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Neff v. Brady

Court of Appeals of Texas, First District

June 29, 2017

TERRY NEFF AND IRON WORKERS MID-SOUTH PENSION FUND, DERIVATIVELY ON BEHALF OF WEATHERFORD INTERNATIONAL, LTD., Appellants
v.
NICHOLAS F. BRADY, DAVID J. BUTTERS, WILLIAM E. MACAULAY, ROBERT B. MILLARD, ROBERT K. MOSES, JR., ROBERT A. RAYNE, BERNARD J. DUROC-DANNER, BURT M. MARTIN, AND WEATHERFORD INTERNATIONAL, LTD., A SWISS CORPORATION, Appellees

         On Appeal from the 270th District Court Harris County, Texas Trial Court Case No. 2010-40764

          Panel consists of Justices Jennings, Keyes, and Brown.

          OPINION

          Terry Jennings Justice

         Appellants, Terry Neff and Iron Workers Mid-South Pension Fund, derivatively on behalf of nominal defendant, Weatherford International, Ltd., a Swiss Corporation ("Weatherford"), challenge the trial court's orders dismissing their claims for breach of fiduciary duty, abuse of control, and corporate waste against appellees, Nicholas F. Brady, David J. Butters, William E. Macaulay, Robert B. Millard, Robert K. Moses, Jr., Robert A. Rayne, Bernard J. Duroc-Danner (collectively, "the directors"), Burt M. Martin, and Weatherford. In four issues, appellants contend that the trial court erred in granting the pleas to the jurisdiction and special exceptions of the directors and Weatherford, granting the special exceptions of Martin, and granting the special appearances of Brady, Butters, Macaulay, Millard, Moses, and Rayne.

         We affirm in part and reverse and remand in part.

         Background

         In their Consolidated Petition, [1] appellants allege that Weatherford is a global oil and gas services company that is headquartered in Houston, is publicly-traded on the New York Stock Exchange, and has market presence in over 100 countries in the Middle East, Asia, Latin America, and Africa. As an issuer of publicly-traded securities, Weatherford's business and operations are subject to the Foreign Corrupt Practices Act ("FCPA"), which prohibits companies from making improper payments, such as bribes or kickbacks, to foreign officials in order to obtain or retain business.[2] To prevent such illicit payments, the FCPA requires companies to establish and maintain a system of accounting controls.[3] According to appellants, some of the countries in which Weatherford conducts its operations present higher risks for corruption because they have cultures in which requests for improper payments are not discouraged and have less-developed regulatory structures. Notwithstanding, the directors failed to implement certain controls, procedures, and processes necessary to comply with the FCPA.

         Appellants further allege that, from 2002 to 2011, Weatherford representatives authorized or paid bribes to foreign officials in Africa and the Middle East in order to obtain or retain business. They paid kickbacks to foreign officials in Iraq to obtain United Nations Oil-for-Food contracts. And, from 2002 to 2007, they violated United States sanctions and export laws by conducting business in and with Cuba, Iran, Sudan, and Syria. Although Weatherford's schemes boosted its revenues by $118 million and its profits by $89 million, they exposed Weatherford to substantial penalties and losses for violations of the FCPA. In 2007, the United States Department of Justice ("DOJ") and the United States Securities and Exchange Commission ("SEC") launched an investigation into Weatherford's practices and compliance with the FCPA. While the governmental investigations were pending, Weatherford publicly announced that it, through its own internal investigations, had discovered potential violations of United States law in connection with its joint venture in Angola.

         From 2002 to February 2009, Weatherford was incorporated in the British Overseas Territory of Bermuda ("Weatherford Bermuda"). On February 26, 2009, Weatherford created a new corporate entity and re-domesticated to Switzerland ("Weatherford Switzerland"), where it presently remains. Weatherford Switzerland became the parent of Weatherford Bermuda, a wholly-owned subsidiary. Brady, Butters, Macaulay, Millard, Moses, Rayne, and Duroc-Danner served as directors of Weatherford Bermuda and then as directors of Weatherford Switzerland. And Martin served as Weatherford Bermuda's senior vice president and general counsel.

