board of directorsCo-author Alexandria Moore

Let’s say two fellows are in the oil business and one of his activities is as a director of an exploration company. A deal comes in, they present it to the company, but take it for themselves, Did they steal the opportunity from the company? In Huff  Energy Fund LP v. Longview Energy Company, the jury said yes, to the tune of several hundred million dollars. Not so fast, said the court of appeals. Reversed and rendered for the directors.

The law

Here is when a director may take a corporate opportunity:

  • The opportunity is first presented to the director in his individual capacity;
  • The opportunity is not essential to the corporation;
  • The corporation does not have an interest or expectancy in the business; and
  • The director has not wrongfully employed the resources of the corporation pursuing the opportunity.

What they did        

  • HEF purchases stock in Longview, which entitled HEF to appoint Huff and D’Angelo to Longview’s Board of Directors.
  • HEF and Riley form Riley-Huff Energy.
  • HEF encourages its portfolio companies, including Longview, to explore opportunities in the Eagle Ford shale.
  • HEF and Longview discuss investment strategies, including the Eagle Ford shale.
  • Longview claims that Huff agreed to fund any investment that “Rick Pearce likes.” (Pearce is Longview’s COO and senior petroleum engineer.)
  • Longview meets with land brokers who do not present any specific leases; instead they drew circles on a map to indicate general areas where leases are available.
  • Management and D’Angelo meet to discuss plans to develop the Eagle Ford shale.
  • The same land broker is meeting with Riley.
  • At a meeting where management presents an investment proposal to the Board, Longview’s president distributes reading materials proposing a strategy for investing and economic projections.
  • Pierce presents the proposal to invest $40 million in Eagle Ford shale acres and shows a map that includes available acreage but not specific leases.
  • The Board does not vote on the proposal because D’Angelo and Huff won’t support an Eagle Ford investment.
  • Longview learns that three days before the Board meeting Riley-Huff signed a contract to purchase the same acreage that Longview was considering through the same land brokers.
  • Longview takes no further action on the Eagle Ford investment plan.

Longview sues Huff and D’Angelo for breach of fiduciary duty by taking a corporate opportunity that belonged to Longview.

The question for the jury

Did Huff and/or D’Angelo fail to comply with their fiduciary duty to Longview by taking a corporate opportunity?  The jury answered yes and the trial court rendered judgment on the verdict.

What so bad about that?

Not much, said the majority. The evidence was legally insufficient to hold that Huff and D’Angelo failed to comply with their fiduciary duty.

Longview did not have an expectancy in the opportunity. Longview was “in a general way, negotiating for and endeavoring to purchase the interests involved.” The Eagle Ford shale encompasses millions of acres across thousands of miles. Longview would acquire 20,000 acres and drill one well per tract to prove up the prospects. To characterize this strategy as an expectancy would give Longview “a virtual monopoly of extensive fields into which its officers and directors were forever precluded from entering.” An opportunity must be more than a desire to invest, especially if the investment is in an area as large as the Eagle Ford shale.

The purchase by Huff and Riley did not hinder or defeat Longview’s plans to also acquire Eagle Ford acreage.

Lawyers, pay attention

By virtue of what some (including the dissent) would see as legal mumbo-jumbo, the majority decided that a second question should not have been asked because it was not pled, and it was thus ignored.  See “Jury Question Number 2” on pages 13 through 21.


The other side of the story.

We are within a few days of the 35th anniversary of John Lennon’s death. Hence, this musical interlude. (Not saying it beats the Isley Brothers)