Air Date: Week of June 11, 2010

Host Jeff Young talks with UC Berkeley corporate law expert Eric Talley about some of BP's options: merger, acquisition, asset sell-off, and how those moves change the chances that those affected by the oil disaster will be compensated.

Transcript

YOUNG: BP stock has lost almost half its value since the Gulf disaster started. And financial pages carry speculation that a weakened BP might be bought out or even go under. We asked Eric Talley what that might mean for those seeking compensation for damages from BP’s spill. Professor Talley co-directs the Berkeley Center for Law, Business and the Economy at UC Berkeley. Welcome to the program!

TALLEY: I’m happy to be here.

YOUNG: Now Professor Talley, I’m looking over this list of BP’s corporate structure. This is not a simple organization. What do we have going on here?

TALLEY: Well the first thing to realize is that BP is no different than just about any other major petroleum company in that it segments itself into a number of different, both holding companies and operating companies. And, in fact if you go through its list I think it’s almost 8 pages of subsidiaries, all wholly owned, ultimately, by BP, the parent corporation, but all formally separate legal entities. And there are over 250 of them.

YOUNG: How easy is it for a company to say, “Oh no, it was this subsidiary of us that caused the problem, or that should go to court.”

TALLEY: This is the most litigated area in corporate law and there’s almost always a liability fight after one of these episodes in which the parent company is saying, “Well it wasn’t us, it was a great-grandchild subsidiary that was the operating entity.” Plaintiffs attorneys are going to have to demonstrate that the way that BP ran its subsidiaries tended to do things like, you know, borrow and lend cash to each other without documenting them, sort of, take dominion over each others property without recognizing that the formal ownership was with the other side.
In addition, sometimes these cases, the ones that are successful, are successful because the parent company has been a little bit sloppy in making sure there was paper trail of distinguishing features between the parent company and the subsidiary.

YOUNG: What if BP goes the route of trying to sell off, cut itself up and sell off its assets. Would that reduce its liability in any way?

TALLEY: The first thing BP is going to have to watch out for, or the subsidiary that’s selling the assets, is something known as fraudulent conveyance law. That basically says, if you owe a bunch of people money and you conduct a fire sale and get rid of your assets at very, very cheap prices to other parties, the people who are your creditors right now can claw back those assets.
Particularly you could sort of see a situation possibly where BP decides, well maybe one of our subsidiaries is going to sell assets, and they’re going to sell it to another subsidiary. On some level the assets are kept within the corporate family but the price may not necessarily reflect fair market values. Another issue could be, even if they sold assets to a third party, those transactions could also be scrutinized as, so-called, fraudulent sales, or fraudulent conveyances, if the price does not seem to be commensurate with fair market value.

YOUNG: You know we’re reading, I think the phrase that I read was, companies “licking their chops” at the possibility that a down-graded BP might be bought up on the cheap by Chevron or Exxon Mobil. What happens in that case of a big merger, if one of the other big oil companies comes in and gobbles up BP? Does that affect the people who are chasing BP to get payments for this spill?

TALLEY: It depends how the acquisition is structured. If it’s a conventional acquisition, then the purchaser of BP would also inherit BP’s liabilities and therefore they’re going to have to be very careful about it. You know a purchaser of BP is going to be very worried about some of these liabilities.
That uncertainty itself is going to take a number of months, if not years, to unravel. And that may end up sort of putting the kibosh on potential purchasers interested in moving today on BP. Maybe they’re licking their chops, but they’re going to wait a few months or years for their dinner.

YOUNG: From your perspective, looking at all of this, do you see major flaws in our system that Congress should be addressing in order to make it more possible for people to get compensation?

TALLEY: There are a couple of large federal acts, in particular something called the Oil Pollution Act of 1990 that places a pretty small, pretty modest by BP’s size standards, a cap on their liability to indirect or secondary claims.
They’re responsible for the clean up, there’s no doubt about it, but it limits them to $75 million in damages to things like business losses. Now that’s pocket change in the overall corporate structure of BP. And, the musings in Congress have been to try to push that cap up into the billions or tens of billions of dollars.
And so that can matter, and that’s real money and it’s probably worth fighting over from both sides’ perspectives.

YOUNG: Eric Talley teaches corporate law at UC Berkeley’s Boat Law School where he co- directs the Center for Law, Business and the Economy. Thank you very much.

TALLEY: Thanks for having me.