Fletcher International, Ltd. v Ion Geophysical Corporation, et al.
Annotate this Case
Download PDF
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
FLETCHER INTERNATIONAL, LTD.,
)
)
Plaintiff,
)
)
v.
)
Civil Action No. 5109CS
)
ION GEOPHYSICAL CORPORATION,
)
f/k/a INPUT/OUTPUT, INC. and ION
)
INTERNATIONAL S.àr.l.,
)
)
Defendants.
)
MEMORANDUM OPINION
Date Submitted: October 31, 2013
Date Decided: December 4, 2013
Kevin G. Abrams, Esquire, J. Peter Shindel, Jr., Esquire, Daniel A. Gordon, Esquire,
ABRAMS & BAYLISS LLP, Wilmington, Delaware, Attorneys for Plaintiff Fletcher
International, Ltd.
Kenneth J. Nachbar, Esquire, Leslie A. Polizoti, Esquire, Ryan D. Stottmann, Esquire,
Angela C. Whitesell, Esquire, MORRIS, NICHOLS, ARSHT & TUNNELL LLP,
Wilmington, Delaware, Attorneys for ION Geophysical Corporation and ION International,
S.àr.l.
STRINE, Chancellor.
I. Introduction
In a prior decision in this case, this court, per Vice Chancellor Parsons, held that it
was likely that the issuance of a note by a subsidiary of the defendant, ION Geophysical
Corporation, which was formerly known as Input/Output (“ION”), in connection with a
$40 million bridge financing that was a minor portion of a much larger transaction,
violated the right of the plaintiff, Fletcher International, Limited (“Fletcher”) to consent
to the note issuance.1 Nevertheless, this court declined to grant a preliminary injunction
because the balance of the equities weighed against granting an injunction and because
damages could be an adequate remedy.2 In a later opinion, Vice Chancellor Parsons
granted Fletcher’s motion for partial summary judgment, holding that the note issued by
the ION subsidiary was a security and that the issuance of that note without Fletcher’s
consent violated Fletcher’s contractual right to consent to such issuances. 3 This is the
posttrial opinion in the case, in which the court determines Fletcher’s damages based on
its admittedly imperfect attempt to discern how a hypothetical negotiation would have
occurred between ION and Fletcher over the consent.
In the fall of 2009, ION needed a transaction that would provide it with liquidity
and enable it to continue operating and avoid bankruptcy. To alleviate its financial woes,
1
Fletcher Int’l, Ltd. v. ION Geophysical Corp. (Fletcher I), 2010 WL 1223782, at *45 (Del. Ch.
Mar. 24, 2010).
2
Id.
3
Fletcher Int’l., Ltd. v. ION Geophysical Corp. (Fletcher II), 2010 WL 2173838, at *1 (Del. Ch.
May 28, 2010).
1
ION reached an agreement to contribute its land equipment business to a newly formed
joint venture with BGP Inc. (“BGP”), a Chinese stateowned enterprise. This was a
strategically important investment for the Chinese government and its stateowned bank,
the Bank of China, stepped in to help BGP secure the deal. As part of that help, the Bank
of China provided ION with $40 million in bridge financing to give ION a cushion to
ensure that it could operate through the closing of that transaction (collectively, the joint
venture and the bridge financing are referred to as the “BGP Transaction”). ION already
had a credit facility in place under which it borrowed money on a revolving basis from a
consortium of banks (the “Existing Lenders”), so the Bank of China provided the bridge
financing by entering into the existing credit facility. In connection with the bridge
financing, ION International S.ár.l. (“ION S.ár.l.”), an ION subsidiary, issued a $10
million convertible promissory note to the Bank of China without obtaining Fletcher’s
consent. The only consent right Fletcher had over the deal was over the $40 million
bridge loan. The much larger overall BGP Transaction, in which BGP contributed
between $195 million and $245 million in consideration to ION, was one that Fletcher
had no right to veto.
During the two day trial, the parties attempted to quantify the damages that
Fletcher is entitled to by presenting evidence to determine what Fletcher would have
received in exchange for its consent in a hypothetical negotiation that occurred before the
announcement of the BGP Transaction. Fletcher attempted to portray itself as a tough
negotiator willing to blow up the entire BGP Transaction unless it received changes to its
2
Preferred Stock that were valued at $78 million in exchange for its consent to a $40
million bridge financing, even though the BGP Transaction was expected to create value
for all of ION’s stakeholders, including Fletcher. Fletcher insisted that, because ION was
a weak negotiator that had no other options, ION would have given in to anything
Fletcher demanded in order to save the BGP Transaction. Thus it would have given $78
million to be able to receive a $40 million shortterm loan.
This twodimensional depiction of the hypothetical negotiation ignores the fact
that BGP and the Existing Lenders — both of which had substantially more negotiating
leverage than Fletcher did — would have been involved in any negotiation for Fletcher’s
consent. As a practical matter, BGP would have needed to agree to proceed with any
consent payment to Fletcher and the Existing Lenders would have had the right to
consent to the modifications to Fletcher’s preferred stock that Fletcher says it would have
demanded. The demands Fletcher says it would have made were ones that had costs to
both BGP and the Existing Lenders and neither would have agreed to Fletcher’s
outrageous demands. In other words, ION could not have unilaterally given Fletcher
what it wanted because Fletcher’s demands would have come at the expense of ION’s
other constituencies, in particular BGP. Fletcher’s version of the hypothetical negotiation
also ignores the fact that ION, with the help of BGP and the Existing Lenders, could have
structured the transaction to avoid implicating Fletcher’s consent right. In fact, Fletcher’s
cartoonish portrayal of its own negotiation position is so extreme in contrast to its
comparatively weak actual bargaining position, that ION argued that it would simply
3
have worked with the Existing lenders and BGP to structure the deal around Fletcher’s
consent. Nevertheless, because Fletcher’s consent right was violated, the court assumes
that Fletcher would have acted with at least bare rationality in the bargaining process and
consented in exchange for a very generous consent fee akin to a bank consent fee.
That is, although the court concludes that Fletcher would not have been able to use
its consent right to extract the king’s ransom that it apparently believes it was entitled to,
Fletcher would have been able obtain valuable consideration from ION in exchange for
its consent. The best measure of the consent fee that Fletcher could have extracted comes
from a comparison to the consent fees that ION paid to the Existing Lenders to obtain
their approval for the BGP Transaction.
II. Factual and Procedural Background
A. Fletcher’s Investment in ION
ION is a Delaware corporation headquartered in Houston, Texas that provides
technologyfocused services and equipment to the global energy industry, particularly to
exploration and production clients in the oil industry. ION’s stock is listed on the New
York Stock Exchange (“NYSE”). ION S.ár.l. is a whollyowned subsidiary of ION,
incorporated in Luxemburg.
On February 15, 2005, ION, seeking a “patient” and “supportive” investor, 4
entered into an Agreement with Fletcher, a hedge fund organized in Bermuda, that
portrayed itself as having those characteristics. Under that agreement, Fletcher paid $30
4
Trial Tr. vol. 1, 72:1719 (Benson).
4
million to purchase 30,000 shares of Series D1 Cumulative Convertible Preferred Stock
of ION at a price of $1,000 per share and received the right to purchase up to 40,000
additional shares of ION at the same price and on similar terms and conditions. 5 Fletcher
exercised its right to purchase additional shares under the agreement in 2007 and 2008 by
purchasing 5,000 shares of Series D2 Cumulative Convertible Preferred Stock and
35,000 shares of Series D3 Cumulative Convertible Preferred Stock, respectively (the
Series D1, Series D2, and Series D3 Cumulative Convertible Preferred Stock are
collectively referred to as the “Preferred Stock”). 6 Each of the three series of Preferred
Stock was governed by a Certificate of Rights and Preferences with substantially similar
terms that included a provision giving Fletcher the right to consent to the issuance of any
security issued by a whollyowned subsidiary of ION.7
Fletcher portrayed itself as a “passive and supportive partner” and claimed that its
“fundamental investment principle [was] to facilitate management’s efforts to enhance
equity value through a significantly improved capital structure.” 8 According to Fletcher’s
marketing materials “[t]his [principle] allows management to focus on the
5
JX 1 (Agreement Between Input/Output, Inc. and Fletcher Int’l Ltd. (Purchase Agreement)
(Feb. 15, 2005)).
6
Fletcher II, 2010 WL 2173838, at *1.
7
JX 2 (Certificate of Rights and Preferences of Series D1 Cumulative Preferred Stock of
Input/Output, Inc. (Feb. 16, 2005)); JX 6 (Certificate of Rights and Preferences of Series D2
Cumulative Preferred Stock of Input/Output, Inc. (Dec. 7, 2007)); JX 8 (Certificate of Rights and
Preferences of Series D2 Cumulative Preferred Stock of ION Geophysical Corp. (Feb. 20,
2008)).
8
JX 53 (PowerPoint presentation of Fletcher Asset Management).
5
implementation of its business plan.” 9 Fletcher’s marketing materials also stated that
Fletcher had an “uncompromising commitment to enter into only those transactions that
[would] create value for all parties to the transactions,” including the companies it
invested in, which it referred to as its “corporate partners.” 10
Fletcher’s investment in ION was essential to Fletcher’s own survival, which was
unusual even for an aggressive hedge fund. As of December 31, 2008, the Preferred
Stock made up 43.25% of Fletcher’s investment portfolio. 11 By December 31, 2009, the
Preferred Stock made up 65.68% of Fletcher’s investment portfolio. 12 Thus, Fletcher had
staked its future on ION and taken a large, nondiversified risk by placing nearly two
thirds of its assets in a single investment — an investment that came with no control
rights or board seats.
B. ION’s Financial Performance Declines And Its Relationship With Fletcher Sours
On July 3, 2008, ION and ION S.ár.l. entered into a new $100 million credit
facility with the Existing Lenders (the “Credit Facility”) that leveraged both ION’s
domestic and international assets. 13 That Credit Facility replaced ION’s old $75 million
credit facility that had leveraged only the domestic assets. 14 HSBC Bank USA (“HSBC”)
9
Id.
10
Id.
11
JX 99 at 6 (Financial Statements and Report of Independent Certified Public Accountants –
Fletcher Int’l, Ltd. (Dec. 31, 2008)); Trial Tr. vol. 1, 6364 (Benson).
12
JX 378 (Fletcher Int’l, Ltd. Financial Statements as of December 31, 2009); Trial Tr. vol. 1,
6263 (Benson).
13
JX 15 (ION’s Amended and Restated Credit Agreement (July 3, 2008)); Trial Tr. vol. 2, 435
36 (Hanson).
14
Id.
6
acted as the lead bank in the Credit Facility. 15 No more than $75 million could be
borrowed under the Credit Facility at the domestic level by ION and no more than $60
million could be borrowed at the foreign level by ION S.ár.l., meaning that if ION
wanted to borrow the maximum amount under the Credit Facility, the borrowing had to
be split between the domestic parent, ION, and the foreign subsidiary, ION S.ár.l. (the
“Split Requirement”).16 A waiver of the Split Requirement required unanimous approval
from the Existing Lenders.17 Although the Split Requirement limited the amount that
could be drawn down by either the domestic parent or foreign subsidiary, the Credit
Facility was crosscollateralized so that all of the assets of ION and ION S.ár.l. secured
both the foreign and domestic notes. 18 The Credit Facility also included a $50 million
accordion feature so that it could be expanded to a $150 million revolving facility. 19
In addition to provisions that governed the functioning of the Credit Facility, the
Credit Agreement contained a litany of restrictive covenants that prohibited ION from
engaging in activities such as making any dividend payments that were not specifically
exempted under the Credit Agreement, 20 exceeding a specified leverage ratio, 21 and
15
Id.
16
JX 15 at 26; Trial Tr. vol. 2, 43738 (Hanson). For tax reasons, ION generally drew down as
much as possible from the domestic side of the facility, and ION only drew down the foreign
side of its facility when it needed to borrow more than $75 million at any given time. In other
words, if ION needed the full $100 million drawn down, its general practice would have been to
draw down $75 million from the domestic side of the facility and $25 million from the foreign
side. Trial Tr. vol. 2, 43738 (Hanson).
17
JX 15 at 5 (ION’s Amended and Restated Credit Agreement (July 3, 2008)) (defining
Collateral to include the property of both ION and ION S.ár.l.); Trial Tr. vol. 1, 33036 (Fowler).
18
JX 15 at 4445.
19
Id. at 44; Trial Tr. vol. 2, 436:2123 (Hanson).
7
maintaining a certain net worth.22 If ION failed to comply with any of the restrictive
covenants in the Credit Agreement, the Existing Lenders could declare a default, which
would result in, among other things, the entire amount of the loans outstanding under the
Credit Facility becoming immediately due. 23 The power to declare a default gave the
Existing Lenders substantial influence over ION.
The financial problems ION faced in 2009 had their origins in a prior transaction.
In early 2008, ION’s management began considering a strategic transaction with ARAM
Systems Ltd. and Canadian Seismic Rentals Inc. (collectively “ARAM”). The
transaction was expected to increase ION’s footprint in certain international markets and
solidify ION’s position in the industry. 24 On July 8, 2008, ION executed a share
purchase agreement with ARAM under which ION agreed to purchase ARAM from its
stockholders in exchange for a total of $350 million (Canadian). 25 ION financed the
ARAM transaction through the combination of an equity issuance to the ARAM
stockholders, a $125 million Term A Facility, a $41 million shortterm bridge loan from
its investment bank, Jefferies, LLC (“Jefferies”), that was set to mature on December 31,
2008, and $45 million in shortterm notes issued to the ARAM stockholders that matured
20
JX 15 at 6566.
