Opinion
C.A. No. 19506-NC
Date Submitted: May 31, 2002
Date Decided: June 6, 2002
Jesse A. Finkelstein, Raymond J. DiCamillo, Becky A. Hartshorn, of RICHARDS, LAYTON FINGER, Wilmington, Delaware; OF COUNSEL: Mark Holscher, Kevin B. Carter, of O'MELVENY MYERS LLP, Los Angeles, California, Attorneys for Plaintiff.
Donald J. Wolfe, Jr., Matthew E. Fischer, of POTTER ANDERSON CORROON LLP, Wilmington, Delaware; OF COUNSEL: Michael W. Case, Gisele Goetz, of FERGUSON, CASE, ORR, PATERSON CUNNINGHAM LLP, Ventura, California, Attorneys for Defendants Rodney L. Eson and William L. Wineland.
Andre Bouchard, Joel Friedlander, of BOUCHARD MARGULES FRIEDLANDER, Wilmington, Delaware; OF COUNSEL: Irwin H. Warren, Seth Goodchild, Jeffrey M. Greilsheimer, WEIL, GOTSHAL MANGES LLP, New York, New York, Attorneys for Defendants and Counterclaim Plaintiffs Jesse Neyman, Richard Lydecker, Sundance Assets, L.P., Joint Energy Development Investments II Limited Partnership, ECTMI Trutta Holdings LP, and ECT Merchant Investments Corp.
MEMORANDUM OPINION
This is my decision on plaintiff Venoco, Inc.'s claim that defendants Rodney L. Eson and William L. Wineland breached their fiduciary duties to Venoco and that defendants Jesse Neyman, Richard Lydecker, Sundance Assets, L.P. ("Sundance"), Joint Energy Development Investments II Limited Partnership ("JEDI"), ECTMI Trutta Holdings LP ("Trutta"), and ECT Merchant Investments Corp. ("ECT") (collectively, the "Enron Defendants") aided and abetted in that breach. All other issues raised in this action and its companion action under § 225, Eson v. Venoco, were resolved through this Court's ruling after a trial held May 29-31, 2002.
Venoco is a large and growing privately held oil and gas company with its principal place of business in Carpinteria, California. Venoco was founded in 1992 by Timothy M. Marquez and Eson. Marquez is the Chairman of Venoco's board of directors and has been Venoco's CEO since its inception. He owns Venoco common stock representing approximately 28% of Venoco's voting power. Eson is a director of Venoco and held various executive positions, including most recently President of Venoco's International Division, until he was fired in late March of this year. He owns Venoco common stock representing approximately 22% of Venoco's voting power. Wineland was Venoco's CFO from 1994 until he, too, was fired in late March. He owns Venoco common stock representing approximately 5% of Venoco's voting power. Eson and Wineland, through their holdings and the holdings of related shareholders, control approximately 52% of Venoco's common stock. This combined ownership does not give Eson and Wineland voting control over Venoco, however, because Venoco's preferred stock votes, on an as converted basis, as a single class with the company's other common stockholders on all matters.
The combined ownership of Eson, Wineland, and their affiliates, represents approximately 35% of the voting power of Venoco.
In 1998, two Enron affiliates, JEDI and Enron Capital Trade Resources Corp. ("Enron Capital"), purchased 6000 shares of Venoco preferred stock for $60,000,000 pursuant to a Securities Purchase Agreement ("SPA"). JEDI purchased 4500 shares, which it has held continuously to this day. Enron Capital purchased 1500 shares, which were later sold and assigned to Sundance, then transferred to ECT, then contributed and assigned to Trutta, which owns the shares today. All of these entities are affiliates of Enron. Because Venoco's preferred shares vote on an as converted basis with its common shares, JEDI and Trutta control approximately 25% and 8%, respectively, of Venoco's voting power. The individual Enron Defendants, Neyman and Lydecker, are Enron executives and, as determined in the related § 225 action, are directors of Venoco.
JEDI now owns 6144.67 shares of Venoco preferred stock because it has received 1644.67 additional shares as dividends.
