The World & Beyond

The writings of a global transient.

Month: February 2015

The Gamesmanship behind the famous $975 million check

If you don’t follow oil stocks you are probably at least familiar with social media images of the $974,709,317.77 check the majority owner of Continental Resources, Harold Hamm, wrote his now ex-wife, Sue Ann Arnal, after a lengthy divorce trial.

At first she refused to cash it but changed her mind a few days later. Underlying the decision is an interesting story of legal gamesmanship.


Fortunately for you the reader I was previously married to and later divorced from an Oklahoma City divorce lawyer.

The entire case is fascinating and through the documents publically available we get a look at Continental and the life of Mr. Hamm through numerous witnesses both inside and outside of Continental.

The focus of the trial was to determine what was a part of the marital estate and what Hamm and Arnal owned separately.  Assets that were not a part of the marital estate would go to whomever they belonged to while marital assets would be divided in a “fair and just” manner, which usually means 50-50.

The relevant Oklahoma Statute is 43 O.S. 121(b) which states:

“The court shall enter its decree confirming in each spouse the property owned by him or her before marriage and the undisposed of property acquired after marriage by him or her in his own right…. As to such property, whether real or personal, which has been acquired by the parties jointly during their marriage, whether the title thereto be in either or both of said parties, the court shall, subject to a valid antenuptial contract in writing, make such division between the parties as may appear just and reasonable, by a division of the property in kind, or by setting the same apart to one of the parties, and requiring the other thereof to be paid such sum as may be just and proper to effect a fair and just division thereof.”

In short:  Separate property is separate, marital property can either be split or it goes to one party he/she then has to pay the other party for half of the value.  We will see later that the judge decided that some of Hamms’ Continental Resources stock was separate property and some martial property, and that he had to pay Ms. Arnal half of the value of the stock that was marital property.

An important question becomes “What is separate property”?

From the judge, separate property may be one of six types:

A.  Property owned by a spouse prior to the marriage, which retained its separate status during the marriage because it was maintained as separate property.

B.  Gifts to one spouse from a third party during the marriage, and gifts from one spouse to the other during the marriage.

C.  Descents or devises to one spouse during the marriage, maintained as separate property;

D.  An exchange during the marriage of property, in which the owning spouse exchanges separate property for other separate property;

E.  The owning spouse’s purchase of other property with his/her separate funds during the marriage; and

F.  Compensation received by one spouse for personal injury

So where does Hamm’s Continental stock fit into this?

Hamm started the company that is now Continental Resources long before the marriage.


In Thilenhaus v. Thielenhaus, 1995 OK 5,8920 P.2d925,931 the Oklahoma Supreme Court held:

“Where as here a spouse brings separate property to the marriage, its increased or enhanced value, produced by investment managed by neither spouse or by appreciation, inflation, changing economic conditions, or circumstances beyond parties’ control, cannot be treated as a divisible marital asset unless, of course, there by proof that the increases resulted from efforts, skills, or funds of either spouse.  The non-owning spouse’s interest in the increase estate of the other, when established through efforts, skills or expended funds, stands confined to the enhanced value of that separate property.  The burden is on the upon the non-owning spouse to show that the enhancement is the result of either spouse’s endeavors.”

Thus we have the peculiar circumstance of Ms. Arnal having to prove that her husband was an excellent oilman who is the reason for Continental’s incredible rise in value since the marriage, and having to prove it, while Mr. Hamm (one of the world’s great oilmen) tries to show that really he didn’t have anything to do with the increase in value, but rather that it was due to the rise in oil prices, other executives, inflation, and advancements in technology.

In order to make her case Ms Arnal hired numerous expert witnesses including Dr. Kenneth Button, a former economist from the US Department of Commerce and the Treasury Department, Dr. Glenn Hubbard, currently Dean of the Business School at Columbia University and formerly Chief Economic Adviser to the President of the United States and author of the textbook Principles of Economics, Stephen Hurley, formerly president of Hunt Oil Company, Dr. Kenneth Lehn, former Chief Economist at the U.S. Securities Exchange Commission and currently a professor at the University of Pittsburgh, and Dr. Joseph Bower, a professor at Harvard Business School for 51 years.

In order to estimate which portion of the rise in value of Continental was likely due to active rather than passive forces, Mr. Button compared Continental to a peer group, going back to the date of marriage and that the outperformance of Continental versus the peer group reflects the value added by Mr. Hamm.

Hamm countered that Button’s approach did not account for the asset mix or capital structure of the differing companies. Namely, that Continental had a larger reserve base than the peer group and thus Continental’s price would have increased more than the peer group as the price of oil rose. The judge dismissed Button’s work, saying “Dr. Button’s analysis may show Continental stock to be a good investment, but it does not address of quantify the skills or efforts of either party in this case, that resulted in the increased value of Continental during the marriage.”

Dr. Lehn took a different approach. He determined how much Hamm’s money would have been worth had he sold all of his Continental stock during the marriage and invested the proceeds in any one of three other types of investments represented by various stock, bond, real estate, and commodity indexes and/or a mixture thereof. All outperformance of Continental over those indexes he attributed to Mr. Hamm as the controlling shareholder. Lehn asserts that all employees were paid the value of their services and that therefore there is no additional value to be attributed to their contribution. If an employee was worth more than his pay package he would leave for employment elsewhere.

The judge dismissed this argument by pointing out that Continental employees are paid a competitive salary in the industry and that employees are precisely paid to create value for a company.

Dr. Lehn did also not consider the composition of assets owned by Continental at the time of the marriage.