21
Id. at 68.
22
Id. at 68.
23
Id. at 6870.
24
Trial Tr. vol. 2, 439 (Hanson).
25
JX 21 (Share Purchase Agreement between ION Geophysical Corp., ARAM Sys., Ltd.,
Canadian Seismic Rentals Inc., and Sellers (July 8, 2008)).
8
on December 31, 2008.26 The $45 million shortterm notes were issued by Nova Scotia
Co. (“Nova Scotia”), a whollyowned subsidiary of ION. 27 To obtain the interim
financing that was provided by the Term A Facility, ION had to secure approval from the
Existing Lenders for, among other things, a waiver to the Split Requirement. 28 The
Existing Lenders unanimously agreed to waive the Split Requirement to facilitate the
ARAM transaction, and the First Amendment to the Credit Facility was entered into on
September 17, 2008.29
ION planned to replace the interim financing structure that it used to close the
ARAM transaction by issuing a bond in the public market. 30 To protect itself in the event
that the public bond offering failed, ION had obtained a backstop commitment from
Jefferies to provide ION with a $150 million loan. 31 Unfortunately, the ARAM
transaction closed on September 18, 2008, mere days after the collapse of Lehman
Brothers and in the midst of a severe financial crisis. Because of the financial crisis, ION
was unable to raise the money needed to replace the interim financing through a public
bond offering, and Jefferies was either unwilling or unable to provide the backstop
financing that it had agreed to provide. 32 ION managed its cash and made the required
payment on its revolving loan, but with the capital markets frozen, it was forced to enter
Trial Tr. vol. 2, 44142 (Hanson).
27
JX 38 (ION Form 8K (September 17, 2008)).
28
Trial Tr. vol. 2, 442:69 (Hanson).
29
JX 46 at 7 (1st Amendment to Amended and Restated Credit Agreement (Sept. 17, 2008));
Trial Tr. vol. 2, 443:58 (Hanson).
30
Trial Tr. vol. 2, 440: 49 (Hanson).
31
Id. at 444:815.
32
Id. at 44748.
9
26
into a new $40 million twelvemonth loan with Jefferies at an interest rate that ION’s
thenCFO Brian Hanson described as “egregious.” 33
Although the ARAM transaction had been expected to create value for ION, the
transaction’s inauspicious closing date left ION with a highly leveraged balance sheet and
put strain on the company at a time when the recession resulting from the financial crisis
was reducing demand for ION’s products and services. By the end of 2008, the financial
performance of ION “really started to decline. . . . And 2009 saw a series of successive
declines in financial performance . . .” 34 At trial, Hanson testified that “it felt like we
were chasing a ball down the hill. And we consistently were forecasting our business and
missing the reforecast because it was falling off sharper than we thought it would.” 35
When asked what happened to ION’s stock price during that period, Hanson testified that
“it was completely under pressure . . . it was trading more as an option whether or not we
were going to survive.”36
On top of its growing financial problems, ION’s managers also had to deal with
discontent from their purportedly patient and supportive investor, Fletcher. On January
23, 2009, Fletcher’s thenattorneys informed ION that Fletcher believed that the notes
issued by Nova Scotia in connection with the ARAM transaction violated Fletcher’s
contractual right to consent to the issuance of a security by any ION subsidiary and
33
Id. at 44950.
34
Id. at 454:12.
35
Id. at 454:58.
36
Id. at 454:1619.
10
“demand[ed] that ION take immediate action to rectify its violation and remedy the harm
to Fletcher.”37 On January 30, 2009, ION responded through its own counsel and stated
that it believed that the notes issued by Nova Scotia did not violate Fletcher’s consent
right.38 Even though ION disagreed with Fletcher’s assertion that its consent right had
been violated, ION attempted to assuage Fletcher’s concerns and eliminate the problem
by assigning the note to itself.39
But ION’s efforts to appease Fletcher were unsuccessful. On March 31, 2009,
Fletcher made a demand for inspection of records under § 220 of the Delaware General
Corporation Law for the purpose of, among other things, investigating potential
violations of its rights as a holder of the Preferred Stock. 40 ION rejected Fletcher’s
demand, and Fletcher filed suit in this court to enforce its right to inspect ION’s books
and records.41
Fletcher’s accusations and its request to inspect ION’s records were not the only
challenges ION’s management had to deal with in the Spring of 2009. By April 2009, the
Existing Lenders were worried about ION’s declining financial performance and its lack
of liquidity.42 In response to the Existing Lenders’ concerns, ION began to search for
37
JX 75 (Letter from Skadden to ION and ION’s Counsel at Mayer Brown (Jan. 23, 2009)).
38
JX 78 (Letter from Beck, Redden & Secrest to [Skadden], responding to Jan. 23, 2009 letter
(Jan. 30, 2009)).
39
See id.; Trial Tr. vol. 2, 64041 (Roland) (describing Fletcher’s position as “confusing”); Trial
Tr. vol. 2, 517:1519 (Hanson) (“We disagreed . . . that we had violated Fletcher’s consent right
. . . we tried to just mitigate it by resolving it.”).
40
Compl. ¶ 34; Trial Tr. vol. 2, 641:1315 (Roland).
41
Supra note 40.
42
See JX 95 (Email from HSBC to ION (Apr. 6, 2011)) (expressing concern related to, among
11
transactions that would improve its liquidity. In June 2009, ION sold around $40 million
of equity in a private placement and used the proceeds to pay off the Jefferies loan. 43
ION also obtained secured equipment financing worth $20 million, which it used for
working capital.44 The Credit Facility was also amended on June 1, 2009 (the “Fifth
Amendment”) to give ION permission to do the secured financing, relax the covenants
that ION’s financial forecasts indicated it would soon violate, and increase the pricing of
the debt by, among other things, increasing the rates on the revolving loans. 45 If the
Existing Lenders had not relaxed the covenants through the Fifth Amendment, ION
would have violated the covenants in the Credit Facility, giving the Existing Lenders the
right to declare a default. In connection with the Fifth Amendment, which required
majority approval of the banks in the Credit Facility, ION paid a fee to the Existing
Lenders of around $3.6 million, or 75 basis points on the amount of the loan outstanding
at that time.46 Although ION was able to obtain approval from the banks for the Fifth
Amendment in June 2009, ION’s relationship with the Existing Lenders was deteriorating
and ION had been designated as an “exit name” by at least one of the Existing Lenders. 47
other things, the downgrade of ION’s credit by Moody’s, the large amount of debt with a rapidly
approaching maturity date and no payoff source, and the possibility that ION would breach
financial covenants in its credit agreement).
43
Trial Tr. vol. 2, 45859 (Hanson).
44
JX 116 (ION Form 8K (July 1, 2009)); Trial Tr. vol. 2, 458 (Hanson).
45
Trial Tr. vol. 2, 45960 (Hanson); JX 106 (5th Amendment to Amended and Restated Credit
Agreement (June 1, 2009)).
46
Trial Tr. vol. 2, 462 (Hanson).
47
Id. at 46162.
12
In Hanson’s words, the transactions in June 2009 “gave [ION] breathing room”
but they did not solve ION’s liquidity issues and ION recognized that it could “burn
through [its] cash by the end of the year.” 48 By July 2009, ION was focused on finding a
longer term solution to its liquidity problems. ION began to consider entering into some
type of strategic transaction with BGP after BGP’s chairman reached out to ION to
discuss the possibility of the two companies engaging in a Joint Venture.
C. The BGP Transaction
BGP is a whollyowned subsidiary of China National Petroleum Corporation
(“China National Petroleum”), which is a large oil company owned by the Chinese
government. BGP was a longtime client of ION’s, and the two companies had
previously considered entering into a strategic transaction. In 2006, ION approached
BGP about the possibility of the two companies engaging in a joint venture. 49 Although
ION and BGP did not form a joint venture in 2006 because BGP did not have the ability
to enter into joint ventures with foreign companies at that time, BGP remained a major
client of ION’s.50 In 2007 and 2008, they formed a “technology alliance” and BGP was
an early adopter of technology developed by ION. 51 When BGP approached ION in
2009 and proposed a possible joint venture, ION viewed the proposed transaction as both
48
Id. at 463:1324.
49
Id. at 465.
50
Id.
51
Id. at 466.
13
a solution to its liquidity problems and a strategic opportunity that could lead to long
term growth.52
The negotiations with BGP regarding the transaction began in late July 2009,
when Jay Lapeyre, the chairman of ION’s board of directors, met with Wang Tiejun, the
President of BGP, to discuss the transaction. Lapeyre reported that “[o]verall [it was a]
good initial meeting.”53 On July 31, 2009, ION’s CEO, Bob Peebler, emailed Wang to
inform him that ION’s board had directed him to proceed with exploring a strategic joint
venture between the two companies. 54
In early August, Hanson traveled to China to meet with representatives from BGP
regarding the joint venture. Back in the United States, ION’s lenders and Fletcher were
still concerned with ION’s projections for the remainder of 2009. After looking at the
projections, Benson “shift[ed] [his] opinion about ION’s nearterm solvency from
thinking it is likely solvent to think[ing] it may not be solvent.” 55 On August 12, 2009,
Steven Larsen, ION’s contact at HSBC, emailed Hanson to express his concerns over the
company’s projections and the possibility that ION would need another amendment to the
Credit Facility to avoid breaching the newlyrelaxed covenants during the third quarter.
The major points of the deal were negotiated extensively during August and
September. ION opened the negotiations by proposing that the two companies enter into
52
Id. at 46667; JX 122 (Email from Hanson to Jay Lapeyre (July 21, 2009)) (analyzing
advantages to a strategic transaction with BGP).
53
JX 126 (Email chain between Peebler and Hanson (July 23, 2009)).
54
JX 133 (Email from Peebler to Wang (July 31, 2009)).
55
JX 140 (Email exchange between Kell Benson, Buddy Fletcher, and Denis Kiely (Aug. 8,
2009)).
14
a joint venture that centered around technology. Under the initial proposal, ION would
have owned 70% of the joint venture and BGP would have owned the remaining 30%. 56
When Peebler and Hanson presented their proposal to Wang in China in early August,
Wang informed them that their proposal was not what he had envisioned, that any
transaction between the two companies would have to involve ION putting all of its land
equipment business into the joint venture, and that BGP would have to have a controlling
interest in the joint venture.57 BGP explained that, because of the precedentsetting
nature of the transaction, it would be very difficult for BGP to enter into any joint venture
if it was not at least a 51% owner. 58 BGP also made it clear at this early stage in the
negotiations that, in addition to control of the joint venture, it wanted a substantial equity
stake in ION.59
BGP considered this to be a precedentsetting transaction because it was one of the
first situations in which a Chinese stateowned enterprise was given permission to enter
into a strategic joint venture with an American company. This joint venture was also in
the energy technology industry, which has economic importance to both China and the
United States. As shall be seen, because BGP is an instrumentality of the Chinese
government and its entry into the United States market was important to the Chinese
government, BGP had the financing support of the Bank of China, a stateowned bank.
56
Trial Tr. vol. 2, 577:1620 (Peebler).
57
Id. at 578.
58
Id. at 57879; JX 143 (Email between Peebler and Jay Lapeyre (Aug. 13, 2009)); JX 147
(Email from Peebler (Aug. 17, 2009)) (noting that a majority interest in the joint venture was a
“condition of doing a deal” for BGP).
59
Trial Tr. vol. 2, 580 (Peebler).
15
When ION realized that it would have to give in to BGP’s demand that it control
the joint venture for the transaction to go forward, ION agreed to take the minority
position in the joint venture but insisted in exchange that BGP set aside its demand for an
equity stake in ION itself.60 Although BGP purported to agree during the first round of
negotiations that it would not insist on owning a large chunk of ION equity, in fact, BGP
never stopped pushing for it. At the banquet following the first round of negotiations, on
the very day that BGP had “agreed” to a transaction structure in which it would not
receive any ION equity, Peebler was seated next to a top executive at China National
Petroleum who spent the dinner explaining to Peebler all of the reasons that it would be
good for ION if BGP owned ION equity. 61
On August 13, 2009, when Peebler boarded his plane after the meetings in China,
he believed that they had agreed to a deal in which BGP would take a majority ownership
interest in the joint venture but would not own any of ION’s equity. 62 But by the time he
landed in Texas, BGP was already renegotiating the deal in an effort to obtain a major
equity stake in ION.63 The week after Peebler returned, the BGP team arrived in Houston
to continue to flesh out the terms of the deal. It became clear during these meetings that
any final transaction would have to be approved not only by BGP, but also by both its
60
Id. at 58081.
61
Id. at 582.
62
JX 143.
63
JX 154 (Email from Peebler (Aug. 15, 2009)).
16
parent, China National Petroleum, and the Chinese Government. 64 While in Houston,
BGP insisted on receiving an ownership interest in ION. 65 By the time the meetings in
Houston ended on August 24, 2009, ION had agreed to consider allowing BGP to
purchase up to 19.99% of ION’s common stock as a part of the deal. 66 This was the
maximum amount of stock ION could issue without having to hold a stockholder vote. 67
A mere four days after ION agreed to consider allowing BGP to take a large
equity position in ION, BGP sent ION a draft term sheet that contemplated BGP
receiving not only a 19.99% equity interest, but also antidilution protection that would
give BGP the right to subscribe to any future issuance of ION common stock in order to
maintain that 19.99% interest. 68 Although this request for antidilution protection would
become one of the most heavily negotiated points of the deal, the negotiations were put
on hold when Peebler made a diplomatic mistake that offended the executives at BGP
and China National Petroleum and almost cost ION the deal.
