DEF 14A 1 nt10012800x1_def14a.htm DEF 14A

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of
the Securities Exchange Act of 1934
Filed by the Registrant ☒
Filed by a Party other than the Registrant
Check the appropriate box:

Preliminary Proxy Statement

Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

Definitive Proxy Statement

Definitive Additional Materials

Soliciting Material under §240.14a-12
Standard Diversified Inc.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
 
 
 
No fee required.
 
 
 
Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
 
 
 
 
(1)
Title of each class of securities to which transaction applies:
 
 
 
 
(2)
Aggregate number of securities to which transaction applies:
 
 
 
 
(3)
Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
 
 
 
 
(4)
Proposed maximum aggregate value of transaction:
 
 
 
 
(5)
Total fee paid:
 
 
 
 
 
 
Fee paid previously with preliminary materials.
 
 
 
Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
 
 
 
 
(1)
Amount Previously Paid: $26,319.92
 
 
 
 
(2)
Form, Schedule or Registration Statement No.: Registration Statement of Form S-4 (File No. 333-238313)
 
 
 
 
(3)
Filing Party: Turning Point Brands, Inc.
 
 
 
 
(4)
Date Filed: May 15, 2020
 
 
 

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PROPOSED MERGER
YOUR VOTE IS VERY IMPORTANT
To the Stockholders of Standard Diversified Inc.:
Standard Diversified Inc., which we refer to as SDI, and Turning Point Brands, Inc., which we refer to as TPB, have entered into an Agreement and Plan of Merger and Reorganization, which we refer to as the merger agreement, pursuant to which SDI will merge with and into a wholly-owned subsidiary of TPB, which we refer to as the merger.
Immediately prior to the effective time of the merger, which we refer to as the effective time, each share of Class A and Class B Common Stock, $0.01 par value, of SDI, which we refer to collectively as SDI Common Stock, will be converted into a portion of the Stock Merger Consideration (as defined below) equal to a fraction of a share of TPB Voting Common Stock, $0.01 par value, which we refer to as TPB Common Stock, equal to (i) the total number of shares of TPB Common Stock constituting the Stock Merger Consideration, divided by (ii) the total number of SDI Common Stock outstanding at such date, plus the number of shares of SDI Common Stock underlying all restricted stock awards and restricted stock unit awards that will vest in accordance with the merger, but only to the extent such shares were not outstanding prior to such vesting. Each SDI stockholder’s aggregate portion of merger consideration will be rounded up to the next whole share of TPB Common Stock. The “Stock Merger Consideration” means a total number of shares of TPB Common Stock equal to 97% of the total number of shares of TPB Common Stock owned by SDI as of the effective time of the merger.
Immediately after the merger, assuming that SDI will own 9,978,918 shares of TPB Common Stock immediately prior to the closing of the merger, which is the number of shares of TPB Common Stock owned by SDI as of the date of this proxy statement/prospectus, SDI’s stockholders as of immediately prior to the effective time are expected to own approximately 50.48% of the outstanding capital stock of TPB and 50.48% of the voting power of TPB. These percentages do not reflect any sales of shares of TPB Common Stock SDI may make, including, without limitation, in order to generate amounts it may need to satisfy its net liabilities exceeding $25,000, as required by the merger agreement. Should SDI make any such sales, the percentage ownership of TPB Common Stock by, and voting power of, SDI’s stockholders after the merger would be reduced accordingly.
Shares of TPB Common Stock are currently listed on the New York Stock Exchange under the symbol “TPB.” On June 8, 2020, the latest practicable trading day before the date of this proxy statement/prospectus, the closing sale price of the TPB Common Stock on the New York Stock Exchange was $25.65 per share.
Shares of SDI Class A Common Stock are currently listed on the NYSE American under the symbol “SDI.” On June 8, 2020, the latest practicable trading day before the date of this proxy statement/prospectus, the closing sale price of the SDI Class A Common Stock on the NYSE American was $13.46 per share.
SDI is holding a special meeting of its stockholders in order to obtain the stockholder approvals necessary to complete the merger and related matters. The SDI special meeting will be a virtual meeting via live webcast on the Internet. At the SDI special meeting, which will be held at 11:00 a.m., local time, on July 9, 2020, unless postponed or adjourned to a later date, SDI will ask its stockholders, among other things:
1.
to approve the merger agreement, and the transactions contemplated thereby, including the merger;
2.
to approve, on an advisory basis, certain compensation that may be paid or become payable to named executive officers of SDI in connection with the merger;
3.
to consider and, if necessary, vote upon an adjournment of the SDI special meeting to solicit additional proxies if there are not sufficient votes in favor of Proposal No. 1.;
4.
to elect five directors of SDI to serve until SDI’s 2021 annual meeting of stockholders, and all until their respective successors are duly elected and qualified (provided that if Proposal No. 1 is approved and the merger is completed, SDI will be merged out of existence and will no longer have a board of directors, and there will be no SDI 2021 annual meeting of stockholders);
5.
to approve, on an advisory basis, a resolution regarding named executive officer compensation for 2019;
6.
to approve, on an advisory basis, a resolution regarding how frequently we will submit future advisory votes on executive officer compensation to our stockholders; and
7.
to consider and act upon any other matters which may properly be brought before the meeting and at any adjournments or postponements thereof.

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As of June 8, 2020, SDI beneficially owns or controls an approximate 51.24% equity interest in TPB through ownership or control of 9,978,918 shares of TPB Common Stock, representing approximately 51.24% of the voting power of the TPB capital stock.
On April 7, 2020, and based upon the recommendation of an independent special committee of the SDI board of directors, which we refer to as the SDI Board, the SDI Board unanimously (i) determined that the entry by SDI into the merger agreement, the merger and the other transactions contemplated by the merger agreement, are advisable and are fair to, and in the best interests of, SDI and its stockholders, (ii) approved and declared advisable the merger and the other transactions contemplated by the merger agreement, (iii) approved and authorized each of the transaction documents, including the merger agreement, and (iv) recommended that the stockholders of SDI approve the merger agreement and the other transactions contemplated thereby. The SDI Board accordingly recommends that SDI’s stockholders vote “FOR” Proposal Nos. 1, 2 and 3. The SDI Board also recommends that SDI’s stockholders vote “FOR” Proposal Nos. 4 and 5, and FOR the “One Year” option on Proposal No. 6.
More information about TPB, SDI and the proposed transaction is contained in this proxy statement/prospectus. SDI urges you to read the accompanying proxy statement/prospectus carefully and in its entirety. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER THE MATTERS DISCUSSED UNDER “RISK FACTORS” BEGINNING ON PAGE 15.
SDI is excited about the opportunities the merger brings to SDI’s stockholders, and thank you for your consideration and continued support.
Sincerely,

Gregory H.A. Baxter
Executive Chairman of the Board and Interim Chief Executive Officer
Standard Diversified Inc.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this proxy statement/prospectus. Any representation to the contrary is a criminal offense.
The accompanying proxy statement/prospectus is dated June 17, 2020, and is first being mailed to SDI’s stockholders on or about June 17, 2020.

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STANDARD DIVERSIFIED INC.
767 5th Avenue, 12th Floor
New York, NY 10153
(212) 922-3752

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 9, 2020
Dear Stockholders of Standard Diversified Inc.:
On behalf of the board of directors of Standard Diversified Inc., a Delaware corporation, which we refer to as SDI, we are pleased to deliver this proxy statement/prospectus for the 2020 special meeting of stockholders of SDI, which will be held on July 9, 2020 at 11:00 a.m., local time, which we refer to as the SDI special meeting, for the following purposes:
1.
to consider and vote upon a proposal to approve and adopt the Agreement and Plan of Merger and Reorganization, dated as of April 7, 2020, which we refer to as the merger agreement, by and among Turning Point Brands, Inc., which we refer to as TPB, SDI, and Standard Merger Sub, LLC, a wholly-owned subsidiary of TPB, which we refer to as merger sub, pursuant to which SDI will merge with and into merger sub, which we refer to as the merger, a copy of which is attached as Annex A to this proxy statement/prospectus, and the transactions contemplated thereby, including the merger, the issuance of shares of TPB Common Stock to SDI’s stockholders pursuant to the terms of the merger agreement;
2.
to approve, on an advisory basis, certain compensation that may be paid or become payable to named executive officers of SDI in connection with the merger;
3.
to consider and, if necessary, vote upon an adjournment of the SDI special meeting to solicit additional proxies if there are not sufficient votes in favor of Proposal No. 1;
4.
to elect five directors of SDI to serve until SDI’s 2021 annual meeting of stockholders, and all until their respective successors are duly elected and qualified (provided that if Proposal No. 1 is approved and the merger is completed, SDI will be merged out of existence and will no longer have a board of directors, and there will be no SDI 2021 annual meeting of stockholders);
5.
to approve, on an advisory basis, a resolution regarding named executive officer compensation for 2019;
6.
to approve, on an advisory basis, a resolution regarding how frequently we will submit future advisory votes on executive officer compensation to our stockholders; and
7.
to consider and act upon any other matters which may properly be brought before the meeting and at any adjournments or postponements thereof.
Due to health concerns related to COVID-19, and to support the health and well-being of our stockholders, employees, and partners, the SDI special meeting will be a completely “virtual meeting,” conducted via live webcast on the Internet. You will be able to attend the SDI special meeting as well a vote and submit your questions during the live audio webcast of the meeting by visiting www.virtualshareholdermeeting.com/SDI2020 and entering the 16-digit control number found on your proxy card provided to you with this proxy statement/prospectus.
SDI will transact no other business at the SDI special meeting except such business as may be properly brought before the SDI special meeting or any adjournment or postponement thereof. Please refer to the attached proxy statement/prospectus for further information with respect to the business to be transacted at the SDI special meeting.
The SDI board of directors, which we refer to as the SDI Board, has fixed June 2, 2020, as the record date for the determination of stockholders entitled to notice of, and to vote at, the SDI special meeting and any adjournment or postponement thereof. Only holders of record of shares of SDI Class A Common Stock (“SDI Class A Common Stock”) and Class B Common Stock (“SDI Class B Common Stock”, and collectively with SDI Class A Common Stock, the “SDI Common Stock”) at the close of business on the record date are entitled to notice of, and to vote at, the SDI special meeting.
At the close of business on the record date, SDI had 8,886,152 shares of SDI Class A Common Stock and 7,697,155 shares of SDI Class B Common Stock outstanding and entitled to vote. The SDI Class A and SDI Class B Common Stock vote together as a single class. Shares of SDI Class A Common Stock are entitled to one (1) vote per share while shares of SDI Class B Common Stock are entitled to ten (10) votes per share.

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Your vote is important. The affirmative vote of holders of shares of SDI Common Stock representing at least a majority of the outstanding voting power of the SDI Common Stock, voting together as a single class, is required for approval of Proposal No. 1. The affirmative vote of the majority of the voting power of the shares of SDI Common Stock present virtually or represented by proxy and entitled to vote at the SDI special meeting, voting together as a single class, is required for approval of Proposals No. 2, 3 and 5. As to Proposal No. 4, the affirmative vote of the holders of a plurality of the shares of the SDI Common Stock present or represented by proxy at the meeting is required for the election of directors. Finally, as to Proposal No. 6, the option that receives the most votes cast by all stockholders will be deemed the frequency preferred by our stockholders for future advisory votes on executive compensation.
Even if you plan to attend the SDI special meeting, SDI requests that you sign and return the enclosed proxy to ensure that your shares will be represented at the SDI special meeting if you are unable to attend. If your shares of SDI Common Stock are held in street name by your broker, dealer, commercial bank, trust company or other nominee, your broker, dealer, commercial bank, trust company or other nominee will be unable to vote your shares of SDI Common Stock without instructions from you. You should instruct your bank, brokerage firm or other nominee as to how to vote your shares of SDI Common Stock following the procedures provided by your bank, brokerage firm or other nominee. The failure to instruct your broker, dealer, commercial bank, trust company or other nominee to vote your shares of SDI Common Stock “FOR” the adoption of the merger agreement will have the same effect as voting against the adoption of the merger agreement.
THE SDI BOARD HAS DETERMINED AND BELIEVES THAT EACH OF THE PROPOSALS OUTLINED ABOVE IS ADVISABLE TO, AND IN THE BEST INTERESTS OF, SDI AND ITS STOCKHOLDERS AND HAS APPROVED EACH SUCH PROPOSAL. THE SDI BOARD RECOMMENDS THAT SDI’S STOCKHOLDERS VOTE “FOR” PROPOSALS NOS. 1, 2, 3, 4 AND 5, AND FOR THE “ONE YEAR” OPTION ON PROPOSAL NO. 6.
By Order of the Standard Diversified Inc. Board of Directors,

Gregory H.A. Baxter
Executive Chairman of the Board and Interim Chief Executive Officer
New York, NY
June 17, 2020

