Baker Hughes' Investors Seek Stock Review In $7.4B GE Deal

By Jeff Montgomery

Law360, Wilmington (October 27, 2017, 5:03 PM EDT) -- Two Baker Hughes Inc. investors asked Delaware’s Chancery Court late Thursday to appraise their stock value at the time of a $7.4 billion tie-up with General Electric Co.’s oil and gas business, citing concern over the adequacy of the company’s price and due diligence.

GKC Strategic Value Master Fund LP and investment advisor Walleye Trading LLC sought review of 1.875 million shares of stock in Baker Hughes, a Texas-based oilfield services provider. GKC owns 1.8 million of the total.

The company’s merger with General Electric created one of the largest oilfield services businesses in the United States, with an estimated $32 billion in annual revenues.

In the appraisal demand, GKC and Walleye allege that Baker Hughes' management “negotiated and agreed to the combination without implementing adequate procedural protections” to assure that company stockholders received fair value.

A majority of Baker Hughes' shareholders approved the deal in July, accepting terms that will pay a one-time, $17.50 cash dividend for each share of common stock, along with one share of BHGE LLC common stock from a pool representing 37.5 percent of the new company’s total shares.

Delaware law, however, allows challenges to deal appraisals for stockholders who refuse to accept or support merger terms of Delaware-chartered companies and instead seek court determinations. The choice can pay huge dividends if a court chooses a higher price. Dissenting stockholders also receive interest on any gain from the appraisal at 5 percent plus the Federal Reserve discount rate, compounded quarterly from the date of the deal.

The suit pointed to what were described as "relevant facts' about the deal, including an alleged lack of public or private sale process or formation of a special committee to negotiate with GE.

“Baker Hughes’ management did, however, promote the combination while receiving personal benefits following the announcement in the form of a substantial uplift to golden parachute compensation,” the suit said.

Martin Craighead, the chairman and CEO of Baker Hughes, and chief financial officer Kimberly Ross led the talks with GE, mainly through phone and in-person talks with Jeffrey Immelt, GE’s then-chairman and CEO.

Prior to the GE merger, Craighead was granted a "golden parachute" assuring him $57.2 million at the end of his employment, according to the records demand. In contrast, Craighead's exit package had been set at $37 million under a proposed merger with Halliburton Co. that was canceled in April 2016, the suit said. The $20 million “uplift” in the severance for the GE deal was made public after announcement of the merger plan but before audited financial statements revealed a $1 billion shortfall in free cash flow and a previously undisclosed $2 billion impairment, according to the appraisal demand.

Baker Hughes’ top managers also relied almost exclusively on GE’s valuations during negotiations, according to the suit.

Negotiated terms for Ross, meanwhile, included accelerated vesting of 50,687 units of restricted stock worth $2.8 million and classification of her exit as a termination without cause — a designation that allowed vesting in $3.5 million restricted stock units.

Earlier this month, GE agreed to make payments to the U.S. Department of Justice as compensation for its unfinished divestiture of a water treatment business, one of the government’s antitrust conditions for approval of the Baker-Hughes deal.

GE must pay $1,500 per day for each jurisdiction in which the water treatment business sales are unfinished starting Jan. 1.

Comment on the suit was not immediately available from GE.

GKC Strategic Value Master Fund LP and Walleye Trading LLC are represented by Ned Weinberger, Thomas Curry, Eric J. Belfi, Ira A. Schochet and David J. Schwartz of Labaton Sucharow LLP.

The case is GKC Strategic Value Master Fund LP, et al, case number 2017-0769, in the Court of Chancery of the State of Delaware.

--Editing by Dipti Coorg.

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