JurisdictionUnited States
Financial Distress in the Oil & Gas Industry
(Feb 2010)


Joseph M. Brooker
Storm Cat Energy Corporation
Denver, Colorado
C. Mark Brannum
St. Mary Land & Exploration Company
Denver, Colorado

Joseph M. Brooker is the Chief Executive Officer of Storm Cat Energy. Joe is a petroleum engineer and lawyer with 25 years of experience in the oil and gas business. He was most recently Vice President and General Counsel of Medicine Bow Energy Corporation, a Denver-based private-equity-backed exploration and production company with operations in the Rockies, Mid-Continent and East Texas. Prior to that, Joe was Vice President of Land and General Counsel of Shenandoah Energy Inc, a Denver-based private-equity-backed exploration and production company with operations in the Uinta and Raton Basins. Mr. Brooker received a B.S. in Petroleum Engineering from Marietta College in 1982 and a Juris Doctorate. from the University of Cincinnati College of Law in 1989.

C. Mark Brannum currently serves as Senior Legal Counsel and Secretary for St. Mary Land & Exploration Company. Before joining St. Mary in 2007, Mark was a shareholder with the Texas law firm, Winstead P.C. in their Dallas Office. At Winstead, Mark was the Chairperson for the Firm's Business Restructuring and Bankruptcy Practice Group and was named one of Dallas Best Lawyers by D Magazine and a Texas Super Lawyer. Mark frequently spoke and wrote on issue of insolvency, bankruptcy and business restructuring. Mark received a Juris Doctor with highest honors from the University of Oklahoma and was a member of the Law Review. He is a member of the Order of the Coif. After graduation, Mark served as the law clerk for the Honorable Leif M. Clark, United States Bankruptcy Judge for the Western District of Texas. Mark is currently a member of the Special Institutes Committee for the Rocky Mountain Mineral Law Foundation.

Corporate Managers Beware: Claims & Causes and Action That Might be Brought in Times of Financial Distress

Over the last year, this country has faced the worst economic crisis since the Great Depression.1 Sometimes referred to as the "Great Recession," this period of crisis has led to financial distress for many of the country's blue chip business powers, from financial institutes like Goldman Sachs, Lehman Brothers and AIG, to automakers like General Motors and Chrysler Corporation. Similarly, many companies in the oil and gas industry have suffered severe financial distress or even bankruptcy.2 With the "state of the economy" ever-present in the news and on the minds of consumers, stockholders and creditors, and allegations of corporate mismanagement and even fraud by corporate managers of financially distressed companies in the news.3 These corporate managers have likewise found themselves under the microscope. The public eye and news are not the only forums where these corporate managers find themselves, however. In times of financial crisis, the economic victims of these reported staggering losses (creditors and stockholders) turn to litigation for recovery of their losses. Often simply looking for any turnip from which to squeeze any blood. More often times, these victims are looking for someone to blame.

The purpose of this paper is to examine the liability or potential liability of corporate managers. Part 1 discusses the different types of corporate managers and their roles in corporate

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management. Part 2 explores the types of duties that are owed by corporate managers, and Part 3 discusses to whom those duties are owed. Part 4 explores the concept of solvency as well as the legal concept of deepening insolvency. Lastly, Part 5 looks at less conventional causes of action.

1. Who Can We Blame?

Economists would say that blame should not be the primary concern in situations of financial loss - only recovery. After all, stockholders knew or should have known the risk of this investment. Likewise, creditors knew or should have known the credit risk of their borrowers. Thus, stockholders and creditors might ought to blame themselves. For obvious reasons creditors and stockholders are not willing to take this responsibility. Rather, they believe that someone else must be to blame for the financial ruin of a corporation. The most obvious choice for "who to blame" are the corporate managers, or in most cases, the officers and directors.

a. Directors.

Directors generally oversee the management of the company. Section 141(a) of the Delaware General Corporation Law (DGCL) provides that the business and affairs of a corporation are to be managed by or under the direction of the board of directors. Boards of large corporations typically fulfill this provision by (i) appointing officers to serve as management, (ii) reviewing and approving the corporation's business plans and strategies, and (iii) monitoring the performance of the corporation.4 In other words, while the statute literally provides that the business of the corporation is to be managed by or under the direction of the board of directors, it is clear that the function of a board of a large corporation is not actually to

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manage, but to oversee the management of the corporation by monitoring the performance of the senior officers.5

The ABA's Corporate Director's Guidebook states that directors have two primary functions: (i) decision making, and (ii) oversight. The decision-making function involves approving corporate policies and strategic plans or goals, selecting and evaluating senior management, approving major expenditures, approving significant acquisitions and dispositions of assets or businesses proposed by management, and declaring dividends. The oversight function involves monitoring the corporation's business and affairs, including financial performance, management performance, and compliance with corporate policies and legal obligations.6

The board's principal responsibilities are to select senior management, plan for succession, and provide general direction and guidance with respect to the corporation's strategy and management's conduct of the business.7 The Guidebook also states that a key challenge for outside directors is to oversee the corporation's activities effectively and make well-informed decisions without themselves usurping the role of management.8

Although the board's responsibility to oversee the management of the corporation is not specifically defined by statute, it has been described as generally involving the following tasks for a board and its committees:

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• monitoring the corporation's performance in light of its operating, financial, and other significant corporate plans, strategies, and objectives, and approving major changes in plans and strategies;
• selecting the CEO, setting goals for the CEO and other senior executives, evaluating and establishing their compensation, and making changes when appropriate;
• developing, approving, and implementing succession plans for the CEO and top senior executives;
• understanding the corporation's risk profile and reviewing and overseeing risk management programs;
• understanding the corporation's financial statements and monitoring the adequacy of its financial and other internal controls as well as its disclosure controls and procedures; and
• establishing and monitoring effective compliance systems and policies for ethical conduct. 9
b. Officers.

The term "officer" generally refer to those to whom administrative and executive functions have been assigned by the company's by-laws or board resolution and who have discretion as to corporate matters.

Section 142(a) of the DGCL provides that the corporation shall have such officers with such duties as are stated in the bylaws or in board resolutions.10 As an example, company bylaws provides that the president shall be the chief executive officer exercising general supervision and administration over all of its affairs and shall have such further duties as shall from time to time be designated by the Board of Directors.

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Senior officers are typically considered to be the management of the corporation, but they are accountable to the board of directors.11 As noted above, their particular roles and duties are to be set forth in the bylaws or in board resolutions. Through this framework, specific management functions and most day-to-day decision making are generally left to the corporation's senior officers and executive employees who work for the corporation full time and have better opportunities for firsthand knowledge of corporate affairs than do directors who are not officers.12

The Business Roundtable's Principles of Corporate Governance - 2005 indicates that, as part of its normal responsibilities, senior management is charged with:

Operating the corporation. The CEO and senior management carry out the corporation's strategic objectives within the annual operating plans and budgets which are reviewed and approved by the board.
Strategic planning. The CEO and senior management generally take the lead in strategic planning. They identify and develop strategic plans for the corporation; present those plans to the board; implement the plans once board review is completed; and recommend and carry out changes to the plans as necessary.
Annual operating plans and budgets. With the corporation's overall strategic plans in mind, senior management develops annual operating plans and budgets for the corporation and presents the plans and budgets to the board. Once the board has reviewed and approved the plans and budgets, the management team implements those plans and budgets.
Identifying qualified management personnel, and establishing an effective organizational structure. Senior management is responsible for identifying qualified management personnel and implementing an organizational structure that is efficient and

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