A Tennessee court extended a temporary restraining order blocking Forward Air’s planned merger with freight forwarder Omni Logistics on Wednesday. The court will decide in the next 15 days if injunctive relief is warranted, which could set the stage for a hearing to determine if shareholders have the right to vote on the transaction.

The 3rd District Chancery Court in Greeneville, Tennessee, where Forward is headquartered, first issued the temporary restraining order at the end of September.

Forward’s bid for Omni is being challenged by shareholders, who said they were denied a vote on the deal as required under Tennessee law. The plaintiffs in the case are former employees at Forward and include its former chief financial officer, Rodney Bell.

All of Forward’s (NASDAQ: FWRD) board members are listed as defendants.

Are shareholders due a vote?

The plaintiffs’ motion for a temporary injunction “pending a full trial on the merits” said shareholder rights have been violated and the deal will cause stockholders “immediate and irreparable harm.”

Forward’s acquisition of Omni is structured as a series of transactions ahead of the closing. One of the transactions includes the transfer of Forward’s assets into a limited liability company (Opco LLC) that the motion said is partly owned by Forward and Omni. The plaintiffs said Tennessee law provides shareholders the right to vote on transactions that involve the full disposition of assets and that valid exceptions to the rule have not been met as the transactions are “not in the regular course of business” and the assets are not being transferred to a Forward wholly owned subsidiary.

“Defendants should not be able to hide behind slick lawyering and complex deal documents to circumvent a statutorily required vote,” a motion read.

Further, the plaintiffs’ filing said the deal would dilute current Forward shareholders’ equity position by more than 20% and requires a vote according to Tennessee law.

An announced purchase price of $3.2 billion includes just $150 million in cash. Forward would give Omni’s stakeholders a 37.7% equity position and assume Omni’s $1.4 billion in net debt. The ultimate deal price will fluctuate as the share count due to Omni at closing is fixed and not tethered to a specified share price. The current deal price is roughly $2.7 billion as shares of FWRD are off 34% since the deal was announced.

“We’d characterize [Forward’s] approach as narrowly focused on the law as written and the plaintiff’s approach as asking the judge to view the series of merger transactions within the spirit of the law and its shareholder vote requirements,” Susquehanna Financial Group analyst Bascome Majors said in a note to clients Tuesday evening.

Forward contends the transaction structure doesn’t require a vote because “at no point will any Forward assets be transferred to any third party,” a court filing showed. The company said the technical language of the agreement calls for a merger but noted the merger is occurring at its subsidiaries and not at the main domestic corporation, which will ultimately be acquiring Omni. It also noted that it will own all interests in Opco at the time of the transfer, eliminating the need for a vote.

Forward also said the plaintiffs can’t prove irreparable harm and that if they could a monetary remedy would be a more suitable award (“based on the value of their stock”), not injunctive relief.

“If Plaintiffs were really at risk of irreparable harm, then they would not have waited nearly eight weeks to seek an injunction,” the filing read. “Plaintiffs’ delay betrays this lawsuit for what it really is: an eleventh-hour arbitrage attempt orchestrated by a New York hedge fund, PSAM [P. Schoenfeld Asset Management], to disrupt the timing of a transaction in order to monetize that disruption.”

Forward says it is the harmed party

Forward asserts delaying the deal has caused and will cause financial harm.

A court filing from Forward showed it recently issued $725 million in notes to fund a portion of the deal. The proceeds from the debt issuance are being held in an interest-bearing escrow account until the deal closes. However, the interest earned daily is less than the interest expense incurred on the 9.5% notes, netting it an expense of $100,694 per day.

Further, the retention of lender commitments for a $1.125 billion term loan facility will cost it $70,313 per day beginning Oct. 23, climbing to $309,586 after Nov. 23. The company is also paying nearly $2,100 in daily interest expense on an $11.1 million draw taken on its revolving credit facility to pre-fund the interest payments.

Both transactions were undertaken with an Oct. 2 deal closing in mind. Forward’s plan was to have the date of the debt transactions coincide with the closing of the acquisition.

“Among other things, if the transaction remains in limbo for any significant period of time, it risks creating uncertainty and anxiety amongst key constituencies — including Forward’s employees and business partners,” the company said in the filing. “Uncertainty surrounding the strategic direction of the business can make it more difficult to retain key employees and to maintain relationships with valued business partners.”

The filing also called out “significant costs and delays” associated with preparing a proxy statement and holding a shareholder vote.

