By Liz Hoffman
Freeport-McMoRan Inc.'s settlement of a shareholder lawsuit over
certain acquisitions leaves Credit Suisse Group AG, its counselor
on the deals, in the cross hairs of investors and underscores the
growing scrutiny Wall Street banks face over their boardroom
advice.
Freeport confirmed in a court filing Thursday that it would pay
$137.5 million to resolve allegations that conflicts of interest
marred its 2013 acquisitions of McMoRan Exploration Co. and Plains
Exploration & Production Co. for a combined $9 billion. The
settlement, one of the largest ever in such a case, explicitly
allows shareholders to pursue claims against Credit Suisse, which
the plaintiffs say made a mathematical error that inflated the
value of McMoRan.
A Credit Suisse spokesman said the allegations "misinterpret
basic principles of buy-side valuation," adding that the Swiss bank
"rejects any suggestion that we acted improperly over the course of
this engagement." Freeport denies the allegations in the case and
settled it only "to avoid the substantial expense and distraction
of continued litigation," a spokesman said.
Credit Suisse now faces the possibility that it will be forced
to defend itself against the shareholders, who said, in the
Delaware Court of Chancery filing, they want to bring a case
against the bank. Such a lawsuit would make Credit Suisse the
latest merger adviser targeted by corporate shareholders. While
deal-related lawsuits against companies are commonplace, in a
handful of recent cases shareholders have gone after the banks that
have advised them, often alleging conflicts or errors.
In October, a Delaware judge ordered RBC Capital Markets LLC to
pay $76 million for its role in a 2011 buyout. RBC has defended its
advice and said it plans to appeal. Goldman Sachs Group Inc. is a
defendant in a lawsuit brought by Tibco Software Inc. shareholders,
who allege the bank failed to spot an error in the company's share
count that resulted in its private-equity buyer paying $100 million
less than agreed. Goldman is fighting the allegations in court.
In a sign of its unease over the possibility it will be targeted
next, Credit Suisse in recent weeks sought to join the settlement
talks after earlier declining offers to do so, people familiar with
the matter said. Credit Suisse, which advised Freeport's
independent directors and wasn't a defendant in the lawsuit,
privately argued that Freeport couldn't settle the case without a
guarantee the plaintiffs wouldn't later target the bank, some of
the people said. Thursday's settlement includes no such
promises.
The unusual behind-the-scenes tussle played out amid sharp
declines in oil prices, which has cast a further shadow over
Freeport's purchases of McMoRan--for which it paid a 74%
premium--and Plains. Freeport's shares are down about 50% since
July, trading at a multiyear low Thursday, and the company has been
selling assets to pay down debt.
Freeport paid $2.1 billion for McMoRan, an oil-and-gas company
it had separated from in the 1990s, and $6.9 billion for Plains, a
Houston-based rival. For Freeport, the moves were a big bet on
energy that created a global producer of commodities including
copper, gold, oil and gas.
But ties between the three companies raised red flags for some
investors. At the time the deals were struck, Freeport owned a
roughly 16% stake in McMoRan. Freeport insiders, several of whom
also held leadership positions at McMoRan, collectively owned
millions of dollars of McMoRan stock, according to public filings.
In the run-up to the deal, McMoRan shares had tumbled amid delays
at an offshore well.
Freeport shareholders sued, claiming the company had overpaid to
bail out McMoRan, and that to seal the deal also agreed to acquire
Plains, whose 30% stake in McMoRan could have been a roadblock.
Thursday's settlement, details of which were reported on by The
Wall Street Journal in November, resolves those allegations.
Freeport will pay $22.5 million of its own money and contribute
another $115 million from a special type of corporate insurance
policy. Most of the funds are earmarked for a special dividend for
Freeport shareholders that, after attorney fees and other costs, is
likely to amount to more than $100 million--a rare payout for
investors in such a case.
The natural-resources company also agreed to governance changes,
including establishing a lead independent-director position.
Investors had alleged that James "Jim Bob" Moffett, Freeport's
co-founder and chairman, wields undue influence over the board. Mr.
Moffett wasn't immediately available for comment on the investors'
allegations.
Write to Liz Hoffman at liz.hoffman@wsj.com
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