Shareholders Win Damages and Increased Corporate Governance Arrangements in In Re Freeport-McMoRan Copper & Gold Inc.

Freeport has announced that it has reached an agreement to settle its Delaware shareholder litigation. The mining and oil and gas exploration and production company faced a derivative action in connection with the 2012 transactions by which Freeport—then a copper, gold and molybdenum producer—acquired oil and gas companies, Plains Exploration & Production Co. and McMoRan Exploration Co. The settlement, if approved by the Delaware court, will result in a payment of US$137.5 million, one of the largest settlements of a U.S. derivative action, and also the adoption by Freeport of corporate governance enhancements.

In the action, the shareholders allege that Freeport overpaid for Plains and McMoRan and that this was the result of conflicts of interest that included an overlap of boards and management and a chairman of Freeport being the largest individual shareholder of McMoRan.  

In a derivative action, the alleged harm is suffered by the company. In this case, however, the settlement proceeds of US$137.5 million, less legal fees, will be paid to the current shareholders of Freeport by means of a special dividend. In effect, this payment turns a derivative action into a direct action by shareholders, akin to an oppression action by shareholders under Canadian corporate statutes.

The corporate governance enhancements negotiated as part of the settlement address the conflicts of interest that gave rise to the litigation. The enhancements include the establishment of a lead independent director, an executive committee of independent directors, the adoption of a policy for approval of related-party transactions, restrictions on setting executive compensation and restrictions on the payment of equity-based compensation on a change of control. These enhancements are to be kept in place for three years.

The Freeport shareholder litigation draws attention to the potentially significant risks associated with related-party and other transactions where conflicts may arise, and to the need to ensure that such conflicts are addressed through an appropriate process intended to protect the interests of all shareholders. Although some of the broader governance matters stipulated in the settlement go beyond Canadian law or practice, the corporate governance enhancements included in the settlement include similar standards used by Canadian public companies in considering related-party transactions.