board
since June 2004 and was appointed President and Secretary of the Company in October 2005. Additionally Smith began serving as the Company Chief Financial Officer ("CFO") in June
2009. In the event that the Proposed Transaction is consummated, Smith wi11likely continue in his current position along side Miller. Smith can be served at 12377 Merit Drive, Suite 1700, LB 83, Dallas, Texas 75251.
20. Defendant Jeffrey D. Benjamin ("Benjamin") has been a director of the Company
since October 2005 and previously served as director from 1998 through 2003. Benjamin can be served at 12377 Merit Drive, Suite 1700, LB 83, Dallas, Texas 75251.
21. Defendant Vincent J. Cebula ("Cebula") has been a director of the Company since
March 2007 and previously served as a director from July 2003 to October 2005. Cebula was a managing director of Oaktree and a founding member of its predecessor Oaktree's Principal Opportunities Funds from 1994 to 2007. Despite his connection to Oaktree, which owns over 16% of EX CO's stock and has agreed to support Miller's Proposed Transaction, Cebula has been appointed to the Company's special committee formed to evaluate Miller's Proposed Transaction. Cebula can be served at 12377 Merit Drive, Suite 1700, LB 83, Dallas, Texas 75251.
Defendant Earl E. Ellis ("Ellis") has been a director of the Company since
October 2005 and previously served as a director from March 1998 through July 2003. Previously, Ellis served as a director of Coda from 1992 to 1996, with Miller. Ellis can be served at 12377 Merit Drive, Suite 1700, LB 83, Dallas, Texas 75251.
23. Defendant B. James Ford ("Ford") has been a director of the Company since
December 1996. Ford is a managing director of Oaktree and is the co-portfolio manager of Oaktree's Principal Opportunities Funds and has been with Oaktree since 1996. Oaktree currently holds about 16.35% of the Company's shares. Oaktree has agreed to support Miller's Proposed Transaction. Ford can be served by serving the Texas Secretary of State as his agent
pursuant to Tex. Prac. & Rem. Code § 17.044 who shall serve Ford at 333 South Grand Avenue, 28th Floor, Los Angeles, CA 90071.
24. Defendant Mark F. Mulhern ("Mulhern") has been a director of the Company
since February 2010. Mulhern, along with Cebula, have been appointed to the Board's special committee to evaluate Miller's Proposed Transaction. Mulhern can be served at 12377 Merit Drive, Suite 1700, LB 83, Dallas, Texas 75251.
25. Defendant. T. Boone Pickens ("Pickens") has been a director of the Company
SInce October 2005, and previously served as a director from March 1998 to July 2003. Pickens has agreed to support Miller's Proposed Transaction. He currently owns about 5% of the Company's stock. Pickens has served as the Chairman of the Board and CEO of BP Capital LP since 1996 and Mesa Water, Inc. since August 2000 and is a board member of Clean Energy Fuels Corp. Pickens can be served at 8117 Preston Road, Suite 260W, Dallas, Texas 75225.
26. Defendant Jeffrey S. Serota ("Serota") has been a director of the Company since
March 2007, and previously served as a director from July 2003 until October 2005. He has also served as a senior partner of Ares since 1997. Ares currently holds about 6% of EXCO's stock. Ares has agreed to support Miller's Proposed Transaction. Serota can be served by serving the Texas Secretary of State as his agent pursuant to Tex. Prac. & Rem. Code § 17.044 who shall serve Serota at 2000 Avenue of the Stars, 12th Floor, Los Angeles, California 90067.
27. Defendant Robert L. Stillwell ("Stillwell") has been a director of the Company
since October 2005. Stillwell has served as the General Counsel of BP Capital LP since 2001 and previously Mesa Water, Inc., where Pickens also served as Chairman and CEO. Stillwell may be served at 12377 Merit Drive, Suite 1700, LB 83, Dallas, Texas 75251.
