8-K: Steel Connect Settles Litigation, Announces Special Dividend and Potential Merger

Steel Connect has reached a settlement in a class and derivative action, resulting in a special dividend for shareholders and a potential merger with a Steel Partners subsidiary.

Summary

• Steel Connect has settled the Reith Litigation, a class and derivative action, with court approval on December 13, 2024.
• The settlement requires the defendants' insurance carriers to pay $6,000,000 to Steel Connect.
• The court also approved $1,154,390.76 in fees and expenses to the plaintiff's counsel and a $463,040.00 mootness fee.
• After a 30-day appeal period, the settlement will become effective, and the company will distribute the Reith Net Litigation Proceeds to shareholders.
• Steel Partners and current directors and officers have waived their rights to the distribution for shares held before May 1, 2023.
• The company estimates shareholders will receive approximately $1.15 per share, excluding waived shares.
• A short-form merger with a Steel Partners subsidiary is under consideration, and if it proceeds, a Contingent Value Rights Agreement (CVR) will be established.
• Each share of common stock (excluding waived shares) will receive one Reith CVR, representing a right to a portion of the Reith Net Litigation Proceeds.
• The CVRs are not transferable, will not be registered with the SEC, and do not represent equity or ownership interest.
• The settlement also includes amendments to the Stockholders Agreement and corporate governance policy enhancements.

Sentiment

Score: 7

Explanation: The settlement and potential merger are positive developments, but the uncertainty around the merger and the limited value of CVRs temper the overall sentiment. The special dividend is a clear positive for shareholders.

Positives

• The settlement of the Reith Litigation provides a cash infusion of $6,000,000 to the company.
• Shareholders will receive a special dividend of approximately $1.15 per share.
• The potential merger could simplify the company's structure.
• Corporate governance policies will be enhanced, including a formal review process for compensation clawbacks.
• The settlement removes uncertainty related to the litigation.

Negatives

• The special dividend is not guaranteed and is subject to the settlement becoming effective after a 30-day appeal period.
• The short-form merger is not guaranteed, and Steel Partners has no obligation to proceed.
• The CVRs are not transferable and do not represent equity or ownership interest.
• The special dividend will not be paid on shares held by Steel Partners and current directors and officers before May 1, 2023.

Risks

• The settlement could be appealed, delaying or preventing the distribution of the special dividend.
• Steel Partners may decide not to proceed with the short-form merger.
• The estimated $1.15 per share dividend is subject to change based on final expenses.
• The CVRs have limited value and are not transferable.
• The company's future performance is subject to various risks and uncertainties.

Future Outlook

The company's future is dependent on the settlement becoming effective, the potential merger with Steel Partners, and the distribution of the special dividend. The company is subject to various risks and uncertainties.

Management Comments

• The company is moving forward with the settlement and potential merger.
• The company is committed to enhancing corporate governance policies.

Industry Context

This announcement reflects a trend of companies resolving legal disputes and streamlining operations through mergers and acquisitions. The use of contingent value rights is a common mechanism in merger transactions to address specific liabilities or future payments.

Comparison to Industry Standards

• The settlement amount of $6 million is relatively small compared to some large-scale corporate litigation settlements.
• The estimated dividend of $1.15 per share is a significant return for shareholders, but the actual amount is subject to change.
• The use of CVRs is a common practice in mergers, similar to those used in the acquisition of Genzyme by Sanofi.
• The corporate governance enhancements are in line with best practices and similar to those adopted by other public companies.

Corporate Governance

Legal Proceedings

• The company was a nominal defendant in the Reith v. Lichtenstein, et al. litigation.
• The litigation has been settled with court approval.

Related Party Transactions

• The Stockholders Agreement involves Steel Partners and other stockholders.
• The short-form merger is with an indirect, wholly-owned subsidiary of Steel Partners.
• The settlement includes a reduction in the materiality threshold for review of related party transactions.

Stakeholder Impact

• Shareholders will receive a special dividend of approximately $1.15 per share.
• Shareholders will receive CVRs if the merger proceeds.
• Employees may be impacted by the potential merger.
• The settlement removes uncertainty related to the litigation.

Next Steps

• The settlement will become effective after a 30-day appeal period.
• The company will distribute the Reith Net Litigation Proceeds to shareholders.
• Steel Partners will decide whether to proceed with the short-form merger.
• If the merger proceeds, the CVR Agreement will be established.

Key Dates

Keywords

settlement, litigation, special dividend, merger, contingent value rights, corporate governance, Steel Partners, shareholders, Reith Litigation