Manville Personal Injury Settlement Fund v. Don L. Blankenship , 231 W. Va. 637 ( 2013 )

IN THE SUPREME COURT OF APPEALS OF WEST VIRGINIA
September 2013 Term
FILED
_______________ September 12, 2013
released at 3:00 p.m.
No. 11-1488 RORY L. PERRY II, CLERK
SUPREME COURT OF APPEALS
_______________ OF WEST VIRGINIA
MANVILLE PERSONAL INJURY SETTLEMENT TRUST;
AMALGAMATED BANK, as TRUSTEE for the
LONGVIEW COLLECTIVE INVESTMENT FUNDS; and
CALIFORNIA STATE TEACHERS’ RETIREMENT SYSTEM;
Petitioners Below, Petitioners
v.
DON L. BLANKENSHIP; BAXTER F. PHILLIPS, JR.;
E. GORDON GEE; RICHARD M. GABRYS;
JAMES B. CRAWFORD; BOBBY R. INMAN;
ROBERT H. FOGLESONG; STANLEY C. SUBOLESKI;
J. CHRISTOPHER ADKINS; M. SHANE HARVEY;
MARK A. CLEMENS; ELIZABETH S. CHAMBERLIN;
and RICHARD R. GRINNAN,
Contemners Below, Respondents
and
MASSEY ENERGY COMPANY,
n/k/a ALPHA APPALACHIA HOLDINGS, INC.,
a Delaware corporation
Nominal Defendant Below
Appeal from the Circuit Court of Kanawha County
The Honorable James C. Stucky, Judge
Civil Action No. 07-C-1333
AFFIRMED
Submitted September 4, 2013
Filed: September 12, 2013
A. Andrew MacQueen, Esq. A. L. Emch, Esq.
Charleston, West Virginia Jonathan L. Anderson, Esq.
Badge Humphries, Esq. Jackson Kelly, PLLC
Motley Rice, LLC Charleston, West Virginia
Mount Pleasant, South Carolina Ronald S. Rolfe, Esq.
Victoria Antion Nelson, Esq. New York, New York
Motley Rice, LLC Stuart W. Gold, Esq.
Morgantown, West Virginia Julie A. North, Esq.
Counsel for the Petitioners Cravath, Swaine & Moore, LLP
New York, New York
Brian Glasser, Esq.
Counsel for Respondents
Ricklin Brown, Esq.
E. Gordon Gee, Richard M. Gabrys,
Christopher S. Morris, Esq.
James B. Crawford, Bobby R. Inman,
Bailey & Glasser, LLP
Robert H. Foglesong and
Charleston, West Virginia
Stanley C. Suboleski
Mitchell A. Lowenthal, Esq.
Boaz S. Morag, Esq.
Thomas V. Flaherty, Esq.
Cleary Gottlieb Steen & Hamilton, LLP
Tammy R. Harvey, Esq.
New York, New York
Flaherty Sensabaugh Bonasso, PLLC
Counsel for Massey Energy Company
Charleston, West Virginia
n/k/a Alpha Appalachia Holdings, Inc.
Counsel for Respondents
Don L. Blankenship, Baxter F. Phillips,
Jr., J. Christopher Adkins, M. Shane
Harvey, Mark A. Clemens and
Richard R. Grinnan
JUSTICE KETCHUM delivered the opinion of the Court.
JUSTICE DAVIS dissents and reserved the right to file a dissenting opinion.
CHIEF JUSTICE BENJAMIN did not participate in the consideration or decision of this
matter.
THE HONORABLE THOMAS E. McHUGH, JUSTICE, sitting by temporary assignment.
SYLLABUS BY THE COURT
1. “‘Generally, findings of fact are reviewed for clear error and conclusions of law are
reviewed de novo. However, ostensible findings of fact, which entail the application of law or
constitute legal judgments which transcend ordinary factual determinations, must be reviewed de
novo.’ Syl. Pt. 1, in part, State ex rel. Cooper v. Caperton, 196 W.Va. 208, 470 S.E.2d 162 (1996).”
Syl. pt. 2, Messer v. Huntington Anesthesia Group, Inc., 222 W.Va. 410, 664 S.E.2d 751 (2008).
2. A fundamental principle of the law of corporations is that a shareholder derivative action
is an equitable proceeding in which a shareholder asserts, on behalf of the corporation, a claim that
belongs to the corporation rather than the shareholder.
3. “The local law of the state of incorporation should be applied to determine who can bring
a shareholder derivative suit.” Syl. pt. 2, State ex rel. Elish v. Wilson, 189 W.Va. 739, 434 S.E.2d
411 (1993).
4. “‘In essence, the question of standing is whether the litigant is entitled to have the court
decide the merits of the dispute or of particular issues.’ Warth v. Seldin, 422 U.S. 490, 498 (1975).”
Findley v. State Farm Mutual Automobile Insurance Company, 213 W.Va. 80, 576 S.E.2d 807(2002).
