PRIVILEGED & CONFIDENTIAL ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT
CALDERWOOD & HARKNESS LLP 600 Lexington Avenue, 38th Floor New York, NY 10022
September 12, 2022
MEMORANDUM
TO:
Nathaniel Bower, Esq. (Responsible Partner, Calderwood & Harkness LLP) Gerald "Gerry" Hartsfield (CEO, Vantage Mobility Systems Corp.) Diana Rozhenko (CFO, Vantage Mobility Systems Corp.) Tobias "Toby" Kessler (Managing Director, Ridgepoint Capital Partners, LP) Mariana Solano (Principal, Ridgepoint Capital Partners, LP)
FROM:
Amy Chesterton (Lead Associate, Calderwood & Harkness LLP)
RE:
Analysis of APA Termination Rights and Outside Date — In re Meridian Precision Components, Inc., Case No. 22-50318-JLG (Bankr. N.D. Ohio)
Matter No.: 1025-00008
cc:
Colette Whitman, Esq. (Billing Partner, Calderwood & Harkness LLP) Nathan Ikeda, Esq. (Working Associate, Calderwood & Harkness LLP)
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I. Executive Summary
This memorandum analyzes the termination rights available to Vantage Mobility Systems Corp. ("VMS" or the "Buyer") under the stalking-horse Asset Purchase Agreement, dated March 30, 2022 (the "APA"), by and between VMS, as Buyer, and Meridian Precision Components, Inc. ("Meridian" or the "Debtor"), as Seller, in the above-referenced Chapter 11 case pending before the Honorable Janet L. Grasso in the United States Bankruptcy Court for the Northern District of Ohio (the "Bankruptcy Court").
The impetus for this analysis is the Bankruptcy Court's order entered on July 18, 2022 (Dkt. 309) granting the Debtor's second motion to postpone the Section 363 auction indefinitely (the "Indefinite Postponement Order"). Since the entry of that order, the sale process has been effectively dormant: no new auction date has been set, no additional qualified bids have been received, and the three principal disputes that precipitated the postponement — the scope of environmental remediation at the Debtor's Elyria, Ohio facility, the Official Committee of Unsecured Creditors' challenge to the classification of the $1.4 million environmental remediation obligation as an assumed liability, and the absence of competing bidders — remain unresolved.
The APA contains a Termination Outside Date (the "Outside Date") of December 31, 2022. As of the date of this memorandum, the Outside Date falls approximately 110 days hence. VMS faces three principal options:
(a) Allow the APA to terminate by its terms on December 31, 2022 (or deliver affirmative written notice of termination on or after that date);
(b) Exercise an earlier termination right, if available, based on the Debtor's material breach of its obligations under the APA, including its covenant to use commercially reasonable efforts to consummate the transaction; or
(c) Negotiate a limited extension of the Outside Date with the Debtor, subject to conditions designed to protect VMS's interests and impose discipline on the sale process timeline.
Summary of Conclusions. Based on our analysis of the APA, the Bid Procedures Order (Dkt. 198), and the Break-Up Fee Approval Order (Dkt. 234), we conclude the following:
First, VMS has the contractual right to terminate the APA on or after December 31, 2022, without forfeiting the good-faith deposit of $3,175,000 currently held by Granite Trust & Escrow Co. The termination right under the Outside Date provision is clean, unambiguous, and not subject to dispute, provided that VMS has not itself been the primary cause of the failure to close — and VMS has not.
Second, upon a valid termination, VMS is entitled to the return of the full $3,175,000 good-faith deposit, and may be entitled to recover up to $2,655,000 in total bid protections, consisting of a break-up fee of $1,905,000 (3.0% of the $63.5 million purchase price) and reimbursement of documented, reasonable out-of-pocket expenses up to $750,000. The entitlement to the break-up fee upon an Outside Date termination turns on the precise trigger language in the APA and Bid Procedures Order and is discussed at length in Section IV.B below. The total bid protections of $2,655,000 represent approximately 4.18% of the purchase price.
Third, while VMS may have a colorable basis to terminate for the Debtor's breach prior to the Outside Date, such a termination would carry greater litigation risk and is not recommended unless circumstances warrant an accelerated exit from the APA.
Fourth, strategic considerations cut both ways. The Meridian assets remain strategically valuable to VMS's vertical integration thesis, and VMS holds significant leverage as the sole remaining stalking-horse bidder. However, the indefinite delay, deteriorating asset value, DIP facility maturity risk, and opportunity costs of continued engagement counsel in favor of either terminating or conditioning any extension on firm milestones and renegotiated economic terms.
We recommend that the VMS management team and Ridgepoint deal team convene a strategy call to discuss the analysis below and agree on a course of action by no later than mid-October 2022, given the approaching DIP facility maturity date of October 31, 2022 and the lead time required to negotiate any extension.
II. Background and Current Status of the Sale Process
A. The Chapter 11 Case
Meridian Precision Components, Inc. is an Ohio corporation headquartered at 4500 Industrial Parkway, Elyria, Ohio 44035. On February 14, 2022, Meridian filed a voluntary petition for relief under Chapter 11 of Title 11 of the United States Code in the United States Bankruptcy Court for the Northern District of Ohio. The case was assigned to the Honorable Janet L. Grasso and is administered under Case No. 22-50318-JLG.
Meridian is a Tier 2 automotive supplier specializing in stamped and welded structural components for body-in-white applications. The company operates three manufacturing facilities in northern Ohio:
(i) Elyria Facility — A stamping operation occupying approximately 285,000 square feet of owned manufacturing space, equipped with a mix of progressive and transfer stamping presses. This facility is Meridian's primary production center and is the site of the environmental remediation issues discussed further below.
