a Form 10-K report filed Friday with the Securities and Exchange Commission.
The SEC requires these reports so investors can know about potential risks and buried toward the end of the report is a mention that if the merger falls apart for some reason, Empire District Electric Company will have to pay $53 million to Liberty Utilities, the U. S. branch of Canadian-based Algonquin.
That would seem to be the kind of poison pill designed to force stockholders to approve the deal.
The risks associated with the merger are printed below:
Empire and its subsidiaries will be subject to business uncertainties and contractual restrictions while the Merger is pending that could adversely affect our financial results.
Uncertainty about the effect of the Merger on employees or vendors and others may have an adverse effect on us. Although we intend to take steps designed to reduce any adverse effects, these uncertainties may impair Empire and its subsidiaries' ability to attract, retain and motivate key personnel until the Merger is completed, and could cause vendors and others that deal with us to seek to change existing business relationships. Employee retention and recruitment may be particularly challenging prior to the completion of the Merger, as current employees and prospective employees may experience uncertainty about their future roles with the combined company. If, despite our retention and recruiting efforts, key employees depart or fail to accept employment with Empire or its subsidiaries due to the uncertainty and difficulty of integration or a desire not to remain with the combined company, our business operations and financial results could be adversely affected.
We expect that matters relating to the Merger, including cooperation with APUC's financing and integration-related issues will place a significant burden on management, employees and internal resources, which could otherwise have been devoted to other business opportunities. The diversion of management time on Merger-related issues could materially affect our financial results.
In addition, the Merger Agreement restricts Empire and its subsidiaries, without Liberty's prior written consent, from taking specified actions until the Merger occurs or the Merger Agreement is terminated, including, without limitation: (i) making certain material acquisitions and dispositions of assets or businesses; (ii) making any capital expenditures in excess of specified amounts; (iii) incurring indebtedness, subject to certain exceptions; (iv) issuing equity or equity equivalents; and (v) paying quarterly cash dividends in excess of current levels. These restrictions may prevent us from pursuing otherwise attractive business opportunities and making other changes to our business prior to consummation of the Merger or termination of the Merger Agreement.
Failure to complete the Merger could negatively impact Empire and/or the market price of our common stock.
There can be no assurance that the Merger will occur. Failure to complete the Merger may negatively impact the future trading price of our common stock. If the Merger is not completed, the market price of our common stock may decline to the extent that the current market price of our common stock reflects a market assumption that there is a high probability that the Merger will be completed. Additionally, if the Merger is not completed, we will have incurred significant costs, as well as the diversion of the time and attention of management. A failure to complete the Merger may also result in negative publicity, litigation against Empire or our directors and officers, and a negative impression of us in the investment community. The occurrence of any of these events individually or in combination could have a material adverse effect on our financial condition, results of operations and our stock price.
Empire and Liberty may be unable to obtain the required shareholder, governmental, regulatory, and other consents and approvals required to complete the Merger or, in order to receive such consents or approvals, the governmental or regulatory entities may impose restrictions or conditions that could cause a termination of the Merger Agreement.
The closing of the Merger is subject to certain conditions, including, among others, (i) approval of Empire shareholders representing a majority of the outstanding shares of Empire common stock, (ii) expiration or termination of the applicable Hart-Scott-Rodino Act waiting period and receipt of all required regulatory approvals and consents, including from the Federal Energy Regulatory Commission, the Federal Communications Commission, the Arkansas Public Service Commission, the Kansas Corporation Commission, the Missouri Public Service Commission, the Oklahoma Corporation Commission and the Committee on Foreign Investment in the United States, which approvals and consents shall not, individually or in the aggregate, have or be reasonably likely to have a material adverse effect on the business, properties, financial condition or results of operations of Liberty Utilities Co. and its subsidiaries (including for such purpose, Empire and its subsidiaries), taken as a whole, (iii) the absence of any law or judgment that prevents, makes illegal or prohibits the closing of the Merger, (iv) the absence of any material adverse effect with respect to Empire and (v) subject to certain exceptions, the accuracy of the representations and warranties of, and compliance with covenants by, each of the parties to the Merger Agreement. The shareholder, governmental, regulatory, and other consents and approvals required to consummate the Merger may not be obtained at all, or may not be obtained on the proposed terms and schedules as contemplated by the parties. A substantial delay in obtaining the required shareholder, governmental, regulatory, and other consents and approvals or the imposition of unfavorable terms, conditions or restrictions contained in such approvals or consents could prevent or delay the completion of the Merger. Additionally, if certain closing conditions are not satisfied prior to the outside date specified in the Merger Agreement, either Empire or Liberty could be permitted to terminate the Merger Agreement and not consummate the Merger.
In the event that the Merger Agreement is terminated prior to the completion of the Merger, we could incur significant transaction costs that could materially impact our financial performance and results of operations.
In connection with entering into the Merger Agreement, Empire has incurred approximately $0.2 million of transaction costs as of December 31, 2015. We expect that the total transaction costs will be approximately $15 to $17 million, with approximately 50% payable in 2016 (assuming a 2017 closing date), of which approximately $4.5 million will be incurred in the first quarter of 2016. The Merger Agreement provides that upon termination of the Merger Agreement under certain specified circumstances, we will be required to pay Liberty a termination fee of $53.0 million. Any fees due as a result of termination could have a material adverse effect on our results of operations, financial condition, and our stock price.
Potential future litigation against Empire and our directors challenging the Merger may prevent the Merger from being completed within the anticipated timeframe.
Empire and/or our directors may potentially be named as defendants in lawsuits filed on behalf of public shareholders challenging the Merger and potentially seeking, among other things, to enjoin the defendants from consummating the Merger on the agreed-upon terms. We will incur significant transaction costs, including legal, filing, printing, and other costs relating to any litigation. If a plaintiff in a potential lawsuit or any other litigation that may be filed is successful in obtaining an injunction prohibiting the parties from completing the Merger on the terms contemplated by the Merger Agreement, the injunction will cause us to incur significant expense and may prevent the completion of the Merger in the expected timeframe or altogether.