Deborah G. Mallow IRA SEP Investment Plan v. McClendon: Failure to Disclose is not Irreparable Injury

In Deborah G. Mallow IRA SEP Investment Plan v. McClendon, No. 5:12-cv-00436-M, 2012 2012 WL 1985903 (W.D. Okla.)  Jun. 6, 2012), the United States District Court for the Western District of Oklahoma denied Deborah G. Mallow IRA SEP Investment Plan, Christopher Snyder, Dolezal Family Limited Partnership, Brian F. Leonard, David A. Kroll, Inc. Employees’ Profit-Sharing Plan and Trust, and Norman Spiegel’s (collectively “Plaintiff’s”) Motion for Preliminary Injunction. 

Defendant Aubrey K. McClendon (“McClendon” or “Defendant”) is the co-founder of Chesapeake Energy Corporation, one of the largest natural gas producers in the nation. Shareholders voted to give McClendon rights to purchase up to a 2.5% interest in each new well Chesapeake drilled. McClendon was required to invest in either all of the wells drilled in a calendar year or none at all and to pay his proportionate share of costs. In 2012, a Reuters article revealed that McClendon had borrowed upwards of $1.1 billion over a three-year period against his personal interests in the Chesapeake wells, and these loans were financed to pay McClendon’s obligations to Chesapeake. The company’s stock fell 5.5% after the publication appeared.

After the article was published, Chesapeake filed a preliminary proxy statement that provided additional information regarding McClendon’s well interests and transactions. The Securities and Exchange Commission (“SEC”) conducted a review of the proxy that Chesapeake then finalized. Plaintiffs asserted that Chesapeake failed to disclose material information necessary for shareholders to cast fully informed votes, and Plaintiffs asked the Court to enjoin the annual shareholders meeting.

For a party to succeed in seeking a preliminary injunction it must show: “(1) a substantial likelihood of success on the merits; (2) irreparable injury to the movant if the injunction is denied; (3) the threatened injury to the movant outweighs the injury to the party opposing the preliminary injunction; and (4) the injunction would not be adverse to the public interest.” The decision to grant a preliminary injunction is entirely discretionary.

To show an irreparable injury, a movant must show the injury to be both “certain and great,” and not merely “serious or substantial.” A showing of a material false solicitation is insufficient to prove irreparable harm. The court held that Plaintiffs did not show irreparable injury and that Plaintiffs had an adequate remedy if the injunction failed; the court could void the shareholders votes related to items of material information, and the items could be resubmitted to a shareholder’ vote if the court ultimately found a failure to disclose material information in the proxy statement.

The court also noted that this instance did not involve a merger or corporate activity that has a higher potential for irreparable injury. The court gave weight to the SEC’s review and clearance of the preliminary proxy.

Because the court found Plaintiffs failed to prove an irreparable injury, it did not reach the other elements of a preliminary injunction, and it denied Plaintiffs’ request for a preliminary injunction for the shareholder vote.

The primary materials for this case may be found on the DU Corporate Governance website.