28. Defendants Miller, Smith, Benjamin, Cebula, Ellis, Ford, Mulhern, Pickens,
Serota, and Stillwell described above are collectively referred to herein as the "Director Defendants. "
29. The Director Defendants owe fiduciary duties including good faith, loyalty, fair
dealing, due care, and candor, to EXCO and its shareholders.
30. The Director Defendants, by reason of their corporate directorships and/or
executive positions, are fiduciaries to and for the Company and the Company's stockholders, which fiduciary relationship requires them to exercise their best judgment, and to act in a prudent manner and in the best interests of the EXCO and its shareholders.
31. As a fiduciary, each of the Director Defendants is required to act in good faith, in
the best interests of the Company and its public shareholders and with such care, including reasonable inquiry, as would be expected of an ordinarily prudent person. In a situation where the directors of a publicly traded company undertake a transaction that may result in a change in corporate control, the directors must take all steps reasonably required to maximize the value of the Company to its public shareholders rather than use a change of control to benefit themselves, and to disclose all material information concerning the proposed change of control to enable the shareholders to make an informed voting decision. To diligently comply with this duty, the Director Defendants were required to:
(a) manage, conduct, supervise and direct the business affairs of EXCO in accordance with the laws of the State of Texas, federal law, state and federal rules and regulations and the charter and bylaws of EXCO;
(b) neither violate nor knowingly permit any officer, director or employee of EXCO
to violate applicable laws, rules and regulations and state law; and
(c) refrain from using their status as directors and substantial minority shareholders to
32. Plaintiff alleges herein that the Director Defendants, separately and together, in
the detriment of the Company.
connection with the Proposed Transaction, violated duties owed to EXCO, including their duties
of loyalty, good faith and independence, insofar as they, inter alia, engaged in self-dealing and
obtained for themselves personal benefits, including personal financial benefits, at the expense of
the Company and not shared equally by EXCO's public shareholders.
33. Each Director Defendant herein is sued individually as a conspirator and aider and
abettor, as well as in their capacity as an officer and/or director of the Company, and the liability
of each arises from the fact that he or she has engaged in all or part of the unlawful acts, plans,
schemes, or transactions complained of herein.
34. Defendant EXCO is a leading oil and natural gas exploration, development and
production company, which primarily operates in East Texas, North Louisiana, Appalachia and
35. Even during the economic downturn, EXCO has maintained positive results as
the Permian. According to the Company's website, "Our primary goal is to build value for our
shareholders by enhancing the value of our assets through efficient operations, a high technology
drilling program, development of our properties and exploitation of unproved upside."
announced most recently in a Company press release about its third quarter results for 2010 on
November 2, 2010, which stated in pertinent part:
-Adjusted net income, a non-GAAP measure adjusting for unrealized derivative gains and losses and other non-cash items typically not included by securities analysts in published estimates, was $0.16 per share for the third quarter 2010.
-Oil and natural gas production was 29.5 Bcfe, reflecting daily production of320 Mmcfe per day, for the third quarter 2010. The third quarter 2010 production
represents a 45% increase from pro forma third quarter 200fi of 20.4 Bcfe, or 222 Mmcfe per day. The increased production highlights the success of our Haynesville shale drilling program where we produced 15.9 Bcfe (173 Mmcfe per day), representing 54% of our total production during the third quarter 2010 compared with 3.7 Bcfe (40 Mmcfper day), or 18% of our total production, in the pro forma third quarter 2009 ....
-Oil and natural gas revenuesfor the third quarter 2010 were $131 million, exclusive of the impacts of derivative financial instruments (derivatives), compared with the third quarter 2009 oil and natural gas revenues of$125 million. Revenues attributable to production from sold properties were almost entirely offset by revenues from production attributable to our development drilling. Revenues were also impacted to a smaller degree by higher realized prices for oil and natural gas, which increased by 13% on a per Mcfe basis from the prior year's third quarter. When the impacts of cash settlements from our oil and natural gas derivatives are considered, the oil and natural gas revenues, as adjusted, were $174 million for the third quarter 201 0 compared with $239 million for the third quarter 2009.