Peebler had become frustrated with the slow progress on the deal and on
September 1, 2009, he emailed his counterpart at BGP and wrote that “it appears that
64
See JX 152 (Email from Peebler (Aug. 15, 2009)) (“Since my last communications we had a
two day meeting in Houston with BGP/[China National Petroleum] representatives. What is
clear is we are in a multilayered negotiation with BGP, [China National Petroleum], and the
Chinese Government, and even though we can make quick decisions ‘on the ground,’ everything
they do has to go up to the higher authorities as part of the process. This creates time lags and
frustration, and often what seems to be mixed messages.”).
65
Trial Tr. vol. 2, 584 (Peebler).
66
JX 150 (Internal ION email (Aug. 24, 2009)).
67
Trial Tr. vol. 2, 58384 (Peebler) (noting that the companies settled on 19.99% because issuing
additional shares would open the transaction up to a shareholder vote, which they felt like was a
“can of worms”).
68
JX 153 (Email attaching draft term sheet (Aug. 28, 2009)).
17
BGP is attempting to put further financial stress on [ION]” by delaying payments on
some receivables that Peebler believed were owed to the company. 69 At trial, he testified
that he “was starting to feel like [BGP was] really gaming us on those receivables and
they [were] just holding that back to put stress on the company.” 70 That email was also
forwarded to top executives at China National Petroleum. 71 BGP and China National
Petroleum viewed this as an allegation that they had done something unethical, and
Peebler testified that in the following days he “actually thought [ION] had lost the
deal.”72 After ION’s Chinese bankers coached Peebler on exactly what to say that would
enable the executives at BGP and China National Petroleum to save face and still
continue to negotiate with ION, Peebler apologized profusely and told them that he had
been lied to and given bad information. 73 Peebler’s apology was successful and
negotiations continued.74
By this point, ION needed a solution to its financial woes and it had very little
leverage with either BGP or the Existing Lenders. 75 BGP continued to push for better
69
JX 166 (Email from Peebler (Sept. 1, 2009)).
70
Trial Tr. vol. 2, 586 (Peebler).
71
Id. at 587.
72
Id. at 587:1719.
73
Id. at 587; JX 168.
74
Trial Tr. vol. 2, 587 (Peebler); JX 173 (Email from Peebler forwarding BGP’s response to
ION’s apology (Sept. 5, 2009) (forwarding an email in which Guo wrote “[w]e accept your
apology . . . . The problem with the recent emails is that they have offended [China National
Petroleum] and I am personally under pressure. Dr. Yu is beginning to question BGP on the
suitability of ION as a long term partner . . .”).
75
JX 210 (Internal ION email chain regarding negotiation strategy (Sept. 22, 2009)) (“I suggest
we think about what few levers we have left.”); JX 204 (Email from Hanson to Peebler regarding
strategy for the Existing Lenders (Sept. 17, 2009)) (“One of the difficulties in our next 12 week
18
deal terms throughout September. With the companies in agreement that BGP would
receive a 19.99% equity interest in ION as part of the deal, BGP turned its attention to
obtaining antidilution protection for its equity interest.
As Hanson prepared to meet with BGP in Beijing in midSeptember, Peebler
advised him not to let the “discussion get tied back to the antidilution ask [BGP had] in
[its] term sheet” and stated “[w]e’ve got to get that one put to bed early.” 76 ION pushed
back against BGP’s continued press for antidilution protection because they felt that
“BGP need[ed] to have skin in the game like all shareholders.” 77 But BGP continued to
insert antidilution protections into the draft term sheets that it circulated throughout
September.78 In response to one of these term draft term sheets, Lapeyre sent an email to
executives at BGP expressing his “disappointment” that the draft term sheet included
several provisions, including antidilution protection for BGP, that were unacceptable to
ION’s board.79
Eventually, the parties agreed that BGP would receive antidilution protection
from issuances of additional equity, but that did not extend to any dilution that would
occur if Fletcher exercised its right to convert its Preferred Stock into ION common stock
cash flow projections is that we assume BGP pays us. If they don’t, we turn negative. As such I
have been giving some thought to the bank group strategy. Under this scenario we need to
preserve cash but have their support so we don’t go sideways on reps for the transaction.”); JX
213 (Email from Peebler regarding the draft term sheet (Sept. 22, 2011)) (“This is an example
where the [sic] ask for one thing, we counter, and they then counter with something worse than
the original offer.”).
76
JX 198 (Internal ION email chain regarding term sheet discussions (Sept. 15, 2009)).
77
JX 208 (Email from Hanson to Peebler (Sept. 18, 2009)).
78
JX 209 (Internal ION email attaching revised term sheet (Sept 21, 2009)).
79
JX 211 (Email exchange regarding term sheet (Sept. 21, 2009)).
19
under the Certificates of Rights and Preferences then in place. 80 Although BGP
continued to push for antidilution rights that would protect them if Fletcher converted its
Preferred Stock, ION consistently refused to give in because BGP was already aware of
Fletcher’s currently existing Preferred Stock and the potential for dilution that it posed. 81
In the end, BGP accepted this and received antidilution protection that did not apply if
Fletcher converted its already existing Preferred Stock under the terms of the Certificates
of Rights and Preferences.
As September drew to a close, BGP and ION had agreed on the structure of the
joint venture, but it was evident that it would take months to get final regulatory
approvals for the transaction. 82 The BGP Transaction provided a longterm solution to
the problems that ION faced, but both BGP and ION were concerned that ION did not
have sufficient cash to meet its obligations during the months between the announcement
of the term sheet and the closing of the transaction. Therefore, the concept of BGP
arranging for some type of bridge financing began to emerge. 83 During the last two
weeks of September, BGP and ION tried to figure out the best way for BGP to inject
capital into ION. Several ideas were floated — including a proposal under which BGP
80
Trial Tr. vol. 2, 622:1824 (Peebler).
81
Trial Tr. vol. 2, 654 (Roland).
82
Because the transaction involved a large investment by a Chinese stateowned enterprise into
an American company in the oil and natural gas industry, the parties were particularly concerned
that it could take a long time to get approval from the Committee on Foreign Investment in the
United States (CFIUS). Trial Tr. vol. 2, 486:611 (Hanson). In addition to CFIUS approval,
BGP and ION had to get international antitrust approvals and approvals from the Chinese
government. Id.
83
Id. at 475:611.
20
would have just purchased equity from ION, which was ultimately abandoned because of
the regulatory approvals that would be required — and BGP ultimately decided to pair
with the Bank of China and arrange for bridge financing to be provided through ION’s
Credit Facility.84 Although the Bank of China, as a stateowned bank, was not in the
regular business of providing financing to small public companies in the United States,
this was not a deal where it viewed itself as acting as a provider of financing to ION.
Rather, the Bank of China was acting as a strategic financial arm of the Chinese
government by seeking to facilitate another stateowned enterprise’s entry into a
precedentiallyimportant joint venture in the United States. The Bank of China agreed to
provide the bridge financing not for business or commercial reasons of its own, but
because of the strategic importance of the transaction to BGP, China National Petroleum,
and the Chinese government. 85 ION believed that it only needed $20 million in bridge
financing to get to closing, but BGP initially wanted to provide ION with $65 million. 86
BGP wanted to make sure that there was no possible scenario under which the amount of
bridge financing provided would be insufficient to see ION through closing. 87
BGP and the Bank of China initially proposed to amend the Credit Facility to
enable the provision of bridge financing through a separate tranche of lending that would
84
Id. at 47778.
85
Trial Tr. vol. 1, 13738 & 17475 (Fowler).
86
Trial Tr. vol. 2, 487 (Hanson).
87
Id.; JX 220 (Internal ION email chain (Sept. 26, 2009)).
21
be added to the existing Credit Facility. 88 That separate tranche proposal was ultimately
abandoned because it would have required the unanimous approval of the Existing
Lenders, and HSBC did not believe that it had enough support from the other banks to
accommodate a proposal for a separate tranche that would have had a shorter
commitment period and maturity date. 89 Thus, the solution was to take a proposal to the
Existing Lenders that would allow the Bank of China to enter into the Credit Facility on
equal terms with the existing lenders. ION planned to issue two promissory notes (one
from ION and one from ION S.ár.l.) that were convertible to ION common stock
(collectively, the “Convertible Promissory Notes”) to the Bank of China under the Credit
Facility. The conversion rates on the Convertible Promissory Notes were set so that they
would convert into an amount of stock equal to the amount outstanding. Under an
agreement entered into on October 23, 2009, the Bank of China and BGP agreed that
BGP would purchase the Bank of China’s rights under the notes and that the Bank of
China would assign all of its rights under the notes to BGP. 90 The purpose of the
convertibility feature was that, at closing, BGP could simply convert the Convertible
Promissory Notes into ION common stock, thereby extinguishing them and eliminating
the need to pay cash at closing. 91 In addition to the Convertible Promissory Notes, ION
would give BGP a warrant that was equivalent in value to the convertible notes. If the
88
JX 238 (Email chain regarding discussions with HSBC (Oct. 2, 2009)).
89
Id.
90
JX 357 (Participation Agreement Between Bank of China and BGP (Oct. 23, 2009)).
91
PostTrial Oral Arg. Tr. 113.
22
transaction did not close, BGP would be able to sell the warrant to recapture the cash it
had put into the bridge loan.92
ION and its advisors viewed it as very unlikely that ION could secure unanimous
approval from the Existing Lenders to add additional debt to the Credit Facility beyond
the $40 million that could be added through the Credit Facility’s accordion feature. 93 The
Existing Lenders felt that such an increase in borrowing under the Credit Facility would
“have the effect of diluting the lenders’ collateral coverage beyond the extent previously
approved.”94 The Existing Lenders were also strongly inclined against waiving the
requirement under the Credit Facility that all lenders be pro rata in order to let the bridge
financing provided by the Bank of China mature before the rest of the Credit Facility or
to be paid earlier.95 Generally, the Existing Lenders were unwilling to permit the Bank of
China to enter the Credit Facility and lend money to ION on better terms than the terms
that the Existing Lenders had under the Credit Facility.
Therefore, ION, BGP, and the Bank of China agreed that the easiest way to
provide the bridge financing was to amend the Credit Facility so that the Bank of China
could be a lender in the Credit Facility under the same terms and conditions as the
92
Trial Tr. vol. 2, 48344 (Hanson).
93
JX 259 (Email Chain discussing the need for approval from the Existing Lenders (Oct. 6,
2009)). Although the record does not clearly indicate why only $40 million was available to be
added through the accordion feature when it was initially set up to allow up to an additional $50
million to be added to the Credit Facility, presumably ION had exercised the accordion feature
once before and added $10 million to the Credit Facility, meaning that only $40 million was left
available.
94
JX 261 (Internal ION email chain (Oct. 6, 2009)).
95
Id.
23
Existing Lenders and then to exercise the accordion feature of the Credit Facility so that
the Bank of China could provide ION with the $40 million of bridge financing. Although
ION still felt that it only needed $20 million, and BGP still would have preferred to
provide more, the companies settled on $40 million because it was the most that could be
provided under the Credit Facility’s accordion feature. 96 ION needed a majority of the
Existing Lenders to agree to amend the Credit Facility to allow the proposal to proceed.
By midOctober, BGP and ION had agreed on the structure of the bridge
financing. ION’s management team next turned its attention to making sure the Existing
Lenders understood how delicate ION’s financial situation was and that, under the deal
with BGP, the Existing Lenders would be paid back in full at closing. 97 The BGP
Transaction was the best chance that the Existing Lenders had to be repaid and, if the
transaction closed, they would be able to end their lending relationship with ION entirely,
which is what they most desired. After a brief phone conversation, HSBC agreed to
support the deal negotiated between BGP and ION and to take it to the Existing
Lenders.98 HSBC proposed an amendment to the Credit Facility that would enable the
96
Trial Tr. vol. 2, 487 (Hanson).
97
JX 307 (Internal ION email chain regarding phone call with Existing Lenders (Oct. 15, 2009))
(“[W]e are prepared at the appropriate point to meet with HSBC and other banks that makes
sense to make sure that they get a loud and clear message from management and the board that
1.) the option on the table is the only option to keep ION out of bankruptcy, 2.) we are at a
decision point b a week from Friday due to our cash situation and stress on our suppliers/etc, and
3.) The company strongly recommends that they go with the Term Sheet as proposed as it seems
inconceivable to us that the banks would force the company into bankruptcy when they have a
deal that has the best chance of . . . paying them back 100% . . . ”).