(ii) Mansfield Facility — A welding and assembly operation occupying approximately 140,000 square feet of owned manufacturing space, featuring robotic welding cells and manual assembly lines.
(iii) Sandusky Facility — An e-coat and finishing operation occupying approximately 68,000 square feet of owned manufacturing space, providing electrocoat painting, powder coating, and finishing services.
At the time of the petition, Meridian employed approximately 620 workers across these three facilities. Of these, approximately 195 production workers at the Elyria facility are represented by the International Union, United Automobile, Aerospace and Agricultural Implement Workers of America, Local 2287 ("UAW Local 2287"), under a collective bargaining agreement (the "CBA") that was in effect as of the petition date.
Meridian's petition-date balance sheet reflected total assets of approximately $87.3 million (book value) against total liabilities of approximately $129.6 million, resulting in a balance sheet deficiency of approximately $42.3 million. For fiscal year 2021, Meridian reported revenue of $138.4 million and an operating loss of ($11.2 million). The operating loss was driven by a confluence of factors, including significant raw-material cost inflation (particularly in flat-rolled steel), the loss of a major original equipment manufacturer ("OEM") program in the second quarter of 2021, and legacy pension and other post-employment benefit obligations.
The Debtor is represented by the law firm of Hargrove Tillinghast LLP, with Marcus Tillinghast, Esq. and Priya Venkatesh, Esq. serving as lead counsel. The Debtor's financial advisor and investment banker is Calloway Strauss Advisory, LLC, led by Elliot Calloway.
B. Pre-Petition Secured Debt and DIP Financing
Meridian's pre-petition capital structure is dominated by secured indebtedness owed to Great Lakes Industrial Credit Corp. ("GLICC"), which holds a first-priority lien on substantially all of the Debtor's assets pursuant to a Credit Agreement dated September 12, 2019, as amended. As of the petition date, the outstanding balance under the GLICC credit facility was approximately $72.4 million, consisting of $28.0 million drawn under a revolving credit facility and $44.4 million outstanding under a term loan. GLICC is represented by Whitfield & Chambers LLP, with Adrienne Whitfield, Esq. serving as lead counsel. Kenneth Doran serves as the workout officer at GLICC responsible for the Meridian account.
On February 22, 2022, the Bankruptcy Court entered an interim order (Dkt. 47) authorizing the Debtor to obtain debtor-in-possession financing in the form of a $15.0 million DIP revolving credit facility (the "DIP Facility"), also provided by GLICC. The final DIP order was entered on March 18, 2022 (Dkt. 112). The material terms of the DIP Facility include the following:
• Facility Size: $15.0 million revolving credit facility
• Interest Rate: Secured Overnight Financing Rate ("SOFR") plus 550 basis points
• Unused Commitment Fee: 1.0% per annum on the undrawn portion
• Exit Fee: 2.0% of the aggregate commitments ($300,000)
• Maturity Date: Originally set for a date in the third quarter of 2022; subsequently extended to October 31, 2022 pursuant to the Indefinite Postponement Order (Dkt. 309)
• Draw Status: As of July 18, 2022, the Debtor had drawn $9.8 million under the DIP Facility, leaving approximately $5.2 million of remaining availability
The DIP Facility is secured by first-priority priming liens on all assets of the estate and carries superpriority administrative expense status under Section 364(c) of the Bankruptcy Code. The DIP maturity date of October 31, 2022 is a significant milestone in the case timeline and, as discussed further in Section VII below, may effectively constrain the practical Outside Date regardless of the contractual December 31 date.
C. The Stalking-Horse APA
VMS executed the stalking-horse APA on March 30, 2022. Under the terms of the APA, VMS agreed to acquire substantially all of the assets of Meridian as a going concern for a total purchase price of $63.5 million, consisting of $58.5 million in cash payable at closing plus an estimated $5.0 million in assumed cure costs payable in connection with the assumption and assignment of executory contracts and unexpired leases. The key terms of the APA are summarized below.
Good-Faith Deposit. In connection with the execution of the APA, VMS deposited $3,175,000 (representing 5.0% of the purchase price) with Granite Trust & Escrow Co., an independent escrow agent located at 201 Superior Avenue, Suite 600, Cleveland, Ohio 44114. The deposit is held pursuant to an Escrow Agreement dated March 30, 2022, the terms of which are discussed in Section IV.A below.
Included Assets. The APA provides for the acquisition of substantially all of Meridian's assets, including:
(a) all three manufacturing facilities (Elyria, Mansfield, and Sandusky), each owned in fee simple;
(b) all machinery, equipment, tooling, dies, fixtures, and other tangible personal property located at or used in connection with the facilities;
(c) all inventory, including raw materials, work-in-progress, and finished goods;
(d) all accounts receivable;
(e) all intellectual property, including patents, trademarks, trade secrets, know-how, and proprietary manufacturing processes;
(f) all customer contracts and OEM programs, including all rights under purchase orders and supply agreements;
(g) the "Meridian" trade name and associated goodwill; and
(h) all books, records, permits, licenses, and governmental authorizations (to the extent transferable).
Excluded Assets. The following assets are excluded from the transaction:
(a) cash and cash equivalents;
(b) causes of action and avoidance actions arising under Chapter 5 of the Bankruptcy Code;
(c) any and all tax refunds or credits attributable to pre-petition periods;
(d) certain personal property of Meridian's insiders and directors; and
(e) any assets not expressly included in the definition of "Purchased Assets."
Assumed Liabilities. Under the APA, VMS agreed to assume the following categories of liabilities:
(a) cure costs under assumed executory contracts and unexpired leases, estimated at approximately $5.0 million;
(b) all post-closing obligations arising under assumed contracts;
(c) accrued employee wages and benefits in the amount of approximately $2.1 million; and
(d) environmental remediation obligations at the Elyria facility, estimated at approximately $1.4 million based on a Phase II Environmental Site Assessment prepared by Pinehurst Environmental Sciences, Inc. (the "Elyria Environmental Obligation").