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REFERENCES TO ADDITIONAL INFORMATION
This proxy statement/prospectus refers to important business and financial information about SDI and TPB that is not included or incorporated by reference in this document. You may obtain this information without charge upon your written or oral request by contacting the Secretary and General counsel of Standard Diversified Inc. at 767 5th Avenue, 12th Floor, New York, NY 10153, or by calling (212) 922-3752.
To ensure timely delivery of these documents, any request should be made no later than July 2, 2020 to receive them before the SDI special meeting.
For additional details about where you can find information about SDI and TPB, please see the section titled “Where You Can Find More Information” in this proxy statement/prospectus.
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QUESTIONS AND ANSWERS ABOUT THE MERGER
The following section provides answers to frequently asked questions about the merger. This section, however, provides only summary information. For a more complete response to these questions and for additional information, please refer to the cross-referenced sections.
Q:
What is the merger?
A:
SDI, TPB and merger sub entered into the merger agreement on April 7, 2020. The merger agreement contains the terms and conditions of the proposed merger involving SDI and TPB. Under the merger agreement, SDI will merge with and into merger sub, with merger sub surviving as a wholly-owned subsidiary of TPB.
At the effective time of the merger, which we refer to as the effective time, each share of SDI Class A and SDI Class B Common Stock (which we refer to collectively as the SDI Common Stock) outstanding immediately prior to the effective time (excluding certain shares to be canceled pursuant to the merger agreement) will be converted into the right to receive the applicable portion of the Stock Merger Consideration, in each case calculated in accordance with and as set forth in the merger agreement as described in more detail in the section titled “The Merger—Merger Consideration.” The Stock Merger Consideration will consist of a total number of shares of TPB Common Stock equal to 97% of the total number of shares of TPB Common Stock owned by SDI as of the effective time, as described in more detail in “The Merger—Merger Consideration.” As of the date of this proxy statement/prospectus, SDI owns 9,978,918 shares of TPB Common Stock. However, there can be no assurance that SDI will continue to own such number of shares of TPB Common Stock. See “What are SDI’s plans for the TPB Common Stock prior to the merger?”
At the effective time, TPB’s stockholders will continue to own and hold their existing shares of TPB Common Stock, and all outstanding and unexercised options to purchase shares of TPB Common Stock will remain in effect pursuant to their terms.
Q:
What will happen to SDI if, for any reason, the merger does not close?
A:
The merger agreement requires that SDI will not, prior to the effective time, transfer any of the capital stock of TPB, including any shares of TPB Common Stock, without the prior written consent of TPB. However, see “What are SDI’s plans for the TPB Common Stock prior to the merger?” for a discussion of potential transactions by SDI involving the TPB Common Stock prior to the merger.
If the merger agreement is terminated pursuant to other provisions of the merger agreement, including for a failure of the merger to occur by September 1, 2020, then, following the termination, sales in the public market of a substantial number of the shares of TPB Common Stock currently held by SDI could occur at any time. These sales or distributions by SDI, or the market perception that the holders of a large number of shares intend to sell TPB Common Stock, could significantly reduce the market price of TPB Common Stock. If the merger does not close, SDI cannot predict the effect, if any, that future public sales of these securities or the availability of these securities for sale will have on the market price of the SDI Common Stock.
Q:
Why are the two companies proposing to merge?
A:
The SDI Board and SDI’s management regularly review SDI’s operating and strategic plans in an effort to enhance stockholder value. These reviews involve, among other things, discussions regarding alternatives creating liquidity for its stockholders. The SDI Board determined that it was in the best interests of SDI stockholders to cause it stockholders to own TPB Common Stock directly, as opposed to through SDI. Thereafter, the SDI Board appointed a special committee of the SDI Board, which we refer to as the SDI special committee, and the TPB board of directors, which we refer to as the TPB Board, appointed a special committee of the TPB Board, which we refer to as the TPB special committees, and the special committees negotiated in earnest. For more information on the negotiations, please see the section titled “The Merger—Background of the Merger” in this proxy statement/prospectus.
SDI believes that the merger will have the effect of an orderly release of the shares of TPB Common Stock held by SDI through their cancellation and a subsequent issuance to SDI’s equity holders. The merger agreement also provides that each holder of SDI restricted stock awards or SDI restricted stock units relating to SDI Common Stock will be entitled to the applicable portion of the Stock Merger Consideration. Each SDI stockholder’s aggregate portion of Stock Merger Consideration will be rounded up to the next whole share of TPB Common Stock.
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For a discussion of SDI’s reasons for the merger, please see the section titled The Merger—SDI Reasons for the Mergerin this proxy statement/prospectus.
Q:
Why am I receiving this proxy statement/prospectus?
A:
You are receiving this proxy statement/prospectus because you have been identified as a stockholder of SDI as of the record date. As a stockholder of SDI, you are entitled to vote at SDI’s stockholder meeting (referred to herein as the “SDI special meeting”) on Proposals Nos. 1 through 6. The merger cannot be completed unless the holders of SDI Common Stock vote to approve the merger and the terms and conditions set forth in the merger agreement.
SDI will hold a virtual meeting of its stockholders to obtain this approval.
This proxy statement/prospectus contains important information about the merger and the other proposals being voted on at the SDI special meeting that you should read carefully.
Your vote is important. You are encouraged to submit your proxy as promptly as possible.
Q:
What is required to consummate the merger?
A:
To consummate the merger, SDI’s stockholders must approve Proposal No. 1.
Proposal No. 1, the approval of the merger requires the affirmative vote of holders of shares of SDI Common Stock representing at least a majority of the outstanding voting power of the SDI Common Stock, voting together as a single class. The foregoing vote of the SDI stockholders is referred to as the required SDI stockholder vote.
To consummate the merger, the TPB stockholders must adopt and approve the merger agreement and the transactions contemplated thereby.
In addition to the requirement of obtaining the stockholder approvals described above and appropriate regulatory approvals, each of the other closing conditions set forth in the merger agreement must be satisfied or waived. For a more complete description of the closing conditions under the merger agreement, we urge you to read the section titled “The Merger Agreement—Conditions to the Completion of the Merger” in this proxy statement/prospectus.
As of June 8, 2020, SDI beneficially owns or controls an approximate 51.24% equity interest in TPB through ownership or control of 9,978,918 shares of the TPB Common Stock.
Q:
What will SDI’s stockholders and option holders receive in the merger?
A:
At the effective time, each share of SDI Common Stock outstanding immediately prior to the effective time (excluding certain shares to be canceled pursuant to the merger agreement) will be automatically converted into the right to receive the applicable portion of the Stock Merger Consideration, in each case calculated in accordance with and as described in more detail in the merger agreement. In addition, in connection with the merger, each share of SDI Common Stock underlying restricted stock awards and restricted stock unit awards will be converted into the right to receive the applicable portion of the Stock Merger Consideration, as applicable, less applicable taxes and withholdings. Each SDI stockholder’s aggregate portion of merger consideration will be rounded up to the next whole share of TPB Common Stock.
There will be no outstanding options to purchase SDI Common Stock as of the date of the closing of the merger.
Immediately after the merger, assuming that SDI will own 9,978,918 shares of TPB Common Stock immediately prior to the closing of the merger, which is the number of shares of TPB Common Stock owned by SDI as of the date of this proxy statement/prospectus, SDI’s stockholders as of immediately prior to the effective time are expected to own approximately 50.48% of the outstanding capital stock of TPB and 50.48% of the voting power of TPB. These percentages do not reflect any sales of shares of TPB Common Stock SDI may make, including, without limitation, in order to generate amounts it may need to satisfy its net liabilities exceeding $25,000, as required by the merger agreement. Should SDI make any such sales, the percentage ownership of TPB Common Stock by, and voting power of, SDI’s stockholders after the merger would be reduced accordingly.
SDI estimates that it will have net liabilities at the effective time, assuming the merger closes on July 10, 2020, of approximately $24.4 million. If SDI chooses to sell a portion of its shares of TPB Common Stock to satisfy
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this condition of the merger agreement, then SDI would need to sell approximately 1.0 million shares of TPB Common Stock, assuming a sale price of $24.00, which is within the range of closing prices of TPB Common Stock in the trading days leading up to June 9, 2020. Assuming such sale occurs and further assuming that there will be 16.6 million shares of SDI Common Stock outstanding as of immediately prior to the closing of the merger, each share of SDI Common Stock will be exchanged for 0.5232 shares of TPB Common Stock. SDI may make additional sales of TPB Common Stock prior to the merger for other purposes. Should it do so, SDI will use the proceeds of any such sales to purchase outstanding shares of SDI Common Stock from funds managed by Standard General L.P. (together with the funds it manages, “Standard General”), such that the number of shares of TPB Common Stock to be issued in the merger to each stockholder of TPB other than Standard General will not be affected by any such additional sales. Any such purchases of SDI Common Stock from Standard General will be at a price designed to reflect the market value of the shares of TPB Common Stock that would otherwise have been issued to Standard General had the shares of SDI Common Stock not been repurchased.
For a more complete description of what SDI’s stockholders will receive in the merger, please see the section titled “The Merger Agreement—Merger Consideration” in this proxy statement/prospectus.
Q:
What are SDI’s plans for the TPB Common Stock prior to the merger?
A:
It is a condition to the consummation of the merger that, as of the effective time, SDI have no liabilities other than liabilities included in an estimate of net liabilities delieverd to TPB, and that the net liabilities included in such estimate not exceed $25,000. Thus, SDI must discharge substantially all of its liabilities prior to the consummation of the merger, including the indebtedness under its $25.0 million Term Loan Agreement with GACP II, L.P. In order to raise the capital needed, along with its existing cash on hand, to retire such liabilities, including this indebtedness, SDI may consider a variety of transactions, including a sale of a portion of its shares of TPB Common Stock.
Q:
How will I receive my Stock Merger Consideration?
A:
Promptly after completion of the merger, SDI stockholders will receive a letter of transmittal with instructions on how to obtain TPB Common Stock in exchange for their shares of SDI Common Stock. You must return the completed letter of transmittal and your SDI stock certificates as described in the instructions, and you will receive the Stock Merger Consideration payable as soon as practicable after EQ Shareowner Services, the exchange agent, receives your completed letter of transmittal and SDI stock certificates. If you hold shares through a brokerage account, your broker will handle the surrender of stock certificates to EQ Shareowner Services. The procedures for exchange of stock certificates are more fully described in this proxy statement/prospectus under the heading “The Merger—Conversion of Shares; Exchange Procedures” beginning on page 61.
Q:
What will TPB’s stockholders and option holders receive in the merger?
A:
At the effective time, TPB’s stockholders other than SDI will continue to own and hold their existing shares of TPB Common Stock, and all outstanding and unexercised options to purchase shares of TPB Common Stock will remain in effect pursuant to their terms.
Q:
Are SDI’s stockholders entitled to appraisal rights?
A:
No. SDI’s stockholders are not entitled to exercise appraisal rights in connection with the merger. See “The Merger—Appraisal Rights” beginning on page 66 for more information.
Q:
Who will be the directors of TPB following the merger?
A:
In connection with the merger, there will be no change to the directors of TPB. Following the closing of the merger, the TPB Board will continue to be constituted as follows:
Name
Current Principal Affiliation
Lawrence Wexler
Chief Executive Officer and Director
Gregory Baxter
Director
H.C. Charles Diao
Director
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Name
Current Principal Affiliation
David Glazek
Director (Chairman)
Peggy Hebard
Director
Arnold Zimmerman
Director
Ashley Davis Frushone
Director
Q:
Who will be the executive officers of TPB immediately following the merger?
A:
In connection with the merger, there will be no change to the executive officers of TPB. Following the closing of the merger, TPB’s executive officers will continue to be as follows:
Name
Current Principal Affiliation
Lawrence S. Wexler
President and CEO
Graham Purdy
Chief Operating Officer
Robert Lavan
Chief Financial Officer
James W. Dobbins
Senior Vice President, General Counsel, and Secretary
Q:
As a stockholder of SDI, how does the SDI Board recommend that I vote regarding the merger and the related proposals?
A:
After careful consideration, on April 7, 2020, the SDI special committee, comprised of David M. Wurzer, (i) determined that the consummation of the merger and the other transactions contemplated by the merger agreement, on the terms and conditions substantially as set forth in the merger agreement, are advisable and are fair to, and in the best interests of, SDI and its stockholders, (ii) approved and declared advisable the merger and the other transactions contemplated by the merger agreement, (iii) approved the merger agreement and (iv) recommended that the SDI Board recommend the approval and adoption of the merger agreement by SDI’s stockholders. On April 7, 2020, and based upon the recommendation of the SDI special committee, the SDI Board unanimously (i) determined that the entry by SDI into the merger agreement, the merger and the other transactions contemplated by the merger agreement, are advisable and are fair to, and in the best interests of, SDI and its stockholders, (ii) approved and declared advisable the merger and the other transactions contemplated by the merger agreement, including the merger, the issuance of the Stock Merger Consideration, (iii) approved and authorized each of the transaction documents, including the merger agreement, and (iv) recommended that the stockholders of SDI approve the merger agreement and the other transactions contemplated thereby, including the merger. The SDI Board accordingly recommends that the SDI stockholders vote:
“FOR” Proposal No. 1, to approve the merger agreement and the transactions contemplated thereby, including the merger;
“FOR” Proposal No. 2, to approve, on an advisory basis, a resolution a proposal to approve certain compensation that may be paid or become payable to named executive officers of SDI in connection with the merger; and
“FOR” Proposal No. 3 to, if necessary, adjourn the SDI special meeting if a quorum is present, to solicit additional proxies if there are not sufficient votes in favor of Proposal No. 1.
Q:
What risks should I consider in deciding whether to vote in favor of the merger?
A:
You should carefully review the section of this proxy statement/prospectus titled “Risk Factors,” which sets forth certain risks and uncertainties related to the merger.
Q:
When do you expect the merger to be consummated?
A:
We anticipate that the merger will occur shortly after the SDI special meeting to be held on July 9, 2020 but we cannot predict the exact timing. For more information, please see the section titled “The Merger Agreement—Conditions to the Completion of the Merger” in this proxy statement/prospectus.
Q:
What are the material U.S. federal income tax consequences of the merger to U.S. Holders of SDI shares?
A:
It is a condition to SDI’s obligation to consummate the merger that SDI receive an opinion from Morgan, Lewis & Bockius LLP, dated as of the closing date, regarding the qualification of the merger as a “reorganization”
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within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the “Code”). It is a condition to TPB’s obligation to consummate the merger that TPB receive an opinion from Lathrop GPM LLP, dated as of the closing date, regarding the qualification of the merger as a “reorganization” within the meaning of Section 368(a) of the Code. Subject to the tax opinion representations and assumptions, in the opinions of Morgan, Lewis & Bockius LLP and Lathrop GPM LLP, the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. Accordingly, subject to the tax treatment of the receipt by a U.S. Holder (as defined in the section titled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger”) of SDI Common Stock of one whole share of TPB Common Stock in lieu of a fractional share by virtue of the aggregate portion of their Stock Merger Consideration being rounded up to the next whole share of TPB Common Stock (as discussed below in the section titled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger—Tax Treatment of Whole Share Received In Lieu of Fractional Share”), a U.S. Holder of SDI Common Stock will not recognize any gain or loss for U.S. federal income tax purposes on the exchange of shares of SDI Common Stock for shares of TPB Common Stock in the merger. If any of the tax opinion representations and assumptions is incorrect, incomplete or inaccurate or is violated, the accuracy of the opinions described above may be affected and the U.S. federal income tax consequences of the merger could differ from those described in this proxy statement/prospectus.
Please review the information in the section titled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” for a more complete description of the material U.S. federal income tax consequences of the merger to U.S. Holders of SDI Common Stock, including the tax treatment of the receipt of one whole share of TPB Common Stock in lieu of a fractional share by virtue of the aggregate portion of your Stock Merger Consideration being rounded up to the next whole share of TPB Common Stock. The tax consequences to you of the merger will depend on your particular facts and circumstances. Please consult your tax advisors as to the specific tax consequences to you of the merger, including the applicability and effect of federal, state, local and non-U.S. income and other tax laws.
Q:
What do I need to do now?
A:
SDI urges you to read this proxy statement/prospectus carefully, including its annexes, and to consider how the merger affects you.
If you are a stockholder of SDI as of the record date, you may provide your proxy instructions in one of four different ways. First, you can mail your signed proxy card in the enclosed return envelope. Second, you may provide your proxy instructions via phone by following the instructions on your proxy card or voting instruction form. Third, you may provide your proxy instructions via the internet by following the instructions on your proxy card or voting instruction form. Finally, you may vote at the SDI special meeting, as described below. Please provide your proxy instructions only once, unless you are revoking a previously delivered proxy instruction, and as soon as possible so that your shares can be voted at the SDI special meeting.
Q:
What happens if I do not return a proxy card or otherwise provide proxy instructions, as applicable?
A:
If you are a stockholder of SDI as of the record date, (a) the failure to return your proxy card or otherwise provide proxy instructions will have the effect of (i) a vote against the proposal to approve Proposal No. 1, to approve the merger agreement and the transactions contemplated thereby, including the merger, (ii) reducing the aggregate number of votes required to approve Proposals Nos. 2, 3 and 5, and (iii) no effect on Proposals Nos. 4 and 6, and (b) your shares will not be counted for purposes of determining whether a quorum is present at the SDI special meeting.
Q:
Why is the SDI holding a virtual special meeting?
A:
Due to the emerging public health impact of COVID-19 and to support the health and well-being of SDI stockholders, the special meeting will be held in a virtual meeting format only. SDI has designed its virtual format to enhance, rather than constrain, stockholder access, participation and communication. For example, the virtual format will allow SDI stockholders to communicate with SDI in advance of, and during, the special meeting so they can ask questions of the SDI board of directors and management, as time permits.
Q:
May I vote virtually at the SDI special meeting of stockholders of SDI?
A:
If your shares of SDI Common Stock are registered directly in your name with SDI’s transfer agent as of the record date, you are considered to be the stockholder of record with respect to those shares, and the proxy
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materials and proxy card are being sent directly to you by SDI. If you are a stockholder of record of SDI as of the record date, you may attend the SDI special meeting and vote your shares virtually. Even if you plan to attend the SDI special meeting, SDI requests that you sign and return the enclosed proxy to ensure that your shares will be represented at the SDI special meeting if you become unable to attend. If your shares of SDI Common Stock are held in a brokerage account or by another nominee, you are considered the beneficial owner of shares held in “street name,” and the proxy materials are being forwarded to you by your broker or other nominee together with a voting instruction card. As the beneficial owner, you are also invited to attend the SDI special meeting. Because a beneficial owner is not the stockholder of record, you may not vote these shares virtually at the SDI special meeting unless you obtain a proxy from the broker, trustee or nominee that holds your shares, giving you the right to vote the shares at the SDI special meeting.
Q:
When and where is the SDI special meeting of SDI’s stockholders?
A:
The SDI special meeting will be held at 11:00 a.m., local time, on July 9, 2020, unless postponed or adjourned to a later date. All of SDI’s stockholders as of the record date, or their duly appointed proxies, may attend the SDI special meeting. In order to participate in the virtual meeting, you must access the meeting website at www.virtualshareholdermeeting.com/SDI2020, and enter the 16-digit control number found on the proxy card provided to you with this proxy statement/prospectus. Stockholders who attend the SDI special meeting via live webcast will be able to participate, vote shares electronically and submit questions prior to and during the meeting.
Q:
If my SDI shares are held in “street name” by my broker, will my broker vote my shares for me?
A:
Unless your broker has discretionary authority to vote on certain matters, your broker will not be able to vote your shares of SDI Common Stock without instructions from you. Brokers are not expected to have discretionary authority to vote for any of the proposals. To make sure that your vote is counted, you should instruct your broker to vote your shares, following the procedures provided by your broker.
Q:
May I change my vote after I have submitted a proxy or provided proxy instructions?
A:
Yes. An SDI stockholder can revoke its proxy at any time before the final vote at the SDI special meeting. If you are the record holder of your shares, you may revoke your proxy in any one of the following ways:
You may submit another properly completed proxy card with a later date.
You may grant a subsequent proxy through the internet.
You may send a timely written notice that you are revoking your proxy to SDI’s Corporate Secretary at 767 5th Avenue, 12th Floor, New York, NY 10153.
You may attend the SDI special meeting and vote virtually. Simply attending the meeting virtually will not, by itself, revoke your proxy.
Your most current proxy card or internet proxy is the one that is counted.
If your shares are held by your broker, bank or other agent, you should follow the instructions provided by your broker, bank or other agent.
Q:
Who is paying for this proxy solicitation?
A:
SDI is responsible for its respective costs of printing and is responsible for the cost of filing of this proxy statement/prospectus and the proxy card. SDI may also reimburse brokerage firms, banks and other agents for the cost of forwarding proxy materials to beneficial owners of SDI Common Stock.
Q:
Who can help answer my questions?
A:
If you are a stockholder of SDI and would like additional copies, without charge, of this proxy statement/prospectus or if you have questions about the merger, including the procedures for voting your shares, you should contact:
Standard Diversified Inc.
767 5th Avenue, 12th Floor
New York, NY 10153
Tel: (212) 922-3752
Attn: Secretary and General Counsel
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PROSPECTUS SUMMARY
This summary highlights selected information from this proxy statement/prospectus and may not contain all of the information that is important to you. To better understand the merger, the proposals being considered at the SDI special meeting, you should read this entire proxy statement/prospectus carefully, including the merger agreement attached as Annex A, the opinion of Houlihan Lokey Capital, Inc. attached as Annex B and the other annexes to which you are referred herein. For more information, please see the section titled “Where You Can Find More Information” in this proxy statement/prospectus.
