Lenois v. Lawal

ROBERT LENOIS,on behalf of himself and all other similarly situated stockholders of ERIN ENERGY CORPORATION,and derivatively on behalf of ERIN ENERGY CORPORATION, Plaintiff, v. KASE LUKMAN LAWAL, LEE P. BROWN, WILLIAM J. CAMPBELL,J. KENT FRIEDMAN, JOHN HOFMEISTER,IRA WAYNE MCCONNELL, HAZEL R. O'LEARY,and CAMAC ENERGY HOLDINGS LIMITED, Defendants,andERIN ENERGY CORPORATION, Nominal Defendant.

C.A. No. 11963-VCF

COURT OF CHANCERY OF THE STATE OF DELAWARE

Date Submitted: September 30, 2020

December 31, 2020

MEMORANDUM OPINION

Michael J. Barry, Rebecca Musarra, GRANT & EISENHOFER, P.A., Wilmington, Delaware; Gordon Z. Novod, GRANT & EISENHOFER, P.A., New York, New York; Peter B. Andrews, Craig J. Springer, Jessica Zeldin, David M. Sborz, ANDREWS & SPRINGER LLC, Wilmington, Delaware; Jeremy Friedman, Spencer Oster, David Tejtel, FRIEDMAN OSTER & TEJTEL PLLC, New York, New York; Attorneys for Plaintiff Robert Lenois and Ronald J. Sommers, Chapter 7 Trustee.

Myron T. Steele, Matthew F. Davis, Jaclyn C. Levy, POTTER, ANDERSON & CORROON LLP, Wilmington, Delaware; David T. Moran, Christopher R. Bankler, JACKSON WALKER L.L.P., Dallas, Texas; Attorneys for Defendants Kase Lukman Lawal and CAMAC Energy Holdings Limited.

David J. Teklits, Kevin M. Coen, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, Delaware; Mark Oakes and Ryan Meltzer, NORTON ROSE FULBRIGHT US LLP, Austin, Texas; John Byron, NORTON ROSE FULBRIGHT US LLP, Houston, Texas; Attorneys for Defendants Lee P. Brown, William J. Campbell, J. Kent Friedman, and Nominal Defendant Erin Energy Corporation.

Srinivas M. Raju, Robert L. Burns, Matthew D. Perri, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Greg Waller, HUNTON ANDREWS KURTH L.L.P., Houston, Texas; Attorneys for Defendants John Hofmeister, Ira Wayne McConnell, and Hazel O'Leary.

FIORAVANTI, Vice Chancellor

On November 7, 2017, this court issued a Memorandum Opinion dismissing Plaintiff Robert Lenois's derivative claims on behalf of Erin Energy Corporation ("Erin" or the "Company") against certain of Erin's directors and its controlling stockholders ("Defendants") for failure to plead demand futility (the "Memorandum Opinion"). Lenois appealed the dismissal. While the appeal was pending, Erin filed for bankruptcy, initially under Chapter 11, and later converted into a liquidation under Chapter 7. The bankruptcy resulted in an automatic stay of the appeal.

During the pendency of the appeal, Lenois and his counsel convinced Erin's bankruptcy trustee, Ronald J. Sommers (the "Trustee"), that the claims in this action have merit and should be pursued. The Trustee recognized, however, that due to the passage of time, asserting the claims in a separate action could give rise to a defense of laches. Thus, the Trustee retained Lenois's counsel and filed a motion in this action to be substituted for Lenois as plaintiff. At the same time, the Trustee and Lenois ("Movants") also filed a motion for relief from judgment under Court of Chancery Rule 60(b) (the "Motion for Relief"). After this court questioned whether it had jurisdiction to consider the motions due to the pendency of the appeal, the Trustee filed motions in the Delaware Supreme Court to vacate the Memorandum Opinion and substitute the Trustee for the Company as the real party in interest to pursue the action on Erin's behalf. Defendants opposed the motions and moved to dismiss the appeal as moot. The Supreme Court dismissed the appeal as moot,denied the Trustee's motions for substitution and vacatur, and remanded to this court for consideration of the previously filed motion for substitution and Motion for Relief.

Following dismissal of the appeal, the Trustee filed an Amended Motion for Substitution and Realignment (the "Motion to Substitute" and, along with the Motion for Relief, the "Motions") seeking to substitute the Trustee for the Company, instead of Lenois, and to realign the Trustee as plaintiff so that Erin may directly pursue in this action the claims that Lenois had previously asserted. This opinion resolves the Motions.

I. BACKGROUND

The facts recited in this opinion are drawn from Plaintiff Lenois's Complaint (the "Complaint" or "Compl."), the Supplement to the Complaint, the Memorandum Opinion, and the parties' submissions in support of and in opposition to the Motions. This opinion summarizes the allegations of the Complaint and the Memorandum Opinion to the extent necessary to address the pending Motions.