The inclusion of the Elyria Environmental Obligation as an assumed liability has been a significant point of contention, as discussed in Sections II.D and VIII below.
Excluded Liabilities. VMS expressly excluded, and is not obligated to assume, the following:
(a) all pre-petition unsecured claims;
(b) all pre-petition secured debt (including the GLICC credit facility);
(c) all obligations under the DIP Facility;
(d) pension and other post-employment benefit withdrawal liabilities, estimated at approximately $14.7 million owed to the Northern Basin Employee Benefits Trust;
(e) all intercompany claims;
(f) all professional fee claims arising in the Chapter 11 case; and
(g) any other liabilities not expressly designated as "Assumed Liabilities."
Employee Matters. The APA requires VMS to offer employment to at least 480 of Meridian's approximately 620 employees on terms and conditions determined by VMS in its sole discretion. VMS is not required to assume the existing CBA with UAW Local 2287, but has committed to negotiate a new collective bargaining agreement with the union following the closing.
Regulatory Matters. A filing under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 ("HSR Act") is not required, as the transaction size of $63.5 million falls below the applicable 2022 notification threshold of $101.0 million. An Ohio Environmental Protection Agency ("Ohio EPA") notification is required in connection with the transfer of environmental permits associated with the Elyria facility.
D. Bid Procedures and Auction Timeline
The following is a detailed chronological summary of the key events in the bid procedures and auction process:
April 5, 2022: The Debtor filed its motion for entry of an order approving bid procedures for the sale of substantially all of Meridian's assets pursuant to Section 363 of the Bankruptcy Code (the "Bid Procedures Motion"). The proposed bid procedures designated VMS as the stalking-horse bidder and incorporated the terms of the APA, including the proposed break-up fee and expense reimbursement provisions.
April 8, 2022: The Official Committee of Unsecured Creditors (the "Committee") filed a limited objection to the Bid Procedures Motion (the "Committee Objection"). The Committee is represented by the law firm of Pendergast McCabe & Lowe LLP, with the Honorable Franklin Lowe (ret.) and Sandra Okoro, Esq. serving as lead counsel. The Committee's financial advisor is Dunbar Phelps Group, LLC, led by Janet Hirsch. The Committee is chaired by Aldric Stamping & Tool Co. and includes among its members the Northern Basin Employee Benefits Trust and Crestwood Logistics, Inc. The Committee Objection argued that the proposed break-up fee of 3.0% of the purchase price was excessive in light of the size of the transaction and prevailing market practice, and sought to reduce the break-up fee to 2.0% of the purchase price.
April 14, 2022: GLICC filed a statement in support of the Bid Procedures Motion, noting its interest as the predominant secured creditor in an orderly and expeditious sale process.
April 22, 2022: The Bankruptcy Court held a hearing on the Bid Procedures Motion. At the conclusion of the hearing, the Court entered an order approving the bid procedures (the "Bid Procedures Order," Dkt. 198), including the stalking-horse designation of VMS, the bid qualification requirements, and the auction and sale hearing timeline. However, the Court reserved ruling on the break-up fee and expense reimbursement provisions pending supplemental briefing.
May 6, 2022: All parties, including VMS, the Debtor, GLICC, and the Committee, filed supplemental briefs addressing the appropriate level of bid protections. VMS's supplemental brief argued that a 3.0% break-up fee was well within the range approved by courts in the Northern District of Ohio and in comparable Tier 2 automotive supplier bankruptcy sales.
May 13, 2022: The Bankruptcy Court entered a supplemental order approving the break-up fee at 3.0% of the purchase price ($1,905,000) and the expense reimbursement cap at $750,000 (the "Break-Up Fee Approval Order," Dkt. 234). The Court found that the bid protections, totaling $2,655,000 (or 4.18% of the purchase price), were reasonable and necessary to induce VMS's stalking-horse bid and were within the range approved in comparable cases. The Court further ordered that the break-up fee and expense reimbursement, if triggered, would be payable as superpriority administrative expense claims.
May 20, 2022 (Original Bid Deadline): One additional bid was received prior to the bid deadline. Axton Industrial Holdings, LLC ("Axton"), a portfolio company led by CEO Philip Drucker and backed by Northstar Equity Advisors, LP, submitted a bid at $64.75 million, represented by the law firm of Kline Rourke & Sato LLP, with Danielle Sato, Esq. serving as lead counsel. However, the Axton bid was conditioned on (i) resolution of the environmental remediation liabilities at the Elyria facility to Axton's satisfaction, and (ii) receipt of consent from UAW Local 2287 to the transaction. Axton's earlier non-binding indication of interest had valued Meridian's assets in a range of $56 million to $60 million. Due to the conditions attached, the Debtor determined that Axton's bid could not be designated as a "Qualified Bid" under the Bid Procedures Order without further resolution of the environmental and labor contingencies.
May 25, 2022 (Original Auction Date): No auction was held. The Debtor requested an adjournment of the auction to allow additional time for Axton to resolve the conditions to its bid and for the Debtor to solicit additional interest. Later that same day, Axton formally withdrew its conditioned bid, citing its inability to resolve the environmental liability and labor contingencies within a timeframe acceptable to its sponsor.
June 3, 2022: The Debtor filed a motion requesting an extension of the auction date to July 15, 2022, arguing that additional time was needed to address the environmental remediation scope issues with the Ohio EPA and to solicit additional bidding interest.
