Shareholders of Forward Air are asking a Tennessee court to rule the company was required to give them a vote before it could execute a merger with Omni Logistics. The class action complaint also asked the court to rescind the merger and for unspecified damages given the precipitous decline in the transportation provider’s stock price following the deal’s announcement.
A Wednesday filing in the 3rd District Chancery Court in Greeneville, Tennessee, where Forward (NASDAQ: FWRD) is headquartered, lists the company and its board members who approved the transaction as defendants. The listed plaintiffs include Cambria County Employees Retirement System, which owns just 585 shares, and former employee Michael Roberts, who owns 5,000 shares.
Roberts served as a senior vice president with the company for 23 years. He was party to an injunctive action last year, which temporarily blocked the deal.
The complaint evokes many of the concerns cited by shareholders last fall, primarily that their input was “intentionally deprived” by the board and in doing so the board breached its fiduciary duty to shareholders.
Forward has contended the deal structure didn’t require a vote from shareholders as it represented less than a 20% shift in voting control at closing. However, shareholders say the company didn’t meet any of the exceptions to the voting requirement as stipulated per Tennessee law, and when including a class of convertible preferred shares that were part of the deal consideration, the transaction represented a 35% change in voting rights, requiring a vote.
The class action complaint claims the law counts both shares issued at closing as well as other convertible securities, meaning a shareholder vote was required.
“But rather than giving shareholders the say they were due, the Director Defendants intentionally and manipulatively structured the Merger for the sole purpose of depriving Forward Air’s shareholders of the opportunity to vote on it,” the complaint said.
Shareholders will get a vote of sorts on the deal. They have been asked to approve the conversion of the preferred shares. That was one of a few items on the company’s proxy statement that was filed with the Securities and Exchange Commission on Monday. It also included the company’s slate of director nominees ahead of its June 3 annual shareholder meeting.
The complaint said investors are compelled to vote for the conversion because failure to do so would result in a 14% dividend, or approximately $94 million in payments in year one. That unpaid balance would get rolled into the $677 million liquidation value of the shares, resulting in dividend payments equal to $110 million in year two.
Forward Air had just $18.3 million in cash on hand at the time of the August deal announcement, which the filing said would have left shareholders with little choice but to vote for the conversion.
“If shareholders continued to reject the Conversion, the liquidation preference and concomitant dividend would grow exponentially from there,” the complaint said. “Thus, shareholders have no real choice but to approve the Conversion.”
The filing also said the board is largely insulated from reprisal, given the swing in voting power to Omni’s private equity backers — Ridgemont Equity Partners and EVE Partners. The group has three spots on the board and is required to vote its shares in favor of the directors nominated by the board.
“These voting agreements mean that the Director Defendants have entrenched themselves against any future shareholder backlash,” the complaint said.
After getting pushback from shareholders, Forward tried to exit the deal, alleging Omni breached the agreement by not providing timely disclosure of financial information and by misrepresenting financial projections. However, Omni said it performed all pre-transaction requirements and called on a Delaware court to force Forward to the closing table.
The two companies settled ahead of a trial, and the deal closed in late January for total consideration of $2.1 billion. The actual purchase price was reduced from an initial $3.2 billion, largely due to the decline in Forward’s share price. (The transaction terms included a fixed number of shares to be issued, not a fixed dollar amount where the number of shares to be issued is adjusted as is commonly seen in M&A.)
Shares of FWRD closed at $110 on Aug. 9, the trading session ahead of the deal’s announcement. The share price was just $14 at 2:19 p.m. EDT on Monday.
Forward closed the first quarter with $1.77 billion in debt, $172 million in cash and $340 million available on an undrawn revolving credit facility.
Net debt-to-adjusted earnings before interest taxes, depreciation and amortization was 5.5 times when using the 12-month trailing calculation stipulated by debt covenants. The company didn’t say if it would be cash flow-positive in the second quarter but said it doesn’t expect to breach the 6 times debt leverage covenant for the period. It plans to deleverage to 4.5 times by the end of 2025.
Forward Air didn’t immediately respond to a request for comment. However, a recent SEC filing acknowledged the potential for a future class action complaint from shareholders.
“The Defendants disagree with the allegations of the proposed amended complaint and will defend the matter if and when an amended complaint is filed,” the company said in its first-quarter filing.