A. Erin and the Challenged Transactions

Erin is an oil and gas exploration company. Kase Lukman Lawal was the Company's Chairman and Chief Executive Officer.¹ At the time of the challenged transactions, Lawal is alleged to have been the Company's controlling stockholder.Lawal and his family owned a majority of CAMAC International Limited ("CIL"), which indirectly owns 100% of Defendant CAMAC Energy Holdings Limited ("CEHL"). Lawal and CEHL owned 58.86% of the Company's outstanding shares prior to the transactions challenged in Lenois's Complaint.

In June 2013, Public Investment Corporation Limited ("PIC"), a quasi-public South African pension fund manager, and Lawal, on behalf of Allied Energy Plc ("Allied"), a wholly owned subsidiary of CEHL, negotiated a transaction through which PIC would invest $300 million in the Company in exchange for a 30% ownership stake in Erin. Erin would then transfer the money invested by PIC and additional Erin stock to Allied in exchange for certain oil assets held by Allied (the "Assets").

On June 14, 2013, Allied and PIC presented the proposed transactions to the Erin board of directors (the "Board"). On June 17, 2013, the Board formed a Special Committee consisting of Defendants John Hofmeister, Ira Wayne McConnell, and Hazel R. O'Leary to consider and negotiate the proposal.

On November 18, 2013, after five months of negotiations with Lawal and Allied,² the Special Committee approved and recommended to the Board a series of related transactions with PIC and Allied (the "Transactions"). The Transactionsprovided for: (1) PIC to invest $270 million in Erin in exchange for approximately 377 million shares of Erin; (2) Erin to pay $170 million in cash and provide a $50 million convertible subordinated note to Allied; and (3) Erin to issue additional stock and a stock dividend, ultimately resulting in post-closing Erin ownership of approximately 30% for PIC, 60% for Allied/CEHL, and 13% for other stockholders.³ The Transactions also provided that Allied would fund the drilling costs of a particular well (with Erin to bear the costs of completion for the well) and that certain contract rights would be terminated in exchange for Erin's agreement to make two $25 million payments to Allied.⁴ The Board approved the Transactions, with Lawal and Defendant Lee P. Brown recusing themselves.

On January 15, 2014, Erin filed a proxy statement with the United States Securities and Exchange Commission (the "SEC") recommending that Erin stockholders approve certain proposals necessary to effectuate the Transactions (the "Proxy"). On February 13, 2014, Erin held a special meeting of stockholders to vote on a Transfer Agreement, a Share Purchase Agreement, and an amendment to the Company's certificate of incorporation.⁵ The proposals were subject to approval bya majority of the minority of stockholders. Each of the proposals received the requisite stockholder approvals, and the Transactions closed about a week later.⁶

B. The Complaint

On July 30, 2015, nearly a year-and-a-half after the Transactions closed, Lenois made a stockholder demand to inspect Erin's books and records pursuant to 8 Del. C. § 220. Counsel for Lenois and Erin negotiated and ultimately agreed upon the scope of the production in response to the demand.⁷ Erin produced minutes and presentations of Board meetings and other records specifically requested by Lenois. Lenois did not request any version of the contracts related to the Transactions or any attachments to the contracts.⁸

On February 5, 2016, Lenois filed a Complaint against Defendants asserting direct claims on behalf of a class of Erin stockholders and derivative claims on behalf of the Company. The Complaint alleged that certain of the Company's directors (the "Director Defendants"), Lawal, and CEHL breached their fiduciary duties by approving the Transactions. The Complaint contained four counts. Counts I and II were styled as derivative claims: Count I asserted a derivative claim for breach of fiduciary duty against Lawal and CEHL as the Company's controlling stockholders,and Count II asserted a derivative claim for breach of fiduciary duty against the Company's directors for permitting Lawal to steer the transaction process. Counts III and IV were styled as class action claims: Count III asserted a direct claim for breach of fiduciary duty against the Company's directors and Count IV asserted a direct claim against Lawal as a controlling stockholder for aiding and abetting the other directors' breaches of fiduciary duty.⁹

The Complaint alleged that the Transactions were subject to and could not withstand entire fairness review because they were transactions between the Company and its controlling stockholder.¹⁰ The Complaint branded the Special Committee process as "fatally flawed,"¹¹ accusing the Special Committee of relying on conflicted management,¹² lacking time to properly consider the complex transactions presented,¹³ being misled and threatened by Lawal, and not being fully informed.¹⁴

One allegation regarding the Special Committee is central to the pending Motions. The Proxy represented that Allied had acquired the Assets in 2012 for"$250 million in cash subject to certain adjustments."¹⁵ On April 7, 2017, Lenois moved to supplement his Complaint with new allegations based on information obtained through a recent publicly filed question-and-answer session at a stockholder meeting of Eni, S.p.A. ("Eni"), the parent company of the original owner of the Assets, Nigerian Agip...