June 10, 2022: The Bankruptcy Court granted the Debtor's motion and entered an order adjourning the auction to July 15, 2022 (Dkt. 271). The order also established a revised bid deadline of July 8, 2022.
July 8, 2022: No additional qualified bids were received by the revised bid deadline. On the same date, the Debtor filed a second motion to postpone the auction indefinitely (the "Second Postponement Motion"), citing three grounds: (i) ongoing negotiations with the Ohio EPA regarding the scope of environmental remediation required at the Elyria facility, which remained unresolved and had material implications for the assumed liabilities under the APA; (ii) the Committee's continuing challenge to the inclusion of the $1.4 million Elyria Environmental Obligation as an assumed liability, which the Committee argued effectively reduced the net consideration available for distribution to unsecured creditors; and (iii) the absence of any additional qualified bids, which the Debtor argued reduced the urgency of proceeding to an auction.
July 18, 2022: The Bankruptcy Court granted the Second Postponement Motion and entered the Indefinite Postponement Order (Dkt. 309), adjourning the auction sine die. In connection with the Indefinite Postponement Order, the Court also approved the extension of the DIP Facility maturity date to October 31, 2022, with GLICC's consent.
E. Current Dormant Status
Since the entry of the Indefinite Postponement Order on July 18, 2022, the sale process has been effectively dormant. No further auction date has been set or proposed. Neither the Debtor nor its advisors — Hargrove Tillinghast LLP and Calloway Strauss Advisory, LLC — have provided VMS, its counsel at Calderwood & Harkness LLP, or any other party known to us with any updated timeline for resuming the sale process, marketing the assets to additional potential bidders, or resolving the disputes that precipitated the postponement.
Three core disputes remain unresolved:
(i) Ohio EPA Remediation Scope. The scope of environmental remediation required at the Elyria facility has not been agreed upon between the Debtor and the Ohio EPA. The Phase II Environmental Site Assessment prepared by Pinehurst Environmental Sciences, Inc. identified contamination requiring an estimated $1.4 million in remediation costs, but the Ohio EPA has indicated that additional assessment and potentially expanded remediation may be required. Until the scope is finalized, the economic burden associated with the Elyria Environmental Obligation cannot be quantified with certainty.
(ii) Committee Challenge to Assumed Environmental Liability. The Committee continues to object to the classification of the Elyria Environmental Obligation as an assumed liability under the APA. The Committee's position is that including the environmental remediation cost as an assumed liability effectively reduces the net proceeds available for distribution to unsecured creditors by the amount of the obligation. The Committee has advocated for either (a) excluding the environmental remediation obligation from the assumed liabilities entirely, thereby requiring VMS to increase its purchase price by a corresponding amount if it wishes to acquire the assets free and clear of the environmental claim, or (b) treating the obligation as an estate expense payable from sale proceeds prior to distribution.
(iii) Absence of Additional Qualified Bidders. Axton Industrial Holdings, LLC, the only competing bidder to emerge during the marketing process, withdrew its conditioned bid on May 25, 2022. No other party has submitted a bid or expressed qualified interest. The absence of competitive bidding pressure has reduced the Debtor's and Committee's urgency to proceed, even as the estate continues to consume resources in the Chapter 11 case.
It is important to note that the DIP Facility maturity date of October 31, 2022 creates its own distinct pressure on the Debtor and GLICC, but this constraint does not directly bind VMS. Nevertheless, as discussed in Section VII below, the DIP maturity has significant indirect implications for VMS's strategic calculus, as the Debtor's ability to continue operating as a going concern beyond that date is uncertain absent a further extension from GLICC.
VMS's stalking-horse APA remains in full force and effect. VMS has not waived any rights under the APA, has continued to comply with its obligations (including maintaining the good-faith deposit and cooperating with reasonable requests for information), and has not taken any action that would constitute a breach or give rise to a forfeiture of its termination rights. The APA is, however, subject to the Termination Outside Date of December 31, 2022, the implications of which are analyzed in the following sections.
III. Analysis of APA Termination Provisions
The APA contains several independent bases for termination. This section analyzes each in turn, with a focus on the Outside Date termination right, which we regard as the most straightforward and defensible option available to VMS.
A. Termination Outside Date (Section 10.1(b) of the APA)
Section 10.1(b) of the APA provides that either the Buyer or the Seller may terminate the APA by delivering written notice to the other party if the Closing has not occurred on or before December 31, 2022 (the "Termination Outside Date" or "Outside Date"), provided that the right to terminate pursuant to this subsection shall not be available to any party whose breach of any representation, warranty, covenant, or obligation under the APA has been the primary cause of, or has primarily resulted in, the failure of the Closing to occur on or before the Outside Date.
Several features of this provision merit careful analysis:
No Automatic Termination. The Outside Date is structured as a right, not as an automatic termination mechanism. The APA does not terminate automatically on December 31, 2022 merely because the Closing has not occurred. Rather, VMS must affirmatively exercise the right by delivering written notice of termination to the Debtor in accordance with the notice provisions set forth in Section 12.4 of the APA. This means that if VMS does not deliver a termination notice, the APA will remain in effect even after December 31, 2022, and VMS will continue to be bound by its obligations thereunder. It is therefore critical that VMS deliver a clear and timely termination notice if it elects to terminate.
Causation Limitation. The terminating party must not have been the "primary cause" of the failure to close. This is a standard proviso in Outside Date termination clauses and is designed to prevent a party from engineering the failure of closing conditions in order to invoke the Outside Date as an exit mechanism. The relevant inquiry is whether VMS's own breach or failure to perform was the primary reason the Closing did not occur by December 31, 2022.