Through the receipt of in-kind dividends, Trutta now owns 2048.22 shares of Venoco preferred stock.
In this action, Venoco alleges that Eson and Wineland breached their duty of loyalty to the company. Venoco contends that Eson and Wineland intentionally misused their positions and the information they received as directors to further their interests as stockholders in an attempt to take over control of Venoco. Specifically, Venoco alleges that Eson and Wineland gave the Enron Defendants confidential information and otherwise assisted the Enron Defendants so that the Enron Defendants could get a higher price from Venoco for their Venoco preferred stock. In exchange for this assistance, it is alleged that the Enron Defendants agreed to act by written consent to benefit Eson and Wineland. Venoco asserts that the Enron Defendants aided and abetted in these breaches of duty by colluding with Eson and Wineland in connection with the negotiation of Venoco's repurchase of the preferred stock.
I. FACTS
Venoco was founded as a California corporation in 1992. In 1998, Venoco reincorporated in Delaware. Its Delaware certificate of incorporation contemplates a staggered board, although no steps were taken to classify the board until late March of this year, after the control fight at issue here began. Venoco has not held a shareholder meeting since 1996.
In 1998, JEDI and Enron Capital entered into the Securities Purchase Agreement with Venoco. Under the terms of the SPA, JEDI and Enron Capital purchased $60 million of Venoco preferred stock. Section 6.04 of the SPA provided that the Enron affiliates would have the right to proportionate board representation as long as the original purchasers or their affiliates owned at least 80% of the original preferred shares. Initially, this right was not exercised.
In March of 2001, the Enron affiliates told Venoco they were interested in selling their preferred shares. The Enron affiliates pursued a variety of options, including a repurchase of the shares, a recapitalization of Venoco, and a sale to a third party. Over the next several months, the parties exchanged several offers and counteroffers but did not reach an agreement. Then, in August, Neyman and Lydecker requested a dinner meeting to discuss their newest proposal, which they had developed after extensive work with their bankers. At the dinner meeting, Marquez quickly dismissed the proposal, which he viewed as a "non-starter" because it would have required Venoco to incur substantial debt at a comparatively high interest rate. Both sides aggressively pushed their positions as tempers flared, and the meeting ended shortly thereafter.
Under the SPA, Enron was permitted to have an observer at Venoco board meetings or, at Enron's option, the right to designate a specific number of Venoco directors pursuant to a formula contained in the SPA. Neyman and Lydecker had previously been observers at Venoco's board meetings. On August 24, after the dinner meeting and after Venoco's board meeting the next day, at which Marquez proposed that Venoco shift its focus and begin expanding internationally, the preferred shareholders sent Venoco a letter requesting board representation as provided in the SPA. Venoco and the Enron affiliates exchanged letters about whom the Enron affiliates intended to nominate. Then, on September 28, Marquez wrote to Neyman on behalf of Venoco and agreed to interim appointments to Venoco's board for Neyman and Lydecker.
There is some dispute about what duration was intended to accompany "interim" status. Venoco contends that it was not in the best interest of the company to appoint any Enron executives to its board in late 2001, for obvious reasons. Marquez sent a letter to Neyman on November 7 indicating that the interim period was to expire on January 31, 2002 and attaching letters of resignation that Venoco would require Neyman and Lydecker to execute before becoming directors. Neyman claims that he never received this letter. In any event, Marquez took the position that Neyman and Lydecker were no longer directors after January 31, 2002.
In late 2001 and early 2002, Marquez, Eson, and Wineland were concerned about the effectiveness of Venoco's management. Accordingly, in January of 2002 they selected five mid-level managers to conduct an internal evaluation program. Those managers presented their report to Marquez, Eson, and Wineland on February 14, 2002. Among other things, the report was critical of Marquez's management style and excessive involvement in day-to-day operations of the company. Eson and Wineland suggested that Marquez focus instead on acquisitions and larger strategic issues, which were his strengths. The ensuing debate among Venoco's senior management continued during the following months, with Marquez ultimately seeking to be bought out of Venoco. It is clear from the evidence and testimony before me that each side genuinely believed its approach was better for the company.
