DEFA14A: LSB Industries Faces Stockholder Lawsuit Over Amended Rights Agreement, Issues Supplemental Disclosures

LSB Industries is supplementing its proxy statement with additional disclosures related to its Amended Rights Agreement following a stockholder lawsuit alleging insufficient disclosures.

Summary

• LSB Industries is providing supplemental disclosures to its proxy statement related to the Amended and Restated Section 382 Rights Agreement.
• This action follows a stockholder lawsuit filed on April 3, 2024, alleging that the initial disclosures were insufficient.
• The lawsuit seeks to enjoin the use of proxies to approve the Amended Rights Agreement and to permanently enjoin the agreement itself.
• The court has scheduled a preliminary injunction hearing for May 9, 2024, regarding the proxy statement disclosure, with a trial on the merits expected in the fall of 2024.
• The company believes its original disclosures complied with applicable law but is providing additional information voluntarily.
• The supplemental disclosures clarify the background of the Amended Rights Agreement, including the expiration of the Original Rights Agreement due to a clerical error and subsequent discussions with Ravenswood regarding their increased ownership.
• The Amended Rights Agreement aims to protect the company's tax attributes, particularly its net operating losses (NOLs), by discouraging an ownership change under Section 382 of the Internal Revenue Code.
• The company has also made technical revisions to the definition of 'Beneficial Ownership' in the Amended Rights Agreement to clarify its intent and scope, as reflected in the First Amendment to the agreement dated May 2, 2024.
• The definition of Beneficial Ownership is intended to allow the Company to analyze all transactions that could result in an ownership change under Section 382, the definition of Beneficial Ownership is limited to circumstances where the effect of any such agreements, arrangements or understandings is to treat such persons as an entity under Section 382.

Sentiment

Score: 4

Explanation: The sentiment is slightly negative due to the stockholder lawsuit and the need for supplemental disclosures, which raise concerns about corporate governance and potential legal liabilities. However, the company is taking proactive steps to address these issues.

Positives

• The company is proactively addressing concerns raised in the stockholder lawsuit by providing supplemental disclosures.
• The company believes the terms of the Amended Rights Agreement, including the definition of Beneficial Ownership contained therein, is a proportionate response to the threat of the occurrence of an ownership change under Section 382 and the resulting risk of substantial impairment to its ability to benefit from its NOLs and its other Tax Attributes.
• The company is taking steps to protect its NOLs and other tax attributes, which could benefit shareholders in the long term.

Negatives

• The stockholder lawsuit introduces uncertainty and potential legal costs.
• The expiration of the Original Rights Agreement due to a clerical error reflects poorly on internal controls.
• The need for supplemental disclosures suggests potential weaknesses in the initial proxy statement.

Risks

• The outcome of the stockholder lawsuit is uncertain and could result in an injunction against the Amended Rights Agreement.
• Failure to obtain stockholder approval for the Amended Rights Agreement would result in the rights expiring.
• An ownership change under Section 382 could substantially impair the company's ability to benefit from its NOLs and other tax attributes.
• The company is at significant risk of experiencing an ownership change within the meaning of Section 382.

Future Outlook

The company is seeking stockholder approval for the Amended Rights Agreement at the Annual Meeting on May 23, 2024. The outcome of the stockholder lawsuit and the vote on the Amended Rights Agreement will significantly impact the company's ability to protect its tax attributes.

Management Comments

• Mr. Robotti confirmed to the Company that he continues to be a strong supporter of the Company and its management team and did not file the Schedule 13D with the intent to seek any change in control or change in management of the Company, or other activist purpose.
• The Company believes that the terms of the Amended Rights Agreement, including the definition of Beneficial Ownership contained therein, is a proportionate response to the threat of the occurrence of an ownership change under Section 382 and the resulting risk of substantial impairment to its ability to benefit from its NOLs and its other Tax Attributes.

Industry Context

Rights agreements, also known as 'poison pills,' are a common defensive tactic used by companies to prevent hostile takeovers. In this case, LSB Industries is using the Amended Rights Agreement to protect its tax attributes, which is a less common but valid application of this type of agreement. The use of such agreements can be controversial, as they can entrench management and limit shareholder rights.

Comparison to Industry Standards

• Rights agreements are a relatively common corporate governance mechanism, particularly among companies with significant tax assets like NOLs.
• Comparable companies in the chemical or industrial sectors, such as CF Industries or Nutrien, may also employ similar strategies to protect their tax attributes.
• The specific terms of the Amended Rights Agreement, including the beneficial ownership threshold and the duration of the agreement, should be compared to those of similar agreements adopted by other companies to assess its reasonableness and potential impact on shareholder value.

Legal Proceedings

• A stockholder plaintiff, on behalf of all public stockholders, filed a putative class action complaint in the Court of Chancery of the State of Delaware, captioned Witmer v. Golsen, et al., C.A. No. 2024-0351, against us and our Board of Directors.
• That litigation concerns, among other things, the sufficiency of the disclosures contained in the Proxy Statement related to the proposal for stockholders to approve and adopt the Amended Rights Agreement.
• The putative plaintiff class seeks to enjoin the use of any proxies to approve and adopt the Amended Rights Agreement, to permanently enjoin the Amended Rights Agreement, and to collect certain fees and expenses.

Stakeholder Impact

• Shareholders: The outcome of the lawsuit and the vote on the Amended Rights Agreement will directly impact shareholder value and their rights.
• Employees: The protection of NOLs could indirectly benefit employees by ensuring the company's long-term financial stability.
• Customers and Suppliers: The legal proceedings and potential changes to the company's tax attributes are unlikely to have a direct impact on customers or suppliers in the short term.

Next Steps

• The company will defend itself in the stockholder lawsuit.
• The company will seek stockholder approval for the Amended Rights Agreement at the Annual Meeting on May 23, 2024.
• The court will hold a preliminary injunction hearing on May 9, 2024, regarding the proxy statement disclosure.
• A trial on the merits is expected to be scheduled for the fall of 2024.

Key Dates

Keywords

Amended Rights Agreement, Section 382, Proxy Statement, Stockholder Lawsuit, Beneficial Ownership, NOLs, Ravenswood, Ownership Change, Tax Attributes, LSB Industries