Application to VMS. On the facts as we understand them, VMS has not breached any representation, warranty, covenant, or agreement under the APA. VMS has performed all of its obligations, including the timely deposit of the good-faith deposit, cooperation with the Debtor's due diligence requests, and continued engagement with the sale process. The failure to close is attributable entirely to factors within the Debtor's domain: the unresolved environmental remediation scope dispute with the Ohio EPA, the Committee's objection to the assumed environmental liability, and the Debtor's inability to attract additional qualified bidders. Each of these factors led to the Debtor's motions to postpone the auction — first to July 15, 2022, and then indefinitely. At no point did VMS seek or support a postponement, and at no point did VMS's conduct contribute to the delay.
Conclusion. VMS is fully entitled to exercise its termination right under Section 10.1(b) by delivering written notice to the Debtor on or after December 31, 2022. The causation limitation does not apply, as VMS has not been the primary or contributing cause of the failure to close. This is the cleanest and most defensible termination mechanism available under the APA.
B. Termination for Debtor's Breach or Failure to Perform (Section 10.1(c) of the APA)
Section 10.1(c) of the APA provides that VMS may terminate the APA if the Debtor has materially breached any representation, warranty, covenant, or agreement contained in the APA, and such breach (a) would, individually or in the aggregate, result in the failure of one or more of the conditions to closing set forth in Article IX of the APA, and (b) is not cured within twenty (20) business days after written notice of such breach is delivered by VMS to the Debtor.
This provision raises the question of whether VMS could terminate the APA prior to the Outside Date on the ground that the Debtor has breached its obligations by failing to pursue the sale process with reasonable diligence.
Potential Arguments for Debtor Breach. The APA contains a covenant (Section 7.2) obligating the Debtor to use "commercially reasonable efforts" to consummate the transactions contemplated by the APA, including obtaining all necessary Bankruptcy Court orders and approvals. VMS could argue that the Debtor's failure to set an auction date, its successive requests for postponement, and its apparent acquiescence in the indefinite dormancy of the sale process constitute a breach of this covenant. The argument would be that a seller acting with commercially reasonable efforts would not allow a sale process to remain dormant for nearly two months (and counting) without establishing a timeline for resolution of the outstanding disputes and scheduling an auction.
Further, VMS could argue that the Debtor's indefinite postponement of the auction constitutes a constructive breach of the APA's implied obligation of good faith and fair dealing, particularly given the detrimental impact of the delay on VMS's resources, opportunity costs, and the deteriorating value of the assets being acquired.
Counterarguments and Risks. The Debtor would likely raise several defenses to a breach-based termination. First, the Debtor could argue that the postponements were not voluntary but were granted by the Bankruptcy Court over VMS's implicit acquiescence — VMS did not file a formal objection to either postponement motion. Second, the Debtor could argue that the commercially reasonable efforts standard does not compel the Debtor to proceed with an auction in the face of legitimate and unresolved disputes, including the EPA remediation scope negotiation and the Committee's objection, both of which have substantive merit and could not be resolved unilaterally by the Debtor. Third, the Debtor could argue that its fiduciary duties as a debtor in possession require it to maximize value for the estate and that proceeding to an auction without resolving these disputes could expose the estate to claims or result in a sub-optimal outcome.
If VMS were to deliver a breach-based termination notice and the Debtor contested the validity of the termination, the dispute would likely be resolved by the Bankruptcy Court. Litigation over whether the Debtor's conduct constitutes a "material breach" of the commercially reasonable efforts covenant would be fact-intensive, uncertain, and potentially time-consuming. During the pendency of such a dispute, the good-faith deposit might remain frozen in escrow, and VMS's entitlement to bid protections could be challenged.
Assessment. While there are colorable arguments supporting a breach-based termination, we do not recommend that VMS pursue this avenue as a primary termination strategy. The Outside Date termination right under Section 10.1(b) is cleaner, less susceptible to challenge, and does not require VMS to prove the Debtor's material breach — only that the Closing has not occurred by December 31, 2022, and that VMS was not the primary cause. We note, however, that the breach-based termination right remains available as a fallback if circumstances change materially before the Outside Date — for example, if the Debtor takes affirmative action that clearly constitutes a breach (such as negotiating a competing transaction without following the bid procedures, or failing to maintain the assets in the ordinary course of business).
C. Termination Upon Approval of a Superior Proposal (Section 10.1(d) of the APA)
Section 10.1(d) contains a "fiduciary out" permitting the Debtor to terminate the APA if the Bankruptcy Court approves a higher or otherwise better bid (a "Superior Proposal") at a properly conducted auction and subsequently authorizes the Debtor to consummate a transaction with the prevailing bidder.
This provision is not currently implicated. No auction has been conducted, no Superior Proposal has been received, and Axton's conditioned bid of $64.75 million — the only competing bid to emerge during the marketing process — was withdrawn on May 25, 2022. There is no indication that any other party has expressed serious interest in acquiring Meridian's assets.
If the Debtor were to terminate the APA under this provision at some future date, VMS would be entitled to the break-up fee and expense reimbursement as set forth in the APA and the Break-Up Fee Approval Order. The break-up fee was specifically designed to compensate VMS for its time, effort, and expense in serving as the stalking-horse bidder in the event the Debtor consummates a transaction with another buyer.
D. Termination by Mutual Written Consent (Section 10.1(a) of the APA)
Section 10.1(a) provides that the APA may be terminated at any time prior to the Closing by the mutual written consent of the Buyer and the Seller, subject to the approval of the Bankruptcy Court (to the extent required). This right is always available by agreement and does not require further analysis. We note, however, that a mutual termination could be used as a vehicle for negotiating the terms of VMS's exit from the APA, including the return of the deposit and payment of bid protections, if VMS and the Debtor are able to reach an amicable resolution.
