By Liz Hoffman
Freeport-McMoRan Inc. is nearing a settlement of more than $100
million to resolve allegations its board and executives had
conflicts of interest while negotiating the natural-resource
company's $9 billion purchase of two affiliates last year,
according to people familiar with the matter.
The agreement would resolve a lawsuit filed by some of
Freeport's shareholders alleging that the company overpaid when it
bought McMoRan Exploration Co. and Plains Exploration &
Production Co. The shareholders allege that the deals were an
effort to rescue a struggling McMoRan, in which Freeport, its board
members and key executives owned shares.
Neither Freeport, nor its directors or executives, is expected
to admit wrongdoing as part of a settlement, which would come in
lieu of a trial.
Under the preliminary settlement agreement the parties have
reached, Freeport would pay more than $130 million, with much of
that earmarked for a special dividend for its shareholders, some of
the people said. After legal fees and other costs, the dividend
would likely amount to more than $100 million, or 10 cents per
Freeport share, those people said.
The settlement and the payout to shareholders would be among the
largest in a recent string of high-profile victories in litigation
over merger deals, which has become a common battleground between
companies and their investors. It could also serve as a warning for
companies contemplating complicated takeover transactions involving
multiple, overlapping constituencies.
Freeport agreed in December 2012 to pay $6.9 billion in cash and
stock for Plains, a Houston-based oil-and-gas producer, and $2.1
billion in cash for McMoRan, a Louisiana rival in the business. For
Freeport, then one of the world's biggest publicly traded copper
miners, the moves were a return to the oil-and-gas business after
splitting from McMoRan in the 1990s. The takeovers created a global
company with a market value of roughly $30 billion, producing
commodities including oil, gas, copper and gold.
But ties between the three companies, including overlapping
board members and ownership stakes, led to claims that Freeport had
used the veil of a strategic acquisition to bail out McMoRan, a key
premise of the lawsuit.
Shareholders also alleged that, to seal the deal, Freeport also
swallowed Plains, which had veto power over the McMoRan
transaction.
Freeport had agreed to pay a 74% premium for McMoRan, whose
shares had tumbled amid delays and other problems with its flagship
Gulf of Mexico oil well.
Freeport owned preferred shares representing 16% of McMoRan, and
the two companies also shared six directors, a relic of their
combined past. McMoRan's chief executive officer, James "Jim Bob"
Moffett, was also Freeport's chairman, and Freeport's CEO, Richard
Adkerson, was McMoRan's co-chairman and former CEO. Nine Freeport
directors owned about 6% of McMoRan stock between them, according
to court and regulatory filings.
Plains, meanwhile, owned 31% of McMoRan, shares it had received
when it sold McMoRan a portfolio of shallow-water offshore acreage
in 2010. Under McMoRan's charter, Plains' stake was large enough to
block a sale of McMoRan to an unwanted suitor.
Investors sent Freeport's shares down 20% over the two days
following the announcement of the deals, and some, including
BlackRock and T. Rowe Price Inc., publicly raised concerns about
potential conflicts of interest. On a conference call after the
deals were announced, a BlackRock Inc. managing director said to
Freeport executives, "I presume that everybody on the call from
your side is conflicted because of the various different
roles."
The transactions closed in June and July 2013, after both
Freeport and Plains agreed to issue special dividends of $1 and $3
a share, respectively.
Freeport's shares climbed about 35% through July, but, like
other energy stocks, have been hit hard in recent months by falling
oil prices.
Most of the cost of the settlement would be paid for using a
special type of corporate insurance policy that covers directors
and executives, according to some of the people. Freeport would pay
for the rest.
Investors routinely challenge takeovers in court now, but the
overwhelming majority of cases are settled after companies agree to
pay fees to plaintiffs' lawyers and to disclose more information or
make minor changes to deal terms. These fees only averaged about
$500,000 last year, according to Cornerstone Research.
But shareholders have scored a few notable successes lately. In
October, a judge ordered RBC Capital Markets LLC to pay $76 million
to shareholders of an emergency-services company whose buyout the
firm advised on in 2011. RBC has said it plans to appeal.
In June, private-equity giant KKR & Co. agreed to pay $29
million to settle allegations that it shortchanged investors in its
acquisition last year of industrial-machinery maker Gardner Denver
Inc.
Write to Liz Hoffman at liz.hoffman@wsj.com
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