Public Interest Briefs

Agreement Reached in Shareholders’ Suit Against Phillips Petroleum Company

Settlement Will Bring Major Reforms

In April, Federal District Court Judge E. Avery Crary approved the landmark settlement of the Center’s shareholders’ class action derivative suit (Gilbar v. Keeler) against the Phillips Petroleum Company, concluding the second successful action by the Center against a corporation charged with making illegal campaign contributions. In 1975, a similar settlement had been reached with the Northrop Corporation.

In announcing the settlement of the suit, The New York Times reported that “business observers said that [the] settlement could have a significant impact in terms of compelling companies to act in a more forthright manner about their political involvements.”

The final settlement provides for a comprehensive set of reforms contained in new bylaw amendments. Foremost is the restructuring of the Phillips Board of Directors, including the appointment of six new outside directors and the establishment of powerful new audit and nominating committees whose membership will be made up exclusively of outside directors. Various other new reforms are designed to prevent the recurrence of the conduct that gave rise to litigation.

In December, 1973, in the course of Watergate investigations, Phillips Petroleum and the Company’s then chief executive officer, W.W. Keeler was found guilty of making a single illegal $100,000 contribution to the Finance Committee for the Re-Election of the President. A special investigation launched after this disclosure revealed that over the course of the ten-year period prior to 1974, Phillips had illegally contributed to numerous senatorial, congressional and presidential campaigns, in violation of federal law.

The contributions, totaling $585,000, had been made from a secret cash fund funneled through “dummy” Swiss corporations to conceal the illegal purposes for which the funds were to be used. They were brought back in cash by corporation’s officers, concealed in a Company office, and disbursed to state and federal campaigns. In 1974, when the illegal contributions were uncovered, $764,000 was found in the fund.

The existence of the illegal contributions and the fund had been concealed from the shareholders. The Company had circulated false and misleading proxy materials during the ten-year period in connection with elections to the Board of Directors, constituting a violation of the directors’ and officers’ fiduciary obligations to the Company’s shareholders.

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