Egleston v. Chesapeake Energy Corp.

• Decision Date: 30 June 2015
• Docket Number: No. 112,925.,112,925.
• Citation: 2015 OK CIV APP 66,377 P.3d 1274
• Parties: Gregory M. EGLESTON, Plaintiff/Appellant, v. CHESAPEAKE ENERGY CORPORATION, Defendant/Appellee.
• Court: United States State Court of Criminal Appeals of Oklahoma. Court of Civil Appeals of Oklahoma

377 P.3d 1274

2015 OK CIV APP 66

Gregory M. EGLESTON, Plaintiff/Appellant,

v.CHESAPEAKE ENERGY CORPORATION, Defendant/Appellee.

No. 112,925.

Court of Civil Appeals of Oklahoma, Division No. 4.

June 30, 2015.

Mark A. Waller, J. David Jorgenson, Sneed Lang PC, Tulsa, Oklahoma, for Plaintiff/Appellant.

Spencer F. Smith, McAfee & Taft, A Professional Corporation, Oklahoma City, Oklahoma, and Robert P. Varian, Pro Hac Vice, M. Todd Scott, Pro Hac Vice, Alex K. Talarides, Pro Hac Vice, Orrick, Herrington & Sutcliffe LLP, San Francisco, California, for Defendant/Appellee.

DEBORAH B. BARNES, Judge.

¶ 1 Plaintiff/Appellant Gregory M. Egleston (Egleston) appeals the trial court's Order granting the motion to dismiss of Defendant/Appellee Chesapeake Energy Corporation (Chesapeake).¹ Egleston previously made a demand on Chesapeake that it take certain actions related to alleged corporate waste and mismanagement. On appeal in that prior case, a separate division of this Court concluded that Chesapeake's action constituted a rejection of Egleston's demand, and that the rejection was a reasonable exercise of business judgment. We now determine that, based on that prior determination, which became final, Egleston may not pursue an action under 18 O.S.2011 § 1065 to compel inspection of corporate records to further investigate events related to his prior demand. Therefore, we affirm the Order.

BACKGROUND

¶ 2 In September, 2013, Egleston filed a petition to compel an inspection of certain books and records of Chesapeake.² Egleston, a shareholder of Chesapeake, seeks

two distinct sets of materials: (1) the Audit Committee Report ... that served as the basis for the Company's Board of Directors ... exonerating Mr. Aubrey McClendon ..., the Company's former Chief Executive Officer ... and Chairman; and (2) materials related to the Board's determination that Mr. McClendon was entitled to excessive and unusual severance terms and benefits despite Mr. McClendon's repeated, self-interested conduct that caused the Company extensive harm and resulted in his removal from the Company.

¶ 3 Egleston alleges that during McClendon's tenure as CEO,

Mr. McClendon engaged in self-dealing practices on multiple occasions that caused material harm to the Company. Despite ample evidence of this malfeasance, the Company's Audit Committee ... submitted a report (the “Audit Committee Report”) to the Company's Board of Directors finding no intentional misconduct on Mr. McClendon's part. Relying on this report, the Board of Directors exonerated Mr. McClendon of all wrongdoing. Later, Mr. McClendon would receive a lucrative severance package upon his resignation and then subsequently, receive altered favorable terms that would allow him continued use of Company assets and the ability to engage in direct competition with Chesapeake.

¶ 4 Egleston also alleges that during McClendon's tenure as CEO, Chesapeake engaged in “pervasive, illegal conduct,” and that

Mr. McClendon was primarily responsible for overseeing the Company and making certain that the proper internal controls were available and functioning to prevent any illicit conduct. Mr. McClendon either knowingly or recklessly disregarded such responsibilities and as a result, the Company has suffered and will suffer harm. Despite disregarding his oversight responsibilities, the Board has still provided Mr. McClendon with lucrative and favorable severance terms.

¶ 5 Egleston further alleges that “McClendon's malfeasance” caused “weakness and instability,” including sharp drops in market capitalization and the “need for Chesapeake to desperately secure financing on the most unfavorable of terms and sell assets below market value....”

¶ 6 In August, 2012, a little over a year prior to filing the petition in this case, Egleston sent what he describes as “well-pleaded factual allegations” to Chesapeake requesting, among other things, that its Board of Directors

assert corporate governance and legal action against Mr. McClendon and the directors that permitted his malfeasance. Specifically, the Egleston Demand requested legal action against Mr. McClendon for abdicating his fiduciary duties and causing the Company substantial harm by concurrently negotiating with financial lenders on his behalf and on behalf of the Company, while securing favorable terms for himself to Chesapeake's detriment.

Egleston asserts he also “requested that Mr. McClendon be terminated from his position as CEO, removed from the Chesapeake Board of Directors[,] and [Egleston] sought the claw back of any salary, compensation or bonuses accumulated between November 2011 and the present.”

