Massey-Alpha merger situation heating up

May 23, 2011 by Ken Ward Jr.

As the June 1 date for shareholders of Alpha Natural Resources and Massey Energy to vote on Alpha’s takeover of Massey, litigation over the potential $8 billion deal is definitely heating up.

We reported earlier today on a lawsuit filed in Boone County by families of some of the miners who died in Massey’s Upper Big Branch Mine Disaster related to the proposed purchase of Massey by Alpha.  Basically, this suit alleges that the transaction is a great deal for Massey insiders — who stand to profit greatly from it — and puts at risk the ability of the victims’ families to recover from lawsuits over the April 5, 2010, explosion.  The suit alleges:

[Massey] is a corporation with considerable assets, including some of the best coal reserves in the central Appalachian region.

As a result of the misconduct and mismanagement of the insider defendants… all assets of [Massey] are being transferred to Alpha in the merger. In doing so, the insider defendants, as well as other members of management, including former CEO Don Blankenship, are liquidating risk into cash and are able to walk away from the merger with substantial amounts of cash while the plaintiff creditors will have nothing more than unsecured claims against a highly leveraged, cash-poor company.

And over at NPR, Howard Berkes reported today on what he called “last-ditch attempts by some Massey shareholders to block the deal.

Howard explained:

The lawsuits are so-called “derivative” suits in which shareholders assert they must sue on behalf of the company, and to protect the company’s value, because of alleged misbehavior by the directors and officers.

UPDATED: The Wednesday hearing referenced by NPR has been postponed, according to the office of Kanawha Circuit Judge Charles King.

The hearings in West Virginia Wednesday and Delaware Thursday seek preliminary injunctions blocking the merger, which is expected to be approved at shareholders meetings June 1.

Most of the court documents in both cases are sealed but NPR has obtained subpoenas issued to former Massey CEO Don Blankenship and current Chief Operating Officer Chris Adkins. Both involve appearances at Wednesday’s hearing in Kanawha County Circuit Court in Charleston, West Virginia.

Some lawsuits by shareholders were filed prior to the Upper Big Branch disaster and settled, while others were filed just after the disaster, and still more have been filed directly regarding the proposed deal with Alpha. A rundown of them all is available in Massey’s most recent quarterly report to shareholders and the U.S. Securities and Exchange Commission.

And, as SEC filings continue to pile in regarding the merger, some are providing more details about Blankenship’s departure from Massey. One in particular is interesting:

The plaintiffs in In re Massey Energy Company Derivative and Class Action Litigation filed a submission on May 15, 2011, in support of their request for equitable relief, including a preliminary injunction enjoining the consummation of the proposed merger of Massey Energy Company (Massey) and Mountain Merger Sub, Inc., a wholly owned subsidiary of Alpha Natural Resources, Inc. (Alpha). In that submission, the plaintiffs alleged, among other things, that the definitive Proxy Statement filed by Massey and Alpha with the Securities and Exchange Commission (SEC) on April 29, 2011, which we call the Proxy, was false and misleading because it allegedly omitted certain facts that plaintiffs contend are material. One of the plaintiffs’ contentions centers around the work of an Advisory Committee formed by the board of directors of Massey in August 2010 to investigate, among other things, derivative claims relating to the safety of the work conditions at Massey. This committee consisted solely of the two members of Massey’s board of directors who had been appointed in August 2010. The plaintiffs allege that the Proxy failed to disclose, but should have, that the committee made an oral report to the Massey board of directors at a dinner meeting on November 21, 2010. According to the plaintiffs, the oral report by the committee indicated to the remaining board members that the committee might recommend that derivative claims be pursued against them, and that those directors might become subject to “grueling” examination by third parties the committee was considering retaining to examine Massey’s safety practices. The plaintiffs also allege that the committee recommended that Mr. Blankenship be removed, and that this was the reason he submitted his resignation on December 3, 2010. Finally, the plaintiffs allege that the foregoing led the board of directors of Massey to conclude that they had no alternative but to sell Massey to a third party.

