COURT: Mallinckrodt battles activist shareholders to preserve RSA negotiations

Mallinckrodt plc has filed an adversary complaint against a group of shareholders that oppose its current Restructuring Support Agreement, accusing the shareholder group of making misleading statements in a proxy campaign designed to disrupt ongoing RSA negotiations.

 

Mallinckrodt alleged that Buxton Helmsley Group Inc is attempting “to frustrate and disrupt this bankruptcy case” by calling an extraordinary general meeting of Mallinckrodt shareholders “whom they are soliciting with legally deficient and materially misleading proxy disclosures.”  Mallinckrodt argued that the move is counter-productive to shareholders, as it will disrupt a restructuring plan that could preserve Mallinckrodt as a going concern, which would preserve value for equity holders that would otherwise be “deeply out of the money.”

 

BHG said in an SEC filing that it and 25 other shareholders who collectively own about 5.4% of Mallinckrodt’s shares, intend to pursue changes to Mallinckrodt’s board and management. The filing was supplemented by postings on a BHG-sponsored website, letters and emails to shareholders, and a public letter to the Mallinckrodt board, through which BHG has “smeared the board and management,” accusing them of “traitorous actions” and “abandoning” shareholder interests in negotiating the RSA, according to Mallinckrodt’s complaint. The effort violates SEC rules on proxy solicitation because the BHG group did not first provide shareholders with a publicly filed proxy statement, according to the adversary complaint.

 

“These communications to Mallinckrodt shareholders are not only riddled with material falsehoods and omissions, as detailed further below, they are also in complete derogation of the federal proxy rules that exist to prevent this kind of abuse,” Mallinckrodt said in its filing.

 

Proxy rules aside, BHG’s attempt to oust Mallinckrodt’s leadership, and to “throw the Company into liquidation if their demands are not met,” openly risks the restructuring effort “in a futile attempt to win a larger share for out-of-the-money equity,” Mallinckrodt wrote.

 

BHG had previously sought the appointment of an official equity committee in the case, which Judge John Dorsey of the US Bankruptcy Court for the District of Delaware rejected.

 

Mallinckrodt’s adversary complaint seeks to block the proposed shareholder meeting, prevent BHG from continuing to solicit shareholders, and to “ensure that any future pursuit of shareholder action complies with the federal securities laws.”

 

Mallicnkrodt is due to return to court tomorrow (16 March) for a hearing that will address the adversary complaint against BHG, as well as Mallinckrodt’s effort to prepay approximately USD 114m in prepetition first-lien debt.

 

The loan prepayment is part of Mallinckrodt’s effort to secure support of first-lien lenders for its RSA, although several parties have raised concerns about the source of funds that Mallinckrodt proposes to use for the payment, as well as its effort to prepay term lenders without also prepaying lenders under its revolving credit facility. An ad hoc group of first-lien noteholders filed a joinder to a previously filed objection to the prepayment, arguing that a prepetition credit agreement requires prepayments to be made on a pro rata basis between term lenders, first lien notes, and revolving credit loans.

 

Mallinckrodt’s RSA is premised on an agreement to pay USD 1.6bn in opioid claims over the next seven years and provide warrants for 19.99% of its equity to settle lawsuits related to the debtors’ production of opioid-based pain medications. The company also has a settlement in principle over its alleged failure to pay hundreds of millions of dollars in back rebates under Medicaid for its Acthar drug, agreeing to pay USD 260m over seven years via a bankruptcy plan. The debtors will also restructure their funded debt under the plan.

 

Under a revised version of the RSA, announced on 10 March, first lien term lenders will either be paid in full in cash or receive new term loans with extended maturity dates and revised interest rates. Alternatively, the company could refinance in full in cash the USD 1.9bn currently outstanding under first lien term loans at par by the plan effective date, subject to reduction for payment upon court approval of the 2020 excess cash flow sweep calculated to be about USD 114m.



 

In addition to the first lien term loan lenders, the RSA is supported by holders of 84% of guaranteed unsecured notes; 50 states and territories and the plaintiffs' executive committee in the opioid multidistrict litigation; and the multi-state governmental entities group, which represents more than 1,300 counties, municipalities, tribes and other governmental entities.

 

by Dietrich Knauth