The Companies
Standard Diversified Inc.
767 5th Avenue, 12th Floor
New York, NY 10153
(212) 922-3752
Attn: Secretary and General Counsel
SDI is a diversified holding company with an experienced management team focused on investing in quality operating businesses run by high-caliber executive teams.
SDI’s Class A Common Stock is listed on the NYSE American, trading under the symbol “SDI.”
Turning Point Brands, Inc.
5201 Interchange Way
Louisville, KY 40229
Tel: (502) 778-4421
Attn: Robert Lavan and James W. Dobbins
TPB is a leading U.S. provider of certain tobacco products, including Stoker’s in Smokeless product, Zig-Zag in Smoking products and the distribution engine in NewGen products.
The TPB Common Stock is listed on the NYSE, trading under the symbol “TPB.”
Standard Merger Sub, LLC
Merger sub is a wholly-owned subsidiary of TPB, and was formed solely for the purposes of carrying out the merger.
The Merger (see page 41)
If the merger is completed, SDI will merge with and into merger sub, with merger sub surviving as a wholly-owned subsidiary of TPB.
At the effective time, each share of SDI Common Stock outstanding immediately prior to the effective time (excluding certain shares to be canceled pursuant to the merger agreement) will be automatically converted into the right to receive the applicable portion of the Stock Merger Consideration as set forth in more detail in the merger agreement and in this proxy statement/prospectus. The Stock Merger Consideration will consist of a total number of shares of TPB Common Stock equal to 97% of the total number of shares of TPB Common Stock owned by SDI as of the effective time, as described in more detail in “The Merger—Merger Consideration.” As of the date of this proxy statement/prospectus, SDI owns 9,978,918 shares of TPB Common Stock. However, there can be no assurance that SDI will continue to own such number of shares of TPB Common Stock. In order to raise the capital needed, along with its existing cash on hand, to retire substantially all of its liabilities prior to the closing of the merger as required by the merger agreement, including $25.0 million of indebtedness under a term loan agreement, SDI may consider a variety of transactions, including a sale of a portion of its shares of TPB Common Stock. SDI estimates that it will have net liabilities at the effective time, assuming the merger closes on July 10, 2020, of approximately $24.4 million. If SDI chooses to sell a portion of its shares of TPB Common Stock to satisfy this condition of the merger agreement, then SDI would need to sell approximately 1.0 million shares of TPB Common Stock, assuming a sale price of $24.00, which is within the range of closing prices of TPB Common Stock in the trading days leading up to June 9, 2020. Assuming such sale occurs and further assuming that there will be 16.6 million shares of SDI Common Stock outstanding as of immediately prior to the closing of the merger, each share of SDI Common Stock will be exchanged for 0.5232 shares of TPB Common Stock. SDI may make additional sales of TPB Common Stock prior to the merger for other purposes. Should it do so, SDI will use the proceeds of any such sales to purchase
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outstanding shares of SDI Common Stock from funds managed by Standard General, such that the number of shares of TPB Common Stock to be issued in the merger to each stockholder of TPB other than Standard General will not be affected by any such additional sales. Any such purchases of SDI Common Stock from Standard General will be at a price designed to reflect the market value of the shares of TPB Common Stock that would otherwise have been issued to Standard General had the shares of SDI Common Stock not been repurchased.
In addition, in connection with the merger, each share of SDI Common Stock underlying restricted stock awards and restricted stock unit awards will be converted into the right to receive the applicable portion of the Stock Merger Consideration, as applicable, less applicable taxes and withholdings. Each SDI stockholder’s aggregate portion of merger consideration will be rounded up to the next whole share of TPB Common Stock.
Immediately after the merger, assuming that SDI will own 9,978,918 shares of TPB Common Stock immediately prior to the closing of the merger, which is the number of shares of TPB Common Stock owned by SDI as of the date of this proxy statement/prospectus, SDI’s stockholders as of immediately prior to the effective time are expected to own approximately 50.48% of the outstanding capital stock of TPB and 50.48% of the voting power of TPB. These percentages do not reflect any sales of shares of TPB Common Stock SDI may make, including, without limitation, in order to generate amounts it may need to satisfy its net liabilities exceeding $25,000, as required by the merger agreement. Should SDI make any such sales, the percentage ownership of TPB Common Stock by, and voting power of, SDI’s stockholders after the merger would be reduced accordingly. See “What will SDI’s stockholders and option holders receive in the merger?” beginning on page 2 for more detail. Mr. Baxter, a member of the TPB Board, is also the Executive Chairman of the SDI Board and an executive officer of SDI. David Glazek and Arnold Zimmerman are also members of both the SDI Board and the TPB Board.
For a more complete description of the merger and the allocation of merger consideration please see the section titled “The Merger Agreement” in this proxy statement/prospectus.
The closing of the merger will occur no later than the second business day after the last of the conditions to the merger has been satisfied or waived (other than those conditions that by their nature are to be satisfied at the closing, but subject to the satisfaction or waiver of each such conditions), or at such other time as SDI and TPB agree. SDI and TPB anticipate that the consummation of the merger will occur in the summer of 2020. However, because the merger is subject to a number of conditions, SDI cannot predict exactly when the closing will occur or if it will occur at all.
SDI Reasons for the Merger (see page 47)
The SDI Board and SDI’s management regularly review SDI’s operating and strategic plans in an effort to enhance stockholder value. These reviews involve, among other things, discussions regarding alternatives creating liquidity for its stockholders. The SDI Board determined that it was in the best interests of SDI’s stockholders to cause the proposed merger whereby the SDI stockholders would hold shares of common stock of TPB directly.
SDI believes that the merger will have the effect of an orderly release of the shares of TPB Common Stock held by SDI through their cancellation and a subsequent issuance to SDI’s equity holders. SDI currently owns 9,978,918 shares of TPB Common Stock, which represents 51.24% of TPB’s total shares outstanding.
The SDI Board approved the merger based on a number of factors, including the:
the in-depth knowledge of and familiarity with the business, operations, financial condition and prospects of TPB, SDI’s primary asset, that was developed by SDI as a significant stockholder of TPB, and the belief that TPB Common Stock represents an attractive long term investment opportunity;
the potential to provide its current stockholders with greater liquidity by owning stock in a public company, provided, however, there can be no certainty on the timing or amount of any liquidity; and
the expectation that the merger with TPB would be a time- and cost-effective means to access liquidity for its stockholders.
The SDI special committee also considered the terms of the merger agreement and the transactions contemplated thereby, including:
the possibility that the merger might not be consummated in a timely manner or at all and the potential adverse effect of the public announcement of the merger on the reputation of SDI and the ability of SDI to obtain financing in the future in the event the merger is not completed; and
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the financial analysis reviewed by Houlihan Lokey with the SDI special committee as well as the oral opinion of Houlihan Lokey rendered to the SDI special committee on April 7, 2020 (which was subsequently confirmed in writing by delivery of Houlihan Lokey’s written opinion addressed to the SDI special committee dated April 7, 2020), as to the fairness, from a financial point of view, to the Unaffiliated Stockholders (as defined below), of the Stock Merger Consideration provided for in the merger pursuant to the merger agreement. See “The Merger – Opinion of the Financial Advisor to the SDI Special Committee.”
Opinion of the Financial Advisor to the SDI Special Committee (see page 48)
On April 7, 2020, Houlihan Lokey Capital, Inc., which we refer to as Houlihan Lokey, verbally rendered its opinion to the SDI special committee (which was subsequently confirmed in writing by delivery of Houlihan Lokey’s written opinion addressed to the special committee dated April 7, 2020), as to the fairness, from a financial point of view, to the holders of the SDI Common Stock other than Standard General and/or its affiliates and portfolio group and their respective officers and directors (which we refer to as the Unaffiliated Stockholders), of the Stock Merger Consideration provided for in the merger pursuant to the merger agreement.
Houlihan Lokey’s opinion was directed to the SDI special committee (in its capacity as such) and only addressed the fairness, from a financial point of view, to the Unaffiliated Stockholders, of the Stock Merger Consideration provided for in the merger pursuant to the merger agreement and did not address any other aspect or implication of the merger or any other agreement, arrangement or understanding. The summary of Houlihan Lokey’s opinion in this proxy statement/prospectus is qualified in its entirety by reference to the full text of its written opinion, which is attached as Annex B to this proxy statement/prospectus and describes the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Houlihan Lokey in connection with the preparation of its opinion. However, neither Houlihan Lokey’s opinion nor the summary of its opinion and the related analyses set forth in this proxy statement/prospectus are intended to be, and do not constitute, advice or a recommendation to the special committee, our board of directors, any security holder of SDI or any other person as to how to act or vote with respect to any matter relating to the merger. See “The Merger – Opinion of the Financial Advisor to the SDI Special Committee.”
Opinion of the Financial Advisor to the TPB Special Committee (see page 53)
On April 7, 2020, Duff & Phelps, LLC, which we refer to as Duff & Phelps, verbally rendered its opinion to the TPB special committee (which was subsequently confirmed in writing by delivery of Duff & Phelps’ written opinion addressed to the special committee dated April 7, 2020), as to the fairness, from a financial point of view, to the holders of TPB Common Stock, of the exchange ratio provided for in the merger pursuant to the merger agreement.
Duff & Phelps’ opinion was directed to the TPB special committee (in its capacity as such) and only addressed the fairness, from a financial point of view, to the holders of TPB Common Stock, of the exchange ratio provided for in the merger pursuant to the merger agreement and did not address any other aspect or implication of the merger or any other agreement, arrangement or understanding. The summary of Duff & Phelps’ opinion in this proxy statement/prospectus is qualified in its entirety by reference to the full text of its written opinion, which is attached as Annex C to this proxy statement/prospectus and describes the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Duff & Phelps in connection with the preparation of its opinion. However, neither Duff & Phelps’ opinion nor the summary of its opinion and the related analyses set forth in this proxy statement/prospectus are intended to be, and do not constitute, advice or a recommendation to the special committee or our board of directors with respect to the merger. See “The Merger – Opinion of the Financial Advisor to the TPB Special Committee.
Material U.S. Federal Income Tax Consequences of the Merger (see page 62)
It is a condition to SDI’s obligation to consummate the merger that SDI receive an opinion from Morgan, Lewis & Bockius LLP, dated as of the closing date, regarding the qualification of the merger as a “reorganization” within the meaning of Section 368(a) of the Code. It is a condition to TPB’s obligation to consummate the merger that TPB receive an opinion from Lathrop GPM LLP, dated as of the closing date, regarding the qualification ofthe merger as a “reorganization” within the meaning of Section 368(a) of the Code. Subject to the tax opinion representations and
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assumptions, in the opinions of Morgan, Lewis & Bockius LLP and Lathrop GPM LLP, the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. Accordingly, subject to the tax treatment of the receipt by a U.S. Holder of SDI Common Stock of one whole share of TPB Common Stock in lieu of a fractional share by virtue of the aggregate portion of their Stock Merger Consideration being rounded up to the next whole share of TPB Common Stock (as discussed below in the section titled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger—Tax Treatment of Whole Share Received In Lieu of Fractional Share”), a U.S. Holder of SDI Common Stock will not recognize any gain or loss for U.S. federal income tax purposes on the exchange of shares of SDI Common Stock for shares of TPB Common Stock in the merger. If any of the tax opinion representations and assumptions is incorrect, incomplete or inaccurate or is violated, the accuracy of the opinions described above may be affected and the U.S. federal income tax consequences of the merger could differ from those described in this proxy statement/prospectus.
Please review the information in the section titled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger” for a more complete description of the material U.S. federal income tax consequences of the merger to U.S. Holders of SDI Common Stock, including the tax treatment of the receipt of one whole share of TPB Common Stock in lieu of a fractional share by virtue of the aggregate portion of your Stock Merger Consideration being rounded up to the next whole share of TPB Common Stock. The tax consequences to you of the merger will depend on your particular facts and circumstances. Please consult your tax advisors as to the specific tax consequences to you of the merger, including the applicability and effect of federal, state, local and non-U.S. income and other tax laws.
Overview of the Merger Agreement
Merger Consideration (see page 67)
At the effective time, each share of SDI Common Stock outstanding immediately prior to the effective time (excluding certain shares to be canceled pursuant to the merger agreement) will be automatically converted into the right to receive the applicable portion of the Stock Merger Consideration, in each case calculated in accordance with and as set forth in more detail in the merger agreement.
The Stock Merger Consideration will consist of a total number of shares of TPB Common Stock equal to 97% of the total number of shares of TPB Common Stock owned by SDI as of the effective time, as described in more detail in “The Merger—Merger Consideration.” As of the date of this proxy statement/prospectus, SDI owns 9,978,918 shares of TPB Common Stock. However, there can be no assurance that SDI will continue to own such number of shares of TPB Common Stock. In order to raise the capital needed, along with its existing cash on hand, to retire substantially all of its liabilities prior to the closing of the merger as required by the merger agreement, including $25.0 million of indebtedness under a term loan agreement, SDI may consider a variety of transactions, including a sale of a portion of its shares of TPB Common Stock. SDI estimates that it will have net liabilities at the effective time, assuming the merger closes on July 10, 2020, of approximately $24.0 million. If SDI chooses to sell a portion of its shares of TPB Common Stock to satisfy this condition of the merger agreement, then SDI would need to sell approximately 1.0 million shares of TPB Common Stock, assuming a sale price of $24.00, which is within the range of closing prices of TPB Common Stock in the trading days leading up to June 9, 2020. Assuming such sale occurs and further assuming that there will be 16.6 million shares of SDI Common Stock outstanding as of immediately prior to the closing of the merger, each share of SDI Common Stock will be exchanged for 0.5232 shares of TPB Common Stock. SDI may make additional sales of TPB Common Stock prior to the merger for other purposes. Should it do so, SDI will use the proceeds of any such sales to purchase outstanding shares of SDI Common Stock from funds managed by Standard General, such that the number of shares of TPB Common Stock to be issued in the merger to each stockholder of TPB other than Standard General will not be affected by any such additional sales. Any such purchases of SDI Common Stock from Standard General will be at a price designed to reflect the market value of the shares of TPB Common Stock that would otherwise have been issued to Standard General had the shares of SDI Common Stock not been repurchased.
Treatment of SDI’s Restricted Stock Awards and Restricted Stock Unit Awards (see pages 59 and 68)
At the effective time, in connection with the merger, each share of SDI Common Stock underlying restricted stock awards and restricted stock unit awards will be converted into the right to receive the applicable portion of the Stock Merger Consideration, as applicable, less applicable taxes and withholdings. Each SDI stockholder’s aggregate portion of merger consideration will be rounded up to the next whole share of TPB Common Stock.
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Conditions to the Completion of the Merger (see page 68)
To consummate the merger, SDI’s stockholders must approve Proposal No. 1. Additionally, TPB, as the sole equityholder of merger sub, must approve the merger agreement and the transactions contemplated thereby.
In addition to obtaining such stockholder approvals and appropriate regulatory approvals, each of the other closing conditions set forth in the merger agreement, as described under the section titled “The Merger Agreement—Conditions to the Completion of the Merger” in this proxy statement/prospectus must be satisfied or waived.
Acquisition Proposals (see page 70)
The merger agreement provides that prior to the SDI’s stockholders’ adoption and approval of Proposal No. 1, in response to an acquisition proposal, if the SDI Board determines in good faith after consultation with its outside legal counsel that, based on the information then available and after consultation with its financial advisor, the acquisition proposal either constitutes a superior offer or could reasonably be expected to result in a superior offer, and that the failure to take such action could be inconsistent with the fiduciary duties of the SDI Board to the stockholders of SDI under applicable law, the SDI Board may:
provide nonpublic information in response therefore (including nonpublic information regarding SDI or any of its subsidiaries) to the person who made an acquisition proposal; and
participate in any discussions or negotiations with any person who makes an acquisition proposal regarding that acquisition proposal. For a more complete description, see the section of this proxy statement/prospectus captioned “The Merger—Acquisition Proposals.”
Change in Board Recommendation (see page 72)
At any time prior to the proper approval of Proposal No. 1 at the SDI special meeting, the SDI Board may withdraw or modify (or propose to withdraw or modify) its recommendation that SDI’s stockholders vote “FOR” Proposal No. 1 in connection with a superior offer.
Termination and Termination Fee (see page 75)
Either SDI or TPB can terminate the merger agreement under certain circumstances, which would prevent the merger from being consummated.
Management Following the Merger (see page 121)
In connection with the merger, there will be no change to the executive officers of TPB. Following the closing of the merger, TPB’s executive officers will continue to be as follows:
Name
Current Principal Affiliation
Lawrence S. Wexler
President and CEO
Graham Purdy
Chief Operating Officer
Robert Lavan
Chief Financial Officer
James W. Dobbins
Senior Vice President, General Counsel, and Secretary
Interests of SDI Directors and Executive Officers in the Merger (see page 58)
In considering the recommendation of the SDI Board with respect to the merger agreement and the other matters to be acted upon by SDI’s stockholders at the SDI special meeting, SDI’s stockholders should be aware that certain members of the SDI Board and executive officers of SDI have interests in the merger that may be different from, or in addition to, interests they have as SDI’s stockholders.
Risk Factors (see page 15)
SDI is subject to various risks associated with its business and assets. In addition, the merger poses a number of risks to each of SDI and TPB and its respective stockholders, including the possibility that the merger may not be completed and the following risks:
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the merger is subject to approval of the merger agreement by SDI’s stockholders, and failure to obtain this approval would prevent the closing of the merger;
the merger may be completed even though certain events occur prior to the closing that materially and adversely affect SDI or TPB;
some SDI and TPB officers and directors have interests in the merger that are different from the respective stockholders of SDI and TPB and that may influence them to support or approve the merger without regard to the interests of the respective stockholders of SDI and TPB;
the market price of TPB Common Stock following the merger may decline as a result of the merger;
during the pendency of the merger, SDI may not be able to enter into a business combination with another party under certain circumstances because of restrictions in the merger agreement, which could adversely affect its business;
certain provisions of the merger agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior to the arrangements contemplated by the merger agreement;
if the conditions to the merger are not met, the merger will not occur;
the merger will involve substantial costs; and
litigation relating to the merger could require SDI or TPB to incur significant costs and suffer management distraction, and could delay or enjoin the merger.
These risks and other risks are discussed in greater detail under the section titled “Risk Factors” in this proxy statement/prospectus. SDI encourages you to read and consider all of these risks carefully.
Regulatory Approvals (see page 68)
In the United States, SDI must comply with applicable federal and state securities laws and the rules and regulations of the New York Stock Exchange, which we refer to as NYSE in connection with the filing of this proxy statement/prospectus with the SEC. As of the date hereof, the registration statement of which this proxy statement/prospectus is a part has not become effective.
Anticipated Accounting Treatment (see page 66)
The merger will be accounted for as an equity reorganization of TPB under which the stockholders of SDI become direct stockholders of TPB. Pursuant to the merger agreement, SDI stockholders will exchange their shares in SDI for shares in TPB. At the time of the merger, it is expected that SDI’s only material assets are its shares of TPB Common Stock and that SDI has no material liabilities which would be required to be disclosed in its financial statements.
Appraisal Rights (see page 66)
No dissenters’ or appraisal rights or other similar rights of objecting SDI stockholders will be available with respect to the merger. See “The Merger—Appraisal Rights” beginning on page 66 for more information.
Comparison of Rights of Holders of SDI Stock and TPB Stock (see page 129)
Both SDI and TPB are incorporated under the laws of the State of Delaware and, accordingly, the rights of the stockholders of each are currently, and will continue to be, governed by the Delaware General Corporation Law, or DGCL. If the merger is completed, SDI’s stockholders will become stockholders of TPB, and their rights will be governed by the DGCL, the TPB Amended and Restated Bylaws (“TPB Bylaws”) and Second Amended and Restated Certificate of Incorporation of TPB (“TPB Charter”). The rights of TPB’s stockholders contained in the TPB Charter and the TPB Bylaws differ from the rights of SDI’s stockholders under the Sixth Amended and Restated Certificate of Incorporation of SDI (“SDI Charter”) and Third Amended and Restated By-laws of SDI (the “SDI Bylaws”), as more fully described under the section titled “Comparison of Rights of Holders of SDI Stock and TPB Stock” in this proxy statement/prospectus.
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SELECTED CONSOLIDATED FINANCIAL DATA OF TPB
The following tables summarize TPB’s consolidated historical financial data. The consolidated financial statements include the accounts of entities wholly-owned by TPB. The consolidated statements of income data for the years ended December 31, 2019, 2018 and 2017 and the consolidated balance sheet data as of December 31, 2019 and 2018 are derived from TPB’s consolidated financial statements incorporated by reference in this proxy statement/prospectus. The consolidated statements of income data for the years ended December 31, 2016 and 2015 and the balance sheet data as of December 31, 2017, 2016 and 2015 is derived from TPB’s consolidated financial statements not included or incorporated by reference in this proxy statement/prospectus. The interim consolidated balance sheet data as of March 31, 2020 and interim consolidated statements of income data for the three months ended March 31, 2020 and 2019 are derived from TPB’s unaudited interim consolidated financial statements incorporated by reference in this proxy statement/prospectus. TPB’s historical results are not necessarily indicative of the results that may be expected in any future period and the results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for the full year or any future period. You should read this data together with the other information contained in TPB’s Annual Report on Form 10-K for the fiscal year ended December 31, 2019, and TPB’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020, including the sections entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes therein. See the section entitled “Where You Can Find More Information” beginning on page 145.
(dollars in thousands, except share data)
Year Ended December 31,
Three Months Ended
March 31,
 
