Jakub A. Wronski and Joseph J. Basile, both corporate attorneys at the Boston office of Weil, Gotshal and Manges, recently published an article expounding the importance of minding the details in corporate law transactions. The article uses Besinger v. Denbury Res. Inc. (E.D.N.Y. Aug. 17, 2011) to illustrate their point.
In Besinger, a merger between Denbury Resources Inc. and Encore Acquisition Company went afoul when Encore shareholders were falsely informed on multiple occasions that the formula for calculating the number of Denbury shares to be distributed to Encore shareholders as consideration for the merger was pegged to a weighted average share price of Denbury stock as of the date two days prior to the closing of the merger, which turned out to be Friday, March 5, 2010. In fact, the merger agreement pegged the calculation to the date of the second full trading day prior to the “effective time” of the merger, which, as that term was defined, turned out to be Monday, March 8, 2010. By using the March 8 date instead of March 5, Denbury paid less to the Encore shareholders (800,000 fewer shares to be exact), which resulted in the lawsuit.
In this case, Denbury’s attorneys’ failure to pay close attention to the details in the Proxy and Registration Statements was the root cause of the error. Denbury misstated the merger calculation in both the Proxy and Registration Statements, and those misstatements are directly related to shareholder compensation. The Proxy and Registration Statements were materially misleading in violation of Section 11 of the Securities Act of 1933 and Section 14 of the Securities Exchange Act of 1934. Section 11 imposes liability for registration statements that, upon becoming effective, contain “an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading.”
The court denied Denbury’s motion to dismiss for failure to state a claim upon which relief may be granted, finding that Denbury misstated in several instances the precise formula that would be used to calculate the merger consideration and that such misstatements are not immaterial as a matter of law. In other words, failure to exercise greater care in drafting the press releases and Securities and Exchange Commission filings that publicly disclosed the merger gave Encore stockholders grounds for a viable, multi-million dollar claim against Denbury.
Wronski and Basile point out two key takeaways from this case. First, all public statements should follow the language of the underlying purchase agreement to the fullest extent possible; and second, lawyers should carefully review such disclosures to ensure that they comply with the truthful disclosure requirements of SEC rules.
“The Denbury transaction exemplifies how seemingly minor omissions or inconsistencies in drafting documents can significantly alter the economic expectations of the parties involved. Deal documentation—whether contracts, press releases, or regulatory filings—should always be carefully prepared and reviewed by legal advisers.”
Whichever firm, corporation, or industry you find yourself practicing in post-graduation, it is imperative that you routinely remind yourself that attention to detail is arguably the most important responsibility of a corporate attorney. “When lawyers do not meet this standard, what follows are costly litigation, unhappy clients, and perhaps fewer invitations to weigh in on those ‘bet-the-company’ issues.”
As Four-star Navy Admiral Hyman G. Rickover once said, “the Devil is in the details, but so is salvation.”