Ketchum, Justice:
This appeal is from the September 29, 2011, order of the Circuit Court of Kanawha County
which dismissed petitions for civil contempt filed by petitioners Manville Personal Injury Settlement
Trust (“Manville Trust”); Amalgamated Bank, as Trustee for the Longview Collective Investment
Funds (“Amalgamated Bank”); and California State Teachers’ Retirement System (“CalSTRS”).
The contempt petitions were filed against the respondents who were former directors and officers
of Massey Energy Company (“Massey”) prior to the purchase of Massey in 2011 by Alpha Natural
Resources. After the purchase, Massey was renamed Alpha Appalachia Holdings and now is a
subsidiary of Alpha Natural Resources.
The petitions for civil contempt alleged that the respondents, while officers and directors of
Massey, failed to implement certain environmental and mine worker safety standards mandated in
a June 30, 2008, order entered in the Circuit Court of Kanawha County. The environmental and
safety standards set forth in the 2008 order were part of the settlement of a shareholder derivative
action filed against the respondents by Manville Trust on behalf of Massey. Among the petitioners’
allegations in the contempt proceeding was the failure of the respondents to implement the safety
standards prior to the April 2010 explosion at Massey’s Upper Big Branch Mine in which 29 coal
miners were killed.
Distinguishing the extensive litigation in other courts surrounding the April 2010 disaster
from this matter, the respondents contend that the contempt petitions filed against them solely
1
addressed the relation of Massey shareholders, directors and officers inter se and that, as a result, the
contempt petitions were peculiar to the internal structure of the corporation. The respondents assert
that the petitioners lack standing to pursue contempt proceedings inasmuch as (1) the petitioners no
longer own any Massey stock; (2) Massey has been purchased by Alpha Natural Resources; and (3)
the respondents were removed by Alpha as corporate directors and officers. The circuit court agreed
and granted the respondents’ motion to dismiss pursuant to the September 29, 2011, order.1
Upon review, this Court is of the opinion that the circuit court was correct in concluding that
the petitioners lacked standing to pursue contempt proceedings against the respondents. Therefore,
the September 29, 2011, order granting the respondents’ motion to dismiss the petitions for civil
contempt is affirmed.
I. Factual Background
Massey was a Delaware corporation with its headquarters in Virginia. Most of its
shareholders, including Manville Trust, Amalgamated Bank and CalSTRS, were institutional
investors. On July 2, 2007, Manville Trust filed a shareholder derivative action in the Circuit Court
of Kanawha County alleging that the Massey board of directors, and various corporate officers,
1
In dismissing the contempt petitions, the circuit court did not reach the merits of the
petitioners’ allegations concerning noncompliance with the June 2008 order. Instead, the circuit
court concluded that the petitioners lacked standing to proceed. Moreover, the circuit court did
not have before it the question of liability with regard to the explosion at the Upper Big Branch
Mine. Accordingly, it is worth noting that in May 2011, prior to this appeal, this Court denied
the petitioners’ request for a preliminary injunction seeking to halt the acquisition of Massey by
Alpha Natural Resources. In denying the request, this Court clarified that the relief the
petitioners sought arose from shareholder derivative claims rather than any “direct claims by
miners, widows or children arising out of the Upper Big Branch Mine disaster.”
2
breached their fiduciary duties by failing to make sure that Massey employees were complying with
certain environmental and mine worker safety laws and regulations. Manville Trust was the sole
plaintiff, and the action was filed “derivatively on behalf of Massey Energy Company.” See W.Va.
R. Civ. P. 23.1 (setting forth requirements for derivative actions by shareholders).2
An amended complaint was filed in December 2007. In both complaints, Manville Trust
included in the relief sought compensatory damages against “[t]he Individual Defendants and in
favor of the Company for the amount of damages sustained by the Company as a result of the
Individual Defendants’ breaches of fiduciary duties.” (emphasis added) Manville Trust also sought
costs and attorney fees.
On May 20, 2008, the parties executed a Stipulation of Settlement of the Manville Trust
action which provided for a release of all claims that were or could have been asserted derivatively
on behalf of Massey - through May 20, 2008. Excepted from the release was the right of the settling
parties, i.e., Manville Trust, “derivatively on behalf of Massey,” and the defendants, to enforce the
2
The action was styled Manville Personal Injury Trust, derivatively on behalf of Massey
Energy Company, Plaintiff v. Blankenship, et al., Defendants; Massey Energy Company, a
Delaware Corporation, Nominal Defendant, Civil Action No. 07-C-1333 (Circuit Court of
Kanawha County). The complaint alleged: “Plaintiff brings this action derivatively in the right
and for the benefit of the Company to redress injuries suffered and to be suffered by the
Company as a result of the breaches of fiduciary duty by the Individual Defendants.”
We note that, because of changes, over time, in the membership of the Massey board of
directors and corporate officers, there are slight discrepancies in the named directors and officers
as between the underlying litigation and the contempt petitions. For purposes of this opinion, we
will refer to the directors and officers, as to the contempt proceedings now before this Court on
appeal, collectively as “respondents.”
3
terms of the settlement. The settlement further provided that its terms were not to be deemed an
admission as to the merits of any claim or defense.