2019
2018
2017
2016
2015
2020
2019
Consolidated Statement of Operations Data:
 
 
 
 
 
 
 
Net sales
$361,989
$332,683
$285,777
$206,228
$197,256
$90,689
$91,628
Cost of sales
225,243
190,124
160,807
105,683
100,775
49,258
51,164
Gross profit
136,746
142,559
124,970
100,545
96,481
41,431
40,464
Selling, general and administrative expenses
109,887
94,075
75,290
56,626
51,758
32,394
28,429
Operating income
26,859
48,484
49,680
43,919
44,723
9,037
12,035
Interest expense, net
17,342
14,819
16,889
26,621
34,284
4,994
3,856
Investment income
(2,648)
(424)
(438)
(768)
(91)
(144)
Loss on extinguishment of debt
1,308
2,384
6,116
2,824
Net periodic benefit (income) cost, excluding service cost
(4,961)
131
180
334
212
(87)
(11)
Income before income taxes
15,818
31,574
26,933
14,908
10,227
4,221
8,334
Income tax expense (benefit)
2,044
6,285
7,280
(12,005)
1,078
946
1,774
Consolidated net income
13,774
25,289
19,653
26,913
9,149
3,275
6,560
Net loss attributable to non-controlling interest
(556)
$
Net income attributable to Turning Point Brands, Inc.
$13,774
$25,289
$20,209
$26,913
$9,149
$3,275
$6,560
 
 
 
 
 
 
 
 
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(dollars in thousands, except share data)
Year Ended December 31,
Three Months Ended
March 31,
 
2019
2018
2017
2016
2015
2020
2019
Basic income per common share:
 
 
 
 
 
 
 
Net income attributable to Turning Point Brands, Inc.
$0.70
$1.31
$1.06
$1.63
$1.27
$0.17
$0.34
Diluted income per common share:
 
 
 
 
 
 
 
Net income attributable to Turning Point Brands, Inc.
$0.69
$1.28
$1.04
$1.49
$1.10
$0.16
$0.33
Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
19,627,093
19,355,607
18,989,177
16,470,352
7,198,081
19,689,446
19,559,596
Diluted
20,037,540
19,827,562
19,513,008
18,015,545
8,354,387
20,106,800
20,045,964
(dollars in thousands)
As of December 31,
As of March 31,
 
2019
2018
2017
2016
2015
2020
Consolidated Balance Sheet Data:
 
 
 
 
 
