C&J Energy Can Proceed With $2.86 Billion Nabors MergerJef Feeley
C&J Energy Services Inc. can proceed with its $2.86 billion merger with a unit of Nabors Industries Ltd. to lower its tax liability, an appeals court ruled, rejecting claims the deal amounted to a secret sale of the oil-services firm.
C&J Energy’s shareholders shouldn’t have been barred by a judge from voting on whether to approve the deal with Houston-based Nabors, the Delaware Supreme Court ruled today. C&J Energy’s directors weren’t obliged to shop around for other offers for the company even though Nabors will wind up with a controlling stake in the new entity, the court said.
“The shareholders can reject the deal for themselves if they do not find its terms to be value-maximizing,” Chief Justice Leo Strine wrote in the court’s decision.
C&J is seeking to join the ranks of U.S. oilfield services companies looking for an exit from the country’s tax system, after similar moves by most of the largest drillers, including Transocean Ltd., Weatherford International Plc, Ensco Plc and Noble Corp Plc. Nabors has been incorporated in tax-free Bermuda since 2002, while its executives run the company from Houston.
The court’s ruling “confirmed our belief that our board and management team complied with their duties,” Josh Comstock, C&J’s chairman and chief executive officer, said in an e-mailed statement. “We remain focused on closing the transaction as soon as possible.”
Dennis Smith, a spokesman for Nabors, didn’t immediately respond to phone calls for comment on the appeals court’s ruling.
C&J, based in Houston, owns the 13th biggest fleet of trucks used in hydraulic fracturing, or fracking. If the merger proceeds, C&J’s fleet will combine with Nabors’s fracking services unit, the sixth-biggest in the U.S.
C&J rose 68 cents, or 4.98 percent, to $14.33 in New York trading. Nabors rose $1.74, or 15 percent, to $13.63.
Delaware Chancery Court Judge John Noble in November temporarily blocked C&J’s shareholders from voting on the Nabors deal after some investors argued the transaction amounted to a surreptitious sale of the company.
Lawyers for a Florida pension fund argued that Comstock, who led the negotiations with Nabors, misled C&J board members about the nature of the deal, which he said involved an acquisition of Nabors’s fleet of trucks that service fracking operations.
They also argued that Comstock had conflicting interests in the deal because he demanded five-year employment contracts for himself and other C&J executives with the new company.
The CEO also pushed Nabors officials to pay him a $19.1 million “success bonus” if the merger was completed, according to court filings. Comstock’s proposed package also includes a $170 million severance payment if he’s forced out within five years, according to the filings.
Under the deal, Nabors investors are slated to get 62.5 million C&J shares and $940 million in cash, officials said when the merger was announced in June. Nabors investors will end up with 53 percent of the new firm’s shares.
Noble concluded that the merger amounted to a takeover by Nabors and C&J’s directors mistakenly treated it as an acquisition. He barred the deal from proceeding for 30 days to allow other bidders to come forward.
Delaware’s highest court overturned that ruling, finding C&J directors knew what Nabors investors would get from the deal and took steps to address potential problems resulting from the change in control of the firm.
The deal also allowed C&J Energy directors to consider a higher offer if one emerged, Strine said. That satisfied their legal duties to insure shareholders were protected in the deal, he added.
Strine indicated that although the court was clearing the way for the shareholder vote, unhappy investors can still seek damages after the deal closed.
“We are mindful that an after-the-fact damages case is an imperfect tool” for addressing investors’ concerns about the deal, the chief justice wrote.
Jeroen Van Kwawegen, an attorney for the pension fund, said today he’ll press ahead with his suit over the deal.
“We have always believed this deal is marred by significant breaches of the duty of loyalty,” Van Kwawegen said in an e-mailed statement. “We look forward to proving those claims and obtaining significant monetary damages.”
The case is C&J Energy Services Inc. v. City of Miami General Employees & Sanitation Employees Retirement Trust, 655, 2014, Delaware Supreme Court (Dover).