What role did Harold Hamm play in the growth of Continental Resources, and how much of the enhanced value of the company can be attributed to external factors?
The divorce case of Hamm v. Hamm was referred to by media commentators as the “King Kong” of all divorce cases. It’s a story that has been well-documented and chronicled in literally hundreds of media articles. The main issue of this divorce case was the enhancement in value of Continental Resources, Inc., which grew from approximately $10 million in 1988 (when the parties were married) to a company with a market cap of approximately $28 billion on the first day of trial (August 4, 2014). The Hamm interest of 68% was worth $19 to $20 billion at that time.
Oklahoma courts recognize that if either spouse’s skill, efforts, labor, or funds result in the enhancement in value of separate property during marriage, then the enhanced value of that property is subject to division in dissolution of marriage proceedings. The foundation of Oklahoma law relating to the issue of the non-owning spouse’s interest in the other’s separate property is established in the much cited Oklahoma Supreme Court opinion in Thielenhaus v. Thielenhaus, 1995 OK 5, 890 P.2d 925. Thielenhaus held that when a spouse brings his or her separate property to a marriage, any increase in value occurring during the marriage is subject to property division in a divorce proceeding, if the appreciation is shown to be the result of the efforts, skill, or funds of either spouse. The growth in value is considered marital property and is subject to equitable division by the Court. 890 P.2d at 931. The burden of showing that the appreciation in value is marital property lies upon the non-owning spouse. Id.
From 1988 to the fall of 2005, Harold G. Hamm was sole or majority shareholder, president, CEO, and Chairman of the Board of Continental Resources, Inc.; all the ultimate power positions of the company were concentrated in him. Today, he continues to hold all these positions except that of president.
His ex-wife, Sue Ann Hamm (who has since reverted to her maiden name, Arnall), claimed that the lion’s share of the enhancement of value of Continental’s stock since 1988 was attributable to the “skills, efforts, or funds” of Harold Hamm – which made the enhanced value marital property. She argued that he was the driving force behind a number of strategic decisions that positioned Continental for its success: such as the shift from natural gas to a heavy emphasis on crude oil, the emphasis on exploring the Williston Basin and the Bakken formation, and the decision to go public at a time when the results from the Bakken play were still undecided. Arnall also presented evidence of Hamm’s hands-on management style that pervades the company’s history. Hamm, however, argued that he had relatively little to do as a personal influence on the enhancement of Continental’s value. Rather, he assigned the cause of the incredible growth to external forces such as the rise in the price of oil and the availability of new technology.
There is a dearth of published case law in Oklahoma discussing the effect of an owning spouse’s role in the success of a separately-owned business. However, Arnall’s attorneys cited a number of cases from other equitable-division jurisdictions to support her argument that a substantial portion of the growth of Continental since 1988 should be attributed to Harold Hamm’s efforts, skills, and/or funds during that period.
Enhancing the Value
Here is a brief discussion of the key cases regarding enhancing the value of a separately-owned company.
Innerbichler v. Innerbichler
In Innerbichler v. Innerbichler, 752 A.2d 291 (Md.App.2000), the husband co-founded a “fledgling” business over a year before the parties’ marriage. He owned 51% and his co-founder owned 49%. He submitted an application for “8(a) certification” from the U.S. Small Business Administration. At the time of marriage, the company still operated from the co-founder’s kitchen and did not have a separate place of business until several months after the marriage. The 8(a) certification was received in April 1984 and the company began growing rapidly thereafter. In 1996 the company earned $47 million in revenues, followed by $51 million in 1997. The parties were granted a divorce in 1998. A major issue was how to treat the corporate stock for purposes of division.
The husband argued that the stock was non-marital. He argued that events prior to the marriage had laid the groundwork for the after-marriage appreciation; that he was not solely responsible for the company’s success; and that there were many external factors that led to the increase in value, such as the 8(a) status and the dramatic increase in defense spending during the Reagan Administration. He maintained that his was just “a classic case of being in the right place at the right time.”(752 A.2d at 304.) On the other hand, substantial evidence pointed toward the husband as the “architect” of the company’s success. He was always president and CEO, and his co-founder reported to him. Corporate documents, testimony at trial, and the husband’s testimony before a committee of Congress all verified that he was in control of the company’s day-to-day affairs and had authority of final approval on all matters concerning the operations of the company. He admitted that he was the company’s “quarterback” and that he had done a “good job of listening to my people and taking that company where it should have gone.” (752 A.2d at 297-298.)
