A $17.5 million tentative deal has been reached to settle class claims in Delaware Chancery Court that Texas-based Sterling Chemicals Inc. sold itself short in a $100 million merger in 2011, allegedly at the prompting of a Sterling shareholder seeking quick cash.
The parties in the case notified the court in a document filing Wednesday that a mediated, tentative agreement had been reached. Among the principal settlement terms listed in an exhibit filed with the notice is a $17.5 million payout to minority, nondefendant shareholders, along with an attorneys' fees pool, and a $2.50 per share merger consideration for some shareholders.
Competitor Eastman Chemical Co. paid what some court filings described as a “low-ball” price for Sterling in August 2011, despite estimates that pegged the acquired company’s likely value at $200 million to as high as $1 billion prior to the sale.
The initial class lawsuit, filed against Sterling by shareholder and asset manager Virtus Capital L.P., alleged that the merger “resulted from an unreasonable process that resulted in an unfair price that drastically undervalued Sterling and its common stock,” according to a transcript from an October Chancery Court hearing on class consolidations.
In 2014, Virtus sued Eastman and a long list of Sterling investors and insiders, claiming that the buyer “corrupted a sale process by systematically exploiting conflicts of Sterling’s fiduciaries and financial advisors so that it could acquire a unique and highly valuable petrochemicals facility for a fraction of its fair value.”
Last year, however, Eastman fought the assignment of class lead status to Virtus, arguing that one of its principals, Steven Gidumal, is a former Sterling director and a former chief investment officer for Sterling’s majority private equity shareholder, Resurgence Asset Management L.P.
Resurgence was the shareholder accused in both suits of rushing Sterling into the sale because the asset management company had run into financial trouble in 2009. Gidumal, whose position with Resurgence was terminated in 2008, still faces a separate civil action in New York filed by Resurgence, accusing him of using proprietary information to secure Sterling shares for Virtus.
During years of discovery and depositions after the first class filing, Virtus claimed to have learned that Sterling’s manufacturing operations vice president, Walter Treybig, allegedly leaked confidential information to Eastman and other bidders. Other fiduciary breaches also surfaced during discovery, Virtus said.
Virtus itself faced trouble during the proceedings, and was ordered to pay $85,000 for sanctions and attorneys' fees in connection with opposing side motions to compel production of documents.
Part of the settlement focuses directly on Gidumal, who was criticized by Eastman for alleged failures to intervene in the $100 million sale despite his knowledge of the Sterling. According to the settlement, both Gidumal and Virtus agreed as part of the deal not to participate in any federal securities actions involving Sterling, while Virtus and the class released all other Sterling-related claim.
The $2.50 per share consideration will be paid on about 258,000 shares that did not receive merger benefits previously.
Comment was not immediately available from the parties involved.
Resurgence and Gidumal released most claims in their New York dispute, with the exception of potential compensation and recovery claims against Gidumal. Virtus, Gidumal and the defendants in the case released one another from all personal claims in connection with the case, including confidentiality breach allegation and defamation claims.
Sterling Chemical owned a valuable acetic acid and nonphthalate plasticizer plant on Galveston Bay, assets that court documents said Eastman viewed as additions to its own production and distribution capabilities.
“This plasticizer facility is sitting there. It’s idle. This is why Eastman comes in and wants to buy it,” then Virtus attorney Jeffrey M. Gorris, now of Friedlander & Gorris P.A., said in a January 2014 transcript of an argument on a motion to compel production of evidence. But a company valuation assigned “zero value to this plasticizer, even though that’s what Eastman is after," Gorris said.
Virtus is represented by Joel Friedlander, Jeffrey M. Gorris and Jaclyn L. Levy of Friedlander & Gorris.
Eastman Chemical is represented by Thomas W. Briggs and Frank R. Martin of Morris Nichols Arsht & Tunnell LLP.
Resurgence, et al, is represented by T. Brad Davey and J. Matthew Belger of Potter Anderson & Corroon and Barry S. Pollack and Joshua Solomon of Pollack Solomon Duffy LLP.
The cases are Virtus Capital L.P. v. Sterling Chemicals Inc., case number 6951, and Virtus Capital L.P. v. Eastman Chemical Co., case number 9808, in the Court of Chancery for the State of Delaware.
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