         On March 1, 2010, Weatherford disclosed to its shareholders that the governmental investigations into its possible violations of the FCPA could adversely affect its operations and financial condition. Thereafter, the price of Weatherford's shares began to decline. On March 25, 2010, Neff made his initial purchase of shares in Weatherford. On May 3, 2010, Weatherford disclosed to its shareholders that it would likely be subject to penalties imposed by the DOJ and SEC. On July 10, 2010, Neff filed the instant suit. And, in December 2010, Iron Workers Mid-South Pension Fund made its initial purchase of shares in Weatherford.

         In 2013, the DOJ and SEC concluded that Weatherford had committed several FCPA violations. For instance, from 2002 to 2011, Weatherford authorized bribes to obtain or retain business; engaged in commercial transactions with sanctioned countries in violation of United States sanctions and export control laws; failed to implement sufficient accounting controls to detect and prevent payments of bribes and improper sales to sanctioned countries; engaged in transactions that were incorrectly described in its books and records; and created false accounting records. During the DOJ and SEC investigations, Weatherford Switzerland incurred over $169 million in FCPA-related expenses. And it subsequently resolved the enforcement actions, in part, by agreeing to pay $252 million in fines and penalties.

         On behalf of Weatherford, appellants assert that the directors breached their fiduciary duties, abused their control, and committed corporate waste. The directors were aware that Weatherford's international business operations required compliance with the FCPA, and they had a fiduciary duty to Weatherford to implement and maintain accounting, financial, and internal controls and systems to ensure such compliance. And the SEC concluded that the directors failed to implement and maintain internal accounting controls for compliance with the FCPA's books and records provisions. Further, the directors breached their fiduciary duties by making false and misleading statements in Weatherford's annual reports about its revenues, profits, and its FCPA compliance. They caused Weatherford to issue false and misleading proxy statements to Weatherford shareholders. And, their conduct constituted an abuse of their control and influence over Weatherford and a waste of its corporate assets.

         Appellants further assert that the directors' acts and omissions caused Weatherford to be "severely injured and damaged." In addition to paying millions of dollars in fines, penalties, and costs, Weatherford will incur millions of dollars more in costs from the appointment of a Corporate Monitor and the implementation of various remedial measures. Thus, appellants seek actual and exemplary damages on behalf of Weatherford.

         Weatherford, as nominal defendant, filed a plea to the jurisdiction, in which the directors and Martin joined. They argued that appellants lack standing to bring derivative claims on behalf of Weatherford for the acts and omissions of the directors of Weatherford Bermuda that pre-date Weatherford's February 26, 2009 re-domestication to Switzerland because such claims are governed by the laws of Bermuda, which prohibit shareholder-derivative claims, absent narrow exceptions not applicable here. They also assert that neither the laws of Bermuda nor Switzerland recognize appellants' claims, which are double-derivative.[4]

         Weatherford also filed special exceptions, in which the directors and Martin joined, challenging appellants' claims concerning the directors' acts and omissions that occurred from 2009 to 2011. Appellees argued that appellants' Consolidated Petition does not provide fair notice to allow them to prepare a defense because appellants failed to plead particularized facts. Appellees also challenged appellants' claims on the ground that Weatherford's shareholders, as authorized under Swiss law, have released the directors from all liability for their conduct from 2009 to 2011.

         In support of their pleas and special exceptions, appellees filed the affidavit of their expert, Dr. Alexander Vogel, LL.M. In his affidavit, Vogel testified that he is a partner in the law firm of Meyerlustenberger Lachenal, which is a commercial law firm comprised of over 80 lawyers across Zurich, Geneva, Zug, and Lausanne. He is the head of the firm's corporate and finance departments, and he advises Swiss and international companies on all aspects of Swiss and international commercial law. Vogel holds a doctoral degree from the University of St. Gallen, Switzerland, and a master of laws degree from Northwestern University School of Law. He is admitted to the bar in Switzerland and in New York. And, he has authored several publications on Swiss corporate structure and liability.