98
Trial Tr. vol. 2, 481:14482:6 (Hanson) (“[T]he conversation I had with a counterpart at HSBC
was a very short one. It was a call that probably lasted an hour and we walked through the
24
Bank of China to enter the Credit Facility and provide ION with the bridge financing and,
after discussing the transaction with ION’s management on October 14, 2009, the
Existing Lenders were all supportive of the proposed amendment. 99 The Sixth
Amendment to the Credit Facility (the “Sixth Amendment”), which permitted the bridge
financing to proceed, was unanimously approved on October 22, 2009 and executed on
October 23, 2009.100 In exchange for their approval of the Sixth Amendment, the
Existing Lenders received a consent fee of 25 basis points over the amount of the loan
outstanding.101
After securing the approval of the Existing Lenders, BGP and ION prepared to
proceed with a public announcement of the term sheet. At 10:26 p.m. on October 22,
2009, the day before the deal was to be announced and the term sheet signed, BGP’s
attorney emailed David Roland, ION’s General Counsel, with several changes to the
documents for the bridge financing. Negotiations continued throughout the night, and the
final term sheet was agreed to less than three hours before the deal was to be
proposed transaction. . . . the way I described it to him was, ‘this is a takeitorleaveit deal and
it’s not one we are going to negotiate.’ I said ‘If you’re not going to take this deal, you can send
in your workout teams. [Peebler] and I will hand you the keys and we are going to the beach
because we have done the best we can do at this point.’ . . . He went back and actually had a
conversation internally; came back to me within a half hour called me and said ‘HSBC will
support the deal and will bring it to the bank group.’”).
99
JX 319 (Email between Hanson and Peebler regarding the Sixth Amendment (Oct. 21, 2009))
(“Good news, all banks are supportive so far.”).
100
JX 336 (6th Amendment to Amended and Restated Credit Agreement (Oct. 23, 2009)); JX
340.
101
JX 351 (Fee Letter – Sixth Amendment to Credit Agreement between ION Geophysical Corp.
and HSBC Bank USA, N.A. (fully executed) (Oct. 23, 2009)).
25
announced.102 As the negotiations drew to a close Peebler emailed his counterpart at
BGP and said, “We are done!! No more changes please.” 103
On October 23, 2009, ION announced that it had entered into a binding term sheet
with BGP that set forth the principal terms for a proposed joint venture between the two
companies, entered into the Sixth Amendment, and issued the Convertible Promissory
Notes evidencing the bridge loan from the Bank of China. 104 Under the Convertible
Promissory Notes, ION, at BGP’s insistence, borrowed the full $40 million ($30 million
at the parent level and $10 million at the international subsidiary) shortly after the close
of the transaction. Although ION accepted the full $40 million in bridge financing that
BGP insisted upon, it still believed that it only needed $20 million and, therefore, repaid
$20 million the next day (including the $10 million that ION S.ár.l. borrowed), leaving it
in a position with net $20 million borrowed. 105 Although all of the $10 million that ION
S.ár.l. borrowed was repaid the next day, the ION S.ár.l. Note was not extinguished
because the $10 million repayment was distributed on a pro rata basis among BGP and
the Existing Lenders.106
The announcement of the term sheet had an immediate positive effect on ION’s
stock price and on Fletcher’s investment in ION. Internally, Fletcher circulated an email
that noted that ION’s stock price increased by as much as 47% following the
JX 339 (Email chain between Yeliang Guo and Peebler (Oct. 23, 2009)).
103
Id.
104
JX 352 (ION Form 8K (Oct. 23, 2009)).
105
Trial Tr. vol. 2, 645 (Roland).
106
Id. at 648.
26
102
announcement of the term sheet.107 Then Fletcher began buying more ION securities.108
In the world of lucre, greenbacks mean more than words, of course. In the case of
Fletcher, its view that the BGP Transaction was positive for ION’s equity value was
made plain by its actions. Fletcher began to buy more ION stock.
D. Fletcher Sues ION
On November 25, 2009, a little over one month after the announcement of the
BGP Transaction, Fletcher, then represented by Skadden and Proskauer Rose, LLP, filed
a complaint in this court seeking, among other things, a declaration that its right to
consent to any issuance of a security by ION S.ár.l. had been violated, an injunction of
the BGP Transaction until ION had provided Fletcher with all material information
regarding the transaction and obtained Fletcher’s consent, and an award of damages. 109
Despite the fact that Fletcher had been circulating articles internally that noted the
increase in ION’s stock price and buying more ION securities, that original complaint
included statements such as “it appears that ION has sold off a substantial part of its
business at fire sale prices at the bottom of a near collapse of the land equipment
business”110 and “[b]ased on the little information disclosed to date, the terms of the BGP
Transactions appear highly unfavorable.” 111 In the complaint, Fletcher even stated that
ensuring that it had the opportunity to exercise its consent right would “not only protect
107
See JX 360 (Internal Fletcher email chain (Oct. 26, 2009)) (showing that employees of
Fletcher internally circulated an email that attached an article describing the increase in ION’s
stock price following the announcement of the term sheet)
108
See JX 361 (Internal Fletcher email chain (Oct. 26, 2009)) (discussing trades in ION
securities Fletcher executed following the announcement of the term sheet).
27
Fletcher, but may protect all stockholders from another disastrous investment by ION and
its directors.”112
On December 23, 2009, Fletcher moved for partial summary judgment “ask[ing]
the Court to declare that ION breached its obligations under its Certificate of
Incorporation by permitting the issuance of the ION S.àr.1 Note ‘without first obtaining a
meaningful and informed vote of approval by Fletcher’” and “that the Note is ineffective
and unenforceable unless and until ION provides Fletcher with facts concerning the BGP
Transactions and obtains Fletcher’s consent to the issuance of the ION S.ar.l Note after
providing Fletcher a reasonable time to consider that issuance.” 113 Because of the exigent
time pressures, Vice Chancellor Parsons treated the motion for summary judgment as a
more provisional request for a preliminary injunction, noting that because Fletcher was
asking the court to invalidate the issuance of the ION S.àr.1 Note and to require that ION
repay any funds borrowed under that note, Fletcher was effectively seeking a preliminary
injunction.114 Oral Argument on Fletcher’s motion was held on January 19, 2010. On
March 24, 2010, the day before the BGP Transaction was scheduled to close, Vice
Chancellor Parsons issued a decision finding that although Fletcher had a reasonable
likelihood of success on its claim that ION had violated its contractual right to consent,
Verified Compl., Request for Relief.
110
Compl. at ¶ 53.
111
Compl. at ¶ 52.
112
Compl. at ¶ 54.
113
Fletcher I, 2010 WL 1223782, at *2.
114
Id. at *3.
28
109
the balance of the equities weighed against granting injunctive relief. 115 Vice Chancellor
Parsons listed three reasons for his decision not to grant injunctive relief: (1) an
injunction could have prevented the BGP Transaction from closing and caused ION to
default on its debt obligations; (2) Fletcher was unlikely to suffer irreparable harm in the
absence of an injunction, because the court could ascertain its damages in the future by
determining the amount Fletcher would have received in a hypothetical negotiation for its
consent; and (3) “Fletcher did not pursue its purported consent rights with the degree of
alacrity that the Court would expect in the context of an effort to interfere with a
transaction of the size and importance to ION of the imminent BGP Transactions.” 116
Vice Chancellor Parsons, therefore, denied Fletcher’s motion for summary judgment
“insofar as it could be construed as a request for a preliminary injunction effectively
invalidating ION’s issuance of the ION S.àr.l. Note or requiring that ION repay funds
borrowed under that Note.” 117
The next day, on March 25, 2010, the BGP Transaction closed. As part of the
closing, BGP acquired 23.8 million shares of ION common stock by converting the
principal balance of the Convertible Promissory Notes, which the Bank of China had
assigned to BGP, thereby extinguishing the ION S.àr.l. Note. ION also entered into a
115
Id.
116
Id. at *45. This wellsupported finding is consistent with the facts in the record that
demonstrate that Fletcher waited an entire month after the announcement of the transaction to
file a complaint and an additional month after the complaint was filed to seek the requested
equitable relief. Fletcher’s lack of speed directly contradicts its attempts at trial to portray itself
as having timely sought to enforce its consent right from the very beginning.
117
Id. at *2.
29
new credit agreement with China Merchants Bank Co. Ltd. (hereinafter “China
Merchants Bank”) on terms and conditions that were substantially improved from its
earlier Credit Facility, and it repaid all of its outstanding loans under the Credit Facility.
The BGP Transaction reduced ION’s total overall debt from over $240 million to only
$106 million, all of which was in the form of a term loan under the new credit facility
with China Merchants Bank.118
Contrary to Fletcher’s assertions in its original complaint, Fletcher actually
believed that the BGP Transaction was valueenhancing for Fletcher, ION, and ION’s
common stockholders.119 So did the stock market. ION’s stock price recovered from its
preBGP Transaction low of $0.83 in March 2009 to over $8.00 by the end of 2010. 120
This increase in value was particularly important for Fletcher, which was carrying its
investment in ION on its books for far more than its market value before the
announcement of the BGP Transaction. 121 Had the BGP Transaction failed to close, and
118
Def.’s Opening PreTrial Br. at 2223.
119
Id. at 23.
120
Id.
121
JX 437 (Spreadsheet reflecting Fletcher preferred stock valuation attached to Fletcher’s
Responses and Objections to Defendants’ Second Set of Interrogatories (Sept. 9, 2011)) (noting
that throughout the fall of 2009 Fletcher valued its preferred stock for more than $110 million).
According to the defendants’ uncontested arithmetic, Fletcher could only have converted its
Preferred Stock into approximately $53 million of ION common stock before the announcement
of the merger. It is curious why Fletcher valued its Preferred Stock so much above fair market
value, but what is not clouded from clarity is the reality that a complete loss of its ION
Investment through an ION bankruptcy — and the subsequent write down of its assets by $110
million — would have been devastating for Fletcher, while the increase in value of the Preferred
Stock following the BGP Transaction was very beneficial for Fletcher.
30
ION been forced to file for bankruptcy, it is likely that Fletcher would have lost its entire
investment in ION.122
On May 28, 2010, Vice Chancellor Parsons issued an opinion addressing the
issues on which he had reserved judgment in Fletcher I and granted Fletcher’s motion for
summary judgment in part (Fletcher II), holding that Fletcher had a right to consent to
any issuance of a security by an ION subsidiary, that the ION S.àr.l. Note was a security,
and that ION had violated Fletcher’s consent right when the ION S.àr.l. Note was issued
without Fletcher’s consent.123 The Vice Chancellor’s determination that the ION S.àr.l.
Note was a security was based on the fact that the note was convertible. As the Vice
Chancellor acknowledged, and as Fletcher admitted, “certain classes of notes are not
securities.”124 Nonetheless, the Vice Chancellor concluded that the ION S.àr.l. Note was
a security because it was “a debt instrument convertible into equity securities.” 125 On
December 1, 2010, Vice Chancellor Parsons recused himself because of developments
unrelated to his own actions and beyond his control, and the case was reassigned.
Fletcher then began concentrating on obtaining damages for the bypass of its
consent rights as to both the ARAM transaction and the BGP Transaction. Fletcher made
plain that it viewed itself as having claims for big dollars — dollars larger, in the case of
122
Although Fletcher’s Preferred Stock would have put it ahead of ION’s common stockholders
in a distribution of assets in a bankruptcy proceeding, Fletcher still would have been behind the
Existing Lenders, who were senior secured lenders. Given that over half of Fletcher’s assets
were invested in ION Preferred Stock, an ION bankruptcy could have led to Fletcher’s
insolvency.
123
Fletcher II, 2010 WL 2173838, at *56.
124
Id. at *5.
125
Id.
31
the BGP deal, than the $40 million bridge loan that Vice Chancellor Parsons held
triggered its consent right.
On June 29, 2012, after more than two years of litigation and after all of the pre
trial discovery had been completed and all of the expert reports filed, Fletcher filed a
voluntary petition for bankruptcy under Chapter 11 of the United States Bankruptcy
Code.126 The bankruptcy trustee elected to hire new counsel to litigate the claims in this
case in early 2013. Shortly after they were retained, Fletcher’s new counsel attempted to
introduce new damages theories and new expert reports. That request was denied by this
court on March 8, 2013.127
Although the report filed by Fletcher’s expert, Peter Fowler, 128 had been floating
around for years, it was not until Fletcher filed its opening pretrial brief on July 3, 2013,
that it specifically quantified its damages and disclosed for the first time that it was
seeking total damages of over $78 million. 129 Fletcher also attempted an endrun around
this court’s denial of its request to introduce new expert reports by introducing a
comparable transactions analysis and a highest intermediate price analysis — neither of
Letter to the Court of Chancery from Counsel for Fletcher, advising the Court of Fletcher’s
filing of a voluntary petition for relief under Chapter 11 in the U.S. Bankruptcy Court for
S.D.N.Y. (July 12, 2012).
127
Order Denying Fletcher’s Motion for Leave to File Narrowed Expert Reports (Mar. 8, 2013).
128
Everyone has a bad day; that comes with being human. For reasons that the trial record
reflects, Fowler’s testimony in this case fell into that category. Put succinctly, his expert report
failed to take into account important factors and his trial testimony was inconsistent, lacked
credibility, and involved unfairness to the defendants. It is therefore deserving of, and given,
little or no weight.
129
Pl.’s Opening PreTrial Br. at 4850.
32
126
which had been disclosed in discovery — in its opening pretrial brief. 130 ION moved to
strike these new analyses, and this court granted that request on July 31, 2013 because
Fletcher’s violations of its discovery obligations and attempts to circumvent the prior
rulings of this court were unfair and prejudicial to ION. 131
E. Trial
The sole issue left for determination is the amount of damages that Fletcher is
entitled to as a result of the breach of its contractual right to consent to the issuance of
any security by an ION subsidiary. In accordance with Vice Chancellor Parsons’s letter
opinion issued on March 24, 2010 — which held that Fletcher would not be irreparably
injured by the denial of its request for an injunction because “Fletcher could still pursue
its claim for money damages” and that the court could resolve that issue by “determining
the amount Fletcher would have received in a hypothetical negotiation regarding its
asserted right to consent to the ION S.àr.1 Note, before it issued[,]” 132 — the parties
constructed competing versions of the hypothetical negotiation. The parties have made
the already challenging task of attempting to construct a hypothetical negotiation even
more difficult by presenting cartoonish versions of the hypothetical negotiation. Those
competing versions of the hypothetical negotiation are described below.
