Scott D. Musoff, Esq., SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP New York, NY, Albert L. Hogan, III, Esq., Amy L. Van Gelder, Esq., Andrew J. Fuchs, Esq. SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP, Chicago, IL, Attorneys for the Defendants Severstal U.S. Holdings, LLC and Severstal U.S. Holdings II, Inc.
Brian E. O'Connor, Esq., Benjamin P. McCallen, Esq., Joshua M. Troy, Esq., WILKIE FARR & GALLAGHER LLP, New York, NY, Attorneys for Plaintiff RG Steel.
ROVERT W. SWEET, District Judge.
Defendants Severstal U.S. Holdings, LLC ("SUSH") and Severstal U.S. Holdings II, Inc. ("SUSH II") (collectively "Severstal" or "Defendants") move pursuant to Rule 12(b)(6) to partially dismiss the Complaint of Plaintiff RG Steel ("RG Steel" or Plaintiff").
For the reasons set forth below, Defendants' motion is granted in part and denied in part.
Plaintiff initially commenced an action in this Court on March 30, 2012. After Defendants disputed the allegations of subject matter jurisdiction, Plaintiff voluntarily dismissed the action on April 20, 2012.
Plaintiff refilled the action the same day in the Supreme Court of the State of New York. Prior to Defendants filing their answer, Plaintiff and affiliated entities filed for protection under Chapter 11 of the Bankruptcy Code, and the State Court stayed the action. By Notice of Removal dated March 7, 2013, RG Steel removed the action to this court.
Plaintiff filed the Amended Complaint ("Complaint") on June 7, 2013. The Complaint alleges five independent causes of action and seeks to recover for losses and/or damages sustained in connection with RG Steel's purchase of certain steel mills from Defendants pursuant to the Stock Purchase Agreement (the "SPA") entered into in 2011, as well as certain declaratory relief.
On July 22, 2013, Defendants filed the motion to dismiss. This motion was heard and marked fully submitted on October 2, 2013.
1. The Parties and the SPA
RG Steel is a Delaware limited liability company that manufactures a variety of steel mill products, including hot-rolled, cold-rolled, and coated sheets, and tin mill products. SUSH is a Delaware limited liability company. It is the sole owner of the issued and outstanding equity interests of SUSH II, a Delaware corporation and former owner of the equity interests of Severstal Sparrows Point, LLC ("Severstal Sparrows Point"). SUSH and SUSH II are subsidiaries of Severstal International, a global steelmaker which has operations in Russia, the United States and elsewhere.
RG Steel, SUSH, SUSH II and Severstal Sparrows Point entered into a March 1, 2011 SPA, which provided that RG Steel would purchase the equity in three U.S.-based steel companies from SUSH. The facilities are located in Sparrows Point, Maryland, Warren, Ohio and Wheeling, West Virginia and were acquired by Severstal between May 2008 and August 2008. In connection with the transaction, RG Steel purchased all of the equity of Severstal Sparrows Point, which in turn owned all of the outstanding equity in Severstal Warren LLC ("Warren" or "Severstal Warren") and Severstal Wheeling Inc. ("Wheeling"). (Compl. ¶ 7; SPA §§ 1.01, 1.04.) In exchange, RG Steel agreed to the following payment schedule: (1) $125 million in cash, subject to a purchase price adjustment based on the amount of working capital at the company at closing ( Id. ¶ 8.); (2) $100 million in the form of a note (the "Note"), the principal of which was due five years after closing ( id. ); (3) repayment of $317 million of third-party bank debt owed by the Severstal entities ( id. ) and (4) $36 million in cash to be paid to two Severstal subsidiaries within one year of closing. ( Id. ) The transaction closed on March 31, 2011. (Compl. ¶ 37.)
1. The Purchase Price
Section 1.01 of the SPA provides that the "aggregate consideration to be paid by [RG Steel] at the Closing... shall be the Note, plus (ii) cash in the amount equal to the Initial purchase Price (as adjusted pursuant to Section 1.04, the Final Purchase Price)."
The Note has a principal amount of $100 million, with a maturity date of March 21, 2016, and quarterly interest payments due beginning on June 30, 2012, until the entire principal amount is repaid in full. (Exhibit 1, § 1.1.) The Note also sets forth certain mandatory prepayment events that require immediate payment of the Note in full, including, for example, a change of control or certain sales, transfers, and dispositions of RG Steel's interest in the acquired businesses. (Exhibit 1 Preamble, § 1.5.) In addition, upon the occurrence of an event of default, including RG Steel's bankruptcy, Severstal may declare all or a portion of the Note immediately due and payable. ( Id. §§ 2.1, 2.3.)