         Vogel explained that in February 2009, Weatherford underwent a re-domestication process, i.e., the place of incorporation of the parent company changed from Bermuda to Switzerland. Prior to its re-domestication, Weatherford was incorporated under the laws of Bermuda and had its registered office in Bermuda. However, Weatherford did not simply move its registered seat from Bermuda to Switzerland. Under the re-domestication, Weatherford formed a new corporation, with its registered office in Switzerland, and it "acquired all shares in Weatherford Bermuda from the (public) shareholders of Weatherford Bermuda." Thus, the re-domestication was not conducted under the most common scheme under Swiss law. As a result, from the perspective of Swiss law, Weatherford Switzerland is not the legal successor of Weatherford Bermuda, but rather its newly established parent; Weatherford Bermuda is a direct, wholly-owned subsidiary of Weatherford Switzerland; and Weatherford Switzerland and Weatherford Bermuda are separate legal entities.

         Vogel, from his review of appellants' Consolidated Petition, opined that, under Swiss law, in conformity with the separate legal entity approach, appellants' claims actually concern the acts and omissions of the directors of Weatherford Bermuda, a "different group company, " because they pre-date Weatherford's February 26, 2009 re-domestication. And appellants, as shareholders of Weatherford Switzerland, lack standing or capacity to bring derivative claims against the directors for an asserted breach of duty committed prior to the February 2009 re-domestication. There is no double- or multiple-derivative-action doctrine under Swiss law. Rather, only acts or omissions of the directors that occurred after February 2009 could be relevant in this case.

         Martin, in addition to joining Weatherford and the directors' special exceptions, separately filed special exceptions to appellants' Consolidated Petition. He argued that appellants' petition inadequately states a cause of action against him because in it they assert only that he resigned from Weatherford in 2010 and news accounts indicated that he was examined as part of the federal government's investigation of Weatherford.

         Appellants, in their response to appellees' pleas to the jurisdiction, asserted that they have standing to bring their claims against the directors of Weatherford Bermuda under the laws of both Bermuda and Switzerland. They argued that they have standing under the laws of Bermuda because their claims fall squarely within United Kingdom Companies Act 2006, section 260, which provides: "A derivative claim under this Chapter may be brought only [with] respect [to] a cause of action arising from an actual or proposed act or omission involving . . . breach of fiduciary duty or trust by a director of the company."[5] Appellants also asserted that they have standing under the laws of Switzerland, pursuant to article 756 of the Swiss Code of Obligations, which states: "In addition to the company, the individual shareholders are also entitled to sue for any losses caused to the company. The shareholder's claim is for performance to the company."[6]

         In regard to their claims for alleged breaches of duty committed by the directors of Weatherford from 2009 to 2011, appellants, in their response to appellees' special exceptions, asserted that they adequately pleaded their claims. They also asserted that their claims were not effectively released by the shareholders.

         After a hearing, the trial court granted appellees' pleas to the jurisdiction and special exceptions, granted Martin's special exceptions, and dismissed appellants' claims against them. Directors Brady, Butters, Macaulay, Millard, Moses, and Rayne each filed a special appearance, on which the trial court did not rule.

         Plea to the Jurisdiction

         In their first issue, appellants argue that the trial court erred in granting appellees' pleas to the jurisdiction, on the ground that appellants' lack standing to bring claims on behalf of Weatherford for the acts and omissions of directors at Weatherford Bermuda, because the laws of Switzerland, and not the laws of Bermuda, govern shareholder standing in this case and entitle them to bring derivative claims. Appellees argue that appellants lack standing because ...


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