-Adjusted EBITDA, defined as earnings before interest, taxes, depreciation, depletion and amortization and other non-cash income and expense items (a nonGAAP measure) for the third quarter 2010 was $116 million compared with $173 million in the third quarter 2009. The lower Adjusted EBITDA primarily reflects lower cash settlements from our oil and natural gas derivatives, which were partially offset by higher realized prices for oil and natural gas.
-Our jointly-owned midstream entity with BG Group in East Texas and North Louisiana, TGGT, had average throughput of 1.2 Bcf per day during the third quarter 2010, an increase of20%from the second quarter 2010. TGGT expects increased throughput due to continued development from our DeSoto Parish drilling program and a major expansion to gather and treat volumes from our recently acquired assets in the Shelby Trough in East Texas.
-On September 15, 2010, we completed an underwritten offering of $750 million of Senior Notes due September 15, 2018, resulting in net proceeds of$724 million after deducting an original issue discount of $11 million and commissions, estimated offering fees and expenses of $15 million. We used a portion of the proceeds to retire all of our Senior Notes due in January 2011.
36. In these same third quarter results CEO Miller stated in pertinent part:
1 Emphasis added unless stated otherwise.
The third quarter 2010 results reflect the continued strength of our Haynesville development. Although we sold 36% of our 2009 third quarter production, we have almost fully replaced those volumes through the drill bit. During the quarter, we began developing our core DeSoto Parish position on 80-acre spacing utilizing multiwell pads. We also began our development activities in the Shelby Trough where we have participated in a well which IP'd at over 35 Mmcfper day. In Appalachia, we will complete two multi-well pads in the fourth quarter. As we plan for 2011, we are focused on reducing costs, particularly drilling and completion costs.
37. EXCO's stock has traded as high as $22.52 this year. In an investor presentation
in July 2010, the Company presented that in a low case scenario the net asset value per share
("NAV") would be $25.43 and a high case scenario estimated EXCO's NAV per a share at
$36.94. In this same presentation EXCO management estimated NAV for 2010 at $25 to $37
and $50 to $60 for 2014. The mid-point NAV of $31 and even the low case scenario of a NAV
38. On November 3,2010, on an analyst conference call Miller acknowledged that he
of $25 per share, are far below the Proposed Transaction offer of $20.50 per a share.
had previously told analysts that the stock should be worth as much as $35, but stated "[ijf
nobody wants to own the stock, and I do, why do I have to pay $35?" He also stated that "I'm a
believer that gas is going to be cheap for at least the next 12 to 18 months. And I think it is an
opportunity to get private and get ready to go make some acquisitions."
39. Indeed, Miller has a history of taking EXCO private at an opportune time for him
by buying it from the shareholders on the cheap and flipping it to them again for more money. In
2003, Miller took old EXCO private for $18 per share, and in 2006 took the Company public
again and used to revenue to payoff the debt from the initial equity used to take EXCO private.
As noted above, Miller stated that the purpose of going private is to make acquisitions while the
price of natural gas is cheap. The only reasons not to do this with EXCO as a public company is
to narrow the beneficiaries of the strategy to Miller and his cohorts, while cutting out the public
shareholders, and to avoid the public shareholders' scrutiny of his actions. 12
40. On November 1, 2010, EXCO announced that it had received an offer from
Chairman and CEO Miller to acquire all of the outstanding shares of EXCO for $20.50 per share
in a transaction valued at $436 billion. Miller later commented that he expected the Proposed
Transaction to close in about six months.
41. Miller's offer letter dated October 29,2010, stated in its entirety:
I am pleased to express my interest in acquiring all of the outstanding shares of common stock of EXCO Resources, Inc. (the "Company") at a cash purchase price of $20.50 per share. I have preliminarily discussed this proposal with Oaktree Capital Management, L.P., on behalf of its funds and accounts under management, Ares Management LLC, on behalf of one or more of its funds under management, and Boone Pickens, and each has expressed an interest in pursuing the acquisition with me.