The claims released pursuant to the Stipulation of Settlement were in exchange for certain
reforms to be made a part of Massey’s corporate governance policies relating to company oversight
and conduct regarding environmental and mine worker safety standards. The reforms were
incorporated into Massey’s written Corporate Governance Agreement and were to remain in effect
for 5 years, subject to removal if found to be in conflict “with any amendment to the Company’s
Certificate of Incorporation approved by the Company’s shareholders.”3 In the words of the
petitioners, the fundamental purpose of the reforms “was to implement a reporting system to deliver
environmental and safety compliance information up Massey’s corporate structure, from the mines
to the Board, and ultimately to the shareholders.”
In June 2008, the circuit court conducted a settlement hearing, at the conclusion of which the
Judge stated: “I find that the settlement is fair, it’s reasonable, it’s adequate, and most importantly
it’s in the best interest of Massey.” Thereafter, on June 30, 2008, the circuit court entered an order
3
In addition, the Stipulation of Settlement provided:
The Stipulation shall be binding upon, and inure to the benefit of, the
successors and assigns of the parties thereto. It is intended by the Settling Parties
that no right of any third-party beneficiary shall arise from this Stipulation.
The Court shall retain jurisdiction with respect to implementation and
enforcement of the terms of the Stipulation, and the Settling Parties submit to the
jurisdiction of the Court for purposes of implementing and enforcing the
Settlement embodied in the Stipulation.
4
approving the settlement and dismissing Manville Trust’s claims, with prejudice. The order
incorporated the Stipulation of Settlement and the Corporate Governance Agreement. The order also
stated that “[a]ll shareholders of Massey Energy Company are bound by this Judgment.”
On April 5, 2010, an explosion occurred at Massey’s Upper Big Branch Mine located at
Montcoal, West Virginia. Twenty nine miners were killed. As stated by the petitioners,
investigations subsequent to the disaster found systematic mine safety compliance failures leading
up to the explosion. In the aftermath of the disaster, regulatory proceedings were conducted and
multiple lawsuits were filed in various courts.4
II. Procedural Background
A. The First Contempt Petition ­
filed by Manville Trust
On April 16, 2010, Manville Trust, the sole movant, filed a petition in the Circuit Court of
Kanawha County seeking a rule to show cause why the individual respondents should not be held
in civil contempt for violating the June 30, 2008, settlement order. The petition for contempt was
filed in the shareholder derivative action settled and dismissed pursuant to the June 30, 2008, order.
4
Among the lawsuits were a number of shareholder derivative actions filed in Delaware.
Moreover, Manville Trust filed a second derivative shareholder action in the Circuit Court of
Kanawha County. In that action, Manville Trust alleged oversight failures by Massey’s board of
directors and various corporate officers subsequent to the prior action’s Stipulation of Settlement
and June 30, 2008, order. In addition to Manville Trust, the plaintiffs in the second shareholder
derivative action are Amalgamated Bank and CalSTRS. That action, styled California State
Teachers’ Retirement System, et al. v. Blankenship, et al., Civil Action No. 10-C-715, is pending
before the Circuit Court of Kanawha County. It was not consolidated with the underlying action
herein, Civil Action No. 07-C-1333, and was not the basis of the contempt petitions now under
consideration before this Court.
5
The petition included a request for expedited discovery.
The petition for contempt did not assert claims by Manville Trust other than derivatively on
behalf of Massey. Manville Trust maintained, inter alia, that a mine safety compliance reporting
system was integral to the terms of the 2008 order and that, consequently, the failure to include such
a report in Massey’s 2009 corporate responsibility disclosure suggested a wide-ranging breach of the
2008 order and its incorporated Stipulation of Settlement and Corporate Governance Agreement.
The circuit court issued a rule to show cause on April 22, 2010.
B. The Purchase of Massey by
Alpha Natural Resources Through Merger
On January 28, 2011, an Agreement and Plan of Merger was made in accordance with the
law of Delaware wherein an entity known as Mountain Merger Sub, Inc., (created to effect the
transaction) would merge with and into Massey, and Massey, renamed Alpha Appalachia Holdings,
would become a wholly-owned subsidiary of Alpha Natural Resources. As a result, Alpha Natural
Resources, the parent company, would become the sole shareholder of Alpha Appalachia Holdings,
both of which were Delaware corporations.
Manville Trust, Amalgamated Bank and CalSTRS challenged the purchase of Massey by
Apha Natural Resources by filing a petition for injunctive relief in this Court. On May 31, 2011, this
6
Court denied the relief sought. See n. 1, supra.5
The merger went into effect on June 1, 2011, having been approved by both Massey and
Alpha stockholders. Over 99% of Massey shares that were voted were in favor of the merger. Upon
completion of the transaction, the petitioners ceased to own Massey shares. The circuit court
subsequently determined:
On June 1, 2011, Massey and Alpha stockholders gave their respective
approvals necessary to complete the Merger. Over 99% of Massey shares that were
voted were for the Merger. * * *
Pursuant to the Merger Agreement, each issued and outstanding share of
Massey common stock . . . was converted into the right to receive 1.025 shares
of Alpha common stock and $10 in cash. As a result, Alpha paid Massey
shareholders consideration that, valued as of the date of the Merger Agreement,
exceeded $7 billion.
