MAGELLAN HEALTH: Asks Court to Approve R2 Settlement Agreement
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Magellan Health Services, Inc., and its debtor-affiliates ask the
Court, pursuant to Rule 9019(a) of the Federal Rules of Bankruptcy
Procedure, to approve a September 29, 2003 Letter Agreement,
between the Debtors, R2 Investments, LDC, the Official Committee
of Unsecured Creditors and Onex Corporation, and the Term Sheet,
pursuant to which:
(1) R2 agreed not to oppose the confirmation of the Debtors'
Third Amended Joint Plan of Reorganization;
(2) the Debtors' objection to the proof of claim filed against
them by R2's investment manager, Amalgamated Gadget,
L.P., for $2,100,000, will be resolved; and
(3) R2 and the Debtors agreed to exchange mutual releases.
Prior to the Petition Date, the Debtors engaged in discussions
with their various creditor constituencies regarding the terms
and provisions of a proposed plan of reorganization. As a result
of the discussions, on the Petition Date, the Debtors filed a
plan of reorganization. One of the conditions of confirmation
and consummation of the Plan was that the Debtors realize not
less than $50,000,000 in proceeds and $47,500,000 in net proceeds
from an equity or debt investment to be implemented in
conjunction with consummation of the Plan.
To achieve their goal, prior to the Petition Date, the Debtors
sought a commitment from their primary creditor constituencies,
as well as a third party investor, Onex, for an equity and debt
infusion to be made in conjunction with the effectiveness of the
plan of reorganization. Because Onex required more time to
complete its due diligence, it was unable to provide the Debtors
with a commitment letter at that time. However, the Debtors did
receive a definitive proposal to provide financing in connection
with the consummation of the restructuring from R2, acting
through its investment manger AG Amalgamated, and Pequot Capital
Management, Inc. -- the Initial Investors.
After extensive negotiations, Stephen Karotkin, Esq., at Weil,
Gotshal & Manges LLP, in New York, reports that the Debtors and
the Initial Investors reached an agreement on the terms and
provisions of an investment that was set forth in a Commitment
Letter dated March 10, 2003. This Court-approved PCM/AG Equity
Commitment Letter also provided for indemnification obligations,
expense reimbursement and the payment of various fees, including
a $1,000,000 break-up fee and a $1,500,000 commitment fee.
The Debtors nevertheless continued to discuss with Onex and other
potential third-party investors regarding a proposal that would
be even more favorable to them and their creditors. After
completing its due diligence and engaging in extensive
negotiations with the Debtors, on May 21, 2003, Onex presented
the Debtors with a funding commitment.
After that, the Debtors conducted an informal auction process,
pursuant to which R2 and Onex continued to make competing
proposals. At the conclusion of this process, the Debtors, with
the support of the Committee, determined to support a proposal
Onex submitted. As a result, the Debtors and Onex entered into
an Equity Commitment Letter, dated July 14, 2003, which was
approved by the Court, over the objection of R2, by Order dated
September 5, 2003.
Mr. Karotkin informs the Court that the Debtors and R2 have other
disputed issues:
A. R2's Motion to Terminate Exclusivity
On July 18, 2003, R2 sought to terminate the Debtors'
exclusive right to file a plan of reorganization and solicit
acceptances thereof so that it could file a competing plan of
reorganization. On August 5, 2003, after extensive discovery
and a five-hour evidentiary hearing, the Bankruptcy Court
denied R2's motion by Order. Subsequently, R2 filed an
appeal from the Exclusivity Termination Order with the U.S.
District Court for the Southern District of New York. The
Appeal is currently pending - briefing and argument, however,
have not taken place.
B. The Debtors' Objection to the Claim
On June 27, 2003, AG filed the Claim with respect to fees
that it asserted was owed to it pursuant to the terms of the
PCM/AG Equity Commitment Letter, including, among other
things, $350,000 for the reimbursement of expenses, $750,000
for the balance of the commitment fee and the $1,000,000
break-up fee. On August 18, 2003, the Debtors objected to
the Claim and ask the Court to allow the Claim in its reduced
amount of $1,750,000. No determination has yet been made
with respect to the Debtors' objection to the Claim.
C. R2's Objection to the Confirmation of the Plan
As owner of $212,500,000 of Senior Subordinated Notes and
$29,750,000 of Senior Notes, R2 disclosed that it intends to
vote against the Plan and object to confirmation of the Plan
on several grounds.
Although the Debtors believe that they will be able to confirm
the Plan despite the rejection and objections by R2, the Debtors
believe that the resolution of the Objection and the AG Claim is
in the best interest of their estates and all parties-in-interest
and will facilitate the Debtors' prompt and smooth emergence from
Chapter 11. Accordingly, the Debtors, the Committee and Onex
engaged in substantive and protracted negotiations. These
negotiations culminated in the Settlement Agreement.
The salient terms of the Settlement Agreement are:
(A) Affiliate Transactions
Until the time as the Minimum Hold Condition is no longer
met, all affiliated party transactions between Reorganized
Magellan and any member of the Onex Group must be approved by
a majority of the members of Reorganized Magellan's Board of
Directors initially selected by the Committee and
subsequently elected by the holders of New Common Stock,
voting as a separate class.
(B) Co-Investment Rights
No person within the Onex Group, on the one hand, or R2, on
the other hand, will commence any tender offer for shares of
New Common Stock unless the other party is granted the
opportunity to participate in the tender offer as a bidder
on a proportionate basis based on shares then owned.
