R.A. Mackie & Co., L.P. v. Petrocorp Inc.

• Decision Date: 09 August 2004
• Docket Number: No. 02 Civ.1984(JGK).,02 Civ.1984(JGK).
• Citation: 329 F.Supp.2d 477
• Parties: R.A. MACKIE & CO., L.P. and Wien Securities Corp., Plaintiffs, v. PETROCORP INCORPORATED and Petrocorp Acquisition Corporation, as successors in interest to Southern Mineral Corporation, and as individual corporations, Defendants.
• Court: U.S. District Court — Southern District of New York

Page 477

329 F.Supp.2d 477

R.A. MACKIE & CO., L.P. and Wien Securities Corp., Plaintiffs, v. PETROCORP INCORPORATED and Petrocorp Acquisition Corporation, as successors in interest to Southern Mineral Corporation, and as individual corporations, Defendants.

No. 02 Civ.1984(JGK).

United States District Court, S.D. New York.

August 9, 2004.

COPYRIGHT MATERIAL OMITTED

Sabrina R. Bagdasarian, Frederic Dorwart, William A. Maher, J. Michael Medina, Wollmuth, Maher & Deutsch, LLP, New York, NY, Steven Kobos, Tori M. Snyder, Frederic Dorwart, Lawyers, Tulsa, OK, for Petrocorp Acquisition Corp., Petrocorp Inc.

Timothy P. Kebbe, Brunelle & Hadjikow, P.C., New York, NY, for R.A. Mackie & Co., L.P., Wien Securities Corp.

OPINION and ORDER

KOELTL, District Judge.

This case arises out of the alleged breach of, and tortious interference with, the Series B Perpetual Warrant Agreement dated September 29, 2000 (the "Warrant Agreement") between Southern Mineral Corporation ("Southern Mineral") and American Stock Transfer and Trust Company ("AST"). The plaintiffs, R.A. Mackie & Co., L.P. ("RAMLP") and Wien Securities Corp. ("WSC"), are purchasers of the Series B Perpetual Warrants (the "Warrants") issued under the Warrant Agreement.

PetroCorp Incorporated and PetroCorp Acquisition Corporation (collectively "PetroCorp") merged with Southern Mineral on June 6, 2001. PetroCorp is the successor-in-interest to Southern Mineral under the Warrant Agreement. See R.A. Mackie & Co., L.P. v. PetroCorp Inc., 244 F.Supp.2d 279, 282 (S.D.N.Y.2003) ("Mackie I"). The action was originally commenced in the Supreme Court of the State of New York, New York County. The defendants timely removed the action to this Court, on the grounds of complete diversity of citizenship, by filing a Notice of Removal on March 1, 2002.¹

The essence of the dispute between the parties is that the plaintiffs, purchasers of the Warrants, contend that the Warrants were by their terms "perpetual," and that the Warrants therefore could not be required to be redeemed. The plaintiffs contend that Southern Mineral violated the terms of the Warrant Agreement when it merged into PetroCorp because the only way that the Warrant holders could receive the merger consideration given to all other Southern Mineral stockholders was to exchange their Warrants for Southern Mineral stock before the merger. If the Warrant holders did not exchange their Warrants, their Warrants thereafter would only be redeemable for $.50, the difference between the $4.71 value of the Southern Mineral stock and the $4.21 exercise price for each Warrant, effectively freezing the consideration to be paid for the Warrants and preventing any appreciation. PetroCorp contends that this was consistent with the terms of the Warrant Agreement. The plaintiffs contend that Southern Mineral breached the terms of the Warrant Agreement by eliminating the provision of the Warrants which made them perpetual and that PetroCorp as the successor to Southern Mineral is liable for that breach. Further, the plaintiffs contend that PetroCorp intentionally interfered with the Warrant Agreement and caused its breach.

The Court conducted a non-jury trial on February 24, 25, and 26 and March 1 and 2, 2004. Having heard the testimony of the witnesses, and having assessed their credibility, and having reviewed the exhibits in evidence, the Court makes the following findings of fact and reaches the following conclusions of law pursuant to Federal Rule of Civil Procedure 52.

FINDINGS OF FACT

The Parties

1. RAMLP is a Delaware limited partnership with its principal place of business located in Irvington, New York. R.A. Mackie & Co., Inc. ("Mackie & Co.") is the general partner of RAMLP. Mackie & Co. is a New York corporation, having its principal place of business located in Irvington, New York. The sole limited partner of RAMLP is Robert A. Mackie ("Mackie"), a citizen of the State of New York. (Amended Joint Pretrial Order ("AJPO") ¶ iii(b).) Mr. Mackie is president and sole owner of Mackie & Co. (Tr. at 613 (Mackie).) RAMLP is engaged in the business of warrant trading, hedge trading and securities arbitrage. (Tr. at 377 (Bridges), 448 (Bridges); Tr. at 605-07 (Mackie).)

2. WSC is a New Jersey corporation with its principal place of business located in the State of New Jersey. (AJPO ¶ 3(c).) Stephen Rose ("Rose"), Manager of WSC's Arbitrage Department, engaged in the business of warrant trading and hedge trading on behalf of WSC. (Tr. at 496-500 (Rose).)

