VALUING DERIVATIVE SUITS IN MERGERS OF FOOD AND NATURAL RESOURCE CORPORATIONS THROUGH ANALYZING THE MASSEY AND ALPHA NATURAL RESOURCES MERGER: METHODS OF ENSURING CORPORATE ACCOUNTABILITY AND MAXIMIZING SHAREHOLDER VALUE

Note Written By: Robert Proudfoot

On April 5, 2010, twenty-nine Massey Energy miners were killed by a massive methane and coal dust explosion in the Upper Big Branch coal mine disaster in West Virginia. This disaster was the result of multiple preventable safety failures. Not only was this the largest coal mining disaster in recent memory, but the incident raised questions about corporate accountability,s the effectiveness of federal regulatory standards, and the impact of a merger when a corporation is in a crisis. As a reaction to the disaster and its fallout, Massey Energy's (Massey) stock price plummeted and Alpha Natural Resources (Alpha) opportunistically offered to take over the beleaguered company in a part cash and part share merger. Massey had one of the largest coal mining accidents in history, and Alpha's subsequent purchase of Massey effectively removed Massey shareholder standing for derivative claims against Massey corporate management.

Using the Massey merger with Alpha as a guidepost, this Note reviews the impact of mergers on derivative actions for natural resource and agricultural companies and proposes that derivative actions are valuable assets of corporations and should be explicitly and appropriately priced in mergers. Additionally, a potential conflict of interest is present when a merger occurs during a pending derivative action because a merger dissolves pending derivative claims against corporate management and the board of directors. While the Delaware Court did not find evidence of fraud in the Massey merger, such a risk of fraud exists, and corporations should take action to mitigate directors' conflicts of interest and mispricing of derivative claim assets. Prior case law states that all corporate assets should be considered in a merger and a derivative suit on behalf of the corporation can have real monetary value. The logical combination of these two concepts yields the focus of this Note. To minimize potential breaches of fiduciary duties during mergers and to maximize shareholder value, successfully pleaded but pending derivative actions should be specifically valued into the purchase price when a corporation merges to compensate existing shareholders for the transfer of control of the derivative action. Without including pending derivative actions when pricing assets, there is a reduced incentive for the purchasing party to continue valid shareholder derivative suits as part of recouping its purchase costs.

Read Note