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Frontier Oil Corp. v. Holly Corp.4/29/2005
tion in market price.
The merger terms were finalized on March 24, 2003. As to corporate governance, Norsworthy would become chairman of the board of the "new" Frontier; Gibbs would be its chief executive officer; and all directors of both constituent corporations would become directors of the "new" board. One adjustment to merger consideration was through a "contingent value right" ("CVR") that Holly shareholders would receive. The contingent value right represented the potential value of a litigation claim asserted by Holly against the United States with respect to the sale of jet aviation fuel. The value of the claim was uncertain.
D. Enter Erin Brockovich During March 2003, in advance of a definitive merger agreement, the parties proceeded with their due diligence efforts. On March 15, Frontier delivered due diligence materials to Vinson & Elkins ("V&E"), the law firm representing Holly in the transaction. One of the items provided was an article from the February 22, 2003, edition of the Los Angeles Times, entitled "Cancer Cluster Alleged." The article described plans by activist Erin Brockovich and the Masry & Vititoe law firm to bring a mass toxic tort suit against Beverly Hills (California) High School, the Beverly Hills municipality, and three oil companies. An oilrig had been in operation for decades on the campus of Beverly Hills High School, next to the athletic field. Brockovich claimed that the students attending the high school suffered from a disproportionately high incidence of various cancers, which she attributed to exposure to air contaminants released during the drilling and on-site processing activities. The crude oil production activities were carried out, at that time, by Venoco, Inc. ("Venoco"), which had acquired its interest in the Beverly Hills site from Wainoco Oil & Gas Company ("Wainoco") in 1995. Wainoco had obtained its interest in 1985 from Waverly Oil Company, an assignee of Chevron USA, Inc. The article, however, failed to set forth one fact that would become critical to the Merger: Wainoco is a wholly-owned subsidiary of Frontier.
E. Due Dilligence I: Holly Becomes Concerned About Beverly Hills
V&E, following receipt of Frontier's due diligence materials, ascertained that Frontier had made no public disclosure regarding the threatened Beverly Hills litigation and realized that only limited information regarding the potential litigation was readily available. On March 27, 2003, as the final details of the Merger documents were being worked out, V&E informed Glancy about the possibility of a toxic tort suit involving prior operations of a Frontier subsidiary. Glancy promptly informed other senior Holly executives. With their sensitivity to complex litigation having been heightened by their unhappy experience in the Longhorn Litigation, Holly management decided to seek additional information from Frontier regarding Beverly Hills. In addition, Holly retained Gibson, Dunn & Crutcher ("Gibson Dunn"), a national law firm headquartered in Los Angeles, to provide advice and guidance with respect to toxic tort litigation in California. As Glancy phrased it in an e-mail to Currie Bechtol, Frontier's general counsel, Holly's management needed to know whether the Beverly Hills problem was "a gnat or an elephant."
F. Frontier Describes the Potential Litigation as a "Bunch of Hooey" Frontier attempted to assuage Holly's concerns in several ways.
Gibbs told Norsworthy that the Beverly Hills problem "was likely to be a nuisance claim." Similarly, Julie H. Edwards, Frontier's chief financial officer, in talking to Matthew Clifton, Holly's president, characterized the claim as a "bunch of hooey" a
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