August 01, 2019

MONTH-IN-BRIEF: Mergers & Acquisitions

Ryan Thomas, Chauncey Lane

Mergers & Acquisitions Law

Stockholder of a Delaware Company Granted Standing to Sue for Breach Anti-Takeover Protections

By George Khoukaz

In Arkansas Teacher Retirement System v. Alon USA Energy, Inc., et al., the Delaware Court of Chancery (the “Court”)” held that a stockholder of a Delaware corporation has standing to sue for breach of a stockholder agreement between the company and a separate stockholder.

In 2015, Delek US Holdings, Inc. (“Delek”), acquired 48% of the common stock of Alon USA Energy, Inc. (“Alon”).  Following Delek’s acquisition of 48% of Alon’s stock, Delek made it known to Alon’s board that it would like to acquire the remaining stock in the company and requested that Alon’s board approve such transaction (thereby eliminating the three year waiting period of Section 203 of the Delaware General Corporate Law (the “Act’). Section 203 of the Act prohibits a target company from entering into a business combination with an acquiring company for a minimum of three years following the date on which the acquiring company first obtains 15% or more of the target company’s stock, unless the target company’s board pre-approves the transaction. Alon’s board approved the sale of Alon’s remaining stock; however, the board conditioned its approval upon the parties entering into a stockholders agreement, which, among other things, established anti-takeover protections for a period of one year. Following their entrance into the stockholders agreement, Delek and Alon breached its terms and Delek went on to acquire the entirety of Alon’s stock in 2017.  

A stockholder of Alon at the time of the acquisition brought a claim against the two companies, claiming that the breach of the stockholder agreement by the parties revived the stockholder’s rights under Section 203 of the Act and therefore, the acquisition should have never been allowed to take place. The Court granted the stockholder standing to sue on this issue, as a third party beneficiary of the stockholders agreement, reasoning that because the stockholders agreement served to limit the stockholder’s statutory rights, once this agreement is no longer in place, Section 203 of the Act and the protections it provides are reasserted.

Contract Wording Costs Sears Buyer Additional $166M

By Ericka Simpson Conner

On January 17, 2019, ESL Investments, Inc. (“ESL”) was selected as the winning bidder for the assets of Sears Holding Corp. (“Sears”) in the bankruptcy auction for Sears’ assets. ESL, owned by former Sears CEO Edward Lampert, and Sears agreed to a purchase price of $5.2 billion for the assets. The acquisition was completed on February 11, 2019, but things quickly turned sour when Sears accused ESL of, among other things, refusing to assume certain of Sears’ liabilities as part of the transaction.

On July 11, 2019, U.S. Bankruptcy Judge Robert Drain listened to arguments from Sears and ESL regarding the assumption of liability provision in the purchase agreement. The purchase agreement states that ESL will assume $166 million in “other payables and all payment obligations with respect to ordered inventory.” Sears argued that “other payables” and “ordered inventory” were separate liabilities and therefore created two separate obligations for ESL (meaning two $166 million dollar payments, one for “other payables” and one for “ordered inventory”).  ESL argued that it would have made no business sense for ESL to assume the additional liabilities, and that the phrase “other payables and all payment obligations with respect to ordered inventory” only refers to a single liability.  Judge Drain, agreed with Sears, concluding that the liabilities are indeed separate and require ESL to pay an addition $166 million to Sears. The Court found significant that the purchase agreement contains separate definitions for the terms “other payables” and “ordered inventory.”

Callon and Carrizo Structure Merger with Eye Towards Avoiding Income Tax Liability

By David Marshburn

On July 15, 2019, Callon Petroleum Company (“Callon”) and Carrizo Oil & Gas, Inc. (“Carrizo”), each an oil and gas company headquartered in Houston, Texas, announced their entry into a definitive agreement of merger valued at approximately $3.2 billion, with a structure aimed at reducing the income tax liability for Carrizo’s shareholders. The deal, which features an all-stock transaction by which Carrizo’s shareholders will receive 2.05 shares of Callon stock for each share of Carrizo common stock, will ultimately result in Callon’s shareholders owning approximately 54% of the combined entity and Carrizo’s shareholders owning the remaining 46%.

Despite the transaction being styled as a merger, Callon disclosed in its Form 8-K filed with the Securities and Exchange Commission that the parties intend the transaction to qualify as a “reorganization” for federal income tax purposes, as used within the meaning of the relevant provisions of the Internal Revenue Code (the “Code”). Under Section 368(a) of the Code, shareholders of a target company may avoid immediate income tax liability if the transaction qualifies as a reorganization. To ensure the deal receives this intended tax treatment, the parties have conditioned the merger’s closing on the delivery of opinion letters from Carrizo and Callon’s legal counsel to the effect that the merger qualifies as a reorganization under Section 368(a) of the Code. If the merger receives shareholder and regulatory approvals, the parties expect the deal to close during the fourth quarter of 2019.

