Directors of Duke Energy Corp. (DUK), the largest utilities provider in the U.S., were sued over the ousting of Progress Energy Inc.’s chief executive officer after the companies merged.
Lesley C. Rupp, a Duke shareholder since 2009, alleged that Duke Chairman James E. Rogers and other directors misled investors and regulators and damaged the company’s reputation when Progress CEO William D. Johnson was removed as head of the combined companies shortly after the deal closed.
“The CEO switch was premeditated, deceitful, in bad faith, and in contravention of the merger agreement,” Rupp’s lawyers said in the complaint filed today in Delaware Chancery Court in Wilmington. The directors’ “conspiracy and tactics have had a devastating effect on Duke’s credibility,” according to the complaint.
Rupp claimed the directors decided as far back as May that they would get rid of Johnson once the merger was completed.
In testimony July 10 before the North Carolina Utilities Commission, which oversees about 45 percent of Duke’s business, Rogers said directors must make decisions “based on what the board believes is in the company’s best interests.”
Rogers told commission members that the merger “will provide significant benefits to all our constituencies.”
After receiving the necessary approval from the commission, known as NCUC, and other regulatory agencies, Duke’s $17.8 billion merger with Progress was completed July 2.
Johnson became CEO of Duke for what may be one of the briefest tenures in corporate history, holding the position for “a few minutes” before the newly formed board held a meeting that night and voted to oust him and reinstate Rogers at the helm, according to court documents.
The board comprised 11 Duke directors and seven Progress directors, according to court papers. The final vote was 10 to 5, with all Duke appointees voting to remove Johnson and all Progress members voting against the action. Rogers, Johnson and one other Progress director didn’t participate in the vote.
Johnson received a severance package estimated to be worth more than $40 million including a $10.3 million cash payment, according to court filings.
Three Progress executives, who were expected to have prominent roles in the combined company, immediately resigned following the CEO swap, according to court documents. Their severance packages are being negotiated.
Lawyers for Rupp said in court papers that directors’ actions “placed Duke in ill repute, subjected it to widespread ridicule,” potentially injured its credit rating, and exposed the company to possible damages from loss of rate increases, increased cost of borrowing, legal defense, and possible costs of future litigation and settlements.
Rupp’s lawyers asked a judge to order directors to make restitution to the company and pay interest and attorneys’ fees.
On July 6, NCUC opened an investigation into whether Duke misled the agency in order to obtain regulatory approval for the merger, according to court documents. Roy Cooper, the North Carolina attorney general, also started a probe into the matter.
Duke didn’t disclose its intention to remove Johnson as CEO because “corporate decisions are announced after they are made, not when they are being contemplated,” Rogers told the commission on July 10. The pre-closing Duke board had no authority to ask for Johnson’s resignation and could only do so once the merger was finished, Rogers said.
Duke may have jeopardized its relationship with regulators who control its ability to raise rates, threatening earnings, Rupp claimed. In North Carolina, where Duke has 3.2 million customers, the company is seeking to raise rates 1 percent, according to court papers.
Duke fell 0.6 percent to $66.34 in New York Stock Exchange composite trading.
The case is Rupp v. Rogers, CA7705, Delaware Chancery Court (Wilmington).
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