Dr. Glenn Hubbard compared Continental’s performance to three specific groups (court documents do not say what these groups were) and that Continental outperformed all three. As the controlling shareholder all strategic decisions were Hamm’s, and thus all outperformance of Continental can be attributed to him. The Judge, however, dismissed this claim (as he did with Lehn’s) by noting that the trial evidence demonstrated that a number of employees contributed to or were credited for key strategic decisions at Continental.

Mr. Hurley concluded that Continental’s growth was due to Hamm’s “unique and extraordinary leadership skills” and that Hamm deserved all of the credit as “Captain of the ship”. His approach was less analytical than the others and only broke out reserves as “marital” or “non-marital” which the judge dismissed as ignoring the legal distinction between Continental as a corporation and Hamm as a shareholder.

The judge summed up Dr. Bower’s testimony as “Respondent has been remarkable and therefore all increase in Continental’s value should be attributable to the Respondent (Hamm)”.

continental resources logo

Testifying on Hamm’s behalf, Devon Energy Chairman Larry Nichols testified that advancements in technology created an “Energy Renaissance” allowing drilling where companies were never able to before.

Energy investment banker Thomas Petrie testified that neither Hamm nor Continental had control over the technological breakthroughs that led to the energy boom in the United States.

At the end of the day, the judge largely agreed with Hamm in a decision Arnal’s lawyers describe a “shocking”.

Per the Memorandum Order With Findings of Fact and Conclusions of Law:

“Respondent (Hamm) owned Continental Stock on the date of the marriage.  The Value of Respondents Continental stock he owned on the date of marriage has become enhanced during the marriage.  This stock contains both separate and marital property character.  The value of the stock must be apportioned before the marital portion can be isolated and then divided between the parties.  Based upon the evidence presented at trial, the enhanced apportioned value of the Continental Stock which resulted from efforts, skills, or expended funds of either spouse, the marital portion of 122,010,608 shares of Continental Stock, is the sum of $1,398,43,783 which is awarded to Respondent. The remaining value of these shares is awarded to Respondent as his separate property.

That is, only 1.4 billion out of as much as $17 billion of Continental stock was deemed to be marital property, of which Arnal was entitled to half of the value.
Including everything (not just Continental stock) the judge awarded marital assets to Ms. Arnal of $25,066,031 and assets to Hamm of 2,016,029,715.  With 1,990,963,684 more awarded to Hamm than to Arnal, Hamm owed her $995,481,842, however he has already paid her 22,750,000, leaving a balance of $972,731,842.  Hamm was ordered to pay 322,731,842 by December 31, 2014, and then $7 million per month thereafter, with the balance accruing at the statutory 5.25% interest.
Arnal launched an appeal on December 5th 2014 over a number of issues that led to Only 2.04 billion of the total 20 billion of Hamm’s assets as part of the marital estate subject to division.

Meanwhile, she was strapped for cash having been awarded a number of non-income producing properties and had already expended millions of dollars on legal expenses and expert witnesses, with more expenses to come.

With the first installment coming due on 12/31/14, on 12/22 Arnal‘s lawyers filed a “motion to clarify” with the court. She wished to accept $266,201,692 of the money owed to her as payments for assets that were subject to her appeal and to do so without jeopardizing her right to appeal.

Under Oklahoma law if one party accepts the benefit of a judgment, he/she waives her right to appeal unless her appeal is limited to issues that the court could only result in a more favorable judgment to her with no risk of a less favorable judgment.

In spite of Hamm’s previous statements that the original divorce decree was “fair and equitable” Hamm responding by filing an appeal that included the marital property division that Arnal was not appealing.

This meant that even if Arnal was granted the right to accept the $266,201,692 without jeopardizing her right of appeal Hamm would now not have to pay her anything at all until his appeal was resolved.

Hamm then increased the pressure on Arnal by presenting her the famous check for the entire $975 million and releasing it to the press. He obtained the money by pledging a portion of his Continental stock as collateral. This put extreme pressure on Arnal to either take the full amount and risk losing her right of appeal or take nothing and not have the money to fund her appeal or her lifestyle.

So she deposited the check. Now, of course, Hamm is arguing that she has waived her right of appeal.
The judge has not ruled on this yet, but I will keep you updated.

Women are the future of the 3rd world

Based on my travels in Africa, Eastern Europe, and Central America I am a firm believer in the 3rd world development story and its positive implications for investors. I have been saying for some time, however, that it is primarily a female story. If you walk by a coffee shop outside a University in Nairobi or Panama City it is easy to see that the students are almost entirely female. Entry level jobs are almost entirely staffed by females as well. Walk into any pharmacy or cell phone store in Panama City, Tirana, or Nairobi and it will be staffed by females.

At my restaurant in Panama I have almost never seen three 28 or 30 year old local guys come in and buy a few drinks. It is all young women with jobs who go out once a week together and have a few margaritas- and they are not inviting their men with them.

People will debate the reasons for this (I imagine feminists would cite the availability of birth control) but for an investor the reasons don’t really matter. The fact is that women are taking charge of their lives and putting in the hard work to improve their position. The guys by and large are sitting around and drinking like they always have. This will certainly have implications as luxury brands expand into Africa and Central America. The mainstream media is finally starting to pick up on this with an ABC Article on the caribbean:

From the article:

Overall, women in the Caribbean and parts of Latin America make up the managerial ranks to a greater extent than in the developed world. Experts say the gain is due in part to improvements in the level of female education, but also because men have failed to keep pace and have in some cases gone backward.

So what exactly are the investment implications? Look towards female oriented luxury brands as opposed to the alcohol and tobacco companies, by and large.

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