In Mudrick Capital Management L.P., et al. v. QuarterNorth Energy Inc., et al., the Delaware Chancery Court declined to grant minority shareholders injunctive relief on claims that the defendant majority investors improperly invoked drag-along rights in connection with a pending merger.
The issue before the court was whether to enjoin the minority investors’ otherwise required participation in a transaction due to alleged inconsistency between the merger agreement and a drag-along provision in target company QuarterNorth Energy Inc.’s (“QuarterNorth”) Stockholders Agreement. The court determined that because the plaintiffs were unlikely to succeed on the merits, the balance of equities disfavored granting the preliminary injunction.
The matter stems from a pending $1.6 billion merger between QuarterNorth and Talos Energy, Inc., pursuant to which QuarterNorth shareholders would receive cash and stock. The plaintiffs, minority QuarterNorth investors, supported the merger but argued that the merger agreement was inconsistent with the terms of a drag-along provision in QuarterNorth’s stockholders agreement and that the provision does not apply to the plaintiffs, as they own only warrants.
The agreements at issue are QuarterNorth’s Warrant Agreements, which were issued to certain investors as consideration for assets acquired by QuarterNorth, and a Stockholders Agreement binding on warrant holders “even if not a signatory thereto.” The Warrant Agreements, which entitle holders to purchase shares at a “then-applicable Warrant Share Number,” also “contemplate that the Warrants would ‘roll through’ after closing” in the event of a merger and preserve applicable warrant holders’ rights in such an event. However, the Stockholders Agreement contains a drag-along provision allowing the “Drag-Along Sellers” (defined as “holders of Common Stock and Warrants” who own 50% or more of the company’s common Stock) to cause the remaining “Other Stockholders” (defined as “each other holder of Common Stock and Warrants”) to join in certain transactions.
Following the January 15, 2024, merger announcement, QuarterNorth issued a notice informing the Other Stockholders that the majority shareholders (the Drag-Along Sellers) were invoking their drag-along rights, requiring other investors to transfer shares and warrants to participate in the deal on the same terms as the Drag-Along Sellers. The plaintiffs subsequently filed this action, arguing improper invocation of the drag-along provision and seeking injunctive relief in respect to their participation in the transaction.
The court applied the standard preliminary injunction analysis, which requires a movant to demonstrate (i) a reasonable probability of success on the merits at a final hearing, (ii) an imminent threat of irreparable injury, and (iii) a favorable balance of the equities. The court found that none of the elements supported injunctive relief, in large part because the movants were “not reasonably likely to succeed” on the merits.
- In assessing the first element, and the movants’ claims in light of the relevant agreements, the court found the merger agreement consistent with the Stockholders Agreement and that if the drag-along provision was not invoked, the movants’ warrants would indeed have rolled through the merger as the plaintiffs preferred. At the same time, the court disagreed with the movants’ position that the drag-along provision did not apply to holders of only warrants (and not common stock), as such an interpretation would be inconsistent with the purpose of the provision in the context of facilitating a merger.
- With respect to the second element, the disagreement was not as to whether the movants would receive the merger consideration but to the timing (i.e., “when they will receive it, which affects the timing of recognizing losses or gains in their positions”). Here, the court found that notwithstanding additional complexities, the movants could take actions to mitigate the associated financial risks.
- Finally, in assessing the equities, the court found that the plaintiffs’ request to enjoin their “forced participation” in the sale would innately “put the $1.6 billion merger at risk,” creating collateral consequences in excess of the prospective value to the plaintiffs.