As of the effective time of the Merger, Plaintiffs ceased to own shares in
Massey. Alpha became the sole shareholder of Massey, which was named Alpha
Appalachia Holdings, Inc.
As of the effective time of the Merger, Massey’s then-current Board
[including the individual respondents herein who were Massey directors] was
replaced by a Board of Directors elected by Alpha, as Massey’s sole shareholder.
The Massey board consists of a sole director (who is not a party here).
Soon after, Alpha Appalachia Holdings’s certificate of incorporation was amended to provide
5
The order denying injunctive relief was styled California State Teachers’ Retirement
System, et al., derivatively on behalf of Massey Energy Company, Petitioners v. Blankenship, et
al., and Massey Energy Company, Respondents, no. 11-0839 (W.Va. - May 31, 2011). Also
worth noting is that in May 2011, a motion for a preliminary injunction to prevent the merger
between Massey and Alpha was denied by the Court of Chancery of Delaware. See In re:
Massey Energy Company Derivative and Class Action Litigation, 2011 WL 2176479 (Del. Ch. ­
May 31, 2011).
7
that the environmental and mine worker safety operations, formerly performed by Massey, would
be conducted in a manner consistent with the programs governing Alpha’s mining activities. In
conjunction therewith, Alpha Appalachia Holdings’s sole director, upon the advice of counsel,
determined that a number of policies found in Massey’s Corporate Governance Agreement conflicted
with the amendment. As a result, the Corporate Governance Agreement, which had been
incorporated in the 2008 order, was rendered inoperative.
C. The Second Contempt Petition ­
filed by Manville Trust, Amalgamated Bank and CalSTRS
On May 31, 2011, just prior to the effective date of the merger, petitioners Manville Trust,
Amalgamated Bank and CalSTRS, “individually and on behalf of all other similarly situated
stockholders,” filed a civil contempt petition in the Circuit Court of Kanawha County against the
individual respondents. Like the first civil contempt petition, this second petition was filed in Civil
Action No. 07-C-1333, the Manville Trust shareholder derivative action settled and dismissed
pursuant to the June 30, 2008, order. The second contempt petition alleged, inter alia, that a failure
to implement the mandates of the 2008 order resulted in the disaster at the Upper Big Branch Mine.
Moreover, the second petition alleged that the individual respondents were pursuing the merger with
Alpha Natural Resources to escape liability for shareholder derivative claims.
This second contempt petition included a demand for compensatory damages in its prayer
for relief. The demand for compensatory damages was for petitioners Manville Trust, Amalgamated
Bank and CalSTRS and for “the entire class of Massey Energy shareholders” on account of
8
violations of the 2008 order. On June 14, 2011, the circuit court issued a rule to show cause.
In June 2011, the respondents, joined by Alpha Appalachia Holdings on behalf of Massey
as nominal defendant, filed a motion to dismiss both civil contempt petitions. The respondents
asserted that the petitioners lacked standing to pursue contempt proceedings because, as a result of
the merger, (1) the petitioners were no longer Massey shareholders, (2) the respondents were no
longer members of the board of directors or in a position to effect compliance with the 2008 order
and (3) any remedies for violation of the 2008 order now belong to Alpha Natural Resources and
Alpha Appalachia Holdings.6
D. The September 29, 2011, Order
Following a hearing, the circuit court entered the order of September 29, 2011, granting the
respondents’ motion to dismiss the two civil contempt petitions. The circuit court did not reach the
merits of the petitioners’ allegations concerning noncompliance with the June 2008 order. Instead,
the circuit court determined that the dispositive issue was the petitioners’ standing to proceed, which,
more appropriately, should be resolved under the law of Delaware. Concluding that the petitioners
lacked standing, the circuit court stated:
6
In denying the motion for a preliminary injunction to prevent the merger, the Court of
Chancery of Delaware noted that, through the purchase, Alpha would acquire along with
Massey’s assets responsibility for Massey’s pre-existing obligations and liabilities, including the
aftermath of the Upper Big Branch Mine disaster. The Court of Chancery commented that to
divest Alpha of available remedies in that regard and place them with Massey’s former
shareholders alone would be “problematic as a matter of equity.” In re: Massey Energy
Company Derivative and Class Action Litigation, 2011 WL 2176479 (Del. Ch. - May 31, 2011)
at 32, 43.
9
The underlying litigation here is a derivative litigation, i.e., “on behalf of
nominal defendant Massey Energy Company” to remedy damages allegedly suffered
by Massey. * * * Because Manville was acting merely as a representative of
Massey, no direct enforcement right arose in the underlying proceeding. * * *
[The petitioners] are now former Massey shareholders. Thus, even if the
2008 Order represented a determination that Manville could properly prosecute
claims on Massey’s behalf, Manville ceased to be the proper party to prosecute those
claims (and enforce the settlement of those claims) when it surrendered its Massey
shares in the Merger that was overwhelmingly approved by Massey’s shareholders.