It was held that his 51% share of the company’s increase in value was marital: “… we are satisfied that the record clearly supports the court’s decision to treat all of TAMSCO’s appreciation as marital; TAMSCO’s value soared after the marriage, while the husband was at the helm and shepherded TAMSCO’s growth. Despite the husband’s assertion that the corporate success resulted from the efforts of others and from a variety of factors not related to his skills, such as “the expanding defense industry during the Reagan administration …,” the court, as fact-finder, was not compelled to accept the appellant’s version of events.” (752 A.2d at 307.)
Schorer v. Schorer
In Schorer v. Schorer, 501 N.W.2d 916, 923 (Wis.App.1993), the husband owned 448 shares of stock in a family business that he inherited from his father. Under the husband’s leadership, the business appreciated in value during the marriage. The trial court held that the husband was the “decision maker” and the person at whom the “buck stopped,” and considered the entire value of the 448 shares to be marital. The appellate court affirmed: “The record substantiates that William was the chief executive and manager of the company and was a hands-on owner. He testified that during the course of the marriage he worked long, hard hours, sometimes six or seven days a week, building the business from a tiny operation into a multimillion-dollar company. Indeed, he acknowledged on cross-examination that the value of the business, built up over the years of his marriage to Deborah, was due to his own hard work and the hard work of his employees, and that he was the one principally responsible for the success of the companies. On this record, we see no error in the court’s inclusion of the stock in the marital estate.” (501 N.W.2d at 922)[emphasis added].
Parry v. Parry
In Parry v. Parry, 933 So.2d 9 (Fla.App.2006), the husband was executive vice president and general counsel of a publicly traded Fortune 500 corporation. One issue was whether the increase in appreciation of certain stock the husband had been issued was due to market forces. The court said: “… Ingrid argues that the evidence showed appreciation due to market forces, not Tim’s efforts. However, Tim presented the testimony of a financial expert with impressive credentials in accounting, public service, the business world, and specifically the health-care field. The expert testified that the appreciation in value of HMA’s stock was not passive but rather was due in part to Tim’s work as a senior officer of the company. (933 So.2d at 15.) See also Lynn Curtis, Valuation of Stock Options in Dividing Marital Property Upon Dissolution, 15 J. Am. Acad. Matrim. Law. 411, 412 (noting that: “These high level executives have a direct bearing on the success of the company, so in a very real sense, the increased value of the company’s stock is directly attributable to their efforts”).
Mayhew v. Mayhew
In Mayhew v. Mayhew, 519 S.E.2d 188, 193 (W.Va.1999), the husband worked at the business every day from early morning to 7:00 or 8:00 p.m., and on Saturday until midafternoon. He ate dinner at the company. He and the wife participated in social and civil activities on weekends so as to become more visible in the community and thus increase sales. For the first two years, he allowed the company to retain his salary. Under these circumstances, it was held to be error for the trial court not to have ruled that “the extraordinary time and effort spent at the corporation by Mr. Mayhew” caused active appreciation.
Berrie v. Berrie
Similarly, in Berrie v. Berrie, 600 A.2d 512 (N.J.Super.1991), the appellate court reversed a trial court’s determination that the increase in the husband’s business was passive. The company, which had originally been founded by the husband, went public the year after the parties’ marriage. The husband, however, had retained a block of shares that kept him as the controlling shareholder. He was the CEO and had stated publicly that he controlled the company. Likewise, the documents filed with the SEC stated that the husband could elect all directors, amend the certificate of incorporation, and approve a merger or similar corporate transactions. He made the decisions as to corporate dividends. He also received by far the highest salary in the company. In its decision, the appellate court rejected the husband’s argument that the enhancement of the stock value was passive, much like a managed portfolio: “Defendant further suggests that in no case can one person’s effort be determinative of the value of a public corporation. We reject this thesis. There is no question that a single person’s effort can influence the growth and success of a sole proprietorship, joint venture, partnership or a close corporation. As the organization grows, however, the question becomes more one of fact, depending upon how closely the individual is identified with the business entity.” (600 A.2d at 516.)