 
Cash
$95,250
$3,306
$2,607
$2,865
$4,835
$99,406
Working capital
133,364
48,088
41,263
37,289
42,815
133,677
Total assets
446,584
339,377
282,277
285,020
242,463
449,320
Notes payable and long-term debt
284,191
220,715
202,040
218,225
292,440
279,977
Total liabilities
339,999
256,754
228,953
250,962
324,075
344,009
Total stockholders' equity (deficit)
106,585
82,623
53,324
34,058
(81,612)
105,311
Certain historical financial data for SDI is incorporated by reference in this proxy statement/prospectus, which does not include pro forma combined financial information. As of the effective time of the merger, (i) SDI’s only material assets will be shares of TPB Common Stock and (ii) SDI will have no liabilities which would be required to be disclosed in its financial statements. As of March 31, 2020, SDI’s financial statements would include the consolidated results of its various former operating entities; however, due to the sale and liquidation of those entities, TPB is not acquiring these operating subsidiaries in the merger. SDI’s historical financial statements for these operating companies no longer have any bearing on the current status of SDI or the going-forward operations of SDI. As a result, pro forma combined financial information is not being provided because such financial data is not meaningful to investors.
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RISK FACTORS
The combined organization will be faced with a market environment that cannot be predicted and that involves significant risks, many of which will be beyond its control. In addition to the other information contained in this proxy statement/prospectus, you should carefully consider the material risks described below before deciding how to vote your shares of stock. In addition, you should read and consider the risks associated with TPB’s business because these risks may also affect the combined organization — these risks can be found under the heading “Risk Factors — Risks Related to TPB” in this proxy statement/prospectus and in TPB’s Annual Report on Form 10-K, as updated by subsequent Quarterly Reports on Form 10-Q, and other documents TPB has filed with the SEC. You should also read and consider the other information in this proxy statement/prospectus. Please see the section titled “Where You Can Find More Information” in this proxy statement/prospectus.
Risks Related to the Merger
The merger is subject to approval of the merger agreement by SDI’s stockholders and TPB, as the sole equityholder of merger sub. Failure to obtain these approvals would prevent the closing of the merger.
Before the merger can be completed, the stockholders of SDI must approve the merger agreement, and TPB, as the sole equityholder of merger sub, must approve the merger agreement. Failure to obtain the required stockholder approvals may result in a material delay in, or the abandonment of, the merger. Any delay in completing the merger may materially adversely affect the timing and benefits that are expected to be achieved from the merger.
Certain provisions of the merger agreement may discourage third parties from submitting alternative takeover proposals, including proposals that may be superior to the arrangements contemplated by the merger agreement.
Prior to obtaining SDI stockholder approval for the transactions contemplated by the merger agreement, SDI may terminate the merger agreement in order to accept an unsolicited bona fide written acquisition proposal that is on terms and conditions that the SDI Board, as applicable, determines in good faith, based on such matters that it deems relevant (including the likelihood of consummation thereof), as well as any written offer by TPB to amend the terms of the merger agreement, and following consultation with its outside legal counsel and outside financial advisors, if any, are more favorable, from a financial point of view, to SDI’s stockholders than the terms of the transactions contemplated by the merger agreement, which we refer to as a superior offer. In connection with a superior offer, the SDI Board may also modify or withdraw its recommendation that the SDI stockholders vote to approve the transactions contemplated by the merger agreement.
Prior to obtaining SDI stockholder approval for the transactions contemplated by the merger agreement, in connection with certain material developments or events, the SDI Board may modify or withdraw its recommendation that the SDI stockholders vote to approve the transactions contemplated by the merger agreement if the SDI Board determines in good faith, taking into account any written offer by TPB to amend the terms of the merger agreement, after having consulted with its outside legal counsel, that, in light of the intervening event, a failure to modify or withdraw its recommendation could reasonably be expected to be inconsistent with the fiduciary duties of the SDI Board to SDI’s stockholders under applicable law.
If the conditions to the merger are not met, the merger will not occur.
Even if the merger is approved by the stockholders of SDI and TPB, specified conditions must be satisfied or waived to complete the merger. These conditions are set forth in the merger agreement and described in the section titled “The Merger Agreement—Conditions to the Completion of the Merger” in this proxy statement/prospectus. TPB cannot assure you that all of the conditions will be satisfied or waived. If the conditions are not satisfied or waived, the merger will not occur or will be delayed, and TPB and SDI each may lose some or all of the intended benefits of the merger.
The merger will involve substantial costs.
TPB and SDI have incurred and expect to continue to incur substantial costs and expenses relating directly to the merger, including professional fees and expenses, insurance premium costs, fees and costs relating to regulatory filings and notices, SEC filing fees, printing and mailing costs and other transaction-related costs, fees and expenses. If the merger is not completed, TPB and SDI will have incurred substantial expenses for which no ultimate benefit will have been received by either company.
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Litigation relating to the merger could require TPB or SDI to incur significant costs and suffer management distraction, and could delay or enjoin the merger.
TPB and SDI may become subject to litigation related to the merger, whether or not the merger is consummated. Such litigation may create uncertainty relating to the merger, or delay or enjoin the merger, and responding to such litigation could divert management’s attention away from TPB’s and/or SDI’s business operations, as applicable.
Risks Related to TPB
Risks related to TPB’s business and industry include the following:
Sales of tobacco products are generally expected to continue to decline.
As a result of restrictions on advertising and promotions, increases in regulation and excise taxes, health concerns, a decline in the social acceptability of tobacco and tobacco-related products, increased pressure from anti-tobacco groups, and other factors, the overall U.S. market for tobacco products has generally been declining in terms of volume of sales and is expected to continue to decline. The general climate of declining sales of tobacco products is principally driven by the long-standing declines in cigarettes. Other Tobacco Products (“OTP”), on the other hand, as measured by Management Science Associates, Inc. (“MSAi”), a third-party analytics and information company, have been generating modest consumer unit volume gains. For instance, while loose leaf chewing tobacco products have declined for over a decade, the Moist Smokeless Tobacco (“MST”) pouch products and snus have been growing in the low single digits over the same period. Additionally, cigarillo cigars and Make-Your-Own (“MYO”) cigar wraps have each demonstrated MSAi volume gains in recent years. TPB’s tobacco products comprised approximately 58% of TPB’s total 2019 net sales and, while some of TPB’s sales volume declines have been offset by higher prices or by increased sales in other product categories, there can be no assurance that these price increases or increased sales can be sustained, especially in an environment of increased regulation, product characteristic restrictions and taxation and changes in consumer spending habits.
TPB depends on a small number of key third-party suppliers and producers for its products.
TPB’s operations are largely dependent on a small number of key suppliers and producers to supply or manufacture TPB’s products pursuant to long-term contracts. In 2019, TPB’s three most important suppliers and producers were: (i) Swedish Match, which produces all of TPB’s loose leaf chewing tobacco in the U.S., (ii) Bolloré, which provides TPB with exclusive access to the Zig-Zag® cigarette paper and related accessories in the U.S. and Canada, and (iii) Durfort, from which TPB sources its MYO cigar wraps.
All of TPB’s loose leaf tobacco products are manufactured by Swedish Match pursuant to a ten-year renewable agreement, which TPB entered into in 2008. The agreement will automatically be renewed for five successive ten-year terms unless either party provides at least 180 days’ notice prior to a renewal term of its intent to terminate the agreement or unless otherwise terminated in accordance with the provisions of the agreement. If a notice of non-renewal is delivered, the contract will expire two years after the date on which the agreement would have otherwise been renewed. Under this agreement, TPB retains the rights to all marketing, distribution and trademarks over the loose leaf brands that TPB owns or licenses. The agreement renewed for an additional ten-year term in 2018. TPB shares responsibilities with Swedish Match related to process control, manufacturing activities, quality control, and inventory management with respect to its loose leaf products. TPB relies on the performance by Swedish Match of its obligations under the agreement for the production of its loose leaf tobacco products. Any significant disruption in Swedish Match’s manufacturing capabilities or TPB’s relationship with Swedish Match, a deterioration in Swedish Match’s financial condition, or an industry-wide change in business practices with respect to loose leaf tobacco products could have a material adverse effect on TPB’s business, results of operations, and financial condition.
All of TPB’s Zig-Zag® premium cigarette papers, cigarette tubes, and injectors are sourced from Bolloré, pursuant to a renewable 20-year exclusive agreement. This agreement was most recently renewed in 2012. In addition, under the terms of the agreement with Bolloré, TPB renegotiates pricing terms every five years. Further, Bolloré sources its needs for certain of TPB’s orders from an affiliate of one of TPB’s competitors.
TPB sources its MYO cigar wraps through the patent holder, Durfort, pursuant to an agreement entered into in October 2008. The agreement extends until expiration of the patents or cancellation of the agreement by either party. TPB relies on Durfort to produce and package its MYO cigar wraps to TPB’s specifications. Any significant disruption in TPB’s relationship with Durfort, a deterioration in Durfort’s financial condition, an industry-wide change in business practices relating to MYO cigar wraps, or TPB’s ability to source the MYO cigar wraps from them could have a material adverse effect on TPB’s business, results of operations, and financial condition.
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Pursuant to agreements with certain suppliers, TPB has agreed to store tobacco inventory purchased on TPB’s behalf and generally maintain a 12- to 24-month supply of TPB’s various tobacco products at their facilities. TPB cannot guarantee its supply of these products will be adequate to meet the demands of its customers. Further, a major fire, violent weather conditions, or other disasters that affect TPB or any of its key suppliers or producers, including Bolloré, Swedish Match, or Durfort, as well as those of TPB’s other suppliers and vendors, could have a material adverse effect on TPB’s operations. Although TPB has insurance coverage for some of these events, a prolonged interruption in TPB’s operations, as well as those of TPB’s producers, suppliers, or vendors, could have a material adverse effect on TPB’s business, results of operations, and financial condition. In addition, TPB does not know whether it will be able to renew any or all of its agreements on a timely basis, on terms satisfactory to TPB, or at all.
Any disruptions in TPB’s relationships with Bolloré, Swedish Match, or Durfort, a failure to renew any of TPB’s agreements, an inability or unwillingness by any supplier to produce sufficient quantities of TPB’s products in a timely manner or finding a new supplier would have a significant impact on TPB’s ability to continue distributing the same volume and quality of products and maintain TPB’s market share, even during a temporary disruption, which could have a material adverse effect on TPB’s business, results of operations and financial condition.
TPB may be unable to identify or contract with new suppliers or producers in the event of a disruption to TPB’s supply.
In order to continue selling TPB’s products in the event of a disruption to TPB’s supply, TPB would have to identify new suppliers or producers that would be required to satisfy significant regulatory requirements. Only a limited number of suppliers or producers may have the ability to produce TPB’s products at the volumes TPB needs, and it could be costly or time-consuming to locate and approve such alternative sources. Moreover, it may be difficult or costly to find suppliers to produce small volumes of TPB’s new products in the event TPB is looking only to supplement current supply as suppliers may impose minimum order requirements. In addition, TPB may be unable to negotiate pricing or other terms with TPB’s existing or new suppliers as favorable as those TPB currently enjoys. Even if TPB were able to successfully identify new suppliers and contract with them on favorable terms, these new suppliers would also be subject to stringent regulatory approval procedures that could result in prolonged disruptions to TPB’s sourcing and distribution processes.
Furthermore, there is no guarantee that a new third-party supplier could accurately replicate the production process and taste profile of TPB’s existing products. TPB cannot guarantee that a failure to adequately replace TPB’s existing suppliers would not have a material adverse effect on TPB’s business, results of operations, and financial condition.
TPB’s business may be damaged by events outside of its suppliers’ control, such as the impact of epidemics (e.g., COVID-19), political upheavals, or natural disasters.
TPB has critical suppliers of raw materials and finished products in other countries where events may prevent them from performing their obligations to TPB, through no fault of any party. Examples of such events could include the effect of potential epidemics, such as COVID-19 (coronavirus); political upheavals including violent changes in government, widespread labor unrest, or breakdowns in civil order; and natural disasters, such as hurricanes, earthquakes or floods. If such events were to occur and disrupt TPB’s supply arrangements, there can be no assurance that TPB could quickly replace the supply and there could be a material adverse impact on TPB’s business, results of operations, and financial condition.
TPB’s licenses to use certain brands and trademarks may be terminated or not renewed.
TPB is reliant upon brand recognition in the OTP markets in which it competes as the OTP industry is characterized by a high degree of brand loyalty and a reluctance to switch to new or unrecognizable brands on the part of consumers. Some of the brands and trademarks under which TPB’s products are sold are licensed to TPB for a fixed period of time in respect of specified markets, such as TPB’s distribution and license agreement with Bolloré for use of the Zig-Zag® name and associated trademarks in connection with certain of TPB’s cigarette papers and related products.
TPB has three licensing agreements with Bolloré, the first of which governs licensing and the use of the Zig-Zag® name with respect to cigarette papers, cigarette tubes, and cigarette injector machines, the second of which governs licensing and the use of the Zig-Zag® name with respect to e-cigarettes, vaporizers, and e-liquids, and the third of which governs the licensing, sourcing and use of the Zig-Zag trademark on paper cones. In 2019, TPB generated
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approximately $108 million in net sales of Zig-Zag® products, of which approximately $52 million was generated from products sold through TPB’s license agreement with Bolloré. In the event the licensing agreements with Bolloré are not renewed, the terms of the agreements bind TPB under a five-year non-compete clause, under which TPB cannot engage in direct or indirect manufacturing, selling, distributing, marketing, or otherwise promoting of cigarette papers of a competitor without Bolloré’s consent, except in limited instances. TPB does not know whether it will renew these agreements on a timely basis, on terms satisfactory to TPB, or at all. As a result of these restrictions, if TPB’s agreements with Bolloré are terminated, TPB may not be able to access the markets with recognizable brands that would be positioned to compete in these segments.
In the event that the licenses to use the brands and trademarks in TPB’s portfolio are terminated or are not renewed after the end of the term, there is no guarantee TPB will be able to find a suitable replacement, or if a replacement is found, that it will be on favorable terms. Any loss in TPB’s brand-name appeal to TPB’s existing customers as a result of the lapse or termination of TPB’s licenses could have a material adverse effect on TPB’s business, results of operations, and financial condition.
TPB may not be successful in maintaining the consumer brand recognition and loyalty of TPB products.
TPB competes in a market that relies on innovation and the ability to react to evolving consumer preferences. The tobacco industry in general, and the OTP industry in particular, are subject to changing consumer trends, demands, and preferences. Therefore, products once favored may over time become disfavored by consumers or no longer perceived as the best option. Consumers in the OTP market have demonstrated a high degree of brand loyalty, but producers must continue to adapt their products in order to maintain their status among these customers as the market evolves. The Zig-Zag® brand has strong brand recognition among smokers, and TPB’s continued success depends in part on TPB’s ability to continue to differentiate the brand names that TPB owns or licenses and maintain similarly high levels of recognition with target consumers. Trends within the OTP industry change often. TPB’s failure to anticipate, identify, or react to changes in these trends could, among other things, lead to reduced demand for TPB’s products. Factors that may affect consumer perception of TPB’s products include health trends and attention to health concerns associated with tobacco, price-sensitivity in the presence of competitors’ products or substitute products, and trends in favor of new NewGen products that are currently being researched and produced by participants in TPB’s industry. For example, in recent years, TPB has witnessed a shift in consumer purchases from chewing tobacco to moist snuff due to its increased affordability. Along with TPB’s biggest competitors in the chewing tobacco market, which also produce moist snuff, TPB has been able to shift priorities and adapt to this change. A failure to react to similar trends in the future could enable TPB’s competitors to grow or establish their brands’ market shares in these categories before TPB has a chance to respond.
Consumer perceptions of the overall health of tobacco-based products is likely to continue to shift, and TPB’s success depends, in part, on TPB’s ability to anticipate these shifting tastes and the rapidity with which the markets in which TPB competes will evolve in response to these changes on a timely and affordable basis. If TPB is unable to respond effectively and efficiently to changing consumer preferences, the demand for TPB’s products may decline, which could have a material adverse effect on TPB’s business, results of operations, and financial condition.
Regulations may be enacted in the future, particularly in light of increasing restrictions on the form and content of marketing of tobacco products, that would make it more difficult to appeal to TPB’s consumers or to leverage existing recognition of the brands that TPB owns or licenses. Furthermore, even if TPB is able to continue to distinguish TPB’s products, there can be no assurance that the sales, marketing, and distribution efforts of TPB’s competitors will not be successful in persuading consumers of TPB’s products to switch to their products. Many of TPB’s competitors have greater access to resources than TPB does, which better positions them to conduct market research in relation to branding strategies or costly marketing campaigns. Any loss of consumer brand loyalty to TPB products or reduction of TPB’s ability to effectively brand TPB’s products in a recognizable way will have a material effect on TPB’s ability to continue to sell TPB’s products and maintain TPB’s market share, which could have a material adverse effect on TPB’s business, results of operations, and financial condition.
TPB is subject to substantial and increasing regulation.
The tobacco industry has been under public scrutiny for over 50 years. Industry critics include special interest groups, the U.S. Surgeon General, and many legislators and regulators at the local, state and federal levels. A wide variety of federal, state, and local laws limit the advertising, sale, and use of tobacco, and these laws have proliferated in recent years. Together with changing public attitudes towards tobacco consumption, the constant expansion of
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regulations has been a major cause of the overall decline in the consumption of tobacco products since the early 1970s. These regulations relate to, among other things, the importation of tobacco products and shipping throughout the U.S. market, increases in the minimum age to purchase tobacco products, imposition of taxes, sampling and advertising bans or restrictions, flavor bans or restrictions, ingredient and constituent disclosure requirements, and media campaigns and restrictions on where smokers can smoke. Additional restrictions may be legislatively imposed or agreed to in the future. These limitations may make it difficult for TPB to maintain the value of any brand.
Moreover, the current trend is toward increasing regulation of the tobacco industry, which is likely to differ between the various U.S. states and Canadian provinces in which TPB currently conducts the majority of its business. Extensive and inconsistent regulation by multiple states and at different governmental levels could prove to be particularly disruptive to TPB’s business as TPB may be unable to accommodate such regulations in a cost-effective manner that allows TPB to continue to compete in an economically viable way. Regulations are often introduced without the tobacco industry’s input and have been a significant reason behind reduced industry sales volumes and increased illicit trade.
In 1986, federal legislation was enacted regulating smokeless tobacco products (including dry and moist snuff and chewing tobacco) by, among other things, requiring health warnings on smokeless tobacco packages and prohibiting the advertising of smokeless tobacco products on media subject to the jurisdiction of the Federal Communications Commission (“FCC”). Since 1986, other proposals have been made at the federal, state, and local levels for additional regulation of tobacco products. It is likely that additional proposals will be made in the coming years. For example, the Prevent All Cigarette Trafficking Act prohibits the use of the U.S. Postal Service to mail most tobacco products and amends the Jenkins Act, which established cigarette sales reporting requirements for state excise tax collection, to require individuals and businesses that make interstate sales of cigarettes or smokeless tobacco comply with state tax laws. Additional federal or state regulation relating to the manufacture, sale, distribution, advertising, labeling, mandatory ingredients disclosure and nicotine yield information disclosure of tobacco products could reduce sales, increase costs, and have a material adverse effect on TPB’s business, results of operations, and financial condition.