Massey disputes the plaintiffs’ characterizations of these events. While the committee provided an oral update to the independent members of Massey’s board of directors on November 21, 2010 after the meeting of the full board of directors had been concluded, the update made no conclusions about whether or not the derivative claims should be pursued, and stated that the committee’s investigation was ongoing. Massey further believes that there is no connection between the committee’s oral update and the decision made by the board of directors to pursue a sale, or agree to a sale, of the company. While the oral update of the committee included a recommendation that at a minimum the board of directors not re-nominate Mr. Blankenship for re-election to the board of directors at the company’s next annual meeting then expected to be held in May 2011, and assess whether Mr. Blankenship as Chairman of the Board and Chief Executive Officer provided the most viable option for Massey going forward, the independent members of Massey’s board of directors did not make any decision on this matter and did not make a recommendation to the board of directors to remove Mr. Blankenship or request his resignation from his positions at Massey.

Stay tuned …

24 Responses to “Massey-Alpha merger situation heating up”

  1. Casey says:

    I would characterize these actions as nuisance lawsuits being filed to extort monies for lawyers. Many groups such as the Manville Personal Injury Settlement Trust have learned how to extract huge sums of money so to avoid lengthy lawsuits. The legal climate in WV is one of the biggest reasons for the lack of economic diversification and job growth for its citizens. Another example:

    http://online.wsj.com/article/SB10001424052748704681904576319163605918524.html

  2. Lisa deGruyter says:

    Casey – Your “example” is of a federal administrative judge making decisions on federal law in several states, who happens to be based in West Virginia. It has nothing to do with West Virginia’s legal climate, since it has nothing to do with West Virginia state law or courts.

  3. Ken Ward Jr. says:

    Casey,

    Perhaps you could explain how the rate of approvals of social security disability payments in an administrative process before an ALJ has anything at all to do with the business climate in West Virginia … ??

    It’s one thing to argue about whether the civil justice system in West Virginia’s circuit courts is unfair to business … but I don’t see how the WSJ story you cite has one thing to do with that. And in any event, a variety of scholars have found the theory that some people advance regarding West Virginia being a “judicial hellhole” to be without merit.

    For example:

    “The essay describes the national Hellhole and Lawsuit Climate campaigns, and then focuses on ATRA’s treatment of West Virginia in order to demonstrate the techniques of the hellhole reports. For example, the reports represent opinions as facts, use quotations and anecdotes in a misleading and manipulative way, omit bad facts, and misuse statistics.”
    Elizabeth G. Thornburg, Southern Methodist University (SMU) – Dedman School of Law, West Virginia Law Review, West Virginia Law Review, Vol. 110, No. 3, 2008 , http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1123808

    Other than WSJ stories and Chamber of Commerce “studies”, I would be interested to see what literature you can point to that supports the idea that the legal climate is “one of the biggest reasons for the lack of economic diversification and job growth” in West Virginia.

    Ken.

  4. Ken Ward Jr. says:

    Also of interest on the topic Casey raises is a great book, “Blocking the Courthouse Door” by journalist Stephanie Mencimer:

    “Investigative reporter Mencimer, a contributing editor to the Washington Monthly, takes on tort reformers with an energetic “serve and volley” approach. First Mencimer serves the arguments that proponents of tort reform make to support their agenda—limiting judicial remedies for victims of accidents, product liability suits, medical malpractice suits and the like—and then volleys those arguments back with statistics, anecdotes and conceptual arguments. She guides readers through many of the tort reformers’ most cherished poster children of tort system abuse—the McDonald’s scalding coffee case, the supposed abuses in medical malpractice and the tort reform movement’s bête noire, the diabolical system of punitive damages—and systematically, and usually convincingly, debunks each of them. Mencimer identifies the architects of the tort reform movement as Republicans, corporations and professional groups that stand to gain politically or economically if the tort system is limited. The book’s conclusion addresses the larger issue of the wisdom of requiring wrongdoers to pay for the damages from their actions, as opposed to other systems that employ social safety nets to spread the cost of such harm throughout the society. Although the author’s advocacy is occasionally too zealous, she provides much food for thought.”

    http://www.amazon.com/Blocking-Courthouse-Door-Republican-Corporate/dp/0743277007

    Ken.

  5. Casey says:

    Why then are large employers like auto manufacturers locating in other southern states although WV has a strategic advantage in its location relative to major population centers and markets? You can argue both sides but the proof is in the results and the economic growth and “well being” is improving else where while WV suffers.

    I stated my opinion and apparently it is the opinion of individuals that make business investment decisions on where to locate. The legal climate is probably not the only unfavorable reason but the overall unfavorable business climate is. Sometimes these decisions are very limited for extractive industries that must invest where the minerals are located.