I believe that $20.50 per share is very compelling and in the best interest of the Company and its public shareholders and that the shareholders will find this proposal attractive. This valuation represents a premium of 38% over today's closing price of the Company's common shares. The acquisition would be in the form of a merger of the Company with a newly-formed acquisition vehicle.
I would continue as Chairman and Chief Executive Officer following the transaction and expect that the Company's senior management team would remain in place. I anticipate continuing to run the business in accordance with our current practice and maintaining the Company's valuable employee base, which we view as one of its most important assets.
My familiarity with the Company means that I will be in a position to proceed velY quickly with this transaction. I expect that you will establish a special committee of independent directors to consider this proposal on behalf of the Company's public shareholders with guidance from its own legal and financial advisors. I welcome the opportunity to present this proposal to the special committee as soon as possible.
42. Specifically, under the terms ofthe Proposed Transaction, Pickens who owns 5%
of EXCO shares, Ares who owns 6% and Oaktree who owns 16.35%, will join Miller who owns
about 2.15% of EXCO shares, in the Proposed Transaction. This creates a voting block of over
30% of EXCO shares, which will make it more difficult for a majority of shareholders to voice
their disapproval with the Proposed Transaction.
43. On November 4, 2010, EXCO issued a press release announcing that it formed a
special committee to evaluate the proposal, stating, in this regard, as follows:
DALLAS, TX, November 4, 2010 - EXCO Resources, Inc. (the "Company") (NYSE:
XCO) announced today that its Board of Directors has formed a special committee consisting of Vincent J. Cebula and Mark F. Mulhern to, among other things, evaluate and determine the Company's response to the proposal made on October 29, 2010 by Douglas H. Miller, the Company's Chairman and Chief Executive Officer, to purchase all of the outstanding shares of stock of the Company for a cash purchase price of $20.50 per share.
The Special Committee has retained Kirkland & Ellis LLP and Jones Day as its legal counsel and is in the process of retaining financial advisors.
44. At least six directors, Miller, Pickens, Ford (as a member of Oaktree), Cebula (as
former Managing Director of Oaktree), Serota (as a member of Ares), and Stillwell (as an
employee of the company of which Pickens controls as Chairman and CFO) are clearly
conflicted, as is the committee comprised of Cebula and Mulhern.
45. According to Miller, under the Proposed Transaction, part of the financing for the
deal will corne from "senior management." If this includes Smith (director, President, Secretary
and Vice Chairman), seven of ten directors will be conflicted. Additionally, director Ellis, may
also face conflicts from his previous service as a director of Coda, where Miller also previously
served with him as CEO, Chairman and director. Other directors may also face conflicts from
previously joining and benefiting from the 2003 private takeover by Miller and may likewise do
so again in this Proposed Transaction.
46. The Proposed Transaction provides that each outstanding share of common stock
of EXCO will be cancelled and converted into the right to receive $20.50 in cash, which is far
below the Company's own estimates for the NAV per share andfuture projections.
47. Upon the announcement of the receipt of the Proposed Transaction, Moody's
analyst Stuart Miller revised his rating of EXCO to "Developing" from "Positive." He noted that
the evaluation process of the Proposed Transaction could become a distraction to the Company's
management, which could drive down operating performance,
48. Additionally, Standard & Poor's Rating Service also downgraded the Company to
a negative credit watch based on the financing and increased debt likely from the structure of the
49. On November 1, 2010, the Wall Street Journal published an article by Ronald
Barusch, a Merger and Acquisitions practitioner who spent more than 30 years at the law finn
Skadden, Arps, Slate, Meagher & Flom LLP, discussing the inherent problems with the Proposed
Transaction. The article stated:
Exco Resources announced Monday that its board chairman - who also happens to be its CEO - proposed to buy Exco for $20.50 per share, some $4.4 billion in all. It was quite a move from an individual who owns only 3% of Ex co today.