During the period following Enron's request for board representation, Venoco's dispute with the Enron affiliates continued. Lydecker had attended Venoco's December 20 board meeting, although the minutes of that meeting identified him as an observer rather than a director. Neyman attended a board meeting on February 22 and attempted to vote as a director, but Marquez told him that his vote would not be recognized because he and Lydecker were merely observers and not directors. The Enron affiliates continued to seek board representation as provided in the SPA. In addition, the Enron affiliates also continued negotiating with Venoco over the repurchase of their preferred shares.
On February 28, Eson met with Neyman while in Houston on other business. Eson told Neyman that there was internal conflict at Venoco between he and Wineland on the one hand and Marquez on the other. They discussed the board representation issue, and Eson told Neyman that Venoco's board had never formally voted to exclude Neyman and Lydecker. As a result of this meeting, Neyman sent a letter to Marquez on March 8 requesting seats on the board for Neyman and Lydecker and demanding proof that the board had formally rejected them as directors.
On March 12, Venoco circulated a draft letter written by Terry Anderson, its General Counsel, in response to Neyman's letter. The draft letter said that Venoco's board did not want any members with employment ties to Enron. Eson and Wineland disagreed with the position taken in the draft letter because Venoco's board had not made any formal determination on the matter. Eson also discussed the draft letter with his personal attorney and with Neyman. At this time, Eson and Wineland began to consider acting by written consent to reconstitute Venoco's board in order to resolve the ongoing management dispute. To that end, Eson sent several e-mails to Neyman to try to gain the support of the Enron affiliates.
Those e-mails form the crux of Venoco's case. First, on March 13, Eson wrote Neyman to say that Marquez would be calling Neyman instead of sending the letter they discussed earlier. Eson noted that "[i]t would not (at this time) be a good idea to mention we met" on February 28. The next day, Eson wrote to Neyman again, telling him that Marquez would be suggesting that Neyman meet with Eson to discuss a buyout of the Enron affiliates. Eson recommended "a noncommittal stall" so that he and Neyman could "discuss/communicate about this" and "make this work to our mutual advantage." Finally, on March 15, Eson sent Neyman an e-mail updating Neyman on Eson's meeting with his personal attorneys and suggesting that Enron "tak[e] the position it is willing to negotiate a sale of the preferred, but only after a special Board meeting and electing you and Dick [Lydecker] as directors."
While Eson was sending these e-mails to Neyman, Venoco was renewing its efforts to repurchase the preferred stock from the Enron affiliates. On March 14, Eson, Wineland, Marquez, and Ed O'Donnell, president and director of Venoco, met with Glen Warren, Venoco's investment banker. They were considering selling Venoco, but they all agreed that Venoco would have to buy back its preferred stock before they could sell the company. This was because under the SPA a change in control of Venoco would trigger a put right under which the Enron affiliates could force Venoco to repurchase the preferred shares at a price that was well above the stock's value at the time. After this meeting, Marquez decided to approach Enron again about the preferred stock. At Wineland's urging, Marquez agreed to send Eson to Houston on behalf of Venoco, not knowing that Eson and Neyman had met in February. Marquez then told Eson to meet with Neyman, and informed Neyman that Eson would be in Houston later that month.
In advance of the meeting between Eson and Neyman, Warren prepared a deal book describing three possible approaches for the transaction: a cash sale; a cash sale contingent on the sale of Venoco; and a conversion of the Enron affiliates' interest into common stock, also contingent on the sale of Venoco. Marquez instructed Eson to push the second approach, and authorized Eson to offer Neyman $45 million in cash contingent on the sale of Venoco. Eson reviewed these materials, and he also contacted Neyman to tell him that he wanted to discuss the proposed actions by written consent at the same time. On March 21, Eson and Wineland delivered a buyout proposal to Marquez, in accordance with their earlier discussions, and then Eson left for Houston.
