Bottini & Bottini represents shareholders of Sanchez Energy Corp. in a shareholder derivative action pending in Delaware Chancery Court. The case alleges that the officers and directors of Sanchez Energy engaged in self-dealing and breached their fiduciary duties by engaging in transactions that benefitted themselves at the expense of the Company and its shareholders.
The complaint alleges that the Company's insiders own and control a privately held company named Sanchez Resources. Eduardo Sanchez, the son of Sanchez Jr. and brother of Sanchez III, established and runs Sanchez Resources, while both Sanchez Jr. and Sanchez III maintain equity interests in it. In August 2013, Sanchez Energy, with the Board’s approval, agreed to purchase working interests in the Tuscaloosa Marine Shale (“TMS”) from Sanchez Resources (the “Transaction”). Sanchez Energy purchased these working interests at a price seventeen times higher than other oil and gas companies have paid for similar interests in the TMS. The beneficiaries of this over-priced purchase were the Sanchez family.
The complaint alleges that Sanchez Resources was originally seen as a way for the Sanchez family to profit exclusively from the development of this acreage. But when the Sanchezes could not finance the development costs themselves, they brought in a private equity investor – Altpoint Capital – to help foot those bills. The acreage was slow and costly to develop. When the Sanchez family asked Altpoint to provide additional cash to fund the business, Altpoint refused. The Sanchez family was unwilling to fund the development of the acreage themselves, so they decided to force Sanchez Energy's public stockholders to do so.
The Transaction had some complex details, but its essence was the following: Sanchez Energy paid $78 million for the working interest leases on 40,000 acres of undeveloped land in the TMS, which it then agreed to develop in a 50/50 joint venture with Sanchez Resources, which had retained the working interest leases on an additional 40,000 acres of land in the TMS. In addition, Sanchez Energy agreed to finance on its own the first six wells to be drilled on the undeveloped property, which is an additional commitment of approximately $22 million. In exchange, Sanchez Resources was able to eliminate its private equity financier, Altpoint, at a substantial premium. In addition, Sanchez Resources received its own cash infusion of $14 million directly from Sanchez Energy, plus a future royalty stream kickback from Sanchez Energy. This kickback has never been disclosed to Sanchez Energy’s stockholders, and it will help to finance Sanchez Resources’ financial obligations in the joint venture. The Sanchez family comes out ahead, Altpoint comes out ahead, and only Sanchez Energy comes out far, far behind. No independent third-party would have ever accepted this deal.
The complaint sought damages due to the fact that transaction required Sanchez Energy to pay a price far higher than any disinterested party would pay for the undeveloped land.
Plaintiffs' complaint was initially dismissed by the trial court. Plaintiffs appealed to the Delaware Supreme Court, and prevailed.
On August 15, 2017, the parties announced that they reached a settlement which is worth approximately $27.75 million. Under the terms of the Stipulation of Settlement, the directors of Sanchez Energy along with the directors of the company that sold it the mining interests will pay $11.75 million to Sanchez Energy, and the equity of the seller in Sanchez Resources, valued at more than $16 million, will be transferred to Sanchez Energy. The seller, Sanchez Resources, will operate as a wholly owned subsidiary of Sanchez Energy.