But, of course, the CEO is not working by himself. He has teamed up with others to make the bid: Oaktree Capital Management, Ares Management, T. Boone Pickens and his senior management. And it is undoubtedly no coincidence that each of these is represented on the Exco board. In fact, five directors - or half of the Exco board representing over 30% of the outstanding Exco shareshave decided they would rather not represent the other shareholders. Instead, they want to buy the whole business for themselves or their companies.
Exco is doing the right thing and forming an independent committee which will undoubtedly work hard to get a fair price. And, of course, anyone else who is prepared to step in could try to make a competing bid. That is, of course, if a competing buyer can get by a few issues.
First, management undoubtedly will be less than enthusiastic to encourage a defeat of a management buyout.
T. Boone Pickens is among the investors offering to help Exco go private.
Second, in terms of diligence it might be hard to get the straight story from management which has a large financial interest in its own bid.
Third, a competing buyer will start in a hole in obtaining the two-thirds requisite shareholder vote for a competing merger. Remember, the management group already has over 30% of the shares.
No doubt that once the special committee is constituted it will immediately begin to struggle with these issues - particularly the issue ofthe effective blocking position of the management group. No matter what the committee does, however, it will never be the same as having an auction where all potential purchasers are on equal footing.
Moreover, it is not the disinterested directors who chose the time to conduct this process. After all, Exco stock was trading above the management group's bid as recently as the beginning of this year. Apparently no one wanted to make a buyout proposal then, or before the financial crisis when the Exco shares traded above $36.
Assuming the management group ultimately buys Exco, I have little doubt that the purchase price will be a "fair" price- as that term is used by investment bankers and the courts. There are sufficient corporate and judicial protections. But does this situation sound fair to you? Of course, we do not know all of the background. Nevertheless, it seems to me that if five directors on a board often want to see a company sold, they should not be putting a deal together in secret. Directors are supposed to be acting in their company's best interests.
I don't think a director should be barred from proposing a transaction with his company, but shouldn't at least a majority of all directors be trying to help the company receive the highest price? And isn't it a little late to form an independent committee now that half the board has made its proposal? What's more, should five directors acting in concert to buy the company even be on the board? And wouldn't the shareholders have benefited if the role of chairman and CEO had been separated so the company had better leadership for this situation?
Finally, I think there could be some regulatory issues here. The New York Stock Exchange requires a majority of the board to be independent. The directors in the buyout group hardly seem independent. As a technical matter, this may be resolved by resignations. But to me, it seems a little late for that.
And when did these parties, all of whom have separate Schedules 13D on file at the SEC, first start talking? Only agreements, arrangements, plans and proposals need be disclosed in a Schedule 13D amendment. However, the CEO's letter says that Oaktree, Ares, and Boone Pickens have "expressed an interest in pursuing the acquisition with me."
Did that really just happen over this past weekend? The existing Schedules 13D, filed years ago, of course contain generic disclosure of what the filers might do in tenus of communicating with other shareholders, but is that really sufficient for this type of a transaction? And where are the amendments to the Schedules 13D to reflect the weekend's events? As of mid-afternoon on Monday, they had not been filed.
All we have is lots of questions at this early stage. Answers will need to await more detailed disclosure. In my opinion, though, based on what we know so far, this does not feel right.
The Proposed Transaction Provides Grossly Inadequate Consideration
50. While the Proposed Transaction is beneficial to Miller, Pickens, Oaktree, Ares,
and certain management and employees of EXCO, the timing of the transaction is opportunistic
and the product of a fatally flawed process that resulted in the Company agreeing to be bought
for inadequate consideration.
