Monday, May 26, 2008

Massey Loses Big in Court

Massey Energy Co., headquartered in Richmond, Vir., is the parent company of Central West Virginia Energy Co., and thus a party to some high-stakes litigation against Wheeling-Pittsburgh Steel Corp.

About a year ago, a trial jury found that Massey and CWVE had reneged on a contract to supply coal to WPS. It found damages of $220 million: $120 million compensatory; $50 million punitive assessed against the parent-corp. defendant; another $50 million punitive assessed against its subsidiary.

Massey had argued unsuccessfully that the apparent breach was actually an instance of "force majeure," i.e. a circumstance in which performance had become impossible for reasons that could not reasonably have been anticipated.

Last week, the West Virginia Supreme Court said that it would not hear an appeal -- which in turn means that it appears the verdict will stand, and Massey is on the hook for the full $220 million plus post-judgment interest.

In a press release, Massey sought to allay shareholder concern by saying that the amount at issue is "approximately only 5 percent of the company's market capitalization." Only? One-twentieth of the company is gone with the stroke of the appellate court's pen and they say this is a matter worthy of the word "only"?

That strikes me rather as whistling past the graveyard.

Massey has in the past attracted attention from activist shareholders. Last year (just a couple of months before the jury verdict) hedge fund Third Point waged a successful proxy campaign to get two of its representatives on the Massey board.

Third Point is no longer at all so heavily invested in Massey as they once were, although they aren't out completely. As their last quarterly filing with the SEC they said they owned $59,000 of its stock. Will they sell it now? Or will they perhaps hold on, expecting that in time this storm will pass -- that 5% loss will be sustained and growth will nonetheless resume?

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