On Friday, March 22, 2002, Eson met with Neyman and Gil Melman, a lawyer for Enron, in Houston. Eson, as instructed, offered to buy the Enron affiliates' shares for $45 million contingent on a sale of Venoco. Neyman was "not insulted" by the offer, which Eson took as encouraging. Later that day, Eson met with Neyman and Lydecker to discuss the transaction further. After that meeting concluded, the three of them also talked about the proposed actions by written consent. Neyman and Lydecker refused to tie the board representation and share repurchase issues together, as Eson had suggested in the March 15 e-mail.
Meanwhile, that same morning in California, Marquez reviewed the buyout proposal he had received the previous day from Eson and Wineland and determined that it was inadequate. Later that day, Marquez and Wineland talked about the internal evaluation report they had received in February. Marquez viewed some of Wineland's comments about the management of Venoco as an ultimatum, a characterization with which Wineland disagrees, and decided to fire Wineland. Marquez told O'Donnell at lunch that Eson and Wineland were trying to oust Marquez. Between then and Sunday, March 24, Marquez talked several times with other directors and executives, including O'Donnell, Anderson, and Venoco directors Joel Reed and Bill Richardson, about Wineland's comments. That Sunday, Marquez, Anderson, and O'Donnell met at Venoco to discuss Wineland's termination.
The next day, March 25, Marquez searched the computers of Eson and Wineland, finding the e-mails they sent to their personal attorneys and to the Enron affiliates contemplating actions by written consent. Marquez then fired Eson and Wineland from their positions as officers (though they remained directors) and retained Delaware counsel to initiate this suit. On March 26, Venoco sent Neyman and Lydecker a letter accusing them of conspiring with Eson to get proprietary information about their negotiations and recommending that Neyman and Lydecker consult with counsel. Marquez scheduled a board meeting for the next day to formalize the termination of Eson and Wineland.
The contest for control of Venoco began in earnest the next day, March 27. First, Venoco filed this action for breach of fiduciary duty of loyalty against Eson and Wineland early that morning. Next, Eson and Wineland delivered the first of several shareholder actions by written consent. The March 27 written consent made several amendments to Venoco's bylaws, appointed Faye Eson ("Faye"), Eson's wife, to the vacant seat on Venoco's board, and appointed Neyman and Lydecker to the board as representatives of the preferred shareholders. After those consents were delivered, the board meeting began. Initially, the board did not dispute Faye's appointment, but Marquez, Richardson, O'Donnell, and Reed (over the objections of Eson, Wineland, and Faye) refused to acknowledge the appointments of Neyman and Lydecker. The board meeting was then recessed for several hours.
The original complaint did not contain any claims against the Enron Defendants, who were added to this action later in Venoco's amended complaint.
All of the shareholder actions were approved by Eson and Wineland, their affiliates, and the Enron affiliates, who collectively represented approximately 68% of the voting power of Venoco. A fuller description of the actions taken by written consent can be found in this Court's ruling in the related § 225 action.
During the recess, Marquez and Venoco's lawyers called Jeffrey McMahon, President of Enron Corp., and threatened to sue Enron if an agreement could not be reached. Venoco proposed that it would buy the preferred shares held by the Enron affiliates for $40 million if the Enron affiliates would revoke their earlier written consent. McMahon and Raymond Bowen, Enron's CFO, were not intimidated by the threat of litigation and refused to revoke the written consent. They also insisted on two other conditions in connection with the repurchase — a Venoco shareholder vote on any transaction and board representation for the Enron affiliates until the consummation of any transaction — that were not acceptable to Marquez. At the end of the day, the board meeting reconvened and then quickly was adjourned until 5:00 the following day.
The next day, March 28, before the board meeting resumed, Marquez e-mailed Bowen and McMahon, offering essentially the same deal that had been discussed the day before. Marquez offered to repurchase the Venoco preferred shares for $40 million, on the conditions that the Enron affiliates would act by written consent with Marquez to reverse the actions taken by Eson and Wineland, that Warren would be appointed to the board to fill a vacant seat, and that the Enron affiliates would take no further steps to change the board or management of Venoco. Marquez refused to enter into a repurchase agreement without these conditions because doing so would likely mean that he would be removed as CEO. Enron again rejected this offer. Later in the day, but still before the board meeting resumed, Eson, Wineland, and the Enron affiliates delivered another written consent that limited the power of board committees. Finally, Venoco's board meeting reconvened.