Similarly, even if Massey’s shareholders had a “legally cognizable interest” in the
Settlement because the Settlement was “made in favor of Massey Energy
shareholders,” they lost that interest when they surrendered their Massey shares. The
legal effect of the Merger is no different than if, for example, [the petitioners] had
sold their Massey shares in the market, not in connection with the merger. * * *
The Court recognizes that [the petitioners] purported to submit their [second]
Petition “individually and on behalf of all other similarly situated shareholders.” *
* * Since [the petitioners] allege harm only to Massey and do not allege any injury
to themselves independent of injury to Massey, their claim is, in fact, derivative. *
* * Thus, regardless of whether [the petitioners] could assert a direct claim, the
Court finds that the claim [the petitioners] have, in fact, asserted is derivative.
The circuit court, therefore, dismissed the two contempt petitions on the basis that the
petitioners lacked derivative standing.
The petitioners, Manville Trust, Amalgamated Bank and CalSTRS, ask this Court to reverse
the September 29, 2011, order and remand the contempt petitions to the circuit court for further
proceedings.
III. Standards of Review
As confirmed in Wrenn v. West Virginia Department of Transportation, 224 W.Va. 424, 427,
10
686 S.E.2d 75, 78 (2009), this Court “generally reviews circuit court orders granting motions to
dismiss de novo.” Syl. pt. 1, Lontz v. Tharp, 220 W.Va. 282, 647 S.E.2d 718 (2007); syl. pt. 1,
Rhododendron Furniture & Design v. Marshall, 214 W.Va. 463, 590 S.E.2d 656 (2003).
Moreover, in complex cases such as the one now before us, which was decided at the
pleading stage, this Court has observed that “‘[g]enerally, findings of fact are reviewed for clear error
and conclusions of law are reviewed de novo. However, ostensible findings of fact, which entail the
application of law or constitute legal judgments which transcend ordinary factual determinations,
must be reviewed de novo.’ Syl. Pt. 1, in part, State ex rel. Cooper v. Caperton, 196 W.Va. 208, 470
S.E.2d 162 (1996).” Syl. pt. 2, Messer v. Huntington Anesthesia Group, Inc., 222 W.Va. 410, 664
S.E.2d 751 (2008). Accord Thomas v. Morris, 224 W.Va. 661, 666, 687 S.E.2d 760, 765 (2009).
IV. Discussion
A. The Underlying Action and Related Contempt Petitions
Are Grounded on Derivative Claims
A fundamental principle of the law of corporations is that a shareholder derivative action is
an equitable proceeding in which a shareholder asserts, on behalf of the corporation, a claim that
belongs to the corporation rather than the shareholder. Siska Revocable Trust v. Milestone
Development, 282 Va. 169, 182, 715 S.E.2d 21, 28 (2011); Simmons v. Miller, 261 Va. 561, 573, 544
S.E.2d 666, 674 (2001). See Ross v. Bernhard, 396 U.S. 531, 538, 539 (1970) (In a derivative
action, the corporation is the real party in interest; “[t]he heart of the action is the corporate claim.”);
12B Fletcher Cyclopedia of the Law of Corporations § 5908 (2009) (An invention of equity, a
11
derivative action seeks redress for a wrong to the corporation.).7
Here, the 2007 underlying action was filed by Manville Trust “derivatively on behalf of
Massey Energy Company.” The complaint alleged that Manville Trust brought the action “in the
right and for the benefit of the Company to redress injuries suffered and to be suffered by the
Company as a result of the breaches of fiduciary duty by the Individual Defendants.” The demand
for compensatory damages was “for the amount of damages sustained by the Company.” That action
was settled, subject to the Stipulation of Settlement and June 30, 2008, order which, inter alia,
provided Manville Trust with the right to enforce the settlement “derivatively on behalf of Massey.”
Both contempt petitions which followed the settlement arose from the underlying action and
the June 30, 2008, order. As later noted by the circuit court, Manville Trust “styled its original
motion for a rule to show cause as part of the underlying ‘Derivative Action’ and Plaintiffs captioned
Massey as a ‘nominal defendant’, which reflects the corporation’s status in a derivative action, in
both petitions.”
As stated above, the first petition for contempt, filed by Manville Trust, did not assert claims
other than derivatively on behalf of Massey. The second contempt petition, filed by Manville Trust,
Amalgamated Bank and CalSTRS, purported to allege direct claims by demanding compensatory
7
The principle, thus stated, is consistent with procedural rules for derivative actions
under both W.Va. R. Civ. P. 23.1 (recognizing an action by shareholders to enforce a right of a
corporation, the corporation “having failed to enforce a right which may properly be asserted by
it”) and Fed. R. Civ. P. 23.1 (applicable when shareholders bring a derivative action to enforce a
right that the corporation “may properly assert but has failed to enforce”).
12
damages for themselves and “the entire class of Massey Energy shareholders.” However, as
discussed below, no direct claims were alleged in the underlying action. In any event, the circuit
court concluded that, since the injury alleged was to Massey, and not to the shareholders themselves,
the claims alleged in the second contempt petition were, in fact, derivative.
