Edwards v. McDermott Int'l, Inc.
| Decision Date | 13 April 2021 |
| Docket Number | CIVIL ACTION NO. 4:18-CV-4330 |
| Parties | MIRIAM EDWARDS, et al, Plaintiffs, v. MCDERMOTT INTERNATIONAL, INC., et al, Defendants. |
| Court | U.S. District Court — Southern District of Texas |
Plaintiff Nova Scotia Health Employees' Pension Plan ("Nova Scotia") is the lead plaintiff in this securities class action brought on behalf of purchasers of the common stock of Defendant McDermott International, Inc. ("McDermott") between December 18, 2017 and September 17, 2019 (the "Class Period"). Nova Scotia has pled claims against McDermott and two of its executives, President and Chief Executive Officer David Dickson ("Dickson") and Executive Vice President and Chief Financial Officer Stuart Spence ("Spence"), under Section 10(b) of the Securities Exchange Act of 1934 ("Section 10(b)") and Rule 10b-5 promulgated thereunder ("Rule 10b-5"). See 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. Nova Scotia has also pled claims of control person liability against Dickson and Spence under Section 20(a) of the Securities Exchange Act of 1934 ("Section 20(a)"). See 15 U.S.C. § 78t(a).
Nova Scotia alleges that the defendants misrepresented the financial health of Chicago Bridge & Iron Company, N.V. ("CB&I") to investors in order to facilitate a risky merger between McDermott and CB&I that guaranteed considerable financial benefits to Dickson and Spence but was disastrous for McDermott shareholders, bankrupting the company and leading to ongoing SEC and federal grand jury investigations. Before the Court is a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) filed by the defendants. The motion (Dkt. 125) is DENIED.
The pertinent factual allegations, drawn from Nova Scotia's live complaint and taken as true for the purposes of this motion, are as follows. McDermott provides technology, engineering, and construction services to the energy industry. (Dkt. 105 at p. 24) For much of its history, the company has "focused on upstream field development, with projects such as production facilities, pipeline installations, and subsea systems, and particularly offshore oil platforms for clients who are exploration and production companies." (Dkt. 105 at p. 25)
In 2017, McDermott was "healthy" and "profitable[,]" with $178 million in net income from $3 billion in revenue, and it "had an established upstream offshore presence in South and Central America and the Middle East[.]" (Dkt. 105 at p. 25) But it was not well-diversified—nearly two-thirds of its 2017 revenue and nearly half of its 2017 contractual backlog came from a single client, Saudi Aramco—and it had "little presence in the stable market of the United States." (Dkt. 105 at p. 25) McDermott was also viewed as a "potential takeover target[.]" (Dkt. 105 at p. 25) Dickson and Spence "discuss[ed] what steps to take next" to alleviate "concern[s] about [McDermott's] lackof diversification" and its "sensitiv[ity] to the cyclical nature of [the oil and gas] industry and the changes in commodity prices." (Dkt. 105 at p. 25)
Dickson, Spence, and McDermott decided that the next step for McDermott was a merger with CB&I, an engineering and construction company that worked in the oil and gas industry and focused on downstream onshore operations, particularly the construction of petrochemical plants. (Dkt. 105 at p. 25) In December of 2017, McDermott entered into a business combination agreement with CB&I to effectuate a merger between the two companies. (Dkt. 105 at p. 30) Under the terms of the merger agreement, "CB&I would merge into McDermott and CB&I shareholders would receive 0.82407 shares of McDermott stock for each share of CB&I stock, and McDermott shareholders would own approximately 53% of the combined entity." (Dkt. 105 at p. 30) The press release announcing the merger stated that the transaction would create a "premier fully vertically integrated onshore-offshore company, with a broad engineering, procurement, construction and installation service offering and market leading technologies portfolio." (Dkt. 105 at p. 30) The merger closed on May 10, 2018. (Dkt. 105 at p. 239)
Commitment to the acquisition of CB&I led Defendants to reject at least one offer to purchase McDermott outright. In 2018, a competitor, Subsea 7, made an initial offer to buy McDermott for $7.00 a share, a premium of 16% over McDermott's then-share price of $6.05 a share. (Dkt. 105 at p. 247) Subsea 7 "said it would also consider increasing its proposed price upon further assessment of McDermott's business through discussions with McDermott management." (Dkt. 105 at p. 247) However, Dickson, Spence, and McDermott "never engaged Subsea 7 in any negotiations regarding a potential dealchoosing, instead, to continue with the proposed Merger with CB&I." (Dkt. 105 at p. 248-49)
