Delaware Chancery Court appoints monitor in Oxbow Carbon exit sale suit

By Sandra Lane | Aug 10, 2018

WILMINGTON, Del. (Legal Newsline) – A multi-part remedy to settle a dispute between defendants identified as the "Koch parties" and Oxbow Carbon LLC was delivered by Vice Chancellor J. Travis Laster on Aug. 1 in the Delaware Court of Chancery.

WILMINGTON, Del. (Legal Newsline) – A multi-part remedy to settle a dispute between defendants identified as the "Koch parties" and Oxbow Carbon LLC was delivered by Vice Chancellor J. Travis Laster on Aug. 1 in the Delaware Court of Chancery.

Oxbow Carbon is one of the world's largest recyclers of refinery and natural gas byproducts. It was founded by billionaire William Koch.

“In a lengthy post-trial ruling, I held that the Koch parties breached the reasonable efforts clause in Oxbow’s LLC agreement by seeking to disrupt, derail, and delay an exit sale," Laster wrote in the court's opinion. "I found that 'but for Koch’s actions, Oxbow would have entered into a deal with ArcLight, and the minority members would have received at least the value of the ArcLight offer.'

“I further determined that if an exit sale did not satisfy the clause for the small holders, then the minority members could force Oxbow, Oxbow Holdings and Oxbow’s other members to engage in an exit sale by providing additional consideration to the small holders through a seller top off.”

He also explained that the parties’ post-trial briefing focused predominantly on breach and only minimally on remedy.

“The post-trial ruling therefore directed the parties to provide supplemental briefing on an appropriate remedy,” he said. “They complied, and a hearing was held.”

The first remedy ordered by the vice chancellor concerned what he called “specific performance.” He ordered the parties to complete the exit sale process that the minority members initiated. 

“Because the resulting undertaking will be complex, and because the parties have demonstrated their ability to disagree on matters large and small, a court-appointed monitor will oversee the parties’ compliance with the exit sale right,” he said.

The second component of the ruling related to a potential award of compensatory damages concerning the exit sale transaction price. Laster said in his opinion that if not for the Koch parties’ breach, “the minority members could have secured the ArcLight offer and closed it by Sept. 30, 2016.” 

He said that simply ordering a do-over on this transaction would give the Koch parties exactly what they wanted.

The vice chancellor said that in his view, a complete remedy for the Koch parties’ breach should take into account the lost value of the ArcLight offer, including the lost time value of not receiving the consideration by Sept. 30, 2016.

“It is possible that a resumed exit sale process may produce a transaction generating greater value for the minority members, even on a time adjusted basis,” he said. “If so, then no additional compensatory remedy is warranted for lost transaction value.”

If there is no greater value, the vice chancellor said that minority members will receive an award of compensatory damages “equal to the difference between the value of the exit sale that the process generates and the time-adjusted value of the ArcLight offer.”

The third component is an award of damages equal to the minority members’ pro rata share of the expenses that Koch caused Oxbow to incur for Mintz Levin and any duplicative amounts that Oxbow must spend on its advisers for the resumed exit sale process.

As stated in court ruling, "(William) Koch originally hired Mintz Levin as his personal counsel, and he used the firm to resist the minority members’ efforts to generate an exit sale. Soon after hiring Mintz Levin, Koch realigned the firm as Oxbow’s counsel. In this role, Mintz Levin continued to serve Koch’s interests, but Oxbow bore the expense. As a result, the minority members indirectly bore one-third of the estimated $50 million that Oxbow paid to Mintz Levin."

According to Laster’s opinion, Mintz Levin’s efforts on Koch’s behalf were an integral part of the breach of the reasonable efforts clause. 

“An exit sale will not enable the minority members to recoup their share of the amounts paid to Mintz Levin, because a buyer will pay for Oxbow as it is, without giving any credit for sunk costs,” Laster stated.

He also said that "although a suit to recover Mintz Levin’s fees typically would be asserted derivatively, the dispute over Oxbow functionally has two sides, and the allocation of proceeds and expenses between the two sides is a zero-sum game." 

“Because of the connection between the payments to Mintz Levin and the breach of the reasonable efforts clause, the minority members can recover their share of those amounts as damages in this proceeding,” he added.

“The minority members are awarded the relief described in this decision. The parties shall take steps to select a monitor. Once an individual has been selected, the monitor will provide comments to the parties on the proposed form of order. If the monitor and the parties cannot agree, then they may submit competing forms of order. Once the resumed exit sale process is complete, further proceedings will be necessary to determine specific amounts for the awards of compensatory damages, interest and costs,” the ruling states.

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