A separate filing from Omni claimed the “waiting in limbo” has caused a loss of business from customers, employee attrition and operational headwinds, among other things.

However, a response from the plaintiffs said Forward’s “harms are largely self-inflicted” as it closed on the financing “after entry of and with full knowledge of this Court’s temporary restraining order.”

Shareholders claim loss of control

The original motion took issue with an apparent loss of control. It said the deal shifts power toward Omni, which will be able to designate four board seats, one of which will be held by its CEO, J.J. Schickel.  Schickel will also assume the role of president of the combined company, making him second in command and in line for the top spot at Forward in the future.

The complaint said Forward’s existing shareholders only have a “false choice” on the transaction, which comes after the closing.

Two-thirds of the shares allocated to Omni’s stakeholders at closing are nonvoting preferred shares, keeping the voting stock issued under the 20% threshold requiring a shareholder vote in Tennessee. Forward’s shareholders will be allowed to vote on converting those shares into voting common stock. If shareholders agree to convert the shares, Omni and its private equity backers (Ridgemont Equity Partners and EVE Partners) would end up with 38% of the voting rights. However, if the conversion is declined, those units would be due a dividend of approximately 13%, defined as 3.5% above the yield on its most junior debt.

“Indeed, the transactions are self-evidently structured to prevent Forward Air shareholders from voting on them before they close,” the motion stated.

Either way, Omni’s shareholders are due 16.5% of Forward’s equity at closing, which would represent the largest voting block held by investors (18.5% of the voting power, according to a separate filing). Further, Omni shareholders have entered an agreement and will be required to vote in favor of board-chosen directors in the future, which the complaint describes as adding to the controlling voting group.

“With such a bloc, the Director Defendants can easily influence elections to keep their seats, despite having driven the Company’s debt rating and share price into the ground,” the motion read.

Combined debt of $1.85 billion would push Forward’s leverage to roughly four times adjusted earnings before interest, taxes, depreciation and amortization (excluding deal synergies). Ratings agencies recently weighed in issuing noninvestment grade, or “junk,” ratings on the company’s new financing package.

Shareholders say deal pits Forward as competitor to its customers

The plaintiffs’ original motion referred to the deal as “a fundamental and irrevocable reshaping of the Company” and noted that it moves Forward into a role of freight forwarder and “at odds with its existing customers.”

Omni is a freight forwarder and customer of Forward. It competes directly with Forward’s other customers. Some of those customers have expressed concerns that their customer lists and shipment details would be made available to Omni, putting them in a disadvantaged competitive position and potentially pushing them to find other linehaul providers.

Forward has said it will maintain “confidentiality and neutrality” across its sales channels. It also expects the combination to position it as the category leader in the expedited less-than-truckload delivery space, driving margins higher and improving returns to shareholders.

Former employee shareholders not the only objectors

A court filing showed a Sept. 18 letter to Forward’s board from institutional holder P. Schoenfeld Asset Management, which says it is focused on “event-driven investment opportunities.” The firm voiced its concern over the lack of a shareholder vote, an apparent shift in voting control and the overall lack of transaction details provided.

“We are requesting you as our fiduciaries to rectify a structure that goes to great length to deprive Forward Air common stockholders of their legally mandated voting rights on a major M&A transaction, while delivering a large percentage of future voting power to selling stockholders who are contractually bound to vote with management, the letter read.

“Critical information about the transaction has been relegated to exhibits to the Merger Agreement, some of which have not been filed publicly.”

Shortly after the deal was announced, ClearBridge Investments, which owns a 4% stake in Forward, penned an open letter asking the company to cancel the transaction.

Susquehanna handicaps outcomes, raises price target

“If an injunction is granted, a November trial is most likely. Without an injunction, the deal should close in the next two to three weeks as financing is already raised,” Majors said.

The transaction agreement stipulates an outside closing date of Feb. 10, which can be extended until May 10. The plaintiffs said they could be ready for a trial in four to six weeks.

Late Friday, Majors raised his price target on shares of FWRD from $80 to $84 based “on a probabilistic view that the deal is now 80% likely to go through ($80 value for FWRD shares) and 20% likely to be blocked if a shareholder vote is required ($100 value for FWRD shares).”

His expectation is for the company to win the temporary injunction, which would immediately lift shares higher.

Shares of FWRD have been under pressure since the deal was announced, down 34% from a pre-deal price of $110. Shares closed Wednesday up 0.2% at $72.91 compared to the S&P 500, which was up 0.4%.

More FreightWaves articles by Todd Maiden