On June 22, 2009, the Family Smoking Prevention and Tobacco Control Act (the “Tobacco Control Act”) authorized the FDA for regulatory authority over tobacco products. The Act also amended the Federal Cigarette Labeling and Advertising Act, which governs how cigarettes can be advertised and marketed, as well as the Comprehensive Smokeless Tobacco Health Education Act (“CSTHEA”), which governs how smokeless tobacco can be advertised and marketed. In addition to the FDA and FCC, TPB is subject to regulation by numerous other federal agencies, including the Federal Trade Commission (“FTC”), the Department of Justice (“DOJ”), the Alcohol and Tobacco Tax and Trade Bureau (“TTB”), the U.S. Environmental Protection Agency (“EPA”), the U.S. Department of Agriculture (“USDA”), the Consumer Product Safety Commission (“CPSC”), the U.S. Customs and Border Protection (“CBP”) and the U.S. Center for Disease Control and Prevention’s (“CDC”) Office on Smoking and Health. There have also been adverse legislative and political decisions and other unfavorable developments concerning cigarette smoking and the tobacco industry, which have received widespread public attention. FDA has, and other governmental entities have, expressed concerns about the use of flavors in tobacco products and an interest in significant regulation of such use, up to and including de facto bans in certain products. There can be no assurance as to the ultimate content, timing or effect of any regulation of tobacco products by governmental bodies, nor can there be any assurance that potential corresponding declines in demand resulting from negative media attention would not have a material adverse effect on TPB’s business, results of operations and financial condition.
TPB’s products are regulated by the FDA, which has broad regulatory powers.
Substantially all of TPB’s 2019 U.S. net sales are derived from the sale of products that are currently regulated by the FDA. The Tobacco Control Act grants the FDA broad regulatory authority over the design, manufacture, sale, marketing and packaging of tobacco products. Among the regulatory powers conferred to the FDA under the Tobacco Control Act is the authority to impose tobacco product standards that are appropriate for the protection of the public health, require manufacturers to obtain FDA review and authorization for the marketing of certain new or modified tobacco products and impose various additional restrictions. Such restrictions may include requiring reduction or elimination of the use of particular constituents or components, requiring product testing, or addressing other aspects of tobacco product construction, constituents, properties or labeling.
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Specifically, the Tobacco Control Act (i) increases the number of health warnings required on cigarette and smokeless tobacco products, increases the size of warnings on packaging and in advertising, requires the FDA to develop graphic warnings for cigarette packages, and grants the FDA authority to require new warnings, (ii) imposes restrictions on the sale and distribution of tobacco products, including significant restrictions on tobacco product advertising and promotion as well as the use of brand and trade names, (iii) bans the use of “light,” “mild,” “low” or similar descriptors on tobacco products, (iv) bans the use of “characterizing flavors” in cigarettes other than tobacco or menthol, (v) requires manufacturers to report ingredients and harmful constituents and requires the FDA to disclose certain constituent information to the public, (vi) authorizes the FDA to require the reduction of nicotine and the potential reduction or elimination of other constituents or additives, including menthol, (vii) establishes potentially expensive and time-consuming pre-market and “substantial equivalence” review pathways for tobacco products that are considered new, (viii) gives FDA broad authority to deny product applications thereby preventing the sale or distribution of the product subject to the application (and requiring such product to be removed from the market, if applicable), and (ix) requires tobacco product manufacturers (and certain other entities) to register with the FDA.
The FDA charges user fees based on the USDA unit calculations pro-rated to the annualized FDA congressionally allocated budget. These fees only apply to certain products currently regulated by the FDA, which include TPB’s smokeless and smoking products (other than cigarette paper products), but TPB may in the future be required to pay such fees on more of its products, and TPB cannot accurately predict which additional products may be subject to such fees or the magnitude of such fees, which could become significant.
Although the FDA is prohibited from issuing regulations banning all cigarettes, all smokeless tobacco products, all little cigars, all cigars other than little cigars, all pipe tobacco, or all roll-your-own tobacco, or requiring the reduction of nicotine yields of a tobacco product to zero, it is likely that its regulations in accordance with the Tobacco Control Act could result in a decrease in sales of these products in the U.S. TPB believes that such regulation could adversely affect TPB’s ability to compete against its larger competitors, who may be able to more quickly and cost-effectively comply with these new rules and regulations. TPB’s ability to gain efficient market clearance for new tobacco products, or even to keep existing products on the market, could also be affected by FDA rules and regulations. Some of TPB’s currently marketed products that are subject to FDA regulation will require marketing authorizations from the FDA for TPB to continue marketing them (e.g., pre-market or substantial equivalence marketing authorizations, as applicable to the product), which TPB cannot guarantee it will be able to obtain. In addition, failure to comply with new or existing tobacco laws under which the FDA imposes regulatory requirements could result in significant financial penalties and government investigations of TPB. To the extent TPB is unable to respond to, or comply with, new FDA regulations it could have a material adverse effect on TPB’s business, results of operations and financial condition.
Some of TPB’s products are subject to developing and unpredictable regulation.
Some of TPB’s NewGen products marketed through TPB’s Nu-X subsidiary and similar third-party products sold through TPB’s NewGen distribution vehicles may be subject to uncertain federal, state and local regulations concerning hemp, cannabidiol isolate (“CBD”) and other non-tobacco consumable products. Enforcement initiatives by those authorities are therefore unpredictable and impossible to anticipate. TPB anticipates that all levels of government are likely to seek in some way to regulate these products, but the type, timing, and impact of such regulations remains uncertain. Accordingly, TPB cannot give any assurance that such actions would not have a material adverse effect on this emerging business.
Many of TPB’s products contain nicotine, which is considered to be a highly addictive substance.
Many of TPB’s products contain nicotine, a chemical that is considered to be highly addictive. The Tobacco Control Act empowers the FDA to regulate the amount of nicotine found in tobacco products, but not to require the reduction of nicotine yields of a tobacco product to zero. Any FDA regulation, whether of nicotine levels or other product attributes, may require TPB to reformulate, recall and/or discontinue certain of the products it may sell from time to time, which may have a material adverse effect on TPB’s ability to market its products and have a material adverse effect on TPB’s business, results of operations and financial condition.
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There is uncertainty related to the federal regulation of NewGen products, cigars and pipe tobacco products. Increased regulatory compliance burdens could have a material adverse impact on TPB’s NewGen business development efforts.
Since their introduction, there has been significant uncertainty regarding whether, how and when tobacco regulations would apply to NewGen products, such as electronic cigarettes or other vaporizer products. Based on a decision in December 2010 by the U.S. Court of Appeals for the D.C. Circuit (the “Sottera decision”), the FDA is permitted to regulate electronic cigarettes containing tobacco-derived nicotine as “tobacco products” under the Tobacco Control Act.
Effective August 8, 2016, FDA’s regulatory authority under the Tobacco Control Act was extended to all remaining tobacco products, including: (i) certain NewGen products (such as electronic cigarettes, vaporizers and e-liquids) and their components or parts (such as tanks, coils and batteries); (ii) cigars and their components or parts (such as cigar tobacco); (iii) pipe tobacco; (iv) hookah products; or (v) any other tobacco product “newly deemed” by FDA. These deeming regulations apply to all products made or derived from tobacco intended for human consumption, but excluding accessories of tobacco products (such as lighters).
The deeming regulations require TPB to (i) register with the FDA and report product and ingredient listings; (ii) market newly deemed products only after FDA review and approval; (iii) only make direct and implied claims of reduced risk if the FDA approves after finding that scientific evidence supports the claim and that marketing the product will benefit public health as a whole; (iv) refrain from distributing free samples; (v) implement minimum age and identification restrictions to prevent sales to individuals under age 18; (vi) develop an approved warning plan and include prescribed health warnings on packaging and advertisements; and (vii) refrain from selling the products in vending machines, unless the machine is located in a facility that never admits youth. Newly-deemed tobacco products are also subject to the other requirements of the Tobacco Control Act, such as that they not be adulterated or misbranded. The FDA could in the future promulgate good manufacturing practice regulations for these and TPB’s other products, which could have a material adverse impact on TPB’s ability and the cost to manufacture its products.
Marketing authorizations will be necessary in order for TPB to continue its distribution of NewGen and cigar and pipe tobacco products. As a result of recent litigation and subsequent FDA guidance, newly-deemed products will require marketing applications no later than May 12, 2020, with the exception of TPB’s “grandfathered” products (products in commerce as of February 15, 2007) which are already authorized, unless FDA grants extensions to these compliance periods. TPB intends to timely file for the appropriate authorizations to allow TPB to sell its products in the U.S. TPB has no assurances that the outcome of such processes will result in TPB’s products receiving marketing authorizations from the FDA. TPB also has certain previously regulated tobacco products which FDA removed from review but remain subject to “provisional” substantial equivalence filings made on March 22, 2011; however, FDA has the discretion to reinitiate review of these products. If the FDA establishes regulatory processes that TPB is unable or unwilling to comply with, TPB’s business, results of operations, financial condition and prospects could be adversely affected.
The anticipated costs of complying with future FDA regulations will be dependent on the rules issued by the FDA, the timing and clarity of any new rules or guidance documents accompanying these rules, the reliability and simplicity (or complexity) of the electronic systems utilized by FDA for information and reports to be submitted, and the details required by FDA for such information and reports with respect to each regulated product (which have yet to be issued by FDA). Failure to comply with existing or new FDA regulatory requirements could result in significant financial penalties and could have a material adverse effect on TPB’s business, results of operations, financial condition and ability to market and sell its products. Compliance and related costs could be substantial and could significantly increase the costs of operating in TPB’s NewGen and cigar and pipe tobacco product markets.
In addition, failure to comply with the Tobacco Control Act and with FDA regulatory requirements could result in litigation, criminal convictions or significant financial penalties and could impair TPB’s ability to market and sell its electronic and vaporizer products. At present, TPB is not able to predict whether the Tobacco Control Act will impact TPB’s products to a greater degree than competitors in the industry, thus affecting TPB’s competitive position.
Furthermore, neither the Prevent All Cigarette Trafficking Act nor the Federal Cigarette Labeling and Advertising Act currently apply to NewGen products; however, there is pending federal legislation that seeks to include certain NewGen products under the requirements of the PACT Act. There may, in the future, also be increased regulation of additives in tobacco products and internet sales of NewGen products. The application of either or both of these federal
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laws, and of any new laws or regulations which may be adopted in the future, to NewGen products or such additives could result in additional expenses and require TPB to change its advertising and labeling, and methods of marketing and distribution of its products, any of which could have a material adverse effect on TPB’s business, results of operations and financial condition.
Significant increases in state and local regulation of TPB’s NewGen products have been proposed or enacted and are likely to continue to be proposed or enacted in numerous jurisdictions.
There has been increasing activity on the state and local levels with respect to scrutiny of NewGen products. State and local governmental bodies across the U.S. have indicated NewGen products may become subject to new laws and regulations at the state and local levels. Further, some states and cities, have enacted regulations that require obtaining a tobacco retail license in order to sell electronic cigarettes and vaporizer products. If one or more states from which TPB generates or anticipates generating significant sales of NewGen products bring actions to prevent TPB from selling its NewGen products unless TPB obtains certain licenses, approvals or permits, and if TPB is not able to obtain the necessary licenses, approvals or permits for financial reasons or otherwise and/or any such license, approval or permit is determined to be overly burdensome to TPB, then TPB may be required to cease sales and distribution of its products to those states, which could have a material adverse effect on its business, results of operations and financial condition.
Certain states and cities have already restricted the use of electronic cigarettes and vaporizer products in smoke-free venues, imposed excise taxes, or limited sales of flavored NewGen products. Additional city, state or federal regulators, municipalities, local governments and private industry may enact additional rules and regulations restricting electronic cigarettes and vaporizer products. Because of these restrictions, TPB’s customers may reduce or otherwise cease using its NewGen products, which could have a material adverse effect on TPB’s business, results of operations and financial condition.
Increases in tobacco-related taxes have been proposed or enacted and are likely to continue to be proposed or enacted in numerous jurisdictions.
Tobacco products, premium cigarette papers and tubes have long been subject to substantial federal, state and local excise taxes. Such taxes have frequently been increased or proposed to be increased, in some cases significantly, to fund various legislative initiatives or further disincentivize tobacco usage. Since 1986, smokeless products have been subject to federal excise tax. Smokeless products are taxed by weight (in pounds or fractional parts thereof) manufactured or imported.
Since the State Children’s Health Insurance Program (“S-CHIP”) reauthorization in early 2009, which utilizes, among other things, taxes on tobacco products to fund health insurance coverage for children, the federal excise tax increases adopted have been substantial and have materially reduced sales in the “roll your own” (“RYO”)/MYO cigarette smoking products market, and also caused volume declines in other markets. Although the RYO/MYO cigarette smoking tobacco and related products market had been one of the fastest growing markets in the tobacco industry in the five years prior to 2009, the reauthorization of S-CHIP increased the federal excise tax on RYO tobacco from $1.10 to $24.78 per pound, and materially reduced the MYO cigarette smoking tobacco market in the U.S. There have not been any increases announced since 2009, but TPB cannot guarantee that it will not be subject to further increases, nor whether any such increases will affect prices in a way that further deters consumers from purchasing its products and/or affects its net revenues in a way that renders TPB unable to compete effectively.
In addition to federal excise taxes, every state and certain city and county governments have imposed substantial excise taxes on sales of tobacco products, and many have raised or proposed to raise excise taxes in recent years. Approximately one-half of the states tax MST on a weight-based versus ad valorem system of taxation. Additional states may consider adopting such revised tax structures as well. Tax increases, depending on their parameters, may result in consumers switching between tobacco products or depress overall tobacco consumption, which is likely to result in declines in overall sales volumes.
Any future enactment of increases in federal or state excise taxes on TPB tobacco products or rulings that certain of TPB’s products should be categorized differently for excise tax purposes could adversely affect demand for TPB’s products and may result in consumers switching between tobacco products or a depression in overall tobacco consumption, which would have a material adverse effect on TPB’s business, results of operations and financial condition.
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If TPB’s NewGen products become subject to increased taxes it could adversely affect TPB’s business.
Presently the federal government and most states do not tax the sale of NewGen products like the sale of conventional cigarettes or other tobacco products, all of which generally have high tax rates and have faced significant increases in the amount of taxes collected on their sales. In recent years, however, state and local governments have taken actions to move towards imposing excise taxes on NewGen products. As of December 31, 2019, nearly half of the states and certain localities impose excise taxes on electronic cigarettes and/or liquid vapor. These tax structures may benefit one type of NewGen product over another, which may result in consumers switching between NewGen products, other traditional tobacco products, or depress overall consumption in general. Should federal, state and local governments and or other taxing authorities begin or continue to impose excise taxes similar to those levied against conventional cigarettes and tobacco products on NewGen products, it may have a material adverse effect on the demand for these products, as consumers may be unwilling to pay the increased costs, which in turn could have a material adverse effect on TPB’s business, results of operations and financial condition.
TPB may be subject to increasing international control and regulation.
The World Health Organization’s Framework Convention on Tobacco Control (“FCTC”) is the first international public health treaty that establishes a global agenda to reduce initiation of tobacco use and regulate tobacco in an effort to encourage tobacco cessation. Over 170 governments worldwide have ratified the FCTC. The FCTC has led to increased efforts to reduce the supply and demand of tobacco products and to encourage governments to further regulate the tobacco industry. The tobacco industry expects significant regulatory developments to take place over the next few years, driven principally by the FCTC. Regulatory initiatives that have been proposed, introduced or enacted include:
the levying of substantial and increasing tax and duty charges;
restrictions or bans on advertising, marketing and sponsorship;
the display of larger health warnings, graphic health warnings and other labeling requirements;
restrictions on packaging design, including the use of colors and generic packaging;
restrictions or bans on the display of tobacco product packaging at the point of sale, and restrictions or bans on cigarette vending machines;
requirements regarding testing, disclosure and performance standards for tar, nicotine, carbon monoxide and other smoke constituents levels;
requirements regarding testing, disclosure and use of tobacco product ingredients;
increased restrictions on smoking in public and work places and, in some instances, in private places and outdoors;
elimination of duty free allowances for travelers; and
encouraging litigation against tobacco companies.
If the U.S. becomes a signatory to the FCTC and/or national laws are enacted in the U.S. that reflect the major elements of the FCTC, TPB’s business, results of operations and financial condition could be materially and adversely affected. If NewGen products become subject to one or more of the significant regulatory initiatives proposed under the FCTC, TPB’s NewGen products segment may also be materially adversely affected.
As part of TPB’s strategy, the company has begun strategic international expansions, such as introducing TPB’s moist snuff tobacco products in South America. This and other future expansions may subject TPB to additional or increasing international regulation, either by the countries that are the object of the strategic expansion or through international regulatory regimes, such as the FCTC, to which those countries may be signatories.
Canada and some Canadian provinces have restricted or are contemplating restrictions on the sales and marketing of electronic cigarettes. Furthermore, some Canadian provinces have limited the use of electronic cigarettes and vaporizer products in public places. These measures, and any future measures taken to limit the marketing, sale and use of NewGen products may have a material adverse effect on TPB’s business, results of operations and financial condition.
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To the extent TPB’s existing or future products become subject to international regulatory regimes that TPB is unable to comply with or fail to comply with, they may have a material adverse effect on TPB’s business, results of operations and financial condition.
TPB’s distribution efforts rely in part on its ability to leverage relationships with large retailers and national chains.