Upon review, this Court is in agreement with the circuit court. The two contempt petitions,
which raised compliance issues with regard to the June 30, 2008, settlement order, while suggesting
indirect harm to the petitioners, alleged, in reality, claims against the respondents for the benefit of
the former Massey Energy Company. Therefore, as in the underlying action, the two contempt
petitions were grounded on derivative claims.
B. This Controversy Involves the Relation of Shareholders and
Corporations inter se, and Delaware Law Applies
In dismissing the contempt petitions, the circuit court did not reach the merits of the
allegations concerning noncompliance with the June 2008 order. Instead, the circuit court concluded
that the petitioners lacked standing to proceed in view of the merger by which Massey was purchased
by Alpha Natural Resources.
The Stipulation of Settlement in the underlying action provided, through the June 2008 order,
that the terms of the settlement would be construed and enforced pursuant to the laws of West
Virginia.8 This Court has recognized the presumptive validity of a choice of law provision, (1)
8
The Stipulation of Settlement provided:
13
unless the provision bears no substantial relationship to the chosen jurisdiction or (2) the application
of the laws of the chosen jurisdiction would offend the public policy of this State. Bryan v.
Massachusetts Mutual Life Insurance Company, 178 W.Va. 773, 777, 364 S.E.2d 786, 790 (1987);
syl. pt. 1, General Electric Company v. Keyser, 166 W.Va. 456, 275 S.E.2d 289 (1981).
In applying the law of Delaware and concluding that the petitioners lacked standing to
proceed, the circuit court relied on this Court’s opinion in State ex rel. Elish v. Wilson, 189 W.Va.
739, 434 S.E.2d 411 (1993), a case holding that an equitable stock ownership was sufficient to
confer standing to participate in a shareholder derivative action. The derivative action in Elish
involved Weirton Steel, a company incorporated in Delaware. Concluding that the issue of standing
should be resolved under Delaware law, the opinion observed: “While Weirton Steel is a prominent
employer in West Virginia, the battle over who can participate in a shareholder derivative suit is a
struggle peculiar to the corporation itself and must be handled as such.” 189 W.Va. at 745, 434
S.E.2d at 417. Thus, syllabus point two of Elish holds: “The local law of the state of incorporation
should be applied to determine who can bring a shareholder derivative suit.”
Nothing in the record herein indicates that the 2008 settlement of the underlying derivative
shareholder action anticipated the 2011 merger through which Massey was purchased by Alpha
This Stipulation and the Exhibits hereto shall be considered to have been
negotiated, executed and delivered, and to be wholly performed, in the State of
West Virginia, and the rights and obligations of the parties to the Stipulation shall
be construed and enforced in accordance with, and governed by, the internal,
substantive laws of the State of West Virginia without giving effect to that State’s
choice of law principles.
14
Natural Resources. In the second contempt petition, however, subsequently filed by Manville Trust,
Amalgamated Bank and CalSTRS, an allegation was included to the effect that the individual
respondents were pursuing the merger to escape liability for derivative claims. As noted above, a
petition for injunctive relief challenging the merger was rejected by this Court on May 31, 2011. In
the order denying an injunction, this Court indicated that Delaware law governed the requested relief.
Moreover, this Court noted that a similar petition for injunctive relief was pending before the
Chancery Court of Delaware, a court of “specialized expertise” in these matters. Since then, the
Chancery Court of Delaware denied a motion for a preliminary injunction to prevent the merger
between Massey and Alpha. See In re: Massey Energy Company Derivative and Class Action
Litigation, 2011 WL 2176479 (Del. Ch. - May 31, 2011).
The terms of the 2008 settlement provided that the settlement was to be construed under
West Virginia law. However, this contempt proceeding strictly concerns derivative shareholder
claims and the viability of those claims in view of the corporate merger.9 The June 30, 2008,
settlement order expressly provided that the settlement was to be enforced derivatively. Massey,
now known as Alpha Appalachia Holdings, and Alpha Natural Resources were incorporated in
Delaware, and the present controversy requires a sorting out of the derivative claims of the
petitioners in complex circumstances involving each company. As stated above, the Agreement and
9
As a result of the merger, the environmental and mine worker safety operations,
formerly performed by Massey, were to be conducted in a manner consistent with the programs
governing Alpha’s mining activities. The Chancery Court of Delaware described Alpha Natural
Resources as “a mining company with a good reputation and track record for miner safety and
regulatory compliance.” In re: Massey Energy Company Derivative and Class Action Litigation,
2011 WL 2176479 (Del. Ch. - May 31, 2011) at 2.
15
Plan of Merger, by which Alpha purchased Massey, was made in accordance with the law of
Delaware.
Following the holding in Elish, this Court concludes that the circuit court correctly
determined that the laws of Delaware should be applied to resolve the issue of the petitioners’
standing to proceed derivatively on the contempt petitions.