External Market Forces
In marital dissolution cases involving a separately-owned business, the owner-spouse will often argue that external factors such as “market forces” are the cause of the business’ enhanced value. Hamm argued that he merely experienced the good fortune of increases in the price of oil. Arnall argued the case law in other jurisdictions that take the position that the existence of external forces will not preclude the owning spouse’s management from being the cause of the business’ growth where the spouse’s efforts have positioned the company to prosper in good times or survive in bad times.
Middendorf v. Middendorf
In Middendorf v. Middendorf (696 N.E.2d 575 – Ohio 1998), the trial court divided the increase in value of the husband’s one-half interest in a stockyard. On appeal, the Ohio Supreme Court affirmed, rejecting the husband’s argument that the increase was passive: “Passive forces such as market conditions may influence the profitability of a business. However, it is the employees and their labor input that make a company productive. In today’s business environment, executives and managers figure heavily in the success or failure of a company, and in the attendant risks (e.g., termination, demotion) and rewards (e.g., bonuses, stock options) that go with the respective position. These individuals are the persons responsible for making pivotal decisions that result in the success or failure of the company. There is no reason that these factors should not likewise be relevant in determining a spouse’s input into the success of a business. (696 N.E.2d at 579.)
Nardini v. Nardini
In Nardini v. Nardini, (414 N.W.2d 184 – Minn. 1987), the business in question was a fire-suppression company that was worth several hundred thousand dollars at the time of the divorce. Nearly all the company’s worth was held to be marital: “Although the parties cast their differences in terms of the extent to which the efforts of each enhanced the value of the business, there is no dispute that the present value of the stock of Nardini of Minnesota is attributable to the efforts of the marital partners over the course of more than 30 years of marriage. Certainly, the business did not prosper of its own accord… Given the nature of the assets of the business in 1949 and of the corporate assets today, the increase in the value of the business cannot be reasonably attributed to market conditions. There can be little doubt that more than 35 years of essentially prosperous and mildly inflationary economic conditions provided a favorable climate in which a budding business could grow and flower. But a business, like a garden, must be tended if it is to flourish…[W]ere it not for the personal efforts contributed by the spouses, the investment would have withered and died…”
Harold Hamm’s Role in Continental’s Growth
Arnall argued that the presence of external market forces (such as commodity prices or the existence of new technology) did not prevent Hamm from being credited with Continental’s growth because it was attributable to his guidance, management, and decision-making in positioning the company to take advantage of such external forces. “The mere presence of favorable economic conditions…does not guarantee a finding that the appreciation is passive…” (1 Turner, Equitable Distribution of Property, §5:22.) Arnall argued that a very substantial proportion of Continental Resources’ enhancement in value since 1988 was attributable to Hamm.
Hamm played a pivotal role in making the strategic decisions that brought Continental to where it is today – such as the decisions to focus on crude oil, to employ newer technology, to explore the north central portion of the United States (particularly the Bakken), to acquire a commanding position in leasehold ownership in those areas, and to go public at a time when its success was not assured.
At the trial, Arnall argued that Hamm took substantial economic risks during the history of the company, including personally borrowing funds and guaranteeing corporate loans. While it was true that economic factors in recent years were favorable to Continental’s growth, the key decisions either directly made by or championed by Harold Hamm gave Continental the ability to take exceptional advantage of those favorable conditions, as was reflected in Continental’s performance substantially above that of its peer group companies. Furthermore, although Continental benefited from a talented group of upper-management personnel, the role of Harold Hamm in selecting and leading such personnel entitles him to a large amount of the credit for his management team’s performance.
Robert Bartz oversees the litigation division of the law firm of Barber & Bartz, counsel of record for Sue Ann Arnall. His practice focuses on complex commercial litigation and handling domestic matters involving high-net-worth marital estates. Mr. Bartz has a Martindale-Hubbell AV preeminent rating, and he is a Fellow in the Litigation Counsel of America. http://www.barberbartz.com