  6. Nanette says:

    I don’t understand folks who repeatedly uphold corporate executives over the working man. IMO talking about WV being a “hellhole” for business when referring to the UBB disaster and the “hellhole” that these families of the fallen miners live everyday is beyond cold. The Chamber of Commerce does not care for the everyday working person, they are for those who hire them, and sometimes have working conditions like Massey that have dire consequences for the workers and their families.

    I don’t believe we have a “judicial hellhole” here when these families and men were used and abused like bank mules are now are wanting their fair due from the company who broke the rules. This is not a “nuisance lawsuit”. If anything the company will never have to pay what these families really deserve.

  7. Mark says:

    I work for Massey all of the mines are not like ubb

  8. Coal Reports says:

    I believe that there are always alternatives to producing coal and fueling those mega structures industries. The government all over the world should come up with ideas on how to protect the environment and at the same time keep the economy running.

  9. Ken Ward Jr. says:

    I want to refer everyone to the Coal Tattoo comments policy, available here:

    http://blogs.wvgazette.com/coaltattoo/comment-policy/

    Two points:

    First, be respectful of others. Say you disagree with them or that you don’t believe their opinions have much merit. Don’t say their views are a pile of whatever …

    Second, and I quote here, “please provide links or citations to published material to back up your views, when appropriate.” Your “opinions” will carry much more weight, and convince other readers, if you have some backup material and aren’t just spouting off.

    Ken.

  10. Patience says:

    Casey, it might have something to do with the “verticality” of the state, i.e., not a whole lot of flat land.

    After all, isn’t that one of the alleged “benefits” of MTR, that it’ll provide enough flat surfaces to build on?

    Or perhaps it’s our road system – ONE north/south interstate (that doesn’t run the length of the state), ONE east/west interstate (that runs just 60 miles or so?)?

    Or maybe it’s the lack of modern infrastructure – not just water/sewer, but readily accessible high-speed Internet access? Reliable phone service?

    Perhaps it’s because the one part of the state where these either aren’t problems or can be fixed easily, that is, the Eastern Panhandle, does attract the “large employers” you’re referring to (such as Macy’s), but that doesn’t get a lot of visibility elsewhere in WV because the EP is so far away from Charleston?

    I think that the “unfavorable business climate” argument is a distraction from the issue at hand.

  11. Casey says:

    I agree with Patience that the topography is a challenge in creating the infrastructure needed for economic development. Some 3% of the state is flat. This is all the more reason to take radical steps to create a favorable climate for business development so that opportunity for our children is created at home. It is imperative to compare WV to the other states and see what is important in attracting investment.

    I do not see the business climate discussion as a distraction. The legal climate is an issue in this post as well as the copious discussions on this blog regarding the lack of economic diversification in WV. The two are related.

    Perhaps someone can explain why are large employers like auto manufacturers locating in other southern states although WV has a strategic advantage in its location relative to major population centers and markets?

  12. Thomas Rodd says:

    No, Casey, these are not “nuisance” actions, because they state legitimate claims, that are based on real and not imagined facts.

    To summarize those facts — innocent people are dead, and a few people are getting huge amounts of money as a result of the conditions that led to those deaths, leaving uncertain financial accountability for those deaths.

    Will some lawyers make a lot of money getting recovery for the families of those innocent people?

    Yes, and until we have a system where the government acts for such innocent people’s families, that’s how our justice system works.

    Patience is right, Casey, the “business climate” issue has nothing to do with this situation.

    But, to nevertheless briefly respond to your contention: a Supreme Court Justice went on a secret Monaco vacation with a rich businessman who had a $50 million dollar case pending in that Court — and neither one of them was held legally acountable.

    Looking at this example, one might conclude that the WV “business climate” is actually pretty tolerant — at least for “monkey business!”

  13. Casey says:

    T Rodd,
    Massey shareholders are filing the claim and they are Manfield. Are you telling me that this is really about justice and an eye for an eye or legalized extortion?

  14. Casey says:

    PS: I might view this different if it was an investment group that owns a substantial portion of the company and not a group of lawyers with 1,000 shares.

  15. Ken Ward Jr. says:

    For a look at West Virginia’s business climate, as far as whether companies can externalize the costs of safety and health protections onto their workforce, readers might want to glance through Chapter 10 of the McAteer report.

    For example —

    “State mine inspectors face an additional obstacle, which can be described simply as the politics of the state of West Virginia. While the chain of command for the federal Mine Safety and Health Administration extends away from West Virginia toward the nation’s capital, the chain of command for West Virginia state inspectors leads directly into the governor’s office. A mine operator who is unhappy with an inspector’s actions has only to pick up the phone and call any one of a number of state officials or the governor’s office to issue his complaint.”