At the meeting, Marquez announced that the board was not going to recognize the appointments of Faye, Neyman, or Lydecker. The Enron affiliates, who were attending the meeting telephonically, disrupted the meeting by vehemently voicing their opposition, forcing Venoco to terminate their phone connection. Reed resigned from Venoco's board because of a conflict of interest stemming from his relationship to Enron. Marquez and his allies then purported to take several actions which were later determined by this Court to be invalid because they were not actions of the duly constituted board of Venoco. Specifically, Marquez, Richardson, and O'Donnell appointed Warren to Reed's former position on the board. The board, led by Marquez and his allies, then adopted a bylaw limiting the ability of shareholders to act by written consent, and formed an Executive Committee consisting of Marquez, O'Donnell, and Warren. The Executive Committee was vested with the full power of the board to act on all matters. The board meeting then concluded, and an Executive Committee meeting began. The Executive Committee staggered Venoco's board and classified its directors, putting Eson and Wineland in class I, with terms expiring at the next shareholder meeting, and Marquez and O'Donnell in class III, with terms expiring in 2005. The Executive Committee also affirmed the termination of Eson and Wineland from their positions as officers and ratified all past conduct of Marquez. Ultimately, all of these actions, and all later actions taken by the rogue board, were determined to be invalid in this Court's Opinion in the § 225 action.
The next day, March 29, the Executive Committee met again to schedule a shareholder meeting at which only the class I directors — that is, Eson and Wineland — would be up for election. Eson and Wineland, in response, sued Venoco in California to compel it to put all of its directors up for election at the meeting. The California court ordered that a meeting be held, and accordingly a shareholder meeting is scheduled for June 10. The California court expressly reserved judgment on all other issues, including that seats would be up for election and whether cumulative voting would be allowed. As this Court determined in the related § 225 action, all nine board positions will be up for election at the June 10 meeting.
In the following weeks, Marquez met with representatives of the Enron affiliates, Eson and Wineland filed the § 225 action and, Eson, Wineland, and the Enron affiliates submitted additional actions by written consent. Finally, after expedited briefing and discovery, this Court held a three-day trial in both this case and the related § 225 action from May 29 through May 31. At the conclusion of the trial, the issues raised in the § 225 action were decided, leaving only Venoco's claims against Eson, Wineland, and the Enron Defendants to be decided in this opinion. There are no fiduciary claims against Marquez, and the counterclaims of the Enron Defendants seeking declaratory and injunctive relief were addressed by the ruling in the § 225 action. Accordingly, the only issues before me are whether Eson and Wineland breached their fiduciary duties and whether the Enron Defendants aided and abetted in any such breach.
In the decision on the § 225 action, this Court ruled that the written consents were all valid (except for one bylaw amendment purporting to vest the authority to set the size of Venoco's board in the shareholders); that the proper board of Venoco was Marquez, O'Donnell, Richardson, Eson, Wineland, Faye, Neyman, Lydecker, and a vacancy; that all actions taken by the rogue board of Venoco since the delivery of the March 27 written consent were without force and effect; and that all nine board positions would be up for election at the June 10 meeting.
II. DISCUSSION
Directors of Delaware corporations owe their corporations a duty of loyalty. It is well-settled that directors "are not permitted to use their position of trust and confidence to further their private interests" because the law "requires an undivided and unselfish loyalty to the corporation [and] demands that there shall be no conflict between duty and self-interest." Venoco contends, essentially, that Eson and Wineland violated their duties as directors by trying to help the Enron affiliates in an attempt to further Eson and Wineland's personal interests as substantial shareholders of Venoco.
Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. 1939).
