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Delaware Court Preliminarily Enjoins Merger Because of Problematic Sales Process

Delaware Court Preliminarily Enjoins Merger Because of Problematic Sales Process

On November 24, 2014, the Delaware Court of Chancery preliminarily enjoined for four weeks a election by C&J Energy Services stockholders on the merger with Nabors Red Lion Limited, to permit here we are at C&J’s board of company directors to understand more about alternative transactions. Inside a bench ruling within the situation, Town of Miami General Employees’ & Sanitation Employees’ Retirement Trust v. C&J Energy Services, Corporation., Vice Chancellor Noble figured that “it’s not so obvious the [C&J] board contacted this transaction like a purchase,” using the attendant “engagement that certain would expect from the board within the sales process.” Interestingly, a legal court known as the problem a “very close call,” and indicated it might approve the issue towards the Delaware Top Court in the request of either from the parties (at the moment it doesn’t appear either party makes a request). The choice provides guidance regarding appropriate board decision-making in merger transactions, particularly where one merger party is presuming minority status within the combined entity yet also obtaining management and board control.

Background

C&J and Nabors be employed in the oilfield completion and production services business. The concept for any merger came about after Citibank bankers contacted the CEOs of both companies to point out a transaction. The C&J-Nabors merger agreement, that was announced in June 2014, deliver to the development of the new company in Bermuda (“New C&J”), which may issue stock towards the stockholders of both companies as well as pay cash shown to Nabors stockholders.

Pursuant towards the merger agreement, each share of C&J common stock would become the authority to receive one share of recent C&J stock and all sorts of shares of Nabors would become the authority to receive aggregate thought on roughly 62.5 million shares of recent C&J stock and roughly $940 million in cash. Following a closing from the transaction, former Nabors stockholders would own roughly 53% from the outstanding New C&J shares, with existing C&J stockholders owning roughly 47% from the combined company. Additionally, C&J’s management would lead the merged company.

The agreement also so long as four people of C&J’s board could be hired to and comprise a lot of the new entity’s board with guaranteed five-year terms, even though the identity from the non-management company directors who’d join the merged company’s board wasn’t made the decision upon at that time the agreement was signed. A Legal Court also discovered that C&J’s publish-merger minority status was driven by tax factors, using the transaction structured being an inversion and also the combined company registered in Bermuda.

On November 24, a legal court granted a 30-day preliminary injunction allowing the C&J board to understand more about other options to a Nabors transaction. A Legal Court accomplished it mainly because in “approving the transaction, the board didn’t consider alternative transactions. The board didn’t look for other potential customers. The board’s overview of the merger process was more similar to what you might expect from the board going after an acquisition instead of one selling a business.Inch

Takeaways

  • Company directors Have Obligations When Selling Stockholder Control No matter Management or Board Charge of the Combined Entity. A Legal Court found, essentially, that selling control triggers a particular degree of board engagement no matter other factors. A Legal Court observed the C&J’s shareholders’ minority status might have been driven by potential tax savings connected by having an inversion, C&J internally viewed the transaction being an acquisition and never a purchase, and C&J would retain management and board control publish-closing. Ultimately, however, C&J shareholders were exchanging 100% possession of C&J for 47% control within the publish-merger entity. No other factors noted above altered the truth that C&J shareholders “technically will no longer have collective control.” Likewise, the truth that C&J shareholders are adequately informed and may election around the deal didn’t suffice because, based on the Court, they’re “titled to possess a sales process run when their clients are being offered.”
  • Company directors Possess A Particularly Compelling Obligation To Know A Merger Partner’s Business And Personal Finances in one-Buyer Stock Transaction. A Legal Court made obvious it had become “not suggesting any sort of steps the board required to take.” Nevertheless, C&J didn’t participate in any market check just before saying yes to merge with Nabors, and also the Court thought it was “imperative” for the reason that situation the “board have impeccable understanding of the need for the organization that it’s selling.” Here, despite the fact that C&J’s management apparently believed they might substantially improve Nabor’s performance, which was not an alternative to understanding the need for Nabors’ business and assets, which will form a considerable area of the worth of the combined company by which C&J shareholders are obtaining a 47% interest. This consideration was really important here, where during the period of negotiations C&J decided to boost the deal value to Nabors shareholders from $2.6 billion to $2.9 billion even while Nabors was revising its very own financial projections downward, Deloitte was forecasting a “ongoing downward trend in profitability” following its research assessment, and C&J’s Chief executive officer asked the credibility of Nabors’ accounting. A Legal Court contrasted the problem inside a cash transaction, where “the need for the obtaining company, presuming it may spend the money for merger cost, isn’t that critical.”
  • Active Participation in Negotiations and/or Approval with a Board or Board Committee That Unquestionably Is Independent and Disinterested Can Impact the end result Even In Which The Board Doesn’t Have A Legally Disqualifying Interest. A Legal Court observed that C&J’s Board delegated primary responsibility for negotiating the transaction towards the Company’s Chief executive officer, who’s to guide the combined entity. And, the Board didn’t form a unique committee to deal with the transaction despite the fact that four company directors, comprising most the C&J Board, were guaranteed membership around the combined entity’s board for relation to 5 years. While neither of those factors was determinative, a legal court discovered that the “five-year guarantee is really a unique status also it raises concern,” even if it didn’t render the board thinking about the transaction. Still, a legal court discovered that the 5-year guarantees of publish-closing board membership continued to be a “factor” in the preliminary injunction stage.
  • The Court’s ruling highlights the significance of approval of the challenged transaction with a board whose disinterest and independence is beyond question. Consideration ought to be provided to whether or how much it’s important to supply within the merger deal for lengthy-term guarantees of publish-closing advantages to the seller’s board or management. In this manner, the choice is in line with Vice Chancellor Parson’s recent opinion in In Re: Crimson Exploration Corporation. Stockholder Litigation. There, although inside a quite different context, a legal court discovered that certain side benefits granted to some large stockholder from the seller inside a merger transaction didn’t produce a conflict along with other shareholders warranting entire fairness review. Along side it benefits were: (i) a registration legal rights agreement that will enable the stockholder easier to market its stock within the combined entity and (ii) a contract through the acquirer to repay early financing through the large stockholder, together with a 1% prepayment penalty. In so holding, a legal court attached substantial weight that these benefits weren’t area of the merger agreement or authorized by the board, while they were “anticipated” at that time the agreement was signed.
  • Other Factors Can Mitigate The Scope Of Injunctive Relief Even Upon A Finding of the Likely Due Care Breach. A Legal Court observed that within the five several weeks following announcement from the transaction, not one other bidders emerged although the world of potential bidders was small , “it’s impossible to think that they don’t know of the transaction.” This, combined with “relatively modest” deal protection measures within the merger agreement, managed to get “simple to be suspiciousInch that another buyer would emerge or the deal was “badlyInch as complaintant contended. While not specifically mentioned within the bench ruling, the lack of other potential bidders emerging more than a five-month period seems, a minimum of partly, to possess brought a legal court to create a “relatively modest” adjustment towards the deal by enjoining the stockholder election for thirty days, where the C&J board “shall solicit interest.” The injunction would be to expire in the finish of this period if not one other transaction develops.

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