51. Even though the Proposed Transaction represents a 38% premium from EXCO
common stock closing the day before the announcement, the consideration offered in the
Proposed Transaction actually represents a discount to the Company's own NA V per share
estimates as recently as July 2010 of about $25 to $37 and 2014 NAV estimates of $50-$60 per share. EXCO's recent NAV estimates and continued positive results substantially contrast with Miller's Proposed Transaction of only $20.50 per share. EXCO's stock has traded over $22 this year.
52. The Proposed Transaction is also the product of an unfair sale process where
Defendants have secured benefits for themselves in the future company at a cost to the Company, including: (1) Defendant Miller's CEO and other executive management positions; and (2) the substantial payout many of the Director Defendants will likely receive after the commencement of the Proposed Transaction.
53. The distinct advantages of the Proposed Transaction, including EXCO's strong
earnings and future growth will all go to Miller, Pickens, Oaktree, Ares, and the as-yet unnamed members of EXCO senior management that, as Miller stated, will contribute to the financing of . the deal. Furthermore, Defendants have virtually locked up the entire deal most significantly with over 30% of the shares involved in the Proposed Transaction that may further chill any other potential bidder from coming forward.
54. Therefore, it is clear that the Proposed Transaction has been orchestrated and
reached on preferential terms to the Director Defendants and at a detriment to the Company. Defendants ignored the best interests of the Company and their duties to it by failing to conduct an appropriate sale process and to reach a transaction that was in the best interest of the Company. Plaintiff, on behalf of the Company, seeks to enjoin the Proposed Acquisition.
55. The Proposed Transaction is wrongful, unfair and harmful to EXCO and its
public stockholders, and represents an attempt by Defendants to aggrandize the personal and financial positions and interests of Director Defendants, management, and employees at the
expense and to the detriment of the Company and its stockholders. The Proposed Transaction will deny plaintiff its right to share appropriately in the true value of the Company's assets and future growth in profits and earnings, while usurping the same for the benefit of Miller, Pickens, Oaktree, Ares, and senior management at an unfair and inadequate price.
56. By forming a conflicted committee to evaluate a management and director-led
privatization, the Director Defendants have breached their fiduciary duties to the Company. If the deal is consummated, as seems exceedingly likely, these fiduciary breaches will be multiplied. Plaintiff seeks injunctive and other equitable relief to prevent the irreparable injury that the Company and its shareholders will continue to suffer absent judicial intervention. Derivative And Demand Futility/Wrongful Rejection of Demand
57. Plaintiff brings this action derivatively in the right and for the benefit of EXCO
to redress injuries suffered, and to be suffered, by EXCO as a direct result of the breaches of fiduciary duty, by the Defendants. This is not a collusive action to confer jurisdiction on this Court which it would not otherwise have.
58. Plaintiff will adequately and fairly represent the interests of EXCO and its
shareholders in enforcing and prosecuting its rights.
59. Plaintiff is and was an owner of the stock of EXCO during all times relevant to
the Director Defendants' wrongful course of conduct alleged herein.
60. Plaintiff, concurrently with the filing of this complaint, made a demand pursuant
to Tex. Bus Orgs. Code § 21.553 setting forth with particularity the wrongdoing alleged here and requesting that the Company take suitable action. However, as a result of the facts set forth throughout this Petition, and the expectation that the Proposed Acquisition and shareholder vote will occur expeditiously, Plaintiff is forced to bring this action immediately, before the 90-day
wait period has expired, because irreparable injury to the Company is being suffered and/or would result by waiting for the expiration of the 90-day period. See Tex. Bus Orgs. Code § 21.553 (b).
61. If the transaction is consummated, the Company will cease to exist in its current
fonn. Plaintiffs only remedy is to bring a derivative action on behalf of the Company before the Company ceases to exist and derivative standing will likely be lost, as well as any other means of recovery for the Company. See In re Schmitz, 285 S.W.3d 451, 456 (Tex. 2009) ("It would be hard to imagine requiring these procedures, especially in cases like this one involving an imminent corporation merger, at the instance of someone who could in no event file suit.") Furthermore, as a result of the Proposed Acquisition, defendants are taking actions such as entering transactions that further thwart the Company's ability to continue independently. Therefore, defendants' actions constitute a continuing harm to the Company and require the immediate commencement of this suit.