Eson and Wineland took several steps to endear themselves to the Enron affiliates after they decided that actions by written consent were necessary. First, Eson told Neyman that Venoco's board had not taken a formal position or voted on Neyman and Lydecker's directorships. Next, Eson discussed Venoco's draft letter of March 12 with Neyman. Then, Eson told Neyman that Marquez would be calling and recommended a "non-committal stall" to "make this work to [Eson and Neyman's] mutual advantage." Finally, Eson suggested to Neyman that the Enron affiliates connect the issues of repurchase and board seat, "taking the position [Enron] is willing to negotiate a sale of the preferred, but only after a special Board meeting and electing you and Dick as directors." Throughout this process, Wineland was working with Eson; he knew of Eson's activities and, indeed, the two of them were jointly represented by the same attorney. Eson and Wineland stepped over the line as directors to help themselves as substantial shareholders, surreptitiously using their positions as directors, without telling the other directors, to advance their position as shareholders.
At the same time, however, Venoco was arguably breaching the SPA by refusing board representation to the Enron affiliates. Directors must be given some latitude to take action in circumstances like these to ensure compliance with corporate obligations, even when those directors comprise a minority of a corporation's board. Nevertheless, in this case, Eson and Wineland did more than that. They did not simply seek to assist the Enron affiliates in their effort to enforce their contractual rights out of an overriding sense of duty and obligation on behalf of Venoco. This concern was, at most, an instrumental one for Eson and Wineland in their efforts to further their private interests as shareholders of Venoco. Eson and Wineland attempted to curry favor with the Enron affiliates on both the board representation issue and the share repurchase issue in order to obtain the Enron affiliates' agreement to act with Eson and Wineland by written consent. While they were arranging this, they took active steps to conceal their plans from other Venoco board members. Shareholders are indisputably free to meet to discuss corporate governance issues and, where allowed by the relevant corporate documents, to act by written consent, but shareholders who are also directors may not take actions, such as offering negotiating advice to an opposing party, that are adverse to the interests of their corporations. This is the essence of the duty of loyalty. The primary concern for directors, even if they are minority directors and significant shareholders, must be the best interests of the corporation rather than their own interests as shareholders.
Although Eson and Wineland were overly zealous in this case, their breach of the duty of loyalty ultimately had little effect on the Enron affiliates or on Venoco. Venoco contends that the Enron Defendants aided and abetted Eson and Wineland's breaches of fiduciary duty. To establish a claim for aiding and abetting, Venoco must prove the existence of a fiduciary relationship, a breach of fiduciary duty, knowing participation in the breach by a defendant who is not a fiduciary, and damages. The first two elements have been established. I conclude, however, that Venoco has not proven the necessary participation of the Enron Defendants. The Enron affiliates treated the board representation and share repurchase issues as independent, refusing to change their position on either issue or to tie the two issues together even after Eson suggested that approach. The Enron affiliates consistently contended that they were entitled to board representation under the terms of the SPA, both before and after discussing the issue with Eson. Similarly, they tried to negotiate a repurchase of their shares of Venoco preferred stock both before and after talking with Eson. Nothing in their contacts with Eson and Wineland changed the Enron Defendants' negotiating strategy or gave the Enron Defendants additional leverage. They did nothing to take advantage of or to benefit from Eson and Wineland's breaches of fiduciary duty; nor were they knowing participants in those breaches. Consequently, I cannot agree with Venoco's contention that the Enron Defendants aided and abetted Eson and Wineland's breaches of fiduciary duty.
Malpiede v. Townson, 780 A.2d 1075, 1096 (Del. 2001).
In its amended complaint, Venoco seeks declaratory and injunctive relief as well as damages "in an amount to be determined by the Court." For reasons discussed in connection with the aiding and abetting claim, I conclude that no calculable harm to Venoco was demonstrated at trial. No transaction has been consummated on terms that were less favorable than Venoco otherwise could have obtained. The composition of Venoco's board has changed through the shareholder actions by written consent, but this exercise of shareholder authority does not entitle the company to money damages. Accordingly, I decline to award Venoco money damages.
III. CONCLUSION
For the foregoing reasons, I conclude that Eson and Wineland breached their fiduciary duty of loyalty to Venoco and hereby enjoin them from disclosing any confidential Venoco information to third parties in the future.
IT IS SO ORDERED.