Slicked and Slabbed, the Barbarians are at the gates: Slabbed peeks inside the world of shareholder derivative lawsuits as we take a closer look at Transocean and the disaster in the Gulf

Amazing what one can find buried in financial filings at the SEC website. This is from a stock in liquidation:

Kwaku O. Kushindana, having a mailing address of…….Baton Rouge, Louisiana……., owner of 10 shares of EDCI common stock, has notified EDCI that he intends to present the following proposal at the Annual Meeting. As required by SEC rules, the text of the proposal and supporting statement are included below exactly as submitted by the stockholder. EDCI is not responsible for the contents of the proposal or the supporting statement.

Stockholder Proposal

“Hereby, that Kwaku O. Kushindana of Louisiana be hired as an Independent Consultant (based from Louisiana) to insure the rights of disaffected concerns (i.e., small shareholders, small firms doing business with EDCI, women & minority owned firms, gay & lesbian entities, artists under the purview of Entertainment Distributions Company, Inc, small retail stores, etc).

Further, that named person receives a three year contract during the winding down period of EDCI which would include a salary, plus expenses to insure the fairness of this process to all disaffected concerns.”

(Disclosure: I am long this issue. Cavet emptor)

The above is an example shareholder exercising his right to petition the ownership with a proposal. In this instance it is of the completely self-serving variety.  As such it represents fodder for big business shills like the folks over at the Competitive Enterprise Institute which is a front for Bermudian reinsurers and other business interests.

Along those lines and since a shareholder has the right to petition the ownership there is an entire class of investors known as activists shareholders who endeavor to change bad corporate governance from the inside out. And that brings us to the opposite, or forced change from the outside in, taking the form of shareholder derivative lawsuits. On matters of corporate governance, especially when the insiders are greedy little piggies that waste the entity’s assets it can be an effective tool. Often though, they are self-serving money grabs filed by ethically challenged ambulance chasing lawyers representing a stockholder with just a few chips in the game.

The topic of the oil spill is emotionally charged and believe me I feel the angst of the Slabbed Nation. The people needs facts not spin so I’ve gotta call bullshit on the shareholder derivative suit against Transocean. Let’s begin with this AP story from nola.com:

A lawsuit claims that the owner of sunken oil rig in the Gulf of Mexico inflated its stock by telling shareholders that safety issues with blowout preventers had been resolved.

The federal court suit, filed in New Orleans, seeks damages from Transocean Ltd. and its CEO Steven Newman.

Lug, Switzerland-based Transocean owned the Deepwater Horizon drilling rig, which exploded on April 20 and sank, killing 11 workers and leading to a massive oil spill in the Gulf. The blowout preventer — a piece of equipment considered to be a last-ditch mechanism to cap a leaking well — failed to activate.

In a suit seeking class-action status under federal securities laws, two Transocean shareholders from New York City, Thomas Yuen and Sumni Ahn, claim that the company made misleading statements about the effectiveness of blowout preventers and attempted to hide potential problems from stock owners.

The suit would cover stockholders who obtained Transocean stock between Aug. 5, 2009 and May 7, 2010. After hitting a high of $94.88 on Jan. 11, the stock has since dropped to around $62.

Interesting. I’ll admit I’ve not listened to the first conference call and I have a hard time believing Newman said anything absolute but beyond that any investor that fails to read the SEC filings gets what they deserve IMHO. This blurb is from Transocean’s annual report (form 10-K) released in February (bottom of page 17):

Our business involves numerous operating hazards.

Our operations are subject to the usual hazards inherent in the drilling of oil and gas wells, such as blowouts, reservoir damage, loss of production, loss of well control, punch-throughs, craterings, fires and natural disasters such as hurricanes and tropical storms. In particular, the Gulf of Mexico area is subject to hurricanes and other extreme weather conditions on a relatively frequent basis, and our drilling rigs in the region may be exposed to damage or total loss by these storms (some of which may not be covered by insurance). The occurrence of these events could result in the suspension of drilling operations, damage to or destruction of the equipment involved and injury to or death of rig personnel. We are also subject to personal injury and other claims by rig personnel as a result of our drilling operations. Operations also may be suspended because of machinery breakdowns, abnormal drilling conditions, failure of subcontractors to perform or supply goods or services, or personnel shortages. In addition, offshore drilling operations are subject to perils peculiar to marine operations, including capsizing, grounding, collision and loss or damage from severe weather. Damage to the environment could also result from our operations, particularly through oil spillage or extensive uncontrolled fires. We may also be subject to property, environmental and other damage claims by oil and gas companies. Our insurance policies and contractual rights to indemnity may not adequately cover losses, and we do not have insurance coverage or rights to indemnity for all risks. Consistent with standard industry practice, our clients generally assume, and indemnify us against, well control and subsurface risks under dayrate contracts. These are risks associated with the loss of control of a well, such as blowout or cratering, the cost to regain control of or redrill the well and associated pollution. However, there can be no assurance that these clients will be financially able to indemnify us against all these risks.

We maintain insurance coverage for property damage, occupational injury and illness, and general and marine third-party liabilities. We generally have no coverage for named storms in the U.S. Gulf of Mexico and war perils worldwide. Also, pollution and environmental risks generally are not totally insurable.

We maintain large self-insured deductibles for damage to our offshore drilling equipment and third-party liabilities. With respect to hull and machinery we generally maintain a $125 million deductible per occurrence, subject to a $250 million annual aggregate deductible. In the event that the $250 million annual aggregate deductible has been exceeded, the hull and machinery deductible becomes $10 million per occurrence. However, in the event of a total loss or a constructive total loss of a drilling unit, then such loss is fully covered by our insurance with no deductible. For general and marine third-party liabilities we generally maintain a $10 million per occurrence deductible on personal injury liability for crew claims ($5 million for non-crew claims) and a $5 million per occurrence deductible on third-party property damage. We also self-insure the primary $50 million of liability limits in excess of the $5 million and $10 million per occurrence deductibles described in the prior sentence. Generally, our turnkey drilling contracts include provisions that limit ADTI’s liability associated with well blowouts to $50 million. We self-insure coverage for expenses to ADTI and CMI related to well control and redrill liability for well blowouts.

If a significant accident or other event occurs and is not fully covered by insurance or an enforceable or recoverable indemnity from a client, it could adversely affect our consolidated statement of financial position, results of operations or cash flows. The amount of our insurance may be less than the related impact on enterprise value after a loss. Our insurance coverage will not in all situations provide sufficient funds to protect us from all liabilities that could result from our drilling operations. Our coverage includes annual aggregate policy limits. As a result, we retain the risk through self-insurance for any losses in excess of these limits. We do not carry insurance for loss of revenue, and certain other claims may also not be reimbursed by insurance carriers. Any such lack of reimbursement may cause us to incur substantial costs. In addition, we could decide to retain substantially more risk through self-insurance in the future. Moreover, no assurance can be made that we will be able to maintain adequate insurance in the future at rates we consider reasonable or be able to obtain insurance against certain risks. As of February 3, 2009, all of the rigs that we owned or operated were covered by existing insurance policies.

This type stuff is what gives the legal profession a bad name IMHO.

sop

2 thoughts on “Slicked and Slabbed, the Barbarians are at the gates: Slabbed peeks inside the world of shareholder derivative lawsuits as we take a closer look at Transocean and the disaster in the Gulf”

  1. Great post, Sop! The issues surrounding the spill are “as deep as the ocean” and I believe the ultimate cost will be “as high as the sky”.

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