(C) Tag-Along Rights
Until the earlier of: (1) the third anniversary of the
Effective Date of the Plan and (2) the date on which the
Minimum Hold Condition is no longer met, no person within
the Onex Group will sell, and R2 will not sell, in one
transaction or a series of related transactions, shares of
less MVS Securities or New Common Stock representing more
than 15% of the aggregate number of outstanding shares of
MVS Securities and New Common Stock to one person or group,
unless all holders of stock are entitled to participate in
the transaction on the same basis.
(D) Expenses
Reorganized Magellan will reimburse R2 for $200,000 in
expenses incurred to date under the terms of the PCM/AG
Equity Commitment Letter, which will be in addition to the
$250,000 advance Magellan paid upon acceptance of the PCM/AG
Equity Commitment Letter. The amount of expenses for which
the Equity Investor is entitled to reimbursement under the
Equity Commitment Letter will be increased by $200,000.
Reorganized Magellan will also reimburse R2 for any expenses
incurred after the date of the Settlement Agreement in
connection with obtaining the state and federal regulatory
approvals R2required in connection with the Plan. These
payments will be in full settlement of the Claim, and, upon
payment thereof, the Claim will be deemed satisfied.
(E) Board of Directors:
Section 5.9 of the Plan will be amended substantially as:
The Board of Directors of Reorganized Magellan will
have nine members in three classes:
Class 1: Chief Executive Officer of Reorganized
Magellan with three-year initial term; independent
member selected by Equity Investor with two year
initial term; two members selected by Equity Investor
with one year initial terms;
Class 2: Chief Operating Officer of Reorganized
Magellan with two-year initial term; one member
selected by Equity Investor with one-year initial term;
and
Class 3: three members initially selected by the
Committee of which two will be Michael Diament, a
Portfolio Manager and Director of Bankruptcies and
Restructurings for Renegade Swish, LLC which through
various contractual agreements provides personnel
services to AG, the investment manager for R2, with an
initial three year term, and Michael P. Ressner, a
professor of finance at North Carolina State
University, who will satisfy the requirements for
independence for audit committees and have an initial
three-year term; and the third who also will satisfy
the independence requirements and have an initial
three-year term.
Until the expiration of the initial term of the Class 3
Directors, any vacancy in the class will be filled by the
vote of the remaining Class 3 Directors. During the three
year period following the Effective Date, the Reorganized
Debtors will not modify the initial terms attributable to
the seats on the Board of Directors.
Reorganized Magellan's Amended Certificate of Incorporation
and Amended Bylaws, will provide that, until the time as the
Minimum Hold Condition is no longer met (1) the holders of
the MVS Securities will (a) vote as a separate class to
elect the four Class 1 Directors and (b) vote together with
the holders of the New Common Stock to elect the two Class 2
Directors and (2) the three Class 3 Directors will be
elected by the holders of New Common Stock voting as a
separate class.
(F) No Amendment
The Amended Certificate of Incorporation and Amended Bylaws
will provide that, until the time as the Minimum Hold
Condition is no longer met, none of the provisions of the
Amended Certificate of Incorporation and the Amended Bylaws
that implement the terms of the Term Sheet will be amended
without the approval of a majority of the Class 3 Directors.
The definitive agreement relating to the "Co-Investment
Right" provided for in the Term Sheet will provide that the
terms of the agreement will not be amended without the
approval of both the Equity Investor and AG.
(G) Board Compensation
In setting compensation of directors in accordance with
Section 11 of the Amended Bylaws, the Reorganized Magellan's
Board of Directors will:
(1) provide compensation for all directors serving on
Reorganized Magellan's initial Board of Directors other
than the Chief Executive Officer and Chief Operating
Officer of Reorganized Magellan; and
(2) determine the level of the compensation in light of the
nature and extent of the services provided by each
eligible director, taking into consideration, among
other factors, service by the director on Reorganized
Magellan's audit committee.
(H) Withdrawal of Appeal
Upon the Court's approval of the Settlement Agreement, R2
will file in the District Court, pursuant to Rule
41(a)(1)(ii) of the Federal Rules of Civil Procedure, a
stipulation executed by the requisite parties dismissing,
with prejudice, the Appeal.
Mr. Karotkin asserts that the Settlement Agreement is the product
of good faith, arm's-length negotiations among the key
constituencies in these Chapter 11 cases. The Settlement
Agreement essentially provides additional protections for all
future creditors and, therefore, benefits the exiting creditors
who will be receiving New Common Stock under the Plan.
Furthermore, Mr. Karotkin points out that the Settlement
Agreement will avoid further costly and protracted litigation.
Litigation with R2 already cost the estates significant expense
and delay and the ability to avoid future expense and potential
delay is in the interest of all parties. The additional expense
reimbursement provided for in the Settlement Agreement is modest
in comparison to the expenses that undoubtedly would be incurred
in a contested confirmation.
More importantly, the Settlement Agreement should serve to assure
the Debtors' prompt and expeditious emergence from Chapter 11.
The benefits accruing from this are invaluable, particularly in
view of the Debtors' need to exit Chapter 11 promptly to be in a
position to credibly bid on new contracts and the renewal of
existing contracts. Indeed, Mr. Karotkin remarks, this factor
alone warrants approval of the Settlement Agreement. (Magellan
Bankruptcy News, Issue No. 15: Bankruptcy Creditors' Service,
Inc., 609/392-0900) |