C. The Petitioners Failed to Allege
that the Merger was Fraudulent or Inequitable
The purchase of Massey by Alpha Natural Resources began with the January 2011
Agreement and Plan of Merger and went into effect on June 1, 2011, at which time the petitioners
ceased to own shares in Massey, and the respondent members of the board of directors were replaced
by a board elected by Alpha. Massey’s Corporate Governance Agreement was rendered inoperative,
and Massey’s environmental and mine worker safety operations came under the authority of Alpha
and were to be conducted in a manner consistent with programs governing Alpha’s mining activities.
The circuit court found that over 99% of Massey shares that were voted were for the merger. Each
share of Massey common stock was converted into the right to receive 1.025 shares of Alpha
common stock and $10 in cash. The circuit court concluded: “Alpha paid Massey shareholders
consideration that, valued as of the date of the Merger Agreement, exceeded $7 billion.”
As stated above, preliminary challenges to the merger were rejected by this Court and by the
Chancery Court of Delaware.
16
In the current matter, Manville Trust, Amalgamated Bank and CalSTRS, suggesting that the
merger was fraudulent, alleged in the second contempt petition that the individual respondents
pursued the merger simply to escape liability upon the derivative claims. Accordingly, the
petitioners contend that the circuit court should have allowed discovery on that issue before
considering the respondents’ motion to dismiss the contempt petitions.
The circuit court found the fraud issue and discovery request to be without merit. W.Va. R.
Civ. P. 9(b), requires that, in all averments of fraud, the circumstances constituting fraud “shall be
stated with particularity,”10 The circuit court concluded:
The entirety of [petitioners’] pleading on this issue amounts to a single
sentence in the [second contempt petition]. * * * [Petitioners] have not alleged
a single fact, other than that the former directors allegedly faced a substantial
likelihood of liability, from which it could be inferred that Defendants were
motivated by their potential liability here (or on any other derivative claim). * *
*
The Court also recognizes that the more than $7 billion purchase price and
the substantial premium delivered to Massey’s former shareholders from the Merger
is hardly indicative of a transaction undertaken “solely” for liability avoidance.
The circuit court cited In re: Massey Energy Company Derivative and Class Action
Litigation, 2011 WL 2176479 (Del. Ch. - May 31, 2011), supra, which rejected the preliminary
challenge to the merger. The Delaware Chancery Court concluded:
The Merger with Alpha is not a mere reorganization, and given the record
10
Similarly, Rule 9(b) of the Rules of the Court of Chancery of Delaware requires that, in
all averments of fraud, the circumstances constituting fraud “shall be stated with particularity.”
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here, it appears highly doubtful that the plaintiffs will be able to show that Massey’s
directors and officers sought to sell the company to Alpha solely in order to
extinguish their potential liability for the pending Derivative Claims. Admittedly,
there is a basis to conclude that the Massey Board perceived that the company’s
ability to prosper independently was impaired by its questionable reputation for
worker and environmental safety, and that the best way to secure value was to sell the
company at a premium, for stock, to an industry rival with a better reputation in those
areas and to allow current Massey stockholders to benefit from the immediate
premium and the prospect that the combined asset base would generate solid profits
and a higher market multiple under Alpha management. But the record does not
suggest that it is likely that the Merger was inspired solely, or even in any material
way, by a desire of the Massey directors to extinguish the Derivative Claims or to
insulate themselves from liability.
In re: Massey Energy Company Derivative and Class Action Litigation, 2011 WL 2176479 (Del.
Ch. - May 31, 2011) at 3.
Upon review, this Court concludes that nothing in the pleadings, suggesting that the merger
was pretextual, fraudulent or even inequitable, was alleged other than in a cursory manner. No
averments were set forth which would satisfy the particularity requirement of W.Va. R. Civ. P. 9(b)
or the similar requirement under Delaware law. No assertion was made, for example, that the
consideration paid for the purchase of Massey was inadequate. This Court is of the opinion,
therefore, that the petitioners’ issue in this regard failed at the pleading stage and that discovery was
not warranted. See Hager v. Exxon Corporation, 161 W.Va. 278, 283, 241 S.E.2d 920, 923 (1978)
(The strict requirements of Rule 9(b) were included in the procedural rules as an exception to the
principles of brevity and simplicity in pleading.)
D. The Petitioners Lack Standing
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to Pursue the Contempt Proceedings
In Findley v. State Farm Mutual Automobile Insurance Company, 213 W.Va. 80, 576 S.E.2d
807 (2002), cert. denied, 539 U.S. 942 (2003), this Court restated the general principle expressed
in Warth v. Seldin, 422 U.S. 490, 498 (1975), that “[i]n essence, the question of standing is whether
the litigant is entitled to have the court decide the merits of the dispute or of particular issues.” 213
W.Va. at 95, 576 S.E.2d at 822. See also State ex rel. Paul B. v. Hill, 201 W.Va. 248, 256, 496
S.E.2d 198, 206 (1997) (“Standing” refers to one’s ability to bring a lawsuit based on a personal
stake in the outcome.).
Here, the circuit court ruled that the petitioners lacked standing under Delaware’s
“continuous ownership” requirement, citing one of Delaware’s leading cases thereon, Lewis v.