¶ 7 The Chesapeake Board of Directors denied Egleston's demand, and Egleston filed a petition in November, 2012, alleging that the Board's denial did not satisfy the business judgment rule. The prior case culminated in the issuance of an opinion by a separate division of this Court: Egleston ex rel. Chesapeake Energy Corp. v. McClendon, 2014 OK CIV APP 11, 318 P.3d 210. In that opinion, the Court confirmed that, prior to filing the November 2012 petition, Egleston made a demand on the Chesapeake Board of Directors that it “take immediate legal action against McClendon and former members of the Board of Directors to recover damages for breach of fiduciary duty, to enforce the rules of corporate governance, and to remove McClendon as CEO,” id. ¶ 3, and that this demand was denied by the Board.³ Egleston filed the November 2012 petition alleging, as stated, that the Board's denial did not satisfy the business judgment rule. The trial court dismissed the November 2012 petition with prejudice. On appeal, in affirming the trial court's dismissal, the Court found the denial of Egleston's demand by the Board constituted a reasonable exercise of business judgment. Id. ¶ 18.⁴

¶ 8 Following the filing of the petition in the present case to compel an inspection of certain books and records of Chesapeake, Chesapeake filed a motion to dismiss, Egleston filed a response, and Chesapeake filed a reply. Both parties attached evidentiary materials to their filings which were not excluded by the trial court. From the trial court's Order filed in May, 2014, granting Chesapeake's motion, Egleston appeals.

STANDARD OF REVIEW

¶ 9 Although Chesapeake titled its motion a “Motion to Dismiss,” it attached matters outside the pleading that were not excluded by the trial court; consequently, we will treat the motion as one for summary judgment.⁵ An order that grants summary relief disposes solely of legal questions and is reviewable by a de novo standard. Residential Funding Real Estate Holdings, LLC v. Adams, 2012 OK 49, ¶ 17, 279 P.3d 788.⁶

ANALYSIS

¶ 10 Chesapeake argues that Egleston “cannot use a Section 1065 action to obtain documents related to allegations in a lawsuit that has been dismissed with prejudice.” Chesapeake argues:

Having already received three voluminous productions of Chesapeake's confidential materials and filing a failed lawsuit on that basis, [Egleston] insists he is entitled to yet more documents related to that suit. But as a matter of law, [Egleston] cannot use the inspection rights afforded by Section 1065 to gather discovery that bears directly on a dismissed case[.]

¶ 11 The Oklahoma Supreme Court has stated:

Our statutes clearly recognize that a “shareholder of record” may seek certain corporate records. 18 O.S.1991 § 1065(A).... If access is denied after the statutory procedure for access has been followed a shareholder of record may apply to the District Court for an order to compel inspection.

Ramco Operating Co. v. Gassett, 1995 OK 8, ¶ 7, 890 P.2d 941. Title 18 O.S.2011 § 1065 provides, in part, as follows:

C. 1. If the corporation or an officer or agent thereof refuses to permit an inspection sought by a shareholder ... the shareholder may apply to the district court for an order to compel an inspection....

2. Where the shareholder seeks to inspect the corporation's books and records, other than its stock ledger or list of shareholders, the shareholder shall first establish that:

a. the shareholder is a shareholder,

b. the shareholder has complied with the provisions of this section respecting the form and manner of making demand for inspection of the documents, and

c. the inspection the shareholder seeks is for a proper purpose.⁷

¶ 12 There is no dispute that Chesapeake has refused to permit access to certain records sought by Egleston. Moreover, this appears to be Egleston's first § 1065 action; consequently, he is not barred by a prior application made to the district court to compel inspection under the same circumstances. See, e.g., Sec. First Corp. v. U.S. Die Casting & Dev. Co., 687 A.2d 563, 570–71 (Del.1997) (“Neither the doctrine of res judicata nor the principle of the law of the case has any application to a subsequent demand ... to inspect” so long as “there has been a material change of circumstances” from the time of a previous demand to inspect.).⁸ Furthermore, the Delaware Supreme Court has rejected as “overbroad,” and “unsupported by the text of, and the policy underlying, Section 220” (the counterpart of which, in Oklahoma, is § 1065 ), a rule that “would automatically bar a stockholder-plaintiff from bringing a Section 220 action solely because that plaintiff previously filed a plenary derivative suit[.]” King v. VeriFone Holdings, Inc., 12 A.3d 1140, 1151 (Del.2011).⁹

¶ 13 Even with this in mind, however, the nature of the prior action was not a “plenary derivative suit” but, rather, a demand, by Egleston, that Chesapeake's Board take certain actions with regard to alleged mismanagement and waste. Moreover, the Board's decision to deny Egleston's demand was specifically found in the prior appeal to “constitute[ ] a reasonable exercise of business judgment,” McClendon, ¶ 18, and this decision became final. Egleston now seeks to pursue a § 1065 action to investigate the same corporate mismanagement about which he complained in the prior demand...