Id. at 3335.
131
Telephonic Rulings of the Court on Defendants’ Motion to Strike, Plaintiff’s Motion in
Limine, and Pretrial Conference (July 31, 2013).
132
Fletcher I, 2010 WL 1223782, at *2.
33
130
i. Fletcher’s Damages Theories And Its Version Of The Hypothetical Negotiation
Fletcher’s version of the hypothetical negotiation pits Fletcher and its eponymous
thenCEO Alphonse “Buddy” Fletcher (“Buddy Fletcher”), a tough negotiator ready to
use his consent right to extract as much value as possible, against ION, a weak and
hapless negotiator that was desperate and would have done anything to close the BGP
Transaction. Although Buddy Fletcher never appeared at trial, how he would have
behaved during the hypothetical negotiation was discussed extensively. In Fletcher’s
own version, Buddy Fletcher was portrayed as an exceedingly selfconfident and
opportunistic individual who believed that he could extract almost two dollars of value
from ION and BGP for every dollar of bridge financing over which he had a consent right
by refusing to grant his consent unless his demands were met.
Thus, as its core theory of damages at trial, Fletcher contended that it would have
demanded and received several changes to the terms of its Preferred Stock in exchange
for its consent to the issuance of the ION S.àr.1 Note. According to Fletcher’s Vice
Chairman, Kell Benson, Fletcher concluded shortly after the announcement of the BGP
Transaction that its consent right had been violated and, from the very beginning, was
focused on obtaining changes to its conversion price and the interest rate on its Preferred
Stock in exchange for its consent. 133 In his expert report, Fowler concluded that Fletcher
would have asked for three changes to the terms of its Preferred Stock in the hypothetical
negotiation: (1) an increase in the dividend rate of 250 to 350 basis points, (2) a decrease
133
Trial Tr. vol. 1, 29 (Benson).
34
in the conversion price from $4.45 to $2.80, and (3) a reinstatement of Fletcher’s
redemption right without a Minimum Price Provision. 134 Fletcher valued these changes
at $78 million as of the time of the hypothetical negotiation. 135 That fact bears repetition:
Fletcher was asking for $78 million in exchange for its consent to a bridge financing that
totaled only $40 million. In other words, the consent fee Fletcher believes it was entitled
to was almost double the size of the transaction to which Fletcher was being asked to
consent.
At trial, Fletcher’s advocates and expert witness premised its case on this extreme
position. Fletcher told this court that Buddy Fletcher would not have consented to the
BGP Transaction without receiving consideration greater in value than the bridge
financing itself. Even more, Buddy Fletcher was portrayed as a person willing to bring it
all down on his own head — and the heads of the Fletcher investors of which he was a
fiduciary.136 Fletcher maintained this portrayal of Buddy Fletcher throughout its pretrial
JX 455 at 1415 (Expert Report of Peter A. Fowler (Nov. 10, 2011)).
135
Pl.’s Opening PreTrial Br. at 4850.
136
JX 447 at 28 (Deposition Minuscript of Alphonse Fletcher (Oct. 4, 2011)) (“The less risky
instrument’s terms, having just been negotiated by the company, should be a good benchmark for
pricing the company’s securities. And so the higher risk instrument owned by Fletcher should
have higher amounts of income and/or lower conversion prices than the less risky instrument that
is being inserted in front of it, only with Fletcher’s consent.”); Id. at 27 (explaining his position
that if Fletcher believed it was entitled to $30 million in exchange for its consent, there were no
circumstances under which it would have agreed to consent for less than $30 million, even if the
company had alternatives that it could have pursued that would have avoided the need for
Fletcher’s consent that would have cost only $1 million); Trial Tr. vol. 1, 33:1419 (Benson)
(testifying that Fletcher only would have consented if it received the compensation it considered
“fair”); Id. at 7780 (testifying that if ION had threatened not to pay the consent fee Fletcher
claims it would have demanded, to forego the BGP Transaction, and file for bankruptcy, Fletcher
would have been willing to call ION’s bluff).
35
134
briefing and at trial even though: (1) Buddy Fletcher’s own actions revealed that he
thought the BGP deal was great for ION and thus Fletcher; (2) an ION bankruptcy would
have ruined Fletcher itself; and (3) Fletcher only had consent rights over a $40 million
bridge financing. This approach to the litigation appears to have been shaped by Buddy
Fletcher, Benson, and Fletcher’s advisors before the bankruptcy. Because the bankruptcy
occurred after this litigation had already proceeded through discovery and the expert
reports had been filed, Fletcher was held to the case that it had already put together and
not permitted to make up a new one at ION’s expense. For reasons that were not
explained, the bankruptcy trustee, who controlled the litigation, and new counsel did not
present Buddy Fletcher as a witness at trial. There was, therefore, no basis for the court
to hear directly from him about the way that he was portrayed by Fletcher’s advisors in
its briefs and expert reports.
Fletcher assumed that in the hypothetical negotiation for its consent, “[it] would
essentially be reunderwriting or reevaluating its investment in [the] negotiation.” 137 But
this was a false premise because Fletcher had no right to exit its investment, no put option
through which it could require ION to repurchase its Preferred Stock if it refused to
consent, and, unlike the Existing Lenders, had no right to declare a default. Consistent
with the false belief that Fletcher would essentially be reevaluating its investment in ION
even though Fletcher was not actually bringing any new capital to the table or giving
JX 455 at 7 (Expert Report of Peter A. Fowler (Nov. 10, 2011)); see also Trial Tr. vol. 1, 29
30 (Benson) (explaining that Fletcher would have asked for these changes to its preferred stock
because similar terms had been granted to BGP).
36
137
anything of value to ION other than its consent, Fowler selected these three demands
because they were on par with the terms of the ION S.ár.l. Note, which was being issued
in exchange for the bridge financing. 138 Importantly, Fletcher viewed its consent right
over the issuance of the ION S.àr.1 Note as applying to the entire BGP Transaction,
which was valued in the hundreds of millions of dollars, not only to the $40 million
bridge financing that the ION S.àr.1 Note was issued in connection with. 139
The hypothetical negotiation that Fletcher believes would have happened is
misleadingly simple: ION and Fletcher would have been the only parties involved in the
negotiation, and ION would have been so desperate to close the BGP Transaction that it
would have simply acceded to all of Fletcher’s demands. In other words, under
Fletcher’s version of the hypothetical consent negotiation, Fletcher would have requested
the three changes to its Preferred Stock listed above and ION would have, immediately
and without consulting BGP or the Existing Lenders, granted those requests in exchange
for Fletcher’s consent.140 This hypothetical negotiation is premised on two key
assumptions: that neither BGP nor the Existing Lenders would have objected to the
changes to Fletcher’s Preferred Stock and that ION had no viable alternatives.
138
JX 455 at 1415 (Expert Report of Peter A. Fowler (Nov. 10, 2011)) (“Given that the ION
S.ár.l. note had a $2.80 conversion price, that is a ready benchmark for the adjustment of
Fletcher’s conversion price. . . . The proposed dividend rate is reasonable because it is only
slightly higher than the floating rate on the ION S.ár.l. note.”).
139
PostTrial Oral Arg. Tr., 57:69 (reiterating Fletcher’s position that the consent right was over
the entire BGP Transaction, not only the $40 million bridge financing).
140
Id.
37
In his expert report and at trial, Fowler took the position that Fletcher had
“significant leverage” because ION did not have a realistic alternative to the BGP
Transaction.141 Fletcher has argued that ION’s only options were to complete the BGP
Transaction or to file for bankruptcy, and that because its consent was necessary for the
BGP Transaction to proceed, it could have withheld that consent to extract tremendous
value. Fowler’s conclusion that ION had no alternatives to the BGP Transaction was
largely premised on his opinion that the Existing Lenders never would have agreed to any
amendment to the Credit Agreement that required unanimous approval of the Existing
Lenders.142 Fowler’s opinion appears to have been based entirely on the emails between
HSBC and ION indicating that HSBC did not believe that there was support from the
Existing Lenders to unanimously approve a specific proposal that would have put the
Bank of China on better terms than the Existing Lenders. 143 And, consistent with his
view that Fletcher’s consent right extended to the entire BGP Transaction instead of only
to the bridge financing, Fowler ruled out the possibility of completing another private
placement or other capital raise because it would not have “given [ION] a strategic
partner like the BGP Transaction.” 144
Fowler also opined that the fact that Fletcher’s investment in ION made up almost
twothirds of its investment portfolio would not have been material to Fletcher and that,
Trial Tr. vol. 1, 23031 (Fowler).
142
Trial Tr. vol. 2, 408:1013 (Fowler).
143
Id.
144
Id. at 390
141
38
because Fletcher would not have believed ION if it had threatened to pursue bankruptcy
instead of making a consent payment to Fletcher, Fletcher would have held fast to its
demands and ultimately received everything that it asked for. 145 In other words, Fowler’s
entire report was premised on the notion that Fletcher was willing to strap a bomb onto its
chest and blow up the entire BGP deal, force ION into bankruptcy, and decimate its own
investment portfolio if it was not paid a ransom in exchange for its consent to a
transaction that was already expected to create substantial value for it. Benson’s
testimony supported this depiction of Fletcher when he testified that, if in the
hypothetical negotiation ION had threatened bankruptcy, Fletcher would have been
willing to call ION’s bluff.146
After it became evident at trial that Fowler’s twodimensional depiction of the
hypothetical negotiation for Fletcher’s consent was unrealistic because it assumed that
the negotiation occurred in a vacuum between ION and Fletcher and that no other parties
would have been involved, Fletcher attempted to argue that neither the Existing Lenders
nor BGP would have cared if ION agreed to give tens of millions of dollars in value to
Fletcher in exchange for its consent. Fowler conceded that as a practical matter, BGP
would find out about any negotiation with Fletcher for its consent and need to approve
the concessions as they came in material part at BGP’s expense, but he contended that
BGP would not have objected to the changes to Fletcher’s Preferred Stock that Fletcher
Id. at 23334 & 156:38.
146
Trial Tr. vol. 1, 80 (Benson).
145
39
would have asked for.147 Fowler’s position that BGP would have been indifferent to
these changes in Fletcher’s Preferred Stock was premised on his opinion that BGP’s
primary objective was getting access to ION’s land assets through the joint venture and
that the equity investment in ION was only a secondary concern. 148
Fowler’s opinion thus ignored several key facts. First, BGP had been insistent on
a substantial equity stake and accompanying antidilution protection. Although BGP had
begrudgingly agreed to let itself be diluted if Fletcher, which had existing contractual
rights, converted its Preferred Stock under the existing Certificates of Rights and
Preferences, the negotiation history reveals that BGP’s equity stake and its protection of
that stake from dilution were both very important to BGP. Fletcher’s hypothetical
demands were critically different from the existing Certificates of Rights and Preferences
and would have subjected BGP to additional dilution because of a consent payment to
Fletcher.
Fowler also erroneously premised his report on the presumption that ION would
not have been required to obtain the consent of the Existing Lenders to make the changes
Fletcher would have requested to its Preferred Stock. But that position is directly
contradicted by the language of the Credit Agreement. Section 6.07 of the Credit
Agreement prohibited ION from agreeing to make any “Restricted Payments” that were
Trial Tr. vol. 2, 15657 (Fowler).
148
Id. at 157:1317 (“Primary objective was getting access to the intellectual property that ION
had and getting that in the [joint venture] and getting control of the [joint venture]. Secondary
objective was an investment in – in ION itself.”); Id. at 15760 (describing Fowler’s position that
BGP would not have been concerned with the changes to Fletcher’s Preferred Stock because its
primary strategic objective still would have been met).
40
147
not specifically exempted from the prohibition. 149 The Credit Agreement defined a
Restricted Payment as “any dividend or other distribution . . . with respect to any Equity
Interests in [ION] . . .”150 This means that, unless a specific exemption was found in the
Credit Agreement, ION was prohibited from agreeing to make any dividend payments
absent an amendment to the Credit Agreement. Excepted from this prohibition on the
payment of dividends by Section 6.07(d) are “all dividends, redemptions, or distributions
. . . in respect of [ION’s] Convertible Preferred Stock.” 151 The Credit Agreement defines
“Convertible Preferred Stock” to mean the “Existing Convertible Preferred Stock,” 152
which is in turn defined as:
those certain (1) Series D1 Cumulative Convertible Preferred Stock issued
pursuant to the terms of the Certificates of Rights and Preferences of Series
D1 Cumulative Convertible Preferred Stock dated February 16, 2005, (ii)
Series D2 Cumulative Convertible Preferred Stock issued pursuant to the
terms of the Certificate of Rights and Preferences of Series D2 Cumulative
Convertible Preferred Stock dated December 6, 2007, (iii) Series D3
Cumulative Convertible Preferred Stock issued pursuant to the terms of the
Certificate of Rights and Preferences of Series D3 Cumulative Convertible
Preferred Stock dated effective as of February 21, 2008 and (iv) shares
issued in accordance with the terms of Section 1(c) of that certain
Agreement dated as of February 15, 2005 between [ION] and [Fletcher]. 153
It was this provision in the Credit Agreement that enabled ION to make dividend
payments to Fletcher, even though ION was generally prohibited from making dividend
payments by the terms of the Credit Agreement. The exception for dividend payments to
JX 15 (ION’s Amended and Restated Credit Agreement (July 3, 2008)).