E. Termination Upon Conversion or Dismissal of the Bankruptcy Case (Section 10.1(e) of the APA)
Section 10.1(e) provides for the automatic termination of the APA if Meridian's Chapter 11 case is converted to a case under Chapter 7 of the Bankruptcy Code or is dismissed. Upon such an event, the APA terminates immediately without the need for either party to deliver written notice.
There is no present indication that conversion or dismissal is imminent. However, the DIP Facility maturity date of October 31, 2022 creates a realistic risk of conversion if the Debtor is unable to obtain a further extension from GLICC or to otherwise repay the DIP obligations from available cash. If the DIP Facility matures without extension, GLICC may seek relief from the automatic stay and pursue foreclosure on the collateral, or may support (or not oppose) a motion to convert the case to Chapter 7. In a Chapter 7 liquidation, the assets would likely be sold in a fire sale at significantly reduced values. The implications of this scenario for VMS's bid protections are discussed in Section VII below.
IV. Consequences of Termination
A. Return of Good-Faith Deposit ($3,175,000)
Upon a valid termination of the APA by VMS under the Outside Date provision (Section 10.1(b)) or the Debtor's breach provision (Section 10.1(c)), VMS is contractually entitled to the return of the full good-faith deposit of $3,175,000 currently held by Granite Trust & Escrow Co. (the "Escrow Agent") at its offices at 201 Superior Avenue, Suite 600, Cleveland, Ohio 44114.
The Escrow Agreement, dated March 30, 2022, by and among VMS, the Debtor, and Granite Trust & Escrow Co., governs the mechanics of deposit release. Under the Escrow Agreement, the deposit will be released to VMS upon the delivery of joint written instructions signed by both VMS and the Debtor (or by their respective authorized representatives) directing the Escrow Agent to disburse the funds to VMS. In the event that the parties are unable to agree on joint instructions — for example, if the Debtor disputes the validity of VMS's termination — the Escrow Agreement provides that the deposit will remain in escrow pending (a) the mutual agreement of the parties or (b) a final, non-appealable order of a court of competent jurisdiction (including the Bankruptcy Court) directing the disposition of the funds.
Risk Assessment. If VMS terminates under the Outside Date provision, the risk of the Debtor contesting the validity of the termination is low, as the termination right is contractually clear, the Outside Date is unambiguous, and VMS has not caused the failure to close. In such a scenario, we would expect the Debtor to execute joint release instructions without litigation. However, in the unlikely event that the Debtor refuses to execute joint instructions — perhaps as leverage to pressure VMS into an extension or price reduction — VMS would need to seek a Bankruptcy Court order directing the release of the deposit. We anticipate that such an order would be readily obtainable given the straightforward facts, but the process could take several weeks.
Escrow Release Timeline. The Escrow Agreement provides that upon receipt of valid joint instructions or a court order, the Escrow Agent will release the deposit within five (5) business days. Interest accrued on the deposit during the escrow period is payable to VMS upon release, net of any escrow fees.
B. Break-Up Fee Entitlement ($1,905,000)
The Break-Up Fee Approval Order (Dkt. 234), entered on May 13, 2022, provides that VMS is entitled to a break-up fee of $1,905,000 (3.0% of the $63.5 million purchase price) upon the occurrence of a "Break-Up Fee Trigger Event," as defined in Section 10.3 of the APA and incorporated by reference into the Bid Procedures Order. The break-up fee, if triggered, is payable as a superpriority administrative expense claim against the Debtor's estate.
The critical question for our analysis is whether VMS's termination of the APA on the Outside Date constitutes a Break-Up Fee Trigger Event, or whether the break-up fee is triggered only upon the occurrence of certain other specified events.
Typical Stalking-Horse APA Structure. In the standard structure for stalking-horse bid protections in Section 363 sales, the break-up fee is payable upon the occurrence of one or more of the following events:
(a) The Debtor consummates a sale or other transaction with a buyer other than the stalking horse (i.e., the stalking horse is outbid at auction);
(b) The Debtor terminates the APA in order to pursue a Superior Proposal;
(c) The APA is terminated for any reason other than the stalking horse's own breach, and the Debtor subsequently consummates an alternative transaction within a specified tail period (typically 12 to 18 months following the termination); or
(d) In some cases, the APA is terminated for any reason not attributable to the stalking horse's own breach, regardless of whether an alternative transaction is subsequently consummated.
Analysis of the APA Language. Based on our review of the APA, the Break-Up Fee Trigger Events are defined to include the events described in clauses (a) through (c) above. Specifically, the APA provides that the break-up fee is payable if:
(i) The Debtor consummates a sale of all or substantially all of the Purchased Assets to any person or entity other than VMS (a "Competing Transaction");
(ii) The Debtor terminates the APA pursuant to Section 10.1(d) (the fiduciary out) in order to accept and consummate a Superior Proposal; or
(iii) The APA is terminated by either party (other than by VMS's breach) and the Debtor consummates a Competing Transaction within twelve (12) months following the date of such termination (the "Tail Period").
Implication for Outside Date Termination. Under this structure, VMS's termination of the APA on the Outside Date does not, standing alone, trigger the break-up fee. The break-up fee becomes payable only if and when the Debtor subsequently consummates a Competing Transaction — either during the remaining life of the Chapter 11 case or within the twelve-month Tail Period following the termination. If the Debtor does not consummate a Competing Transaction (for example, if the case is converted to Chapter 7 and the assets are liquidated piecemeal, or if no buyer emerges), VMS would not be entitled to the break-up fee.
This is a meaningful distinction. VMS should understand that the break-up fee is not a guaranteed payment upon termination, but rather a contingent claim that may or may not become payable depending on subsequent events. We note, however, that if the Debtor does resume the sale process and ultimately sells the assets to another buyer within the Tail Period, VMS's break-up fee claim will be a superpriority administrative expense with strong priority of payment.