62. Moreover, any rejection of demand or refusal to act pursuant thereto would be
wrongful, particularly for the following reasons:
(a) as described above, at least six of the ten EXCO directors are conflicted;
(b) Directors of EXCO, as more fully detailed herein, participated in, approved and/or
permitted the wrongs alleged herein to have occurred and participated in efforts to conceal or disguise those wrongs from EXCO's stockholders or recklessly and/or negligently disregarded the wrongs complained of herein, and are therefore not disinterested parties;
(c) In order to bring this suit, all of the directors of EXCO would be forced to sue themselves and persons with whom they have extensive business and personal
entanglements, including with each other, which they will not do, thereby excusing demand;
(d) The acts complained of constitute violations of the fiduciary duties owed by
EXCO's officers and directors and these acts are incapable of ratification;
(e) Any suit by the directors of EXCO to remedy these wrongs would likely expose the Director Defendants and EXCO to further violations of the securities laws, which would result in civil actions being filed against one or more of the Director Defendants, thus, they are hopelessly conflicted in making any supposedly independent determination whether to sue themselves;
(f) Each member of the EXCO Board IS, directly or indirectly, the recipient of remuneration paid by the Company, including benefits, stock options and other emoluments by virtue of their Board membership and/or positions as officers and control over the Company, the continuation of which is dependent upon their cooperation with the other members of the Board of Directors, and their participation and acquiescence in the wrongdoing set forth herein and are therefore incapable of exercising independent objective judgment in deciding whether to bring this action;
(g) Because of their association as directors of the Company and with each other and their positions as present or former employees, the directors are dominated and controlled so as not to be capable of exercising independent objective judgment; and
(h) If EXCO's current and past officers and directors are protected by directors' and officers' liability insurance against personal liability for their acts of mismanagement, waste and breach of fiduciary duty alleged in this Petition, they caused the Company to purchase that insurance for their protection with corporate funds, i.e., monies belonging
to the stockholders of EXCO. However, due to certain changes in the language of
directors' and officers' liability insurance policies in the past few years, the directors' and
officers' liability insurance policies covering the defendants in this case contain
provisions which eliminate coverage for any action brought directly by EXCO against
these defendants, known as, inter alia, the "insured versus insured exclusion." As a result,
if these directors were to sue themselves or certain of the officers of EXCO, there would
be no directors' and officers' insurance protection and thus, this is a further reason why
they will not bring such a suit. On the other hand, if the suit is brought derivatively, as
this action is brought, such insurance coverage exists and may provide a basis for ·the
Company to effectuate recovery. If there is no coverage pursuant to directors' and
officers' liability insurance, the defendant directors will not cause EXCO to sue them,
since they will face a large uninsured liability.
Reasonable Doubt Exists That the EXCO Board is Entitled to the Business Judgment Protection
63. For the reasons set forth herein, a reasonable doubt exists that the Board's
approval and/or acquiescence to the Proposed Transaction will be the product of a valid exercise
of business judgment.
64. The Director Defendants served on Committees that were to provide them and,
therefore, the shareholders, with valuable information regarding the activities of the Company.
65. As part of their fiduciary duties, the Director Defendants had an obligation to
inform themselves, prior to making a business decision, of all material information reasonably
66. A majority of the directors are conflicted and cannot act independently with
67. Accordingly, the Director Defendants, as of the filing of this Petition, faced a
substantial likelihood of liability of an action asserting the claims alleged herein, thus disabling the Board from being capable of making a disinterested, independent decision about whether to prosecute this action. Therefore, demand on the Board, although made, was futile in retrospect.
