The Interplay Between Corporate Governance Issues and Litigation: What Is Corporate Governance and How Does It Affect Litigation?

Corporate governance, as defined by Investopedia, is the system of rules, practices, and processes by which a company is directed and controlled. Corporate governance essentially involves balancing the interests of a company’s many stakeholders, such as shareholders, management, customers, suppliers, financiers, government, and the community. Given that corporate governance also provides the framework for attaining a company’s objectives, it encompasses practically every sphere of management, from action plans and internal controls to performance measurement and corporate Disclosure. Corporate governance issues often lay at the heart of complex commercial litigation that seeks to establish fault and responsibility for losses, or more technically, litigation that seeks to determine liability, causation, and damages. This three-part series will focus on the adequacy of the structures and processes in an organization and how the business conduct of its board, management, and employees can have a significant effect on the outcome of a business dispute. This series will discuss the interplay of corporate governance issues with both plaintiff and defendant strategies in litigation, and describe how governance issues affected the ability of litigants and their counsel to prevail.

Case: Plaintiff ABC oil company sued defendant XYZ oil company under a letter agreement and operating agreement involving the purchase and subsequent operation of an oil field. ABC contended that XYZ, the operator, had intentionally hindered ABC’s efforts to participate in development of the field by various actions, including failure to provide access to data in breach of both the letter agreement for purchase of the field and the operating agreement.ABC asserted that the resulting delay in development of the field allegedly caused by defendant XYZ’s actions had injured ABC by lowering its stock price in a subsequent public offering. XYZ retained an expert team to analyze these allegations and the damages calculated by ABC’s expert. The expert team consisted of four senior executives with energy-related experience. Using available information on the financial and operational condition of both XYZ and ABC and drawing upon their extensive knowledge of the oil and gas industry and financial experience in damage calculation, the expert team concluded:

Plaintiff ABC Oil Company was in dire financial straits and was not capable of financing the proposed development program.
Defendant XYZ Oil Company had operated in a manner that benefitted both ABC and XYZ.
Plaintiff ABC expert’s stock pricing model damage calculation based on historic cashflows violated generally accepted valuation techniques and ignored accepted factors used in valuation, e.g., the timing and amount of future cash flows.

The result in this case was that, after extensive discovery, including production of expert reports and depositions, the plaintiff filed an amended petition basically eliminating the allegations challenged by the expert team. A satisfactory settlement was reached.

Click here for the full article, as published in Business Law Today by H. Stephen Grace,

John E. Haupert, and Susan Koski-Grafer.

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