Risk & Compliance

TXU Agrees to Major Governance Changes

In addition to fat fines, companies are settling securities lawsuits for mandated changes to corporate governance structures. TXU is just the lates...
Stephen TaubJanuary 26, 2005

Officials at TXU Corp. agreed to sweeping corporate governance changes as part of a class-action lawsuit settlement with its shareholders. The investors sued the Dallas-based utility after the company’s stock price collapsed in October 2002.

TXU, which has a market cap of $19 billion, also agreed to pay $150 million to the class members.

TXU is the latest of a growing number of companies that have agreed to significant governance changes as part of securities litigation settlements. Usually shareholders launch the suits following a precipitous drop in the company’s stock price caused by unexpected losses, accounting restatements, or fraud.

For example, in a case settled last year, officials at Applied Micro Circuits Corp. agreed to several governance changes after a shareholders suit cited the company’s stock price plummeted in 2001. Most of the changes were aimed at creating a more independent board. The price drop — from $70 per share to $53 per share — was reportedly caused by the revelation that the company was experiencing significant order cancellations. That was information that certain directors and officers had not disclosed publicly.

In other examples, including settlements involving Broadcom and Hanover Compressor, company officials agreed to settlements stipulating that shareholders would be allowed to directly nominate a director.

In the TXU case, shareholders charged that senior executives failed to disclose significant financial problems between the spring of 2001 and fall of 2002. According to the suit, shareholders were kept in the dark about, among other things, declining earnings, an increasing liquidity risk, growing problems in the company’s European operations, and the failure of a new billing system.

At the time, TXU’s stock plummeted from about $55 to below $11, and the dividend was shaved by about 80 percent. According to company executives, TXU will receive $66 million from several directors’ and officers’ liability insurance carriers, and they expect to recover more from other carriers. Executives also stressed that the remaining $84 million that it owes to the plaintiffs is less than the amount previously reserved for the settlement of litigation cases.

Company spokesman Chris Schein told Reuters that while the company denied any wrongdoing, “we settled this to put it behind us and move forward.”

Directors and officers “should hear a loud and clear message from this and other recent shareholder litigation: the days when corporate insiders could act with impunity are over,” Darren Robbins, an attorney for the plaintiffs and partner at Lerach Coughlin Stoia Geller Rudman & Robbins LLP told the news service.

Under the settlement, TXU agreed to replace two board members, create a lead independent director, and reconfigure the current board so 70 percent of its members qualify as independent directors. The company also agreed to create two new positions — chief governance officer and director of corporate governance — and new restrictions on insider trading.

The resolution also requires shareholder approval of executive stock option plans prior to implementation and lays out new policies relating to contracting, executive compensation, and auditing practices.