150
Id. at 22.
151
Id. at 65.
152
Id. at 8.
153
Id. at 10.
41
149
Fletcher, however, was clearly limited to the terms of the specific existing Certificates of
Rights and Preferences that governed Fletcher’s Preferred Stock. For ION to increase the
dividend payments to Fletcher, as Fletcher and its expert contend ION would have done,
ION would have had to get the consent of the Existing Lenders to amend the Credit
Agreement to allow the payment of the increased dividends. Fowler’s assumption that
the Existing Lenders would not have been part of the negotiation for Fletcher’s consent
was, therefore, incorrect. Not only would the Existing Lenders have been involved in the
negotiation, but they would have been required to consent to any increase of Fletcher’s
dividend.
Fowler’s opinion never considered that the demands he contended Fletcher would
have been seeking would have required ION to go to BGP and the Existing Lenders and
obtain their consent. If ION had gone to BGP and the Existing Lenders with Fletcher’s
request, they would have asked ION why they should agree to approve changes that
would transfer value to a preferred stockholder that nearly doubled the value of the bridge
financing the preferred stockholder was being asked to consent to, especially when that
preferred stockholder faced catastrophic loss if BGP walked away and the BGP
Transaction didn’t happen. These were critical real world factors Fowler either chose to
ignore or just overlooked.
After it became evident at trial that Fowler’s report was based on erroneous and
unsupported assumptions, Fletcher completely abandoned its earlier damages theory and,
in its posttrial opening brief filed on September 13, 2013, disclosed its new damages
42
theory: that the hypothetical negotiation would have resulted in a decrease of Fletcher’s
Preferred Stock conversion price from $4.4517 to $4.0867. 154 This new damages theory
removed the request for an increase to Fletcher’s dividend rate entirely. Presumably
Fletcher elected to drop that request because the Credit Agreement would have required
the Existing Lenders to consent to any increase in the dividend rate on Fletcher’s
Preferred Stock. Under this new damages theory, Fletcher contends that it is entitled to
damages, before prejudgment interest, “of no less than $6,235,553” and that the “floor”
for damages should be set by the total consent fee ION paid to the Existing Lenders in
connection with the Fifth Amendment. 155
Unlike its shifting damages calculations, Fletcher has maintained consistency on
one point: that ION had no options other than to pay the ransom that Fletcher would have
demanded in exchange for its consent and that ION would have rolled over and agreed to
Fletcher’s demands in order to avoid bankruptcy. 156 But Fletcher’s version of the
hypothetical negotiation — in which Fletcher and ION were the only two parties
involved, ION was the only party with anything to lose, and ION was a weak negotiator
who either had to declare bankruptcy or agree to pay whatever Fletcher demanded —
does not comport with the record.
Pl.’s Opening PostTrial Br. at 20.
155
Id.
156
Pl.’s Answering PreTrial Br. at 2029; Pl.’s Opening PostTrial Br. at 2728.
43
154
ii. ION’s Version Of The Hypothetical Negotiation
By the time of posttrial briefing, ION’s patience reserves were understandably
depleted. Before it entered bankruptcy, Fletcher aggressively litigated this case and made
plain that it thought big, big dollars were owed it for the deprivation of its consent right to
the $40 million bridge loan. ION was, of course, forced to spend a great deal of money
seeking to rebut the case Fletcher was making. Then Fletcher filed for bankruptcy,
causing a delay in the litigation. After that, the bankruptcy trustee entered the litigation
with new counsel, and Fletcher tried to fundamentally change its approach. After being
denied that chance once after motion practice, Fletcher tried it again in its pretrial
briefing, and ION again had to spend resources to prevent this. At trial, Fletcher
presented its long established damages theory, which is that it would accept nothing less
than the changes to its Preferred Stock which it valued at $78 million and that anything
materially less than this demand would have been rejected. Seizing on Fletcher’s own
portrayal of itself as prepared to be nihilistic, ION’s posttrial briefing took on a
cartoonish character of its own, albeit one with more realistic qualities than that drawn by
Fletcher.
Building on Fletcher’s own case theory, in ION’s version of events, Fletcher
would have opened the negotiations by requesting the three changes to its Preferred Stock
that would have had a present value of around $78 million. ION contends that because
neither itself, BGP, or the Existing Lenders would have agreed to those changes, and
because Fletcher has maintained that it never would have accepted anything less, ION,
44
BGP, and the Existing Lenders simply would have found a way to structure the
transaction so that it did not require Fletcher’s consent, thereby obviating the need to
make any consent payment to Fletcher. To buttress this position, ION spells out several
ways for ION to get bridge financing that would have been far less painful to the most
powerful players at the negotiating table, BGP and the Existing Lenders, and to ION —
whose common stockholders Fletcher erroneously believes could be trampled upon at
will. If Fletcher had acted in the extreme manner it claims it would have, one of these
less painful alternatives would have been taken, resulting in nothing for Fletcher.
III. Legal Analysis
A. Expectation Damages
Damages for breach of contract are determined by the reasonable expectations of
the parties before the breach occurred. 157 As our Supreme Court has held:
This principle of expectations damages is measured by the amount of
money that would put the promisee in the same position as if the promisor
had performed the contract. Expectation damages thus require the
breaching promisor to compensate the promisee for the promisee’s
reasonable expectation of the value of the breach of contract, and, hence,
what the promisee lost.158
157
Duncan v. TheraTx, Inc., 775 A.2d 1019, 1022 (Del. 2001).
158
Id.; see also Paul v. Deloitte & Touche, LLP, 974 A.2d 140, 146 (Del. 2009) (“Contract
damages are designed to place the injured party in an action for breach of contract in the same
place as he would have been if the contract had been performed. . . . Expectation damages are
measured by the losses caused and gains prevented by the defendant’s breach.”) (internal
citations omitted); RESTATEMENT (SECOND) OF CONTRACTS § 347 cmt. a (“Contract damages are
ordinarily based on the injured party's expectation interest and are intended to give him the
benefit of his bargain by awarding him a sum of money that will . . . put him in as good a
position as he would have been in had the contract been performed.”).
45
Damages are to be measured as of the time the contract was breached. 159
To prevail in a claim for damages for breach of contract, a plaintiff “must show
both the existence of damages provable to a reasonable certainty, and that these damages
flowed from defendant’s violation of the contract.” 160 In other words, a plaintiff “must
show that the injuries suffered are not speculative or uncertain and that the Court may
make a reasonable estimate as to an amount of damages” 161
Consent rights are commonly viewed as protective devices meant to shield the
holder of the right against being harmed by a new transaction that is adverse to its
interests.162 Although Benson paid lipservice to this understanding of a consent right
when he initially described the consent right that Fletcher possessed over issuances of
securities by ION subsidiaries, 163 Fletcher apparently viewed its consent right as an
Comrie v. Enterasy Networks, Inc., 837 A.2d 1, 17 (Del. Ch. 2003).
160
LaPoint v. AmerisourceBergen Corp., 2007 WL 2565709 at *9 (Del. Ch. Sept. 4, 2007).
161
Id. at *9; see also Cincinnati Bell Cellular Sys. Co. v. Ameritech Mobile Phone Serv. of
Cincinnati, Inc., 1996 WL 506906 at *20 (Del. Ch. Sept. 3, 1996) (“Damages cannot be
speculative or uncertain but must be based on a reasonable estimate.”) (internal citations
omitted).
162
See, e.g., NAMA Holdings, LLC v. Related World Market Center, 922 A.2d 417, 432 (Del.
Ch. 2007) (noting that the plaintiff “presumably insisted upon inclusion” of a consent right “[t]o
protect its rights”); TelcomSNI Investors, LLC v. Sorrento Networks, Inc., 2001 WL 1117505, at
*6 (Del. Ch. Aug. 29, 2001) (“The apparent intent of the protective provisions is to protect
against the issuance of more equity, without the consent of the holders of a majority of the Series
A Preferred Stock, that could result in a reduction of their rights through a restructuring of
Sorrento’s equity.”); Richard M. Buxbaum, Preferred Stock – Law and Draftsmanship, 42 CAL
L. REV. 243, 29397 (1954) (noting that preferred stockholders often negotiate for provisions that
require their approval of certain contemplated transactions and describing those provisions as
“protective requirements”).
163
Trial Tr. vol. 1, 21:18 (Benson) (describing the purpose of Fletcher’s consent right as “to
give us some protection from subsidiaries being traded or issuing securities . . . that might
increase the risk to Fletcher, this was a way to give us comfort that the company would not do
anything through subsidiaries that would harm Fletcher’s position.”).
46
159
opportunity to coerce value from ION, even in circumstances where Fletcher believed
that the transaction it was being asked to consent to was highly beneficial to itself as an
ION preferred stockholder.164 In a recent case, Zimmerman v. Crothall, a consent holder
who, like Fletcher, had shown a breach of its consent rights, learned a lesson about
overplaying one’s hand.165 In that case, the court held, after finding repeated violations
of a consent right, that a plaintiff was entitled only to nominal damages of $1.00 because
the actions taken in violation of the plaintiff’s consent right did not harm, and actually
benefited the plaintiff.166 The BGP Transaction benefited Fletcher immensely, and
therefore Fletcher suffered no damage as a result of its consummation.
Nonetheless, Fletcher’s contractual consent right was violated, it had some
leverage in a hypothetical negotiation, and it is entitled to have its reasonable
expectations honored. But the term “reasonable” is essential to a proper damages
analysis. Fletcher’s view that its expectation damages should be measured by reference
to its fantasy “ask” does not accord with our law, especially because: (1) Fletcher knew
the BGP Transaction was good for ION and itself; (2) Fletcher stood to become insolvent
itself if the BGP Transaction did not go forward; (3) other parties had far greater leverage
Id. at 3334, 7577 (explaining that Fletcher viewed its consent right as an opportunity to
“obtain value” and would only have consented to the transaction if it received “fair
compensation”).
165
62 A.3d 676 (Del. Ch. 2013).
166
Id. at 713 (“Having concluded that none of the Challenged Transactions has been shown to
have been unfair to [the holder of the consent right], however, I find that there are no such
damages. The Challenged Transactions provided the Company with crucial capital on fair terms.
The dilution [the holder of the consent right suffered] suffered was in exchange for maintaining
some value to his investment . . . [I] decline to award any damages beyond nominal damages of
$1.”).
47
164
than Fletcher; (4) Fletcher had consent rights only to an optional part of a much larger
transaction; (5) and there were viable ways to structure around Fletcher’s consent right.
To determine the amount of damages that Fletcher suffered as a result of the
breach of its contractual right to consent to the issuance of any security by ION S.àr.l.,
the parties have presented evidence to determine what they would have agreed to in a
hypothetical negotiation for Fletcher’s consent that occurred before the issuance of the
ION S.àr.l. Note in the fall of 2009.167 Fletcher’s damages, therefore, are calculated
based on the expected outcome of a hypothetical negotiation between these parties before
the announcement of the BGP Transaction.
B. The Hypothetical Negotiation For Fletcher’s Consent
Determining what Fletcher would have received for its consent to the bridge
financing in a hypothetical negotiation is not easy. It is an exercise in counterfactual
historical imagination that is, by its very nature, fraught with uncertainty. In general, this
is why consent rights cases are better dealt with by injunctive relief if the court can act
with alacrity and give the parties a reasonable period to have the negotiation or work
around the consent rights. Vice Chancellor Parsons found that was not the situation
here.168 And, as noted, the parties have unnecessarily complicated it still further by
presenting simplified caricatures of how they believe the negotiators would have
167
Pl.’s Opening PreTrial Br. at 2123 (describing the outcome of the hypothetical negotiation
constructed by Fowler); Def.’s Opening PreTrial Br. at 2627 (critiquing Fowler’s account of
the hypothetical negotiation); Pl.’s Opening PostTrial Br. at 2024 (describing what it believed
to be the “most plausible” outcome of the hypothetical negotiation); Def.’s Opening PostTrial
Br. at 1114 (describing what ION believes would have happened in a hypothetical negotiation).
168
Fletcher I, 2010 WL 1223782 at *45.
48
behaved. Nonetheless, the court must conjure up the most likely path a hypothetical
negotiation would have taken. To do so, it seems important to first explain which parties
would have been involved in the hypothetical negotiation and what leverage those parties
would have had. After describing the parties that would have been involved in the
hypothetical negotiation and considering how much leverage each of them would have
had, the court will set forth, using its best effort, how the hypothetical negotiation likely
would have ended.
C. Parties In The Hypothetical Negotiation
To determine the outcome of a hypothetical negotiation for Fletcher’s consent, the
court must consider the relative bargaining power of each of the parties that would be
involved in the hypothetical negotiation: Fletcher, ION, the Existing Lenders, and BGP.
At trial, Fletcher’s attorneys attempted to paint a picture in which Fletcher and ION were
the only two parties involved in the hypothetical negotiation. In Fletcher’s version of
events, it had all of the bargaining power and ION was weak and willing to capitulate to
whatever Fletcher demanded, no matter how unreasonable those demands may have
been. This simplified picture of the negotiations is unrealistic and does not comport with
the record.