3. Defendant PetroCorp Incorporated is a Texas corporation with its principal place of business located in Tulsa, Oklahoma. (AJPO ¶ iii(d).)² Defendant PAC was a wholly owed subsidiary of PetroCorp Incorporated. (PX15 at p. 58.) PAC was formed for the purpose of acquiring Southern Mineral. (PX15 at I-1-I-2.) Prior to its merger into PetroCorp Incorporated, PAC was a Delaware corporation with its principal place of business located in Tulsa, Oklahoma. (AJPO ¶ 3(e).)

4. According to its Form 10-K for the fiscal year ended December 31, 2001, PetroCorp is "engaged in the acquisition, exploration and development of oil and gas properties, and in the production of oil, natural gas liquids and natural gas in North America." (PX26 at p. 2.) In accordance with the Agreement and Plan of Merger between PetroCorp and Southern Mineral, dated as of December 22, 2000, as amended (the "Merger Agreement"), PetroCorp is the successor-in-interest to Southern Mineral, and Petro Corp has assumed Southern Mineral's obligations under the Warrant Agreement. (PX15 at I-2 § 1.1; Mackie I, 244 F.Supp.2d at 282.)

Background

5. In connection with its emergence from a Chapter 11 bankruptcy proceeding in July 2000, Southern Mineral issued to its "current common shareholders, option holders, and warrant holders of record on July 24, 2000 ... approximately 3,667,000 warrants allowing them to increase their ownership from 22% to up to 40% of [Southern Mineral's] outstanding common stock." (PX30 at p. 7; see also PX35 at pp. 70-72; Tr. at 548 (Mikel).) These Series B Perpetual Warrants (the "Warrants") were "for a perpetual term with an exercise of $4.21 per share, subject to adjustment for certain customary anti-dilution stock splits, stock dividends and other recapitalization events." (PX30 at p. 7; see also PX1 §§ 1.1, 2.1, 2.2, 3.3; PX35 at p. 71; PX32 at p. 1.) The phrase "adjustment for ... customary recapitalization events" encompasses "mergers." (Tr. at 281-82 (Buck); Tr. at 388 (Bridges).)

6. The Warrants began trading on the NASD's Over-the-Counter Bulletin Board on October 16, 2000 and were delisted from the Bulletin Board on June 7, 2001, one day after Southern Mineral's merger into PetroCorp was consummated. (Mackie I, 244 F.Supp.2d at 282.)

The Warrant Agreement

7. The Warrant Agreement states that it is made between "Southern Mineral Corporation ... (including its successors and permitted assigns, the "Company") and American Stock Transfer & Trust Company...." (PX1 at p. 1.) The Warrant Agreement provides that each Warrant issued thereunder "entitles its holder to purchase from the Company one share of Common Stock at $4.21 per share, subject to adjustment as provided in Article III [thereof]." (PX1 § 2.1.) Section 6.10 of the Warrant Agreement states that "[a]ll the covenants and provisions of this Agreement by or for the benefit of the Company or the Warrant Agent or the holders of the Warrant Certificates shall bind and inure to the benefit of their respective successors and assigns hereunder." (PX1 § 6.10.) Under the plain text of the Warrant Agreement, the Warrants were exercisable into the common stock of Southern Mineral and its successors, which includes PetroCorp. The Warrant Agreement is binding on Southern Mineral, PetroCorp, and the plaintiffs, as well as the successors and assigns of each party.

8. With respect to the duration of the Warrants, the Warrant Agreement states that the Warrants "are perpetual; that is, the Warrants will not expire." (PX1 § 2.2; Tr. at 280 (Buck) ("the perpetual nature of the warrant ... by definition, does not have an expiration date").) The Warrants' perpetual duration was a unique and unusual feature for warrant agreements. David C. Buck, an attorney at Andrews & Kurth which represented the Creditors Committee of Southern Mineral, asked Southern Mineral's bankruptcy attorneys at Akin, Gump, Strauss, Hauer & Feld, LLP ("Akin Gump") whether the perpetual term of the Warrants was permissible because he had never encountered a perpetual warrant before. (Tr. at 285-86 (Buck).) The witnesses at trial testified that the Warrants' perpetual duration was a unique feature that they had not previously encountered in a warrant agreement. (Tr. at 112-13 (Berlin); Tr. at 213-214 (Lemmer); Tr. at 279 (Buck), 284-285 (Buck); Tr. at 625 (Mackie).) The witnesses also testified, however, that other than its perpetual duration, the Warrant Agreement did not contain unusual or unique features. (Tr. at 279 (Buck); Tr. at 724 (Mackie).)

9. The perpetual term of the Warrant could not be terminated "[w]ithout the agreement of the [W]arrant holders or the other parties to the [W]arrant." (Tr. at 281 (Buck).) Under the terms of the Warrant Agreement, the Warrants could not be called, redeemed or extinguished; nor could any action of Southern Mineral or PetroCorp cause the expiration of the Warrants. (Mackie I, 244 F.Supp.2d at 282; PX1 § 2.2.)

10. Section 3.3 of the Warrant Agreement is central to the outcome of this action. Section 3.3 provides, in relevant part:

Section 3.3 Reorganization, Merger and Asset Sales. If after the date hereof any ... merger involving the Company ... shall be effected, then, as a condition of such ... merger ... lawful and fair provision shall be made whereby the Warrant Certificate holders shall thereafter have the right to purchase and receive upon the basis and upon the terms and conditions specified in the Warrant Certificates...