GE Escapes Merger Suit, but Baker Hughes Ex-CEO Must Face It

General Electric Co. didn’t help Baker Hughes Inc.'s board dupe shareholders into agreeing to its merger with GE’s oil and gas division in a deal worth $23 billion, but the oilfield giant’s former CEO must face claims that he concealed GE’s financials from investors, a Delaware Chancery Court judge ruled Tuesday.

Although “GE was motivated to strike the best deal it could,” the lawsuit “does not allege facts suggesting that GE was privy to the internal process of the Baker Hughes board or conspired with anyone who was,” Chancellor Andre G. Bouchard wrote. “Thus, GE was not in a position to taint the board’s internal deliberations.”

But the allegations against Baker Hughes ex-CEO Martin S. Craighead—"although not overwhelming"—are “sufficient” to tentatively show he failed to disclose certain financials that that would have been material to shareholders evaluating the merger, Bouchard said.

The 2017 deal combined GE’s oil and gas unit with Baker Hughes to form “Baker Hughes, a GE company,” with GE owning 62.5%. Former Baker Hughes investors got 37.5% of the new company and a $7.4 billion cash dividend. GE later shed its majority stake in the business, which renamed itself Baker Hughes Co.

Unaudited Financials

A consolidated proposed class action by two former Baker Hughes Inc. shareholders followed the merger. In addition to Craighead and GE, it originally targeted Baker Hughes’ board and former chief financial officer, Kimberly Ross.

The case concerned the unaudited GE financials—the best available at the time, because its oil and gas division wasn’t run as a separate business—that Baker Hughes originally relied on in agreeing to the transaction. The deal included protections giving Baker Hughes the right to terminate it, and get a fee, if there were major differences between those preliminary statements and the audited financials it eventually received.

The suit accused Baker Hughes’ board and leadership of failing to disclose those unaudited financials to investors, who then allegedly couldn’t evaluate the fairness of the merger or the wisdom of going through with it after getting the audited documents.

The plaintiffs eventually dropped their claims against the board, acknowledging that the company’s corporate certificate shielded its members from mismanagement claims and that they couldn’t show bad faith or conflicts of interest.

But even if the directors couldn’t be liable for simple negligence, GE could still be on the hook for aiding and abetting those breaches, the suit claimed. It also blamed Craighead and Ross for withholding the unaudited financials and manipulating the board into approving the merger, in which they stood to earn millions.

No ‘Tainted’ Decisionmaking

Dismissing the claims against GE, Bouchard said the suit was “devoid of any allegations suggesting that GE participated—knowingly or otherwise—in any of the alleged failures of the Baker Hughes board.”

The judge also let Ross out of the case, calling the allegations against her “exceedingly thin.” And he dismissed claims that Craighead “tainted the decisionmaking” of a “concededly indepednent” board.

But Craighead must face one count of failing to disclose the unaudited financials, the judge said.

The plaintiffs are represented by Labaton Sucharow LLP, Bernstein Litowitz Berger & Grossmann LLP, McCollom D’Emilio Smith Uebler LLC, and Hach Rose Schirripa & Cheverie LLP.

Craighead and the former CFO are represented by Potter Anderson & Corroon LLP and Paul Hastings LLP. GE was represented by McCarter & English LLP and Shearman & Sterling LLP.

The case is In re Baker Hughes Inc. Merger Litig., Del. Ch., No. 2019-0638, 10/27/20.