TPB’s distribution efforts rely in part on its ability to leverage relationships with large retailers and national chains to sell and promote its products, which is dependent upon the strength of the brand names that TPB owns or licenses and its salesforce effectiveness. In order to maintain these relationships, TPB must continue to supply products that will bring steady business to these retailers and national chains. TPB may not be able to sustain these relationships or establish other relationships with such entities, which could have a material adverse effect on its ability to execute its branding strategies, ability to access the end-user markets with its products or its ability to maintain its relationships with the producers of its products. For example, if TPB is unable to meet benchmarking provisions in contracts or if TPB is unable to maintain and leverage its retail relationships on a scale sufficient to make TPB an attractive distributor, it would have a material adverse effect on its ability to source products, and on TPB’s business, results of operations and financial condition. In addition, there are factors beyond TPB’s control that may prevent TPB from leveraging existing relationships, such as industry consolidation. If TPB is unable to develop and sustain relationships with large retailers and national chains, or is unable to leverage those relationships due to factors such as a decline in the role of brick-and-mortar retailers in the North American economy, TPB’s capacity to maintain and grow brand and product recognition and increase sales volume will be significantly undermined. In such an event, TPB may ultimately be forced to pursue and rely on local and more fragmented sales channels, which will have a material adverse effect on TPB’s business, results of operations and financial condition.
TPB has a substantial amount of indebtedness that could affect its financial condition.
As of February 28, 2020, TPB had $146.0 million outstanding under its credit facility with the ability to borrow an additional $46.3 million under its revolving credit facility (collectively, the 2018 Credit Facility”). In addition, TPB had $172.5 million outstanding under its Convertible Senior Notes. If TPB cannot generate sufficient cash flow from operations to service its debt, the company may need to further refinance its debt, dispose of assets or issue equity to obtain necessary funds. TPB does not know whether it will be able to do any of this on a timely basis or on terms satisfactory to the company or at all. TPB’s substantial amount of indebtedness could limit its ability to:
obtain necessary additional financing for working capital, capital expenditures or other purposes in the future;
plan for, or react to, changes in its business and the industries in which it operates;
make future acquisitions or pursue other business opportunities;
react in an extended economic downturn; and
pay dividends.
The terms of the agreement governing TPB’s indebtedness may restrict its current and future operations, which would adversely affect its ability to respond to changes in its business and to manage its operations.
TPB’s 2018 Credit Facility contains, and any future indebtedness would likely contain, a number of restrictive covenants that impose significant operating and financial restrictions on TPB, including restrictions on its ability to, among other things:
incur additional debt;
pay dividends and make other restricted payments;
create liens;
make investments and acquisitions;
engage in sales of assets and subsidiary stock;
enter into sale-leaseback transactions;
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enter into transactions with affiliates;
transfer all or substantially all of its assets or enter into merger or consolidation transactions; and
enter into certain hedging agreements.
TPB’s 2018 Credit Facility requires TPB to maintain certain financial ratios. As of December 31, 2019, TPB was in compliance with the financial and restrictive covenants of the 2018 Credit Facility. However, a failure by TPB to comply with the covenants or financial ratios in its debt instruments could result in an event of default under the applicable facility, which could adversely affect its ability to respond to changes in its business and manage its operations. In the event of any default under TPB’s 2018 Credit Facility, the lenders under TPB’s debt instruments could elect to declare all amounts outstanding under such instruments to be due and payable and require TPB to apply all of its available cash to repay these amounts. If the indebtedness under TPB’s 2018 Credit Facility were to be accelerated, which would cause an event of default and a cross-acceleration of its obligations under the company’s other debt instruments, there can be no assurance that its assets would be sufficient to repay this indebtedness in full, which could have a material adverse effect on TPB’s business, results of operations, and financial condition.
TPB faces intense competition and may fail to compete effectively.
TPB is subject to significant competition across its segments, and competes against companies in all segments that have access to significant resources in terms of technology, relationships with suppliers and distributors and access to cash flow and financial markets. The OTP industry is characterized by brand recognition and loyalty, with product quality, price, marketing and packaging constituting the primary methods of competition. Substantial marketing support, merchandising display, competitive pricing and other financial incentives generally are required to introduce a new brand or to improve or maintain a brand’s market position. TPB’s principal competitors are “big tobacco,” Altria Group, Inc. (formerly Phillip Morris) and British American Tobacco p.l.c. (formerly Reynolds) as well as Swedish Match, Swisher International and manufacturers of electronic cigarettes, including U.K.-based Imperial Brands PLC. These competitors are significantly larger than TPB and aggressively seek to limit the distribution or sale of other companies’ products, both at the wholesale and retail levels. For example, certain competitors have entered into agreements limiting retail-merchandising displays of other companies’ products or imposing minimum prices for OTP products, thereby limiting their competitors’ ability to offer discounted products. In addition, the tobacco industry is experiencing a trend toward industry consolidation, most recently evidenced by the December 2018 investment in Juul Labs by Altria, the July 2017 acquisition of Reynolds American, Inc., by British American Tobacco p.l.c., and the June 2015 acquisition of Lorillard, Inc., by Reynolds American, Inc. Industry consolidation could result in a more competitive environment if TPB’s competitors are able to increase their combined resources, enhance their access to national distribution networks, or become acquired by established companies with greater resources than TPB’s. Any inability to compete due to TPB’s smaller scale as the industry continues to consolidate and be dominated by “big tobacco” could have a material adverse effect on TPB’s business, results of operations and financial condition.
The competitive environment and TPB’s competitive position is also significantly influenced by economic conditions, the state of consumer confidence, competitors’ introduction of low-priced products or innovative products, higher taxes, higher absolute prices and larger gaps between price categories and product regulation that diminishes the consumer’s ability to differentiate tobacco products. Due to the impact of these factors, as well as higher state and local excise taxes and the market share of deep discount brands, the tobacco industry has become increasingly price competitive. As TPB seeks to adapt to the price competitive environment, competitors that are better capitalized may be able to sustain price discounts for long periods of time by spreading the loss across their expansive portfolios, with which TPB is not positioned to compete.
“Big tobacco” has also established its presence in the NewGen products market. There can be no assurance that TPB’s products will be able to compete successfully against these companies or any of the company’s other competitors, some of which have far greater resources, capital, experience, market penetration, sales and distribution channels than TPB. In addition, there are currently no U.S. restrictions on advertising electronic cigarettes and vaporizer products and competitors, including “big tobacco,” may have more resources than TPB for advertising expenses, which could have a material adverse effect on TPB’s ability to build and maintain market share, and thus have a material adverse effect on TPB’s business, results of operations and financial condition.
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The market for NewGen products is subject to a great deal of uncertainty and is still evolving.
Vaporizer products and electronic cigarettes, having recently been introduced to market, are at an early stage of development, and represent core components of a market that is evolving rapidly and is characterized by a number of market participants. Rapid growth in the use of, and interest in, vaporizer products and electronic cigarettes is recent, and may not continue on a lasting basis. The demand and market acceptance for these products is subject to a high level of uncertainty. Therefore, TPB is subject to all of the business risks associated with a new enterprise in an evolving market. Continued evolution, uncertainty and the resulting increased risk of failure of TPB’s new and existing product offerings in this market could have a material adverse effect on TPB’s ability to build and maintain market share and on TPB’s business, results of operations and financial condition. Further, there can be no assurance that TPB will be able to continue to effectively compete in the NewGen products marketplace.
TPB is subject to significant product liability litigation.
The tobacco industry has experienced, and continues to experience, significant product liability litigation. Most tobacco liability lawsuits have been brought against manufacturers and sellers of cigarettes by individual plaintiffs, often participating on a class-action basis, for injuries allegedly caused by cigarette smoking or by exposure to cigarette smoke. However, several lawsuits have also been brought against TPB and other manufacturers and sellers of smokeless products for injuries to health allegedly caused by use of smokeless products. There are several such suits pending against TPB with limited activity. In addition to the risks to TPB’s business, results of operations and financial condition resulting from adverse results in any such action, ongoing litigation may divert management’s attention and resources, which could have an impact on TPB’s business and operations. TPB cannot predict with certainty the outcome of these claims and there can be no assurance that TPB will not sustain losses in connection with such lawsuits and that such losses will not have a material adverse effect on TPB’s business, results of operations and financial condition.
In addition to current and potential future claims related to TPB’s smoking and smokeless products, TPB is subject to several lawsuits alleging personal injuries resulting from malfunctioning vaporizer devices or consumption of e-liquids and may be subject to claims in the future relating to TPB’s other NewGen products. TPB is still evaluating these claims and the potential defenses to them. As a result of their relative novelty, electronic cigarette and vaporizer product manufacturers and sellers have only recently become subject to litigation. TPB may see increasing litigation over NewGen products or the regulation of its products, as the regulatory regimes surrounding these products develop.
As a result, TPB may face substantial costs due to increased product liability litigation relating to new regulations or other potential defects associated with NewGen products we ship, which could have a material adverse effect on TPB’s business, results of operations and financial condition.
The scientific community has not yet studied extensively the long-term health effects of certain substances contained in some of TPB’s products.
Electronic cigarettes, vaporizers and many of TPB’s NewGen products were recently developed and therefore the scientific community has not had a sufficient period of time to study the long-term health effects of their use. Currently, there is no way of knowing whether these products are safe for their intended use. If the scientific community were to determine conclusively that use of any or all of these products poses long-term health risks, market demand for these products and their use could materially decline. Such a determination could also lead to litigation and significant regulation. Loss of demand for TPB’s product, product liability claims and increased regulation stemming from unfavorable scientific studies on these products could have a material adverse effect on TPB’s business, results of operations and financial condition.
TPB is required to maintain cash amounts within an escrow account in order to be compliant with a settlement agreement between TPB and certain U.S. states and territories.
In November 1998, the major U.S. cigarette manufacturers entered into the Master Settlement Agreement (“MSA”) and the Smokeless Tobacco Master Settlement Agreement (“STMSA”) with 46 U.S. states and certain U.S. territories and possessions. Pursuant to the MSA and subsequent states’ statutes, a “cigarette manufacturer” (which is defined to also include a manufacturer of RYO/MYO cigarette tobacco) has the option of either becoming a signatory to the MSA, or, as TPB has elected, operating as a non-participating manufacturer (“NPM”) by funding and maintaining an escrow account, with sub-accounts on behalf of each settling state. These NPM escrow accounts are governed by
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states’ escrow and complementary statutes that are generally monitored by the Office of the State Attorney General. The statutes require NPM companies to deposit, on an annual basis, into qualified banks’ escrow funds based on the number of cigarettes or cigarette equivalents, which is measured by pounds of RYO/MYO tobacco sold. NPM companies are, within specified limits, entitled to direct the investment of the escrowed funds and withdraw any interest or appreciation, but cannot withdraw the principal for twenty-five years from the year of each annual deposit, except to withdraw funds deposited pursuant to an individual state’s escrow statute to pay a final judgment to that state’s plaintiffs in the event of such a final judgment. The investment vehicles available to TPB are specified in the state escrow agreements and are limited to low-risk government securities.
Various states have enacted or proposed complementary legislation intended to curb the activity of certain manufacturers and importers of cigarettes or MYO tobacco that are selling into MSA states without signing the MSA or who have failed to properly establish and fund a qualifying escrow account. TPB believes it has been fully compliant with all applicable laws, regulations, and statutes, although compliance-related issues may, from time to time, be disruptive to its business, any of which could have a material adverse effect on its business, results of operations, and financial condition.
Pursuant to the NPM escrow account statutes, in order to be compliant with the NPM escrow requirements, TPB is required to deposit such funds for each calendar year into a qualifying escrow account by April 15 of the following year with each year’s deposit being released from escrow after 25 years. TPB discontinued its MYO tobacco line in the third quarter of 2017. During 2019 no monies were deposited into this qualifying escrow account. As of December 31, 2019, TPB had made deposits of approximately $32.1 million. Thus, pending a change in MSA legislation, TPB has no remaining product lines covered by the MSA and will not be required to make future escrow deposits.
Although no such legislation has been proposed or enacted, future changes to the MSA, such as legislation that extends the MSA to products to which it does not currently apply or legislation that limits the ability of companies to receive unused escrow funds after 25 years, may have a material adverse effect on TPB’s business, results of operations and financial condition. Despite the amounts maintained and funded to the escrow account, compliance with the funding requirements for the escrow account does not necessarily prevent future federal and/or state regulations with respect to the OTP industry from having a material adverse effect on TPB’s business, results of operations and financial condition.
Competition from illicit sources may have an adverse effect on TPB’s overall sales volume, restricting the ability to increase selling prices and damaging brand equity.
Illicit trade and tobacco trafficking in the form of counterfeit products, smuggled genuine products and locally manufactured products on which applicable taxes are evaded, represent a significant and growing threat to the legitimate tobacco industry. Factors such as increasing tax regimes, regulatory restrictions, and compliance requirements are encouraging more consumers to switch to illegal, cheaper tobacco products and providing greater rewards for smugglers. Illicit trade can have an adverse effect on TPB’s overall sales volume, restrict the ability to increase selling prices, damage brand equity and may lead to commoditization of TPB’s products.
Although TPB combats counterfeiting of its products by engaging in certain tactics, such as requiring all sales force personnel to randomly collect its products from retailers in order to be tested by its quality control team, maintaining a quality control group that is responsible for identifying counterfeit products and using a private investigation firm to help perform surveillance of retailers TPB suspects are selling counterfeit products, no assurance can be given that TPB will be able to detect or stop sales of all counterfeit products. In addition, TPB has in the past and will continue to bring suits against retailers and distributors that sell certain counterfeit products. While TPB has been successful in securing financial recoveries from and helping to obtain criminal convictions of counterfeiters in the past, no assurance can be given that TPB will be successful in any such suits or that such suits will be successful in stopping other retailers or distributors from selling counterfeit products. Even if TPB is successful, such suits could consume a significant amount of management’s time and could also result in significant expenses to the company. Any failure to track and prevent counterfeiting of TPB’s products could have a material adverse effect on TPB’s ability to maintain or effectively compete for the products TPB distributes under its brand names, which would have a material adverse effect on its business, results of operations and financial condition.
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Reliance on information technology means a significant disruption could affect TPB’s communications and operations.
TPB increasingly relies on information technology systems for its internal communications, controls, reporting and relations with customers and suppliers and information technology is becoming a significantly important tool for its sales staff. TPB’s marketing and distribution strategy is dependent upon its ability to closely monitor consumer and market trends on a highly specified level, for which TPB is reliant on its highly sophisticated data tracking systems, which are susceptible to disruption or failure. In addition, TPB’s reliance on information technology exposes the company to cyber-security risks, which could have a material adverse effect on the ability to compete. Security and privacy breaches may expose TPB to liability and cause TPB to lose customers or may disrupt its relationships and ongoing transactions with other entities with whom TPB contracts throughout its supply chain. The failure of TPB’s information systems to function as intended, or the penetration by outside parties intent on disrupting business processes, could result in significant costs, loss of revenue, assets or personal or other sensitive data and reputational harm.
Security and privacy breaches may expose TPB to liability and cause TPB to lose customers.
Federal and state laws require TPB to safeguard its wholesalers’ and retailers’ financial information, including credit information. Although TPB has established security procedures to protect against identity theft and the theft of its customers’ and distributors’ financial information, TPB’s security and testing measures may not prevent security breaches and breaches of privacy may occur and could harm its business. Typically, TPB relies on encryption and authentication technology licensed from third parties to enhance transmission security of confidential information in relation to financial and other sensitive information that TPB has on file. Advances in computer capabilities, new discoveries in the field of cryptography, inadequate facility security or other developments may result in a compromise or breach of the technology used by TPB to protect customer data. Any compromise of TPB’s security could harm TPB’s reputation or financial condition and, therefore, TPB’s business. In addition, a party who is able to circumvent TPB’s security measures or exploit inadequacies in TPB’s security measures, could, among other effects, misappropriate proprietary information, cause interruptions in TPB’s operations or expose customers and other entities with which TPB interacts to computer viruses or other disruptions. Actual or perceived vulnerabilities may lead to claims against TPB. To the extent the measures TPB has taken prove to be insufficient or inadequate, TPB may become subject to litigation or administrative sanctions, which could result in significant fines, penalties or damages and harm to its reputation.
Contamination of, or damage to, TPB’s products could adversely impact sales volume, market share and profitability.
TPB’s market position may be affected through the contamination of its tobacco supply or products during the manufacturing process or at different points in the entire supply chain. TPB keeps significant amounts of inventory of its products in warehouses and it is possible that this inventory could become contaminated prior to arrival at the company’s premises or during the storage period. If contamination of its inventory or packaged products occurs, whether as a result of a failure in quality control by TPB or by one of its suppliers, TPB may incur significant costs in replacing the inventory and recalling products. TPB may be unable to meet customer demand and may lose customers who purchase alternative brands or products. In addition, consumers may lose confidence in the affected product.
Under the terms of TPB’s contracts, TPB imposes requirements on its suppliers to maintain quality and comply with product specifications and requirements, and on its third-party co-manufacturer to comply with all federal, state and local laws. These third-party suppliers, however, may not continue to produce products that are consistent with its standards or that are in compliance with applicable laws, and TPB cannot guarantee that it will be able to identify instances in which its third-party suppliers fail to comply with its standards or applicable laws. A loss of sales volume from a contamination event may occur, and such a loss may affect TPB’s ability to supply its current customers and to recapture their business in the event they are forced to switch products or brands, even if on a temporary basis. TPB may also be subject to legal action as a result of a contamination, which could result in negative publicity and affect its sales. During this time, TPB’s competitors may benefit from an increased market share that could be difficult and costly to regain. Such a contamination event could have a material adverse effect on TPB’s business, results of operations and financial condition.
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TPB intellectual property may be infringed.
TPB currently relies on trademark and other intellectual property rights to establish and protect the brand names and logos it owns or licenses. Third parties have in the past infringed, and may in the future infringe, on these trademarks and TPB’s other intellectual property rights. TPB’s ability to maintain and further build brand recognition is dependent on the continued and exclusive use of these trademarks, service marks and other proprietary intellectual property, including the names and logos it owns or licenses. Despite TPB’s attempts to ensure these intellectual property rights are protected, third parties may take actions that could materially and adversely affect its rights or the value of this intellectual property. Any litigation concerning TPB’s intellectual property rights, whether successful or unsuccessful, could result in substantial costs to TPB and diversions of its resources. Expenses related to protecting TPB’s intellectual property rights, the loss or compromise of any of these rights or the loss of revenues as a result of infringement could have a material adverse effect on TPB’s business, results of operations and financial condition, and may prevent the brands TPB owns or licenses from growing or maintaining market share.