NRC Group Holdings will Proceed with US Ecology Merger over Shareholders’ Objections

By David Marshburn

NRC Group Holdings Corp., a waste management company (“NRCG”), announced its intent to proceed with a definitive merger agreement with US Ecology, Inc. (“US Ecology”) despite concerns raised by several of NRCG’s shareholders, according to a filing with the Securities and Exchange Commission (the “SEC”) on July 10, 2019. The all-stock transaction, which was originally announced on June 24, 2019, is valued at $966 million and provides that US Ecology will form a new holding company that will own both US Ecology and NRCG. The combined company will use the US Ecology name, with 70% of the new entity being owned by US Ecology shareholders and the remaining 30% owned by NRCG shareholders. Notably, the terms of the agreement provide for the automatic conversion of shares of NRCG’s 7.00% Series A Convertible Cumulative Preferred Stock (the “Preferred Shares”) into shares of common stock in the new holding company.

In a letter accompanying a Schedule 13D filed with the SEC dated July 2, 2019, two shareholders owning a majority of the Preferred Shares objected to the merger agreement, arguing that the terms governing the conversion of the Preferred Shares violates their certificates of designation, as well as Delaware law. Specifically, the shareholders argue that the merger agreement violates Section 242(b)(2) of the Delaware General Corporation Law because NRCG intends to proceed with the merger without a vote regarding the Preferred Shares. Despite the shareholders’ concerns, NRCG maintains that the conversion of the Preferred Shares, as provided in the terms of the merger agreement, complies with Delaware law. With approval secured from the board of directors of both NRCG and US Ecology, the parties expect the deal to close in late 2019, pending approval by NRCG’s and US Ecology’s respective shareholders.

Nebraska Federal Judge Approves $1.95 Million Settlement for Investors of Transgenomic

By Marisa Mariencheck & Lora Wuerdeman

On July 10, 2019, a Nebraska federal judge preliminarily approved a $1.95 million settlement in favor of the certified class of shareholders of Transgenomic, Inc. after the Eighth Circuit panel revived a proposed investor class action suit alleging that Transgenomic, Inc., a biotech company (“Transgenomic”), excluded important information from pre-merger documents. Jesse Campbell, a Transgenomic shareholder, filed a class action lawsuit against former officers and directors of Transgenomic after Transgenomic announced a merger with Precipio, Inc., a cancer diagnostics company (“Precipio”). Campbell argued that Transgenomic omitted material information from its proxy statement in violation of the Exchange Act, which made Transgenomic’s filing misleading because it failed to include projections about Precipio’s net income and loss in its proxy statement filed with the U.S. Securities and Exchange Commission ahead of the merger.

U.S. District Judge, John Gerrard, initially dismissed Campbell’s claims because the omitted information did not affect the accuracy of Transgenomic’s proxy statements; however, the Eighth Circuit panel ruled that the district court analyzed the issue incorrectly, and concluded that the omitted financial figures were significant because they would have “significantly altered the total mix of information made available.” Projections about net income and loss are not immaterial because their exclusion from the proxy statements could have made Precipio appear more attractive than it was.

Florida Judge Approves $6 Million Settlement for Alleged Covert Merger

By Allison McNamara & Chris Johnson

On July 9, 2019, Florida US District Judge, Federico A. Moreno, granted a preliminary approval of a $6 million proposed settlement for a proposed class action suit against two former executives of Linkwell Corporation (“Linkwell”), a supplier of aftermarket crusher wear parts, and its counsel.

The controversy behind the suit began in 2012, when Frederick Siegmund (“Plaintiff”) filed a stockholder derivative suit accusing Linkwell executives of breaching their fiduciary duties. The proposed class action, filed in 2016, alleged that Linkwell conspired with its counsel to take the company private, resulting in a freeze-out merger, thereby depriving Plaintiff of his shares and his standing to sue. The Linkwell board approved the merger in August 2014, but the proposed class action alleged that Linkwell did not provide its stockholders with proper notice and details of the approval vote. Plaintiff maintained that his shares were ultimately canceled in November of 2014 for a “grossly inadequate price” of $0.88 per share.

A final fairness hearing will be held on November 19, 2019, and the expected $6 million payout is estimated to pay $29.93 per share to the class members before deducting attorney fees.

Ryan Thomas

Counsel, Bass Berry & Sims PLC

As mergers and acquisitions (M&A) and securities counsel to numerous national companies and private equity firms, Ryan Thomas has closed more than $50 billion in M&A transactions, and more than $60 billion in overall transactions, including both the largest domestic LBO, and the largest private equity-backed IPO at the time. Ryan’s practice focuses on public and private companies within the healthcare, media, retail, government services, life sciences and technology industries, among others.

Chauncey Lane

Counsel; Husch Blackwell, LLP

Boards and senior executives of public and private companies and investment management firms call on Chauncey for his knowledge and experience in mergers and acquisitions and capital market transactions. In this role, Chauncey regularly assists domestic and international clients with buy-side and sell-side mergers, divestitures, asset acquisitions, going-private transactions, debt and equity offerings, corporate governance and corporate restructurings. Chauncey is an active member of the Business Law Section’s Mergers and Acquisitions Committee and Federal Regulation of Securities Committee.