The hypothetical consent negotiation would have occurred just before the
announcement of the BGP Transaction in the fall of 2009. For months before the
hypothetical consent negotiation, BGP and ION had engaged in numerous rounds of
intense and detailed negotiations over the structure of the BGP Transaction and the
49
bridge financing. Contrary to Fletcher’s assertions, the record indicates that BGP was
concerned not only with the joint venture, but also with the 19.99% equity stake that it
was taking in ION. BGP had reiterated the importance of its equity investment at every
step in the negotiation and, in addition to negotiating for an equity stake, BGP also took
steps to protect its investment from dilution. 169 Although BGP successfully negotiated
for limited antidilution protection for its equity stake in ION, that did not protect it from
dilution related to Fletcher’s Preferred Stock on its existing terms.170 But accepting the
preexisting rights of a preferred stockholder like Fletcher is one thing; agreeing to a $78
million package for Fletcher’s consent to a $40 million bridge loan — especially when
included in that package is a decrease in Fletcher’s conversion price, which would
increase the dilution BGP would suffer — is entirely different. The notion that ION
could have given Fletcher the changes to its Preferred Stock that Fletcher claimed it
would have demanded without BGP’s consent is inconceivable. BGP was under no duty
to do a deal, and it could have walked away from the transaction all together if it were
presented with such outrageous demands. BGP would have been involved in any
negotiation for Fletcher’s consent, especially if the negotiation started out with Fletcher
demanding changes to its Preferred Stock that would result in additional dilution to BGP.
Thus, any negotiation for Fletcher’s consent at that time would have included BGP.
169
Trial Tr. vol. 2, 62022 (Peebler).
170
Id.
50
Of all of the parties involved in the hypothetical negotiation, BGP had the most
leverage. Although Fletcher rightly points out that BGP had certain interests in the
transaction and that they wanted the deal to be consummated, BGP also had the least to
lose from walking away from the transaction. Even Fletcher’s expert, Fowler — who did
not take BGP’s participation in the negotiation or its substantial leverage into account in
his report on the hypothetical negotiation — agreed that, of all the parties involved, BGP
had the least to lose if the transaction failed to close. 171 There is nothing in the factual
record that supports the proposition that BGP would have been willing to go through with
the transaction under the terms suggested by Fletcher, and in fact the opposite is more
likely true. The record indicates that this was an important precedentsetting transaction
for BGP and for Chinese companies generally. Neither BGP nor its stateowned parent,
China National Petroleum, would have been willing to approve a consent payment to
Fletcher that made them appear weak or inexperienced. To grant huge concessions to a
party like Fletcher, which was a preferred stockholder with no right to exit its investment
and which stood to face insolvency if the BGP Transaction did not go through, would
have made BGP and China National Petroleum look like amateurs. But BGP, China
National Petroleum, the Bank of China, and their sophisticated advisors were not rubes.
And, as the principal driver of the structure of the BGP Transaction and the party with the
most leverage, BGP could have worked with ION and the Existing Lenders to find a way
to structure around Fletcher’s consent right. There is simply nothing in the record which
Trial Tr. vol. 1, 15152 (Fowler).
171
51
would support the proposition that BGP would have rolled over and acceded to Fletcher’s
demands.
The party with the second most leverage would have been the Existing Lenders.
Fowler initially took the position that the Existing Lenders would not have had any right
to consent to the changes to Fletcher’s Preferred Stock that were being requested. 172 But,
as was discussed previously, ION would have had to secure the approval of the Existing
Lenders to amend the Credit Agreement in order to give in to Fletcher’s initial ask, which
included an increase in Fletcher’s dividend rate. 173 In addition to containing terms which
gave the Existing Lenders the right to consent over any increased dividend payment to
Fletcher, the Credit Facility also gave the Existing Lenders substantial leverage in
negotiations with ION and Fletcher. Without the cash infusion that was provided by
BGP and the Bank of China in the bridge financing, Fletcher would have bumped up
against the covenants of its Credit Facility, giving the Existing Lenders the power to
declare a default.
Although it is clear that the Existing Lenders wanted the BGP Transaction to close
and to ensure that they would be fully repaid, they had greater negotiating leverage than
either Fletcher or ION, a fact that Fletcher’s own expert, Fowler, conceded at trial. 174
The power that the Credit Facility gave the Existing Lenders over ION meant that ION
Id. at 303.
173
See supra notes 149153 and accompanying text (describing the relevant provisions of the
Credit Agreement that would have required ION to seek the consent of the Existing Lenders
before agreeing to increase Fletcher’s dividend rate).
174
Trial Tr. vol. 1, 15253 (Fowler).
52
172
needed to make sure that the Existing Lenders approved of any deal that was finished.
And the Existing Lenders had less to lose than Fletcher if the deal did not close. First of
all, the Existing Lenders were the senior secured lenders, meaning that if the BGP
Transaction did not close and ION was forced into bankruptcy, they would have been
repaid first. Fletcher held only Preferred Stock and likely would have been wiped out by
an ION bankruptcy. The Existing Lenders also had less to lose than Fletcher because
they were all large commercial banks with diversified loan portfolios. Fletcher, on the
other hand, had over half of its portfolio tied up in ION Preferred Stock. Even if the
Existing Lenders had not been repaid at all, a consortium of banks writing off a $100
million loan would not have had to fear that the loss would send them into bankruptcy.
But if Fletcher had lost its entire investment in ION, Fletcher would likely have been
forced into bankruptcy shortly thereafter. The Existing Lenders, who had substantially
more leverage than Fletcher and who also had a right to consent to the bridge financing,
gave their consent to the transaction in exchange for a payment of only 25 basis points on
the amount of the loan outstanding.175
The other two parties, Fletcher and ION, had much less leverage than either BGP
or the Existing Lenders. Both of them needed the BGP Transaction to close, because
without it they were both likely facing bankruptcy. The primary difference between the
two is that ION had the Chinese and the Existing Lenders in its corner, and with those
175
JX 351 (Fee Letter – Sixth Amendment to Credit Agreement between ION Geophysical Corp.
and HSBC Bank USA, N.A. (fully executed) (Oct. 23, 2009)).
53
tough negotiators willing to work to find solutions to avoid paying an exorbitant fee to
Fletcher in exchange for its consent to a transaction that would provide it with immense
benefit, there is no reason to believe that ION would have rolled over and given in to the
crazy man in the corner threatening to blow up the transaction. Fletcher imagined that
BGP, the Existing Lenders, and ION were trapped in the locked vault with the crazy man
with the bomb, giving the crazy man the opportunity to coerce immense value from them
in exchange for not blowing itself up. The problem for Fletcher is that only the crazy
man was actually in the bombtesting vault, in the far corner away from the door; the
others were already outside the vault with their hands on the door and just had to push the
vault door closed to be safe. The bomber could then detonate if he wished, but he would
have been the only one injured.
Even if the court credits Fletcher’s theory that ION was a weak negotiator who
ordinarily could have been bullied by Fletcher into acceding to Fletcher’s demands, the
court must deal with the fact that in this instance, ION would have had to go and get the
permission of two much larger and stronger bullies before it could give into Fletcher’s
demands. Even if ION so desperately wanted the BGP Transaction to close that it was
willing to agree to changes to Fletcher’s Preferred Stock that would transfer tens of
millions of dollars in value to Fletcher in order to get the deal done, there is nothing that
suggests that BGP or the Existing Lenders were that desperate or that they would have
agreed to the changes Fletcher was requesting. This reality also undercuts Fletcher’s case
theory that the Existing Lenders would not give a unanimous consent if necessary to get
54
the BGP Transaction done. Because the Existing Lenders wanted to get out and because
the BGP Transaction promised them not only full repayment but a complete exit in a few
months time, had Fletcher made demands that came at the expense of BGP and led BGP
to consider walking away, the equation would have been fundamentally changed for the
Existing Lenders. If the Existing Lenders found out that a preferred stockholder without
a put option or other exit right was seeking $78 million in value for consenting to a $40
million bridge loan, the Existing Lenders would have had every reason to work with ION
and BGP to restructure the deal and avoid the consent and give Fletcher no extra
consideration at all.
D. The Hypothetical Negotiation And Its Likely Outcome
In its posttrial briefs, Fletcher’s new counsel drastically altered its damages case.
As noted, throughout discovery and at trial, Fletcher had insisted that it would have
sought and obtained economic consideration that was substantial in comparison to the
$40 million to which it had consent rights. When Fletcher finally quantified the damages
theory in its expert report before trial, the damages it sought amounted to $78 million, or
nearly two times the $40 million loan it had a consent right over.
After being denied the chance to file an untimely expert report raising other
theories to justify a number of this comparative enormity, Fletcher proceeded to push its
$78 million damages theory at trial, and it steadfastly asserted that it would not have
consented unless it received something close to that level. After the viability of that
theory was undercut at trial, Fletcher’s new counsel put forward, for the first time, a more
55
moderate — if still aggressive — position in its posttrial briefs. Under Fletcher’s new
posttrial damages theory, Fletcher claims that it would have received a decrease in its
stock conversion price from $4.4517 to $4.0867, which it valued at $6,236,553. Fletcher
also claims that the “floor” on its damages should be set at $3,653,105, or the total
amount that Fletcher paid to the Existing Lenders in connection with the Fifth
Amendment.176
This new position was more measured, but it was not fairly raised nor is it
supported by the record. To accept it would require the court to discount all of Fletcher’s
witness testimony at trial and in depositions, all the previous briefs, and its key expert
report. Fletcher itself chose to portray its eponymous leader as willing to bring down
Fletcher and its investors in a suicidal grab for ransom from ION and BGP. Although the
court will indulge in leniency toward Fletcher because its contract rights were violated
and take a less caricatured view of Fletcher than it has drawn of itself, the court cannot
assume that Fletcher would have either started or ended negotiations with anything close
to its posttrial request of $6,236,553. Rather, the court assumes, as it must, that Fletcher
would have come out recklessly overthetop bold with something like the demand in its
expert report. This is charitable to Fletcher. If Fletcher is positing it would have received
$78 million, one assumes that its initial demand would have been closer to $100 million
in value — two and a half times the $40 million bridge loan over which it had a consent
right. For the purposes of this opinion, the court need not assume, though, that Fletcher
176
Pl.’s Opening PostTrial Br. at 20.
56
acted with more audacity than to demand two times the loan to which it was being asked
to consent. That is enough to frame what is likely to have happened if, contrary to
Fletcher’s portrayal, Buddy Fletcher had a basic, residual sense of rationality and a
rudimentary regard for his fiduciary duties to his investors. The court credits Buddy
Fletcher with these characteristics even though it had no chance to hear Buddy Fletcher’s
testimony in person, Buddy Fletcher’s deposition testimony was consistent with the over
the top portrayal of him, and the trial testimony of his subordinate — Benson — was
consistent with that extreme posture. Because Fletcher’s rights were violated, the court
errs on the side of assuming that Buddy Fletcher was a very bold, but ultimately practical
hedge fund manager who would, in the end, not be nihilistic and end up with nothing
when he had the chance to pocket something tangible.
The court therefore assumes that if ION had approached Fletcher in October 2009
to ask for its consent to issue the ION S.ár.l. Note, before the announcement of the BGP
Transaction, Fletcher would have started the negotiations by asking for the changes to the
terms of its Preferred Stock that Fletcher has contended it was entitled to. The court
assumes that Fletcher would have opened the negotiations by requesting the following
three changes to its Preferred Stock: (1) an increase in the dividend rate of 250 to 350
basis points, (2) a decrease in the conversion price from $4.45 to $2.80, and (3) a
reinstatement of Fletcher’s redemption right without a Minimum Price Provision. 177
177
JX 455 at 1415 (Expert Report of Peter A. Fowler (Nov. 10, 2011)).
57
ION would have been speechless at Fletcher‘s audacity. When ION’s managers
recovered their equilibrium, they would have gone back to ION’s legal and financial
advisors to discuss this astonishing ask. There is nothing in the record to support the
proposition that ION, BGP, and the Existing Lenders would have agreed to the transfer of
tens of millions of dollars in value to Fletcher in exchange for its consent, especially
when the transaction at issue was expected to benefit Fletcher immensely and where
Fletcher faced disaster itself if ION went into bankruptcy. Because of the nature and
magnitude of the changes that Fletcher sought to its Preferred Stock, ION could not and
would not have merely granted Fletcher’s request without consulting with and receiving
permission from BGP and the Existing Lenders. ION’s negotiators may not have been
bold, but they were intelligent. Their lack of bravado, moreover, would lead them to
realize there was no way to give in to Fletcher without first going to the more powerful
players — BGP and the Existing Lenders. The people acting on behalf of BGP and the
Existing Lenders were also intelligent business people advised by intelligent legal and
financial advisors, and they would have realized that the changes Fletcher was requesting
— which Fletcher valued at $78 million — would result in a value transfer that nearly
doubled the value of the $40 million bridge financing Fletcher was consenting to. There
is nothing in the record that would explain why the intelligent business people at ION,
BGP, and the Existing Lenders would have agreed to pay $78 million in exchange for
consent to complete a $40 million bridge financing.
