Duke Faces Class Action Lawsuit Over Post-Merger CEO Switch

by Trefis Team
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Duke Energy (NYSE:DUK) has faced stiff criticism over ouster of Progress CEO William Johnson after its merger with Progress Energy. This abrupt management change has stoked concerns about the company’s strategies differing or something else going on behind the scenes about which investors are unaware. According to the merger agreement, Progress Energy CEO William Johnson was slated to become Duke CEO post-merger, but just hours after the merger completion Duke’s pre-merger CEO James Rogers was elected for the position.

We are in the process of updating our analysis for Duke to account for the Progress acquisition and reverse stock split.

See our complete analysis for Duke Energy here

A class action lawsuit has been filed against Duke Energy in the United States District Court for the Eastern District of North Carolina. [1] The charges include failing to disclose that Rogers would act as the CEO of the combined company and misleading North Carolina Utilities Commision (NCUC) and others regulatory bodies to gain approval of the merger. The pre-merger announcement of ouster of Mr. Johnson would have costed Duke $675 million as termination fee, but since the decision came post merger it costed just around $50 million in severance pay.

There are four ways Duke’s stock could get impacted by the lawsuit. One is Duke might finally settle the litigation with a sizable sum of money, which will hamper its cash position. Second is Duke could face troubles when new tariffs in North Carolina are scheduled to be instituted later in the year as it has already ruined its credibility with NCUC. This will impact Revenue per MWh Duke charges for its franchised electricity and gas business.

Third impact relates to the leadership styles of Mr. Johnson and Mr. Rogers. Johnson is more authoritative as a leader, evidenced by Progress’s Crystal River nuclear plant closure in Florida, which could have been important as the scale of the company has enlarged significantly. Many say that Johnson is a loss for Duke and its investors, but Directors of the company happened to have voted against him and there would have been considerable conflict in decision making had he stayed in the management.

Last and the most important impact relates to the involvement of the company’s top managers in regulatory hassles. The important officials of the company will be stuck in the legal and regulatory troubles emanating from the merger in the near future. This will delay proceedings towards combining the two companies, which would have resulted in cost benefits.

We expect Duke to immensely benefit from the scale it has attained after the merger, but regulatory troubles could affect the normal business activities causing the stock to suffer in the near term.

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Notes:
  1. Shareholder Class Action Filed Against Duke Energy Corporation By The Law Firm Of Kessler Topaz Meltzer & Check, LLP, prnewswire.com, July 24, 2012 []
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