BREACH OF FIDUCIARY DUTY AGAINST THE DIRECTOR DEFENDANTS
68. Plaintiff repeats and realleges each allegation set forth herein.
69. The Director Defendants have violated fiduciary duties of care, loyalty, candor and good faith owed to EXCO and its public shareholders.
70. By the acts, transactions and courses of conduct alleged herein, the Director
Defendants, individually and acting as a part of a common plan, are attempting to consummate the Proposed Transaction and thereby assure the continuation of the positions and compensation with the Company and secure a liquid market for the sale of their large blocks of EXCO stock, even though the consideration offered in the Proposed Transaction is grossly inadequate and was arrived at through an unfair process to the injury of EX CO and its public shareholders.
71. As demonstrated by the allegations above, the Director Defendants failed to
exercise the care required, and breached their duties of loyalty, good faith, candor and independence owed to EXCO and its public shareholders because, among other reasons, they failed to take steps to maximize the value of EXCO to its public shareholders, by, among other
things, favoring their own, or their fellow directors or executive officers' interests to secure all possible benefits with a friendly suitor (comprised largely of current management and members ofthe Board), rather than protect the best interests of EXCO and its public shareholders.
72. The Director Defendants dominate and control the business and corporate affairs
of EXCO, and are in possession of private corporate information concerning EXCO's assets,
business and future prospects. Thus, there exists an imbalance and disparity of knowledge and economic power between them and the public shareholders of EXCO, which makes it inherently unfair for them to benefit their own interests to the exclusion of maximizing shareholder value.
73. By reason of the foregoing acts, practices and course of conduct, the Director
Defendants have failed to exercise ordinary care and diligence in the exercise of their fiduciary obligations toward EXCO and its public shareholders.
74. As a result of the actions of the Director Defendants, EXCO and its public
shareholders will suffer irreparable injury in that shareholders have not and will not receive their fair portion of the value of EXCO's assets and businesses and have been and will be prevented from obtaining a fair price for their common stock.
75. Unless Defendants are enjoined by the Court, they will continue to breach their
fiduciary duties owed to EXCO and its public shareholders, all to the irreparable harm of the Company.
76. Plaintiff, on behalf of nominal defendant EXCO, has no adequate remedy at law.
Only through the exercise of this Court's equitable powers can EXCO and its public shareholders be fully protected from the immediate and irreparable injury which the Director Defendants' actions threaten to inflict.
77. Plaintiff, on behalf of nominal defendant EXCO, has no adequate remedy at law.
(a) Declaring that this action is properly maintainable as a derivative action and
declaring plaintiff to be an adequate representative ofthe Company;
(b) Preliminarily and permanently enjoining defendants and their counsel, agents, employees, and all persons acting under, in concert with, or for them, from proceeding
(c) In the event that the Proposed Transaction is consummated, rescinding it and
setting it aside;
(d) Awarding compensatory damages against defendants, individually and severally,
in an amount to be determined at trial, together with pre-judgment and post-judgment
interest at the maximum rate allowable by law;
(e) Awarding plaintiff, on behalf of nominal defendant EXCO, costs and
disbursements, including reasonable allowances for fees of plaintiffs counsel and
(f) Granting plaintiff, on behalf of nominal defendant EXCO, such other and further
reimbursement of expenses; and
Plaintiff hereby demands a trial by jury on any triable claims.
, Stephen L. Hubbard slhubbard@hblawfinn.com State Bar No. 10140500 Robert w. Biederman rwbiederman@hblawfinn.com State Bar No. 02301050 Hubbard & Biederman LLP 1601 Elm Street, Suite 1995 Dallas, Texas 75201 Telephone: (214) 857-6000 Facsimile: (214) 857-6001 Attorneys for Plaintiff
MILBERGLLP Benjamin Y. Kaufman Kent A. Bronson Andrei V. Rado
Peggy Wedgeworth Jessica J. Sleater
New York, New York 10119-0165 Telephone: 212.594.5300 Facsimile: 212.868.1229