Alternative Interpretation. We will conduct a further, word-by-word review of Section 10.3 of the APA and the corresponding provisions of the Bid Procedures Order to confirm the analysis above. It is possible that the specific language of the APA provides a broader trigger — for example, some stalking-horse APAs define the trigger event to include any termination of the APA that is not caused by the stalking horse's own breach, without requiring a subsequent Competing Transaction. If the APA contains such broader language, VMS would be entitled to the break-up fee immediately upon a valid Outside Date termination, regardless of whether the Debtor subsequently consummates a Competing Transaction. We will advise VMS and Ridgepoint promptly upon completing this review.
Recommendation. Regardless of the precise trigger mechanism, VMS should take the following steps to preserve its break-up fee entitlement:
(a) Deliver a clear, written termination notice that expressly reserves all rights under the APA, including the right to the break-up fee and expense reimbursement;
(b) If the break-up fee is triggered only upon a subsequent Competing Transaction, monitor the Debtor's activities during the twelve-month Tail Period and be prepared to assert the claim if a Competing Transaction is announced; and
(c) If the Debtor disputes VMS's entitlement to the break-up fee, assert the claim as a superpriority administrative expense in the Chapter 11 case (or in any successor Chapter 7 case) and seek a court order directing payment.
C. Expense Reimbursement Entitlement (Up to $750,000)
Section 10.4 of the APA and the Break-Up Fee Approval Order provide that, upon a valid termination (under the same circumstances that trigger the break-up fee), VMS is entitled to reimbursement of its documented, reasonable, and actual out-of-pocket expenses incurred in connection with the negotiation, execution, and performance of the APA and the pursuit of the transaction, subject to a cap of $750,000.
Reimbursable expenses include, without limitation:
(a) Legal fees and expenses of Calderwood & Harkness LLP. As of the date of this memorandum, total C&H fees billed in connection with this matter are approximately $305,650. Additional fees will continue to accrue through the termination date and any subsequent enforcement proceedings.
(b) Environmental consulting fees of Pinehurst Environmental Sciences, Inc. in connection with the Phase II Environmental Site Assessment of the Elyria facility and related environmental due diligence.
(c) Title and survey work performed by Commonwealth Abstract & Title Services, LLC in connection with the real property included in the transaction.
(d) Other transaction-related costs, including travel expenses, third-party due diligence vendor fees, and financial advisory costs (to the extent incurred directly by VMS, as distinguished from Ridgepoint's internal costs).
We recommend that VMS and C&H compile a detailed schedule of all reimbursable out-of-pocket expenses incurred to date, organized by category and supported by appropriate documentation (invoices, receipts, engagement letters). This schedule should be prepared in advance of any termination so that VMS is prepared to submit a prompt and complete reimbursement claim. The expense reimbursement claim, like the break-up fee, has superpriority administrative expense status under the Bid Procedures Order.
Based on a preliminary review, we believe that VMS's total reimbursable out-of-pocket expenses are likely to approach or reach the $750,000 cap, particularly when environmental consulting and title/survey costs are included. However, a complete accounting is necessary to confirm.
D. Total Bid Protections Recovery
In summary, upon a valid termination and the satisfaction of any applicable trigger conditions, VMS's maximum recovery would be as follows:
It is important to note that the break-up fee and expense reimbursement are claims against the Debtor's estate, and their collectability ultimately depends on the estate's administrative solvency. As of the date of this memorandum, the estate's administrative solvency is uncertain. The DIP Facility obligations ($9.8 million drawn), professional fee claims (estimated at $2.0 million to $3.0 million and growing), and other administrative expenses must be satisfied before — or pari passu with — VMS's superpriority administrative claims, depending on the specific priority waterfall established by the DIP order and the Bid Procedures Order. Given GLICC's secured position, the superpriority administrative status of VMS's claims, and the value of the Debtor's assets (even in a distressed scenario), we believe the risk of non-recovery is modest, but it is not zero, particularly if the case is converted to Chapter 7 and the assets are liquidated at fire-sale values.
V. Strategic Considerations
The decision whether to terminate the APA, extend the Outside Date, or pursue a conditional extension involves a balancing of legal rights, economic interests, and strategic considerations. We set forth below the principal arguments on each side, followed by our assessment of a potential hybrid approach.
A. Arguments in Favor of Allowing the APA to Terminate on December 31, 2022
1. Indefinite Delay and Uncertainty
The sale process has now been dormant for nearly two months since the entry of the Indefinite Postponement Order on July 18, 2022, with no indication of when — or whether — the process will resume. No auction date has been set. The Debtor and its advisors have not communicated any timeline for resolving the three principal disputes that precipitated the postponement. The environmental remediation scope negotiations with the Ohio EPA appear to be at an impasse, and the Committee's objection to the assumed environmental liability has not been resolved or withdrawn.
This indefinite delay imposes real costs on VMS and Ridgepoint. VMS's management team — including Mr. Hartsfield and Ms. Rozhenko — has devoted significant time and attention to the Meridian acquisition, time that could be directed toward other strategic initiatives. Ridgepoint's deal team — Mr. Kessler and Ms. Solano — likewise has opportunity costs associated with the continued commitment of resources to a transaction that may never close. Every month that the APA remains in effect without progress toward closing is a month in which VMS and Ridgepoint are effectively held hostage by the Debtor's inability to resolve disputes that are not of VMS's making.