    ” … While the West Virginia Mine Act gives the WVMHST director and inspectors broad authority to administer and enforce state mining regulations,13 the agency has only 126 employees, including administrative and support staff. This work force is charged with ensuring that health and safety regulations are followed in some 705 underground and surface mines, quarries and coal handling facilities spread across the back roads of the state. In 2010, there were on any given day a total of 78 inspectors whose job it was to carry out the four mandated complete inspections of underground mines and two complete inspections of surface mines, along with their other duties. Of those 78 inspectors, 13 are electrical inspectors, who only address electrical issues, and 13 are surface mine inspectors, who cover both surface coal mines and quarries.

    “The result is that, on a given day, the state has only 52 inspectors assigned to inspect 261 underground mines with 405 working sections. State inspectors also are charged with regulating approximately 2,300 independent contracting companies. They also are responsible for investigating all serious mining accidents, providing industry training, reviewing safety programs for all facilities and conducting miner and foreman certificate examinations. To illustrate the scope of the challenge for the 78 inspectors, there are 27,892 men and women employed in West Virginia’s coal mines and facilities, and the state’s mines produced 144 million tons of coal in 2009.

    Gerald Pauley, an inspector working out of the WVMHST’s Oak Hill office, was assigned to the Upper Big Branch mine in April 2009 and had completed his assignment there at the end of March 2010. Pauley, with more than sixteen years of experience with the agency opinions as to how the state might have been able to do a better job at UBB.

    “A couple of guys should be assigned to that mine,” he said. “It’s a very expansive mine, very large mine. Just to be able to go in all directions at one time, every couple or three weeks or something. That’s my opinion.”15 According to WVMHST acting director C. A. Phillips, Pauley had requested additional inspection help from his supervisor, Steve Snyder. An electrical inspector was assigned responsibility at UBB, but the complete mandatory inspections were not completed.”

    http://www.nttc.edu/programs&projects/minesafety/disasterinvestigations/upperbigbranch/chapter10.asp

    Ken.

  16. Thomas Rodd says:

    Shareholder litigation is quite common. I bet there is a huge amount of it in Delaware — perhaps the most business-friendly state(?) — and I’m sure that the people on the receiving end of it almost always see it as “extortion,” whether filed in Delaware or in West Virginia.

    Shareholders are businesspeople, too, worried about getting the most for their investments. They have a right to make their claims against people who are scurrying away with huge sums that were earned off the work of innocent deceased miners, where shareholders could end up holding the bag.

    My point is, and I hope you agree, that the courts are in fact the best place to handle these competing claims, both by shareholders and by the families — not an “eye for an eye.”

  17. Casey says:

    Ken,
    Perhaps a better example of under-staffing would be OSHA compared to their inspection sites.Is there any studies showing a strong correlation of inspections and reduced injuries? What do regulatory agencies do to reduce the unsafe actions of some miners that result in most of the injuries that occur in the mines?

  18. Ken Ward Jr. says:

    Casey,

    Please provide some data or other evidence (other than your own opinion) to support this claim:

    “What do regulatory agencies do to reduce the unsafe actions of some miners that result in most of the injuries that occur in the mines?”

    Please review the blog’s comments policy in this regard … thanks, Ken.

  19. Casey says:

    Check out slide #19

    http://www.google.com/search?q=unsafe+acts+injuries&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a

    “Accident statistics from all industries have been compiled over the years by insurance companies and governmental agencies. The results of analyzing hundreds of thousands of accidents reveal 85 to 98 percent of all accident causes result from the unsafe acts of employees. There may be more than one cause of an accident, but most accidents are caused, in whole or in part, by the unsafe acts of employees.”

    http://www.dmssafetyservices.com/flash/text/hottips/osharelated/acc&in/red.htm

    The unsafe act pyramid:

    http://www.kalsafe.com/pdfs/newsletter-no-3.pdf

    Perhaps a lot of modern safety professional’s focus on reducing unsafe acts to prevent injuries stem from this study:

    http://lachlan.bluehaze.com.au/books/nsc_safety_facts_1941/index.html

    A ten-year study of all serious injuries occurring across all Du Pont sites showed that: 96% of the injuries resulted from the unsafe acts of people or from poor work practices and Only 4% of the injuries resulted from unsafe conditions.

    www-ppd.fnal.gov/…/Supervisors_and_Managers_Safety_Audit_Training%20v.3.3.ppt

    My experience and training does not allow me to believe that more inspectors looking at conditions are the answer for reducing most injuries in the workplace. I think some of the above studies and literature supports this belief.

