May 26, 2011 / 10:14 PM / 8 years ago

Massey shareholders make case to block Alpha deal

* Massey Shareholders seek to block Alpha deal

* Merger will prevent Massey board from being accountable

* Massey’s poor safety record cost shareholders

By Tom Hals

WILMINGTON, Del., May 26 (Reuters) - The $7.1 billion merger of coal miners Massey Energy Co MEE.N and Alpha Natural Resources Inc ANR.N should be blocked or Massey’s board will avoid responsibility for their reckless management, a shareholder attorney told a court on Thursday.

Several pension funds that invested in Massey have sued to block the vote next week by shareholders of the two companies.

The funds argue Massey’s price is a discount of as much as $1.5 billion because of the impact of management’s long disregard for safety, which they argue led to last year’s accident in West Virginia that killed 29 miners.

The mine has not reopened, draining potential profits.

Stuart Grant, an attorney with Grant and Eisenhofer, which is representing pension funds, told the court Massey’s discounted shares are the fault of management because no one properly values the business in their hands.

Court papers unsealed earlier this week showed Massey’s former chief executive, Donald Blankenship, and Chairman Bobby Imman blamed a string of safety violations on a secret government plan to destroy the company. [ID:nN25178503].

The judge, Leo Strine, reminded Grant that shareholders also enjoyed years of windfall profits thanks to Massey’s underinvestment in safety.

Grant acknowledged that Massey shareholders face an unpleasant choice. A vote to approve the merger puts the business in the hands of Alpha’s management, which has a much better safety record.

However, the merger also transfers claims by shareholders against Massey’s board to Alpha, which Grant said would be a “get out of jail free card” for Massey’s management.

Grant argued Alpha’s board would not want to incur the legal costs or risk its reputation by pursuing those claims, which he said could be worth $400 million or more.

“Blankenship is never going to be held accountable for those damages” if Alpha acquires the claims, said Grant. “We’re living in fantasyland to think anything else.”

Instead, Grant proposed a relatively novel solution under Delaware corporate law. If Strine refused to block the deal, then he should allow a litigation trust for shareholders so they can continue the lawsuit against Massey’s board.

Massey argued the court should allow the deal, which would not cause irreparable harm to Massey’s shareholders.

Transferring shareholders’ claims to a litigation trust would hurt shareholders by lowering the overall value of Massey, said Kevin Abrams of Abrams & Bayliss, which represents the Massey board.

Strine said he would rule over the weekend, although he faces pressure from a parallel ruling in another court.

A similar lawsuit was brought in West Virginia and a ruling from that state’s supreme court is expected this week, according to Abrams.

Massey’s stock closed up 1.8 percent at $63.91 and Alpha’s also ended up 1.8 percent, at $52.78. Both trade on the New York Stock Exchange.

The case is: In re Massey Energy Co. derivative and class action litigation, 5430, Delaware Chancery Court (Wilmington).

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