58
ION would therefore have responded in due course to Fletcher’s demands by
explaining the following: (1) the request for an increase in the dividend rate would
require the Existing Lenders to approve an amendment to the Credit Facility; and (2) that
BGP was very focused on its equity interest in ION and would be unlikely to approve
changes to Fletcher’s Preferred Stock that would result in dilution. The record indicates
that BGP would have been particularly unwilling to give in to Fletcher’s demands
because one of Fletcher’s asks — a reduction in the conversion price of its Preferred
Stock — would have resulted in substantial dilution to BGP’s equity stake in ION. The
importance that BGP placed on its 19.99% equity stake in ION was clear from the
extensive negotiations over both how much equity BGP would receive and what the
contours of its antidilution protections would be. Therefore, there is no reason to believe
that BGP would have agreed to the changes Fletcher was requesting to its Preferred
Stock. Furthermore, because BGP was taking an equity stake, there was no reason for it
to indulge a request by a vulnerable party like BGP for an increase in dividend payments
on its Preferred Stock. Those dividend payments would cost ION money, and they would
come at the expense of its ability to invest in future projects and at the expense of BGP as
a stockholder.
Having thought about it, ION also would have explained to Fletcher that it had
alternatives to the issuance of the $10 million ION S.ár.l Note, which was the only part of
the BGP Transaction that implicated Fletcher’s consent right and which was severable
from the larger BGP Transaction. The record indicates that there were at least two viable
59
alternatives ION could have pursued to structure the bridge financing around Fletcher’s
consent right: (1) the $40 million Convertible Promissory Notes issued by ION and ION
S.ár.l could have been made nonconvertible, and therefore not a security according to
Vice Chancellor Parsons’s reasoning in Fletcher II; and (2) ION could have obtained a
waiver to the Split Requirement, and the entire $40 million in convertible notes could
have been issued by ION so that Fletcher did not have the right to consent.
The easiest way that ION could have structured around Fletcher’s consent right
would have been to remove the convertibility feature on the notes. In Fletcher II, which
is the law of this case, Vice Chancellor Parsons noted that not all notes are securities, 178
but found that the ION S.ár.l Note was a security — even though it otherwise looked like
an ordinary commercial bank loan — because it had a convertibility feature, allowing the
loan to be converted into ION equity. Because equity is clearly a security, Vice
Chancellor Parsons reasoned that the note, which was designed to convert into equity,
was a security.179 If ION and BGP had agreed to make the notes nonconvertible, the
notes would not have been securities, obviating the need for Fletcher’s consent.
Fletcher took the position in its posttrial briefs and at posttrial oral arguments
that the purpose of the convertibility feature was to protect BGP and the Bank of China in
the event that the transaction did not close and that they would not have agreed to issue
178
Fletcher II, 2010 WL 2173838, at *5.
179
Id. (“Fletcher acknowledges that certain classes of notes are not securities, but contends that
notes that are convertible into stock unquestionably meet the definition of a ‘security’” . . . “[I]
hold that, as a debt instrument convertible into equity securities, the ION S.àr.l. Note qualifies as
a “security” under Section 5(B)(ii) of the Certificates.”).
60
the notes if they were not convertible. 180 This position is contradicted by the record and
makes no economic sense. Even Fowler agreed at trial that the warrants were the
mechanism through which BGP and the Bank of China would get their money back from
the bridge financing in the event the transaction did not close. 181 If the BGP Transaction
had failed to close, BGP and the Bank of China would have been in a much better
position holding $40 million in senior secured debt than they would have been holding
ION common stock. Holding senior secured debt would have given them the greatest
chance of repayment, whereas if they had converted their notes into ION common stock,
they would have been last in line if ION had filed for bankruptcy. There is nothing in the
record that indicates that BGP and the Bank of China would have been unwilling to
structure the notes so that they were not convertible in order to avoid making a $78
million consent payment to Fletcher.
Furthermore, BGP would have been aware that Fletcher’s consent was only
required because of the $40 million in bridge financing that BGP insisted ION take to
ensure that ION made it through closing. ION had maintained, throughout the
negotiations, that it only needed an additional $20 million to make it to closing. Even
more, Fletcher was asking for considerable value that would have come largely out of
BGP’s own hide. Therefore, BGP and ION could have agreed to reduce the amount of
PostTrial Ans. Br. at 15; PostTrial Oral Arg. Tr., 13738.
181
Trial Tr. vol. 1, 131:814 (Fowler) (noting that the warrant was exercisable if the deal did not
close so that BGP and the Bank of China would have a way to get their money out); see also
Trial Tr. vol. 2, 483 (Hanson) (explaining that the warrant was the mechanism through which
BGP and the Bank of China would get their money out if the transaction did not close).
61
180
the bridge financing to $20 million and, as was the case if the full $40 million bridge loan
was restructured with no convertibility feature, it was even more likely that the Bank of
China would have agreed to lend only the $20 million that ION actually needed without
that feature. In this respect, it is important to remember why the Bank of China was even
involved in lending to ION. The Bank of China was only involved to facilitate the
completion of a precedentsetting investment in America in an important industry sector
by its fellow stateowned enterprise, BGP. Given that context, there is no reason to
believe that the Bank of China would not have agreed to structure the transaction so that
it was not convertible, which would mean no extra credit risk for itself, in order to help
BGP get a better deal than would be the case if it gave in to Fletcher’s $78 million
demands.
The second way that ION could have avoided Fletcher’s consent right is to have
ION issue the entire $40 million convertible note itself. Fletcher correctly points out that,
in order for the entire bridge financing to occur at the parent level, ION would have had
to secure a waiver to the Credit Facility’s Split Requirement, which required unanimous
approval from the Existing Lenders. Fletcher and its expert contended that ION never
would have taken this proposal to the Existing Lenders because it required unanimous
consent and that the Existing Lenders never would have unanimously consented. This
argument is based entirely on emails indicating (1) that HSBC did not believe it would be
able to secure unanimous approval from the Existing Lenders for an amendment to the
Credit Facility that would add a separate tranche of debt that would have a shorter
62
commitment period and an earlier maturity date than their loans; and (2) that ION did not
believe the Existing Lenders would unanimously agree to add more than the $40 million
that could be added under the accordion feature of the Credit Facility because doing so
would dilute the collateral that secured the loans already outstanding under the Credit
Facility. From these emails, Fletcher draws the conclusion that seeking unanimous
approval from the Existing Lenders for an amendment to the Credit Facility was some
kind of “untouchable ‘third rail’” and that BGP and ION would not have requested
anything that required unanimous lender approval. 182
In both of the instances where ION and BGP indicated that they did not want to
seek unanimous lender approval, it was for a transaction structure that would have
disadvantaged the Existing Lenders. The fact that ION and BGP did not believe they
could get unanimous approval from the Existing Lenders for transaction structures that
gave the Bank of China better terms than the Existing Lenders or that would dilute the
collateral of the Existing Lenders by more than the amount agreed to under the accordion
feature does not mean that BGP and ION would have been unwilling to request a waiver
of the Split Requirement. Because the Credit Facility was entirely crosscollateralized,
there would have been no adverse economic consequences to the banks from a waiver of
the Split Requirement.183 There is nothing in the record that indicates that the Existing
182
Pl.’s Opening PostTrial Br. at 89.
183
When pressed at trial, Fowler was unable to come up with any adverse economic consequence
or increase in risk that the Existing Lenders would face as a result of a waiver of the Split
Requirement. The only reason he could give for why the Existing Lenders would not agree to
63
Lenders would have been unwilling to work with ION and BGP to structure the bridge
financing around Fletcher’s consent right if Fletcher was threatening to blow up the entire
BGP Transaction and cause immense harm to itself, ION, and the Existing Lenders.
Nothing was more likely to galvanize the Existing Lenders to promptly give a unanimous
consent than to be told that Fletcher, a mere preferred stockholder, was asking for a
ransom to consent to the bridge financing. The Existing Lenders knew ION’s straits,
knew that Fletcher had a huge equity investment, and knew that Fletcher stood to gain
hugely if the BGP deal went through and to suffer hugely if it did not. The BGP
Transaction gave the Existing Lenders their most fervent desire: full repayment and an
exit from the Credit Facility. The Existing Lenders, therefore, had compelling reasons to
work with ION and BGP in denying Fletcher’s disproportionately large and greedy
request.
There is another reason to believe that ION and BGP could have obtained the
unanimous consent of the Existing Lenders to waive the Split requirement. Under
Fletcher’s theory, it was demanding a concession — an increase to the dividend rate on
its Preferred Stock — that would already have required the unanimous consent of the
Existing Lenders. If the Existing Lenders were going to have to give a unanimous
consent to enable the BGP Transaction to proceed, a waiver of the Split Requirement
waive the Split Requirement was that the lenders would not all receive prorata treatment and
that, in his experience, banks have a strong “policy preference” in favor of prorata treatment.
Trial Tr. vol. 1, 34146 (Fowler).
64
would have been much more palatable to them than giving value to Fletcher for acting as
a spoiler.
But the fact that BGP, ION, and the Existing Lenders could have structured the
BGP Transaction to avoid Fletcher’s consent right does not mean that they would have
done so. To restructure the bridge financing in late October, after the majority of the
negotiations had already taken place, the parties likely would have needed to pay
hundreds of thousands of dollars to their legal and financial advisors to redraft the
documents, which would have wasted everyone’s time. They would have also had to
spend time with the Existing Lenders, securing consents, depending on the option taken.
All else being equal, ION and BGP would have preferred to pay a reasonable consent fee
to Fletcher to avoid the complication of having to restructure the bridge financing.
For the reasons previously indicated, the court assumes that when ION responded
to Fletcher by pointing out the realities that it was asking for value in excess of the bridge
loan, Buddy Fletcher would listen in a gruff way and then consult with his own brain,
conscience, and advisors. Fletcher would have to recognize that BGP was highly
unlikely to agree to the changes Fletcher requested, that the Existing Lenders would have
to give unanimous consent for those changes to proceed, and that ION was inclined to
work with BGP and the Existing Lenders so that no consent was needed at all. After a
quick “walk around the block” to allow the cold, brisk air of rationality to ease through
his respiratory system, Fletcher would have come back with a responsible, aggressive,
demand, still displaying some chutzpah, but attractive enough to make ION (and BGP in
65
turn) think it less painful and more efficient than restructuring the bridge financing. 184
For these purposes, Buddy Fletcher, who seems to have face issues of his own, would
have demanded three times what the Existing Lenders got for their consent to the Sixth
Amendment, or 75 basis points. Buddy Fletcher would have put this forward as his best
and final offer and made clear that he would withhold his consent and litigate if he didn’t
receive a consent fee equal to 75 basis points. Although the reality is that this was still an
aggressive ask, ION and BGP would have realized that it was likely cheaper to give in
and would have agreed to pay that consent fee.
This outcome is supported by the fact that both Fletcher and ION have agreed that
the consent fees that were paid to the Existing Lenders are relevant benchmarks that can
be used to determine what a reasonable consent fee would be. 185 The consent fee that the
184
Another reality existed that the court could have held against Fletcher, but does not. Fletcher
believed that its consent right had been violated in connection with the ARAM Transaction and
the record indicates that Fletcher was portraying to its investors an inflated value of its ION
investment that could only be justified by a belief that it would obtain relief in court that
amounted to tens of millions of dollars. Fletcher’s accounting for its investment exceeded ION’s
market value by a large margin, and that seems to be at least partially attributable to the fact that
Fletcher valued its claim for breach of its contractual right to consent to the ARAM Transaction
at tens of millions of dollars. If the court were to take that factor into account, the court would
not award Fletcher any damages at all. The reason for that is that if Fletcher refused to accept a
much more generous consent fee than the Existing Lenders received in a situation when the
Existing Lenders had far more leverage, the most likely outcome would have been that ION,
BGP, and the Existing Lenders would have restructured the transaction to avoid implicating
Fletcher’s consent rights. In other words, if Fletcher were to put its overall litigation posture and
demands into the equation, it would strengthen the argument made by ION that no consent
payment at all would have been made to Fletcher and thus Fletcher suffered no compensable
damage.
185
See Def.’s Opening PostTr. Br. at 34 (“The best evidence in the record of a reasonable
consent fee is the amount that the existing lenders were paid to consent to the Sixth
Amendment”); Pl.’s Opening PostTr. Br. at 2427 (explaining that prior bank consent fees paid
by ION “set a realistic floor” on damages).
66
Existing Lenders extracted in association with the Sixth Amendment was 25 basis points
over the amount of the loan outstanding, and the consent fee in connection with the Fifth
Amendment was 75 basis points. There is little reason to believe that Fletcher, who had
less leverage and substantially more to lose than the Existing Lenders, would have been
able to extract a consent fee that was materially larger than the one the Existing Lenders
were able to obtain for themselves. Because Fletcher’s consent would enable BGP and
ION to avoid the delay and expense of restructuring the bridge financing, the record
supports the conclusion that ION would have granted Buddy Fletcher’s ask for a consent
fee equal to 75 basis points — the equivalent of the consent fee paid in the summer of
2009 in connection with the Fifth Amendment — over the amount of the transaction that
Fletcher was being asked to consent to, which was the $40 million bridge financing.
IV. Conclusion
For all of these reasons, I impose a monetary damage award of $300,000 (.75% x
40,000,000). Because Fletcher has subjected ION to unnecessary prejudice and expense
by violating its discovery obligations, attempting to circumvent the rulings of this court,
and changing its damages theories, I exercise my discretion to award prejudgment
interest calculated at twothirds of the statutory rate, compounded on an annual basis.
The court will not entertain any further applications for feeshifting. ION shall submit a
conforming final judgment within five days, after giving notice as to form to Fletcher.
67
Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.