2. Deteriorating Asset Value
There is a significant risk that the value of Meridian's assets is deteriorating during the Chapter 11 case. Meridian was already experiencing declining revenue and operating losses prior to the petition (FY2021 revenue of $138.4 million; operating loss of ($11.2 million)). Extended bankruptcy operations tend to accelerate value erosion: customers may redirect programs to alternative suppliers, key employees may depart, equipment may not be properly maintained, and the going-concern premium embedded in the $63.5 million purchase price may diminish.
Moreover, the DIP Facility proceeds are being consumed to fund ongoing operations. As of July 18, 2022, the Debtor had drawn $9.8 million of the $15.0 million DIP Facility, leaving only $5.2 million of remaining availability. If the Debtor's burn rate continues at a pace consistent with the first five months of the case, remaining DIP availability could be exhausted well before the December 31 Outside Date. If the DIP Facility matures on October 31, 2022 without extension, and GLICC declines to further fund the Debtor's operations, the case may be converted to Chapter 7, rendering the assets far less valuable and the transaction economics fundamentally different from those reflected in the March 30 APA.
3. Opportunity Cost
VMS and Ridgepoint have significant capital earmarked for the Meridian acquisition: a $33.5 million equity contribution from Ridgepoint Capital Fund II, LP, and $30.0 million in incremental debt capacity under VMS's existing credit facility with Lakeshore Commercial Lending, Inc. While these commitments remain outstanding, VMS and Ridgepoint are constrained in their ability to pursue other acquisition opportunities. The automotive supplier sector continues to present attractive consolidation opportunities, and delays in the Meridian transaction may cause VMS to miss alternative targets that could deliver comparable or superior strategic value.
Additionally, C&H legal fees continue to accrue during the dormant period. From August 2022 through the date of this memorandum, C&H has billed approximately $18,200 in fees related to ongoing monitoring, correspondence, and internal analysis. While modest relative to the transaction size, these fees will continue to accumulate through any extension period and any subsequent negotiations or litigation.
4. Recovery of Bid Protections
Upon a valid termination, VMS recovers its $3,175,000 good-faith deposit and preserves its entitlement to up to $2,655,000 in bid protections (subject to the trigger analysis discussed in Section IV.B). Termination allows VMS to redeploy its capital while retaining the upside of the break-up fee claim if the Debtor ultimately consummates a Competing Transaction within the Tail Period.
B. Arguments in Favor of Extending the Outside Date
1. Strategic Value of the Acquisition
VMS's original strategic rationale for the Meridian acquisition remains compelling. The acquisition would provide VMS with vertically integrated stamping and welding capabilities, reducing VMS's reliance on third-party suppliers for body-in-white structural components. Meridian's three Ohio facilities, combined with VMS's existing operations, would create a comprehensive platform for serving OEM customers with end-to-end structural component manufacturing, from stamping through e-coat finishing. The geographic proximity of Meridian's facilities to VMS's existing Ohio operations would facilitate operational integration and logistics optimization.
Meridian's customer contracts, OEM program relationships, and trained workforce are assets that would be difficult and time-consuming to replicate through organic growth. The loss of these assets to a competing buyer — or their destruction through a Chapter 7 liquidation — would represent a meaningful strategic setback for VMS's vertical integration strategy.
2. Favorable Purchase Price
The $63.5 million purchase price represents a significant discount to the book value of Meridian's assets ($87.3 million). While book value does not necessarily reflect fair market value, the discount suggests that VMS is acquiring the assets at a favorable basis. If Meridian's operational issues — including the raw-material cost pressures and the loss of the major OEM program — can be addressed post-closing, the acquisition could be highly accretive to VMS's existing $412 million revenue base and $51.8 million EBITDA. Ridgepoint's investment thesis for the transaction, as reflected in the fund's investment committee memorandum, projected a return on invested capital that was among the most attractive in the fund's pipeline.
3. Limited Competition
Axton Industrial Holdings, LLC was the only competing bidder to emerge during the marketing process, and its conditioned bid at $64.75 million was withdrawn due to inability to resolve environmental and labor contingencies. No other party has submitted a bid or expressed qualified interest. In the current market environment — characterized by rising interest rates, supply chain disruption, and uncertainty in the automotive sector — the pool of potential acquirers for a distressed Tier 2 automotive supplier with environmental liabilities and a unionized workforce is limited.
This absence of competition strengthens VMS's negotiating position. If the environmental and labor issues are resolved, VMS may be able to close at the current price or potentially renegotiate a lower purchase price, recognizing that the Debtor has no credible alternative buyer.
4. Stalking-Horse Leverage
As the only bidder, VMS holds significant leverage over the Debtor, the Committee, and GLICC. Each of these parties has a strong interest in seeing the transaction close, and VMS's threat of termination is a powerful negotiating tool. An extension of the Outside Date could be negotiated with conditions highly favorable to VMS, including, without limitation:
(a) A reduction in the purchase price to account for the deterioration in asset value during the delay period;
(b) A narrowing of the assumed liabilities, particularly the exclusion or capping of the Elyria Environmental Obligation;
(c) A firm commitment by the Debtor to set an auction date within a specified timeframe;
(d) Additional bid protections, such as an increased break-up fee or a reduced threshold for the expense reimbursement trigger;
(e) A cap on VMS's environmental remediation exposure, backed by an environmental indemnity from the estate or an escrow holdback;
(f) GLICC's agreement to extend the DIP Facility maturity to match the new Outside Date; and
(g) VMS's right to terminate immediately if any of the foregoing conditions are not satisfied within specified deadlines.
C. Hybrid Approach: Conditional Extension
In light of the foregoing considerations, we believe that a conditional extension of the Outside Date may offer the best balance of preserving VMS's optionality while protecting its downside. Under this approach, VMS would agree to extend the Outside Date for a limited period — we would suggest ninety (90) days, to March 31, 2023 — conditioned on the satisfaction of the following milestones: