HOUSTON (CN) - The crash in oil and gas prices has gutted the compensation that Targa Resources unitholders expected under a proposed merger, but that's no cause to delay a vote on the deal, a federal judge ruled.
Targa Resources Corp. is a publicly traded Fortune 500 midstream energy company based in Houston. "Midstream" is an industry term for pipeline operators that move hydrocarbons from "upstream" drillers to "downstream" refiners.
Targa Resources Corp. does not operate any assets of its own. Its income is generated by affiliate Targa Resources Partners LP, in which it holds an 11 percent stake.
To simplify, this story refers to Targa Resources Partners as Targa Partners and Targa Resources Corp. as Targa Corp.
Targa Corp.'s fortunes are linked to Targa Partners' natural gas plants and gas and oil pipelines in Texas, Oklahoma, Louisiana and North Dakota.
Targa Corp.'s board announced on Nov. 3 that it plans to merge with Targa Partners in a stock-for-stock deal then valued at $6.3 billion.
Under the deal, Targa Partners owners will get 0.62 of Targa Corp. stock for every Targa Partners unit.
When Targa made the announcement, Targa Partners owners were to get around $36 per unit, based on the $50.88 closing price of Targa Corp. that day.
But Targa Corp. stock has tumbled along with the price of crude oil and natural gas. It closed at $22.02 on Jan. 11, the day Targa released a definitive proxy statement that recommends Targa Resources unitholders approve the merger.
The diminished Targa Corp. share price means Targa Partners unitholders will get a fraction of what they initially stood to gain.
The price of a barrel of Brent crude oil, the international benchmark, dropped from $50 in early November to $28.55 on Jan. 18 before rallying to close at $34.74 on Friday.
The price of natural gas fell from $2.25 per million British thermal units, the standard measure, in early November to $1.75 in mid-December and closed at $2.29 on Friday.
A British thermal unit is the amount of heat needed to raise the temperature of one pound of water by one degree Fahrenheit.
Targa Partners unitholders Richard Greenthal and John Lindeman filed federal class actions on Jan. 6 and Jan. 19 in Houston against Targa Corp.'s board.
The lawsuits were consolidated. Their attorney Thomas Bilek on Thursday asked U.S. District Judge Melinda Harmon for a restraining order and injunction to stop Targa from holding shareholder votes on the merger as planned on Feb. 12, until the board provides an update on how the deal has changed since it was announced.
From appearances, Bilek seemed overmatched at the hearing. He and his co-counsel, Derrick Farrell, sat at the plaintiffs' table staring at eight attorneys from Houston-based international law firm Vinson & Elkins, representing the Targa directors.
Bilek, tall and goateed, specializes in securities class actions and appeared unperturbed by the mismatch.
"Originally, back on Nov. 3, the implied consideration was $36.09 and that's what they disclosed in their proxy statement," Bilek said.
"Since then, though, Targa Resources [Corp.] stock price has gone to the floor and as of last night the implied consideration was $13.94, so it's dropped by roughly 60 percent."
Bilek hardly stopped to breathe while reading federal securities case law that he said shows that Targa Corp.'s board has a "duty to update" compensation projections for the deal, given the "radical shift in commodity prices."
Judge Harmon asked him to slow down.
"I'll try to. I have a bad habit of speed reading," he said.
"If you look at Targa LP, the stock price has declined by a median of 29.9 percent, but if you look at Targa Corp., it has declined by a median of 36.3 percent. So if Targa Corp. falls a lot more than Targa LP, then you're getting less per share than you originally thought you were when the board approved this transaction," he said.
The board's lead counsel Michael Holmes with Vinson & Elkins in Dallas accused Bilek of using a novel interpretation of case law.
"All of the cases they've cited, there's not a single one that says we're going to enjoin the vote for the reasons they're asking. What plaintiff is asking you to do is unprecedented," Holmes said.
Holmes said Bilek's argument fails at the outset because of disclaimers Targa made in its proxy statement: that financial projections may not pan out.
"Because the market price of (Corp.) shares will fluctuate prior to the consummation of the merger, TRP common unitholders cannot be sure of the market value of the (Corp.) shares they will receive as merger consideration," the proxy states .
Holmes also criticized Bilek for "waiting until the 11th hour to seek a temporary restraining order," 19 days after Bilek's client Greenthal filed suit.
But Bilek said Texas state courts have ruled that shareholders do not have a claim in such cases until a definitive proxy statement is filed. Targa filed that 230-page document on Jan. 11.
"So we were waiting for that definitive proxy, and I was actually really surprised when the definitive proxy came out that there was no updated information contained in it, because at that point we knew oil and gas markets had tanked," Bilek said.
Holmes countered that since Targa announced the merger, Targa Partners' unit price has dropped in tandem with Targa Corp.'s share price, so the equity that Targa Partners owners would give up also has been reduced.
"You can say you're getting less, but you're giving up less too."
He asked Harmon not to approve the temporary restraining order because Bilek's clients have another way to oppose the merger, outside of the courtroom.
"It sounds like his client just doesn't like the deal because the price of his equity will go down," Holmes said. "There's a method for Mr. Greenthal to voice his displeasure, and that's at the ballot box."
Harmon on Friday declined to issue a restraining order.
"(T)he authorities cited by plaintiff found a 'duty to update' only where a defendant is representing that its statements continue to remain current, not where (as here) defendants disclosed historical information and repeatedly disclaimed any inference that this information would remain current after the date it was created or would be updated," Harmon wrote. She also denied plaintiffs' request for expedited discovery.
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