Anderson, 477 A.2d 1040 (Del. 1984). In Lewis, the plaintiff filed a shareholder derivative action
against the management of Old Conoco. The plaintiff demanded, inter alia, that management
account for any damages sustained by Old Conoco resulting from management’s “golden parachute”
agreements. The action was dismissed by the Delaware Chancery Court, however, following a
merger of Old Conoco into a wholly-owned subsidiary of Du Pont. As characterized in Lewis, the
plaintiff ceased to be a shareholder, and Old Conoco was “merged out of existence.”
In Lewis, the Supreme Court of Delaware affirmed the dismissal. The opinion states:
In the context of a corporate merger, . . . a derivative shareholder must
not only be a stockholder at the time of the alleged wrong and at time of
commencement of suit but that he must also maintain shareholder status throughout
the litigation. * * * The two recognized exceptions to the rule are: (1) where the
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merger itself is the subject of a claim of fraud; and (2) where the merger is in reality
a reorganization which does not affect plaintiff’s ownership of the business
enterprise.
477 A.2d at 1046. In accord In re: Syncor International Corporation Shareholders Litigation, 857
A.2d 994, 998 (Del. Ch. - 2004).
The current matter involves an underlying action and related contempt petitions grounded
on derivative claims. Looking first to the exceptions under Lewis, neither applies. As discussed
above, the petitioners failed to sufficiently allege that the merger was fraudulent or inequitable.
Moreover, no assertion has been made that, through the right to receive shares of Alpha stock or
otherwise, the merger was a mere reorganization which did not affect the petitioners’ ownership in
the business enterprise. The reorganization exception was never brought into this case. We,
therefore, consider the “continuous ownership” requirement articulated in Lewis and applied herein
by the circuit court.
As already stated, nothing in the record indicates that the settlement of the underlying action
anticipated the merger through which Massey was purchased by Alpha Natural Resources. As of the
effective date of the merger, June 1, 2011, the petitioners ceased to be shareholders of Massey.
Under Delaware law, therefore, the petitioners lost standing to pursue derivative claims on Massey’s
behalf. Those claims, by virtue of the merger, passed to Alpha. The petitioners respond by asserting
that, in the second contempt petition, they alleged direct claims for themselves and “the entire class
of Massey Energy shareholders,” thus conferring the petitioners with standing independent of the
effect of the merger. The basis of those claims was Massey’s Corporate Governance Agreement
which was to provide environmental and safety compliance information to Massey’s shareholders.
The Corporate Governance Agreement, however, was rendered inoperative shortly after the merger,
and Massey’s environmental and safety operations were transferred to Alpha to be conducted in a
manner consistent with the programs governing Alpha’s mining activities. See n. 9, supra.
The first petition for contempt, filed by Manville Trust, did not assert claims other than
derivatively on behalf of Massey. As the circuit court determined, the second contempt petition,
filed by Manville Trust, Amalgamated Bank and CalSTRS, although purporting to allege direct
claims, asserted, in reality, derivative claims for injury to Massey flowing from alleged violations
of the 2008 settlement order. No direct harm to the shareholders themselves was alleged. Moreover,
the 2008 order specified that the settlement would be enforced by the defendants and Manville Trust
“derivatively on behalf of Massey.” Nevertheless, even if direct claims were alleged in the second
contempt petition, direct claims by Massey shareholders were not a part of the underlying
shareholder derivative action filed by Manville Trust in circuit court. Accordingly, by raising new
claims or independent causes of action, i.e., direct claims, in the second contempt petition, the
petitioners are improperly attempting to expand the scope and reach of the original shareholder
derivative action and the 2008 settlement. See Reeves v. Transport Data Communications, Inc., 318
A.2d 147, 149 (Del. Ch. 1974) (“If the injury complained of is to the stockholder individually, and
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not to the corporation, then the cause of action is individual, not derivative.”)
As a result, the petitioners’ demand for compensatory damages must also fail. See Tooley
v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1036 (Del. 2004) (Recovery in a derivative
suit brought on behalf of the corporation goes to the corporation.); Chounis v. Laing, 125 W.Va. 275,
297, 23 S.E.2d 628, 640 (1942) (Subject to exceptions, in a derivative suit recovery is ordinarily paid
to the corporation.). Here, the demand for compensatory damages arose from derivative claims,
rather than from any purported direct harms to shareholders the petitioners now assert. The direct
harms are only theoretical in this proceeding, and there is no retrospective remedy for claims never
alleged.
V. Conclusion
The findings of fact and conclusions of law set forth by the circuit court are amply supported
by the evidence and the authorities pertaining to this matter. As the circuit court found, on June 1,
2011, Massey and Alpha stockholders gave their respective approvals necessary to complete the
merger. Over 99% of Massey shares that were voted were for the merger. The respondent board of
directors was replaced, and the former Massey Energy Company is now owned and operated by
Alpha Natural Resources. The underlying action filed and settled by Manville Trust, and the two
civil contempt petitions arising therefrom, are purely derivative in nature.
Consequently, under Delaware law, the petitioners are without standing to pursue the two
contempt petitions. Therefore, the September 29, 2011, order granting the respondents’ motion to
dismiss the petitions is affirmed.
.
Affirmed.
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