A temporary restraining order has been issued blocking asset-light transportation provider Forward Air’s recent merger agreement. A complaint filed by three shareholders, who are also former employees, said shareholders weren’t allowed to vote on the transaction as required by Tennessee law.
The 3rd District Chancery Court in Greeneville, Tennessee, where Forward (NASDAQ: FWRD) is headquartered, set an Oct. 11 hearing on the matter. All of Forward’s board members were listed as defendants.
On Aug. 10, Forward announced plans to acquire Omni Logistics through a series of transactions. The boards of both companies have approved the deal, and Forward has said a vote from its shareholders approving the transaction is not required.
The complaint listed several issues with the transaction, including an initial purchase price of roughly $3.2 billion. The deal structure includes only $150 million in cash, requiring Forward to give Omni’s stakeholders a 37.7% equity stake and assume Omni’s massive debt load ($1.4 billion in net debt), pushing Forward’s total debt to $1.85 billion (nearly four times adjusted earnings before interest, taxes, depreciation and amortization excluding synergies).
The plaintiffs in the motion, who included the company’s former chief financial officer, Rodney Bell, also said the deal would shift control of the combined company toward Omni’s stakeholders. Omni will have control of four board seats as well as the role of president, which is second in command only to Forward’s current chairman, president and CEO, Tom Schmitt.
Forward has said the transaction would solidify it as the category leader in expedited less-than-truckload delivery, allowing it to generate superior margins and returns to investors. However, analysts have questioned the price tag and further model diversification into freight forwarding, which puts it in direct competition with its other forwarding customers.
Omni is currently a forwarding customer of Forward’s and competes directly with some of Forward’s other customers. Those legacy customers have concerns that their account lists and shipment data could be accessed by Omni, although Forward has vowed to maintain confidentiality across its sales channels.
Forward is “altering its strategic direction through an expansion into freight forwarding services, which threatens to put Forward Air at odds with its existing customers,” the complaint read.
The complaint also said Forward’s current shareholders have been given a “false choice” when voting on whether to convert the nonvoting preferred shares allocated to Omni to common shares. If Forward’s shareholders approve the conversion, Omni, which is majority-owned by private equity firms Ridgemont Equity Partners and EVE Partners, would end up with 38% of the voting rights. If the conversion was voted down, the preferred shares would be due a dividend in excess of 12%, the complaint said.
Further, the complaint noted the conversion vote comes after the merger closes, compelling current shareholders to approve it. Omni’s shareholders are due 16.5% of the company’s equity at closing, which would be the largest voting block even if the conversion is rejected. Either way, the complaint spelled out the transaction as creating a controlling voting block as Omni shareholders are required to vote in favor of board-chosen directors in future elections.
The complaint said, “Forward Air is trying to circumvent the requirement under Tennessee law for a stockholder vote” by disposing assets to its subsidiaries ahead of the closing of a series of transactions. It said the transactions are “not in the ordinary course of business” and therefore not exempted from a vote.
Shares of FWRD have been under pressure since the deal was announced, down nearly 37% from a pre-deal price of $110. Shares were up 2.7% at 12:25 p.m. on Friday at $69.55 compared to the S&P 500, which was up 0.3%.
“The market’s adverse reaction shows stockholders’ disdain for Defendant’s merger with Omni,” the complaint read. “Forward Air’s shareholders have no opportunity to voice their opinions on the deal, and many voiced their negative opinions by selling the stock.”
In a Friday filing with the Securities and Exchange Commission, Forward said it “believes the claims made in the Complaint are without merit and [it] intends to vigorously defend against them.” It also said one of the closing requirements has been satisfied as the required waiting period expired on Thursday.
Last week, Forward announced a new notes offering to restructure the debt of the combined company.
“Parent is actively preparing for the post-closing integration of Parent and Omni and expects to close the Transactions promptly following the dissolution or the expiration of the TRO [temporary restraining order],” Forward’s Friday filing said.
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