The moves took some by surprise. At the time of the merger, CB&I was "basically bankrupt" and "[d]esperate" and "looking to sell business units . . . to raise badly needed capital." (Dkt. 105 at p. 29) The most coveted of those units was CB&I's technology business, Lummus ("the Technology Business"), which "held extremely valuable patents[;]" "had a very high profit margin[;]" and, according to the former Financial Operations Controller for CB&I's USA Oil and Gas Division, was the "gemstone in the rusty crown" that was CB&I. (Dkt. 105 at pp. 17, 29-30) Considering that McDermott could have purchased the Technology Business alone, CB&I employees found it "odd" that McDermott had purchased CB&I in its entirety "because a lot of CB&I seemed to be dead weight that should have been cut out from the deal." (Dkt. 105 at p. 30)
In the end, "dead weight" was an apt metaphor, as acquiring CB&I dragged McDermott's value down precipitously. McDermott's share price dropped 92.5% in less than two years after the merger and experienced multiple single-day double-digit percentage drops along the way as information about the merger's costs came to light. (Dkt. 105 at pp. 8-13) On November 4, 2019, McDermott filed a Form 10-Q with the Securities and Exchange Commission ("SEC") in which the company disclosed that the SEC had served subpoenas on the company on July 26, 2019 and was "conducting an investigation related to disclosures [McDermott] made concerning the reporting ofprojected losses associated with the Cameron LNG project."1 See McDermott Form 10-Q dated November 4, 2019.2 McDermott filed for Chapter 11 bankruptcy protection on January 21, 2020. See Southern District of Texas bankruptcy case number 20-30336.3 On May 8, 2020, McDermott filed a Form 10-Q in which the company reiterated that the SEC is "conducting an investigation related to disclosures [the company] made concerning the reporting of projected losses associated with the Cameron LNG project" and further disclosed that "a Federal Grand Jury is conducting a criminal investigation and [has] requested various documents, including cost forecasts and other financial-related information, related to the Cameron LNG project." See McDermott Form 10-Q dated May 8, 2020. The investigations are ongoing.
When McDermott and CB&I merged, CB&I's contractual backlog included four large construction projects in the United States dubbed "the Focus Projects." (Dkt. 105 at p. 5) The Focus Projects consisted of two gas turbine projects, known as the Calpine Gas Turbine Power Project ("Calpine") and the IPL Project ("IPL"), and two liquefied natural gas export facility projects, known as the Freeport LNG Project ("Freeport") and the Cameron LNG Project ("Cameron"). (Dkt. 105 at p. 5) Nova Scotia alleges that, beforethe merger, "it was already internally apparent that the Four Focus Projects were gravely behind schedule and over budget and, as such, would vastly underperform their contracts." (Dkt. 105 at p. 8) The undisclosed risks and costs and improper accounting alleged in Nova Scotia's complaint largely revolve around the Focus Projects.
Defendants announced the proposed merger between CB&I and McDermott on December 18, 2017 (Dkt. 105 at p. 30) On that date, Dickson and Spence, along with CB&I's CEO, participated in a conference call. See McDermott Form 425 dated December 18, 2017. Dickson and Spence repeatedly told the analysts on the call that they had "dedicated a significant amount of time performing joint due diligence together with CB&I's team[,]" including "a great deal of due diligence" on the Focus Projects. (Dkt. 105 at p. 218) In response to a question about how McDermott had "priced in the potential risk" on the Focus Projects, Dickson said that the Focus Projects were "fairly well-progressed, so that takes out a lot of the risk that you would expect at the start-up." (Dkt. 105 at p. 62)
On February 20, 2018, CB&I disclosed $101 million in project charges for the Focus Projects for the fourth quarter of 2017. (Dkt. 105 at p. 73); see also CB&I Form 8-K dated February 20, 2018. Because of those project charges, CB&I's Engineering & Construction group posted a $41.2 million operating loss for the quarter. See CB&I Form 8-K dated February 20, 2018. CB&I reported a net loss of $1.5 billion for the full year 2017; CB&I had reported a net loss of $313.2 million in 2016. See CB&I Form 8-K dated February 20, 2018. Nevertheless, at a conference call the next day, Dickson said that Defendants were "even more confident" in the merger and that CB&I's financialdisclosures were no cause for alarm. (Dkt. 105 at pp. 72-73); see also McDermott Form 425 dated February 21, 2018. With regard to the Focus Projects specifically, Dickson told the analysts on the call that "[t]he potential for incremental overruns on [the Focus] projects was considered during our due diligence and these charges are well within the potential downside scenarios we contemplated as part of our due diligence." (Dkt. 105 at p. 73); see also McDermott Form 425 dated February...
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