Section 1.04(a) of the SPA defines the Initial Purchase Price as $125 million, subject to an upward or downward adjustment based on the acquired business's net work capital and certain indebtedness as of the Closing Date, also known as the "Effective Time, " as compared with baseline amounts set forth in the SPA. (SPA § 1.04.) The SPA provides for two phases of this adjustment. First, pursuant to a calculation two business days before the Closing, the Initial Purchase Price was subject to an initial upward or downward adjustment based on Severstal's estimate of the net working capital and certain indebtedness as of the Closing Date, as compared with baseline amounts set forth in the SPA. ( Id. ) The estimates of net working capital and indebtedness resulted in RG Steel paying only $85 million at the Closing. Several U.S. Holdings LLC v. RG Steel, LLC, Case No. 11-cv-6922 (RWS), 865 F.Supp.2d 430 (S.D.N.Y. 2012).
Second, as is typical with stock purchase agreements, to take into account additional information that would become available shortly after Closing, the SPA provides for another, final adjustment to the purchase price based on the difference between final calculations of net working capital and certain indebtedness, and Severstal's estimate of net working capital and certain indebtedness of Severstal Sparrows Point and its subsidiaries, as of the Closing Date. (SPA § 1.04(b).) The second adjustment is conducted through a multi-step exchange of calculations between the parties and yields the Final Purchase Price. ( Id. )
2. The Arbitration Process
In the event that the parties were unable to agree on the amount of this final adjustment, Article I of the SPA provides for either party to refer their disputes to an independent accounting firm. ( Id. §§ 1.04(b)(iii) and (iv).) The parties would then use the independent accounting firm's resolution of their disputes to calculate the Final Purchase Price. ( Id. §§ 1.04(a)(i), (b)(iii), and (b)(iv).)
In this case, at the conclusion of the parties' exchange of calculations, RG Steel proposed adjustments to the final purchase price that could, if accepted, essentially reduce the cash purchase price to zero. Severstal disputed the validity of nearly all of these purported adjustments because under Severstal's calculation of the purchase price adjustment, RG Steel would owe it $29 million. See Severstsal U.S. Holdings LLC v. RG Steel, LLC, 865 F.Supp.2d 430 (S.D.N.Y. 2012). On September 3, 2011, RG Steel notified Severstal that it was referring the parties' disputes to arbitration pursuant to Section 1.04(b)(iii) of the SPA. Id. at 431.
The parties selected an individual within the independent accounting firm to serve as arbitrator and negotiated and executed an engagement letter. On December 27, 2011, the independent accounting firm issued a schedule for the arbitration, including a staggered exchange of submissions and a decision date of May 11, 2012. (Exhibit 2.) On March 8, 2012, prior to rendering a final decision, the independent accounting firm resigned as arbitrator due to a conflict of interest involving RG Steel. (Compl. ¶ 81.)
On May 31, 2012, RG Steel filed a voluntary petition for relief under Chapter 11 of the United States Code in the United States District Court for the District of Delaware. (Compl. ¶ 1.) Pursuant to the bankruptcy stay, the arbitration was suspended for approximately one year until recently when the parties worked to locate and engage a new arbitrator. The parties have agreed upon a schedule that concludes the arbitration in 2013. (Compl. ¶ 81.)
3. Representations and Warranties
In negotiating the SPA, the parties bargained for and obtained certain representations and warranties. ( Id. ¶ 8.) In particular, the preamble to Article II of the SPA provides that, "[e]xcept as otherwise set forth in a schedule to any particular representation and warranty (collectively, the "Disclosure Schedules"), the Company and Parents represent and warrant to Purchaser that all of the statements contained in this Article II are true as of the date of this Agreement...." ( Id. ¶ 30.)
Section 8.02 of the SPA provides that Defendants must indemnify and hold harmless RG Steel for any breach of representation or warranty made by Severstal in Article II or failure to perform or fulfill any covenant contained in the SPA:
Subject to the provisions of this Article II, from and after the Closing, Parents shall, jointly and severally, indemnify Purchaser and its Affiliates... in respect of, and hold them harmless from and against, any and all Losses suffered, incurred or sustained... by reason of or resulting from (i) any inaccuracy or breach of a representation or warranty of Parents and the Company contained in Article II of this Agreement or (ii) any nonfulfillment of or failure to perform any covenant or agreement on the part of any of ...