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BP Investors Will Be First to Test New English Shareholder Rights Statutes

Coughlin Stoia Corporate Governance Bulletin

July 15, 2007

Since 1843, nary a shareholder in an English company has made meaningful progress prosecuting corporate misconduct claims against the executives of U.K. companies. The impediments arose from a notoriously investor-hostile English decision, Foss v. Harbottle, which dictates that “in any action in which a wrong is alleged to have been done to a company, the proper claimant is the company itself,” rather than its shareholders.

After 163 years, this has finally changed. In the wake of corporate calamities on both sides of the Atlantic – Enron, WorldCom, Adelphia, Tyco, AOL Time Warner and their European counterparts, including Vivendi, Parmalat, Royal Dutch Shell, and Adecco – the English set out in March 1998 to reform their statutes. Finally, in November 2006, the Companies Act 2006 received Royal Assent in England. Under the new Act, shareholder derivative actions will operate in England like they do in the U.S. Shareholders of English companies will now be able to step into the shoes of the boards of directors when necessary in order to protect corporate assets.

Shortly before the new Act was made law, UNITE HERE National Retirement Fund (“UNITE”) and The London Pensions Fund Authority (“LPFA”) filed a shareholder derivative action against the officers and directors of BP p.l.c., a company organized under the laws of England, in Alaska state court. Though chartered in the U.K., energy giant BP is very much an American enterprise: BP is the largest non-U.S. based company listed on the NYSE, the largest oil and gas producer in the U.S., and nearly 40% of its shareholders reside in the U.S. Through its Alaska subsidiary, BP is the state of Alaska’s sixth largest employer, the state’s largest investor and taxpayer, and a 47% owner and the sole operator of Trans-Alaska Pipeline. In fact, BP derives 10% of its worldwide oil production from the state of Alaska.

Following its acquisitions of Amoco and Arco and a felony guilty plea in a 1999 toxic dumping lawsuit, BP’s directors undertook a massive PR campaign targeted at investors and the public to recast BP as a progressive, ethical company focused on safety and the environment, rebranding themselves as “Beyond Petroleum.” But behind closed doors, a storm of operational calamities was brewing. Spending on safety and environmental protection efforts at BP’s American operations was disproportionately slashed as the new London stepparent instituted arbitrary cuts of 20% across the board on safety practices. BP’s senior executives in London permitted, and even encouraged, improper and illegal activities at BP’s American facilities to boost revenues and inflate the financial results reported from the company’s U.S. operations.

As conditions turned from bad to worse, the “perfect storm” began to strike in March 2005 when a BP oil refinery exploded in Texas City, Texas, killing 15 workers in a trailer situated dangerously close to the refinery’s main cracker. 170 more were injured. The U.S. Chemical Safety Board, OSHA, the U.S. Congress and even BP’s own independent review panels would later fault reckless safety underfunding. Damagingly, an internal BP report received in London just months before the explosion ominously forewarned that the facility’s deteriorated condition would soon lead to a tragic event.

A year later, a second disaster struck when over 200,000 gallons of crude oil gushed out through a hole in BP’s pipeline across the frozen tundra in Alaska at the massive Prudhoe Bay facility. The cause? Pipeline corrosion that BP claimed it had been monitoring and controlling. When yet another leak was detected in August 2006, half of Prudhoe Bay’s pipelines were shuttered, resulting in dramatic reductions in world oil supply and revenues for BP and the state of Alaska.

BP has been labeled a corporate malefactor by the U.S. Congress and faces multiple criminal grand jury investigations arising out of the Texas City refinery explosion and the 2006 Prudhoe Bay spill. BP is also being investigated for illegal price manipulation in the U.S. propane market following the conviction of one of its energy traders. BP has already expended over $1.6 billion settling personal injury and wrongful death suits arising from its negligence, and the entire affair may cost BP billions more.

In their derivative action, plaintiffs UNITE and LPFA seek to hold BP’s officers and directors personally liable for the damage to the company, and seek a host of badly needed corporate governance changes. In response, defendants have sought to dismiss the entire action, claiming that the Alaska courts lack jurisdiction over BP and most of its officers and directors, and that a shareholder suit such as this could only be brought in England, invoking the Foss decision.

Alaska state court Judge Jack Smith denied defendants’ motion on all three counts on May 17. First, Judge Smith held that BP’s officers and directors knew their actions were impacting Alaska, and that “the State of Alaska and its citizens have an interest in the board and officer activity of any foreign corporation when those decisions result in injury to the local environment or the local economy.” As to the application of the old rule of Foss v. Harbottle, Judge Smith held that plaintiffs had stated a case in which Alaska law applied, and that even if English law did apply, it was not entirely clear that he could not apply the new Companies Act.

This news comes on the heels of other bad news for BP, including the disclosure of improper use of company funds in oil-rich Central Asian republics, and the perjury certification and resignation of Lord John Browne, the disgraced former CEO.

UNITE HERE National Retirement Fund, et al. v. The Lord John Browne of Madingley, et al., No. 3AN-06-011929, Order (Alaska Super. Ct. May 17, 2007).

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