  20. Vnxq809 says:

    Excellent data, Casey…..Thanks for taking the time to provide the data to support your claim….

    Vnxq809

  21. Ken Ward Jr. says:

    yes, thanks Casey.

    I apologize for not replying … I haven’t had time to review your data yet — tied up with Massey-Alpha merger stuff. But I will and will respond.

    Ken.

  22. Casey says:

    Did I miss your response elsewhere?

  23. Ken Ward Jr. says:

    Casey,

    No … I apologize … you may have seen from the stories and blog posts that we’ve been busy in court ensuring that the public has access to important documents in the Alpha-Massey merger, and I’ve been been reading those. I also took a few days off for Memorial Day.

    I apologize. I’ll take a look at your materials now, and post a response.

    Ken.

  24. Ken Ward Jr. says:

    Casey,

    OK … now just to refresh, you wrote:

    “What do regulatory agencies do to reduce the unsafe actions of some miners that result in most of the injuries that occur in the mines?”

    The part of that I question, as I’m sure you guess, is this:

    ” … Unsafe actions of some miners THAT RESULT IN MOST OF THE INJURIES THAT OCCUR IN THE MINES … ”

    You have made this argument before, and offered absolutely no empirical evidence to support your claim — and I asked that you do so.

    So let’s review the evidence you offered in your recent comment:

    1. You suggested checking out Slide No. 19 from this link, http://www.google.com/search?q=unsafe+acts+injuries&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a ..

    I clicked on that link, and I couldn’t find a Slide No. 19 … Instead, it’s a two-page Word file headlined, “Unsafe Acts cause four times as many accidents & injuries as unsafe conditions.” It doesn’t say who wrote it, where it was published, or what data was used. Can you elaborate on who wrote this, where this was published, and what data was used? Did it specifically look at coal mining? What data from the coal industry was used and what were the results? Without more information, it’s impossible to judge whether this is valid.

    2. You suggested looking at this link, http://www.dmssafetyservices.com/flash/text/hottips/osharelated/acc&in/red.htm … again, who wrote this? What data was used? Was it peer-reviewed or published anywhere other than this private company’s website?

    3. You suggested this link, http://www.kalsafe.com/pdfs/newsletter-no-3.pdf … Again, this doesn’t cite any data at all to support your claims.

    4. You referred us to this link:
    http://lachlan.bluehaze.com.au/books/nsc_safety_facts_1941/index.html

    I take if you put a lot of stock into this DuPont study. But I don’t believe that site includes a copy of the actual study. And, I would urge readers to take a look at the United Steelworkers critique of it (referenced at your link) available here, http://www.fluoridealert.org/pesticides/2005/dupont.sept.2005.report.steelworkers.pdf … Interestingly, the Steelworkers point out that these “behavior-based” safety programs focused on blaming workers began with the research of an insurance investigator, H.W. Heinrich in the 1930s and 1940s.

    Among other points:

    — It is difficult to draw any accurate conclusions from Heinrich’s research as the raw data supplied by supervisors was skewed in the company’s favor. Despite this, companies such as DuPont continue to propagate Heinrich’s flawed research as fact.

    — Heinrich reclassified 15% of the records originally classified as unsafe conditions to unsafe acts. By adding that 15% to the 73% that were initially recorded as unsafe acts, he concluded that 88% of all industrial accidents were caused primarily by unsafe acts of persons. During the same period of time the National Safety Council published a study that indicated that 87% of the industrial accidents were caused by unsafe acts and 78% by mechanical hazards.8 (The National Safety Council study allowed cases to be classified with multiple causes.) One can conclude
    from the National Safety Council that many industrial accidents of this era involved recognized mechanical hazards.

    — However, upon closer examination of the study, it appears to contradict itself in its blame-the worker findings. The lack of management training its workers, poorly written/implemented safety policies, inadequately designed workplaces and improper tools or equipment for the job are true root causes for many of these accidents.

    5. You cited this website, www-ppd.fnal.gov but I can’t for the life of me figure out why. Please explain.

    In short, Casey, I don’t see much here that really goes to the argument you’re making. Can you provide some actual research that was published in a journal somewhere?

    Ken.

Leave a Reply