Third parties may claim that TPB infringes their intellectual property and trademark rights.
Competitors in the tobacco products and NewGen markets may claim that TPB infringes their proprietary rights. Such claims, whether or not meritorious, may result in the expenditure of significant financial and managerial resources, injunctions against TPB or the payment of damages. Further, TPB’s vapor distribution businesses distribute third party product brands with those suppliers’ branding and imagery. If that branding or imagery is alleged by other parties to infringe or otherwise violate intellectual property rights, TPB could be drawn into such litigation.
TPB may fail to manage its growth.
TPB has expanded over its history and intends to grow in the future. TPB acquired the Stoker’s® brand in 2003, and has continued to develop it through the introduction of new products, such as moist snuff. TPB’s acquisition of the VaporBeast® brand in 2016 accelerated TPB’s entry into non-traditional retail channels. More recently, TPB’s September 2018 acquisition of IVG added a top B2C platform which enhances TPB’s marketing and selling of proprietary and third party vapor products to adult consumers. More recently, the acquisition of Solace provided TPB with a leading line of liquids and a powerful new product development platform.TPB has also focused on growing its relationships with its key suppliers through expansion into new product lines such as MYO cigar wraps, which are sourced from Durfort. However, any future growth will place additional demands on TPB’s resources, and TPB cannot be sure it will be able to manage its growth effectively. If TPB is unable to manage its growth while maintaining the quality of its products and profit margins, or if new systems that it implements to assist in managing its growth do not produce the expected benefits, TPB’s business, financial position, results of operations and cash flows could be adversely affected. TPB may not be able to support, financially or otherwise, future growth, or hire, train, motivate and manage the required personnel. TPB’s failure to manage growth effectively could also limit TPB’s ability to achieve its goals as they relate to streamlined sales, marketing and distribution operations and the ability to achieve certain financial metrics.
TPB may fail to successfully integrate its acquisitions or otherwise be unable to benefit from pursuing acquisitions.
TPB believes there are meaningful opportunities to grow through acquisitions and joint ventures across all OTP product categories and TPB expects to continue a strategy of selectively identifying and acquiring businesses with complementary products. TPB may be unable to identify, negotiate, and complete suitable acquisition opportunities on reasonable terms. There can be no assurance that any business acquired by TPB will be successfully integrated with TPB’s operations or prove to be profitable to TPB. TPB may incur future liabilities related to acquisitions. Should any of the following problems, or others, occur as a result of TPB’s acquisition strategy, the impact could be material:
difficulties integrating personnel from acquired entities and other corporate cultures into its business;
difficulties integrating information systems;
the potential loss of key employees of acquired companies;
the assumption of liabilities and exposure to undisclosed or unknown liabilities of acquired companies; or
the diversion of management attention from existing operations.
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TPB is subject to fluctuations in its results that make it difficult to track trends and develop strategies in the short-term.
In response to competitor actions and pricing pressures, TPB has engaged in significant use of promotional and sales incentives. TPB regularly reviews the results of its promotional spending activities and adjusts its promotional spending programs in an effort to maintain its competitive position. Accordingly, unit sales volume and sales promotion costs in any period are not necessarily indicative of sales and costs that may be realized in subsequent periods. Additionally, promotional activity significantly increases net sales in the month in which it is initiated and net sales are adversely impacted in the month after a promotion. Accordingly, based upon the timing of TPB’s marketing and promotional initiatives, TPB has and may continue to experience significant variability in its results, which could affect the ability to formulate strategies that allows TPB to maintain its market presence across volatile periods. If TPB’s fluctuations obscure its ability to track important trends in its key markets, it may have a material adverse effect on TPB’s business, results of operations and financial condition.
TPB is subject to the risks of exchange rate fluctuations.
Currency movements and suppliers’ price increases relating to premium cigarette papers and cigarette tubes are the primary factors affecting TPB’s cost of sales. These products are purchased from Bolloré and TPB makes payments in euros. Thus, TPB bears certain foreign exchange rate risk for certain of its inventory purchases. In addition, as part of its strategy, TPB has begun strategic international expansions. As a result, TPB may be more sensitive to the risks of exchange rate fluctuations. To manage this risk, TPB sometimes utilizes short-term forward currency contracts to purchase euros for its inventory purchases. TPB has a foreign exchange currency policy which governs its hedging of risk. While TPB engages in hedging transactions from time to time, no assurance can be made that TPB will be successful in eliminating currency exchange risks or that changes in currency rates will not have a material adverse effect on TPB’s business, results of operations and financial condition.
Adverse U.S. and global economic conditions could negatively impact TPB’s business, prospects, results of operations, financial condition or cash flows.
TPB’s business and operations are sensitive to global economic conditions. These conditions include interest rates, energy costs, inflation, recession, fluctuations in debt and equity capital markets and the general condition of the U.S. and world economy. A material decline in the economic conditions affecting consumers, which cause a reduction in disposable income for the average consumer, may change consumption patterns, and may result in a reduction in spending on OTP or a switch to cheaper products or products obtained through illicit channels. Electronic cigarettes, vaporizer and e-liquid products are relatively new to market and may be regarded by users as a novelty item and expendable. As such, demand for TPB’s NewGen products may be particularly sensitive to economic conditions such as inflation, recession, high energy costs, unemployment, changes in interest rates and money supply, changes in the political environment and other factors beyond TPB’s control, any combination of which could result in a material adverse effect on TPB’s business, results of operations and financial condition.
TPB’s supply to its wholesalers and retailers is dependent on the demands of their customers who are sensitive to increased sales taxes and economic conditions affecting their disposable income.
Consumer purchases of tobacco products are historically affected by economic conditions, such as changes in employment, salary and wage levels, the availability of consumer credit, inflation, interest rates, fuel prices, sales taxes, and the level of consumer confidence in prevailing and future economic conditions. Discretionary consumer purchases, such as of OTP, may decline during recessionary periods or at other times when disposable income is lower and taxes may be higher.
In addition, states such as New York, Hawaii, Rhode Island, Georgia and North Carolina have begun collecting taxes on internet sales where companies have used independent contractors in those states to solicit sales from residents of those states. These taxes apply to TPB’s online sales of NewGen products into those states, and may result in reduced demand from the independent wholesalers who may not be able to absorb the increased taxes or successfully pass them onto the end-user without experiencing reduced demand. Further, as a result of South Dakota v. Wayfair, states are now able to impose sales tax on internet purchases made from out-of-state sellers, even if the seller does not have a physical presence in the taxing state. Consequently, additional states are likely to seek to impose sales tax on TPB’s online sales. The requirement to collect, track and remit taxes may require TPB to increase its prices, which may affect demand for its products or conversely reduce its net profit margin, which could have a material adverse effect on TPB’s business, results of operations and financial condition.
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TPB’s failure to comply with certain environmental, health and safety regulations could adversely affect its business.
The storage, distribution and transportation of some of the products that TPB sells are subject to a variety of federal and state environmental regulations. In addition, TPB’s manufacturing facilities are similarly subject to federal, state and local environmental laws. TPB is also subject to operational, health and safety laws and regulations. TPB’s failure to comply with these laws and regulations could cause a disruption in its business, an inability to maintain its manufacturing resources, and additional and potentially significant remedial costs and damages, fines, sanctions or other legal consequences that could have a material adverse effect on its business, results of operations and financial condition.
The departure of key management personnel and the failure to attract and retain talent could adversely affect TPB’s operations.
TPB’s success depends upon the continued contributions of its senior management. TPB’s ability to implement its strategy of attracting and retaining the best talent may be impaired by the decreasing social acceptance of tobacco usage. The tobacco industry competes for talent with the consumer products industry and other companies that enjoy greater societal acceptance. As a result, TPB may be unable to attract and retain the best talent, which could have a material adverse effect on its business, results of operations and financial condition.
Imposition of significant tariffs on imports into the U.S., could have a material and adverse effect on TPB’s business.
TPB is required to purchase all of its cigarette papers, cigarette tubes and cigarette injector machines from Bolloré in France. Additionally, a substantial portion of its NewGen products are sourced from China. In 2018, President Trump and his administration imposed significant additional tariffs on certain goods imported from outside the U.S. and could impose additional tariffs in the future. These additional tariffs apply to a significant portion of TPB’s NewGen products and may result in increased prices for its customers. These increased prices may reduce demand where customers are unable to absorb the increased prices or successfully pass them onto the end-user. If the U.S. were to impose additional tariffs on goods TPB imports, it is likely to make it more costly for TPB to import goods from other countries. As a result, TPB’s business, financial condition and results of operations could be materially adversely affected.
The reduced disclosure requirements applicable to emerging growth companies may make TPB Common Stock less attractive to investors, potentially decreasing TPB’s stock price.
TPB is an “emerging growth company” as defined under the federal securities laws. For as long as TPB continues to be an emerging growth company, TPB may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. Investors may find TPB Common Stock less attractive because TPB may rely on these exemptions, which include but are not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act (“Section 404”), reduced disclosure obligations regarding executive compensation in TPB’s periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and shareholder approval of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act (“Section 107”) provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. TPB has elected to opt out of the extended transition period for complying with the revised accounting standards.
If investors find TPB Common Stock less attractive as a result of exemptions and reduced disclosure requirements, there may be a less active trading market for TPB Common Stock and the price of the TPB Common Stock may be more volatile or decrease.
TPB may lose its status as an emerging growth company before the five-year maximum time period a company may retain such status.
TPB has elected to rely on certain exemptions and reduced disclosure requirements applicable to emerging growth companies and expects to continue to do so. However, TPB may choose to “opt out” of such reduced disclosure requirements and provide disclosure required for companies that do not qualify as emerging growth companies. In
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addition, TPB chose to opt out of the provision of the JOBS Act that permits TPB to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. Section 107 provides that TPB’s decision to opt out of the extended transition period for complying with new or revised accounting standards would be irrevocable.
Furthermore, although TPB is able to remain an emerging growth company for up to five years, TPB may lose such status at an earlier time if (i) its annual gross revenues exceed $1 billion, (ii) TPB becomes a “large accelerated filer” as defined in Rule 12b-2 under the United States Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would occur if the market value of its common stock that is held by non-affiliates exceeds $700 million as of the last business day of its most recently completed second fiscal quarter, or (iii) TPB issued more than $1 billion in non-convertible debt during the preceding three-year period.
When TPB loses its emerging growth company status, whether due to an election, the end of the five-year period, or one of the circumstances listed in the preceding paragraph, the emerging growth company exemptions will cease to apply and TPB expects it will incur additional expenses and devote increased management effort toward ensuring compliance with the non-emerging growth company requirements. TPB cannot predict or estimate the amount of additional costs it may incur as a result of the change in its status or the timing of such costs, though such costs may be substantial.
TPB’s principal stockholders are able to exert significant influence over matters submitted to its stockholders and may take certain actions to prevent takeovers.
SDI, which is controlled by funds managed by Standard General, is a significant stockholder. SDI owns approximately 50.0% of TPB’s stock and Standard General directly owns approximately 3.4% of the TPB Common Stock. The existence of these and other significant stockholders may have the effect of deterring hostile takeovers, delaying or preventing changes in control or changes in management, or limiting the ability of TPB’s other stockholders to approve transactions that they may deem to be in the best interests of TPB. In addition, TPB’s significant stockholders will be able to exert significant influence over the decision, if any, to authorize additional capital stock, which, if issued, could have a significant dilutive effect on holders of common stock.
The TPB Charter provides that the doctrine of “corporate opportunity” will not apply against SDI and Standard General in a manner that would prohibit them from investing in competing businesses or doing business with TPB’s customers. To the extent they invest in such other businesses, SDI and Standard General may have differing interests than TPB’s other stockholders. In addition, SDI and Standard General are permitted to engage in business activities or invest in or acquire businesses which may compete with or do business with any competitors of our TPB’s.
Furthermore, Standard General is in the business of managing investment funds and therefore may pursue acquisition opportunities that may be complementary to TPB’s business and, as a result, such acquisition opportunities may not be available to TPB.
The TPB Charter and TPB Bylaws, as well as Delaware law and certain regulations, could discourage or prohibit acquisition bids or merger proposals, which may adversely affect the market price of the TPB Common Stock.
The TPB Charter authorizes the TPB Board to issue preferred stock without stockholder approval. If the TPB Board elects to issue preferred stock, it could be more difficult for a third party to acquire TPB. In addition, some provisions of the TPB Charter, TPB Bylaws and applicable law could make it more difficult for a third party to acquire control of TPB, even if the change of control would be beneficial to TPB’s stockholders, including:
limitations on the removal of directors;
limitations on the ability of TPB’s stockholders to call special meetings;
limitations on stockholder action by written consent;
establishing advance notice provisions for stockholder proposals and nominations for elections to the TPB Board to be acted upon at meetings of stockholders; and
limitations on the ability of TPB’s stockholders to fill vacant directorships or amend the number of directors constituting the TPB Board.
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The TPB Charter limits the ownership of TPB Common Stock by individuals and entities that are Restricted Investors. These restrictions may affect the liquidity of TPB Common Stock and may result in Restricted Investors being required to sell or redeem their shares at a loss or relinquish their voting, dividend and distribution rights.
For so long as TPB or one of its subsidiaries is party to any of the Bolloré distribution agreements, the TPB Charter will limit the ownership of TPB Common Stock by any “Restricted Investor” to 14.9% of TPB’s outstanding common stock and shares convertible or exchangeable therefor (including our non-voting common stock) (the “Permitted Percentage”). A “Restricted Investor” is defined as: (i) any entity that directly or indirectly manufactures, sells, markets, distributes or otherwise promotes cigarette paper booklets, filter tubes, injector machines or filter tips in the United States, the District of Columbia, the territories, possessions and military bases of the United States and the Dominion of Canada (a “Bolloré Competitor”), (ii) any entity that owns more than a 20% equity interest in any Bolloré Competitor, or (iii) any person who serves as a director or officer of, or any entity that has the right to appoint an officer or director of, any Bolloré Competitor or of any entity that owns more than a 20% equity interest in any Bolloré Competitor (each, a “Restricted Investor”). The TPB Charter further provides that any issuance or transfer of shares to a Restricted Investor in excess of the Permitted Percentage will be ineffective as against TPB and that neither TPB nor its transfer agent will register the issuance or transfer of shares or be required to recognize the transferee or owner as a holder of TPB Common Stock for any purpose except to exercise its remedies described below. Any shares in excess of the Permitted Percentage in the hands of a Restricted Investor will not have any voting or dividend rights and are subject to redemption by TPB in its discretion. The liquidity or market value of the shares of TPB Common Stock may be adversely impacted by such transfer restrictions.
As a result of the above provisions, a proposed transferee of TPB Common Stock that is a Restricted Investor may not receive any return on its investment in shares it purchases or owns, as the case may be, and it may sustain a loss. TPB is entitled to redeem all or any portion of such shares acquired by a Restricted Investor in excess of the Permitted Percentage (“Excess Shares”) at a redemption price based on a fair market value formula that is set forth in the TPB Charter, which may be paid in any form, including cash or promissory notes, at TPB’s discretion. Excess Shares not yet redeemed will not be accorded any voting, dividend or distribution rights while they constitute Excess Shares. As a result of these provisions, a stockholder who is a Restricted Investor may be required to sell its shares of TPB Common Stock at an undesirable time or price and may not receive any return on its investment in such shares. However, TPB may not be able to redeem Excess Shares for cash because TPB’s operations may not have generated sufficient excess cash flow to fund the redemption and TPB may incur additional indebtedness to fund all or a portion of such redemption, in which case its financial condition may be materially weakened.
The TPB Charter permits it to require that owners of any shares of TPB Common Stock provide certification of their status as a Restricted Investor. In the event that a person does not submit such documentation, The TPB Charter provides the company with certain remedies, including the suspension of the payment of dividends and distributions with respect to shares held by such person and deposit of any such dividends and distributions into an escrow account. As a result of non-compliance with these provisions, an owner of the shares of TPB Common Stock may lose significant rights associated with those shares.
Although the TPB Charter contains the above provisions intended to assure compliance with the restrictions on ownership of TPB Common Stock by Restricted Investors, TPB may not be successful in monitoring or enforcing the provisions. A failure to enforce or otherwise maintain compliance could lead Bolloré to exercise its termination rights under the agreements, which would have a material and adverse effect on the TPB’s financial position and its results of operations.
In addition to the risks described above, the foregoing restrictions could delay, defer or prevent a transaction or change in control that might involve a premium price for TPB Common Stock or that might otherwise be in the best interest of TPB’s stockholders.
Future sales of TPB Common Stock in the public market could reduce TPB’s stock price, and any additional capital raised by TPB through the sale of equity or convertible securities may dilute TPB’s stockholders.
TPB may sell additional shares of common stock in subsequent public offerings. TPB may also issue additional shares of common stock or convertible securities.
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TPB cannot predict the size of future issuances of its common stock or securities convertible into common stock or the effect, if any, that future issuances and sales of shares of TPB Common Stock will have on the market price of TPB Common Stock. Sales of substantial amounts of TPB Common Stock (including shares issued in connection with an acquisition), or the perception that such sales could occur, may adversely affect prevailing market prices of TPB Common Stock.
TPB may issue preferred stock whose terms could adversely affect the voting power or value of TPB Common Stock.
The TPB Charter authorizes TPB to issue, without the approval of its stockholders, one or more classes or series of preferred stock having such designations, preferences, limitations and relative rights, including preferences over TPB Common Stock respecting dividends and distributions, as the TPB Board may determine. The terms of one or more classes or series of preferred stock could adversely impact the voting power or value of the TPB Common Stock. For example, TPB might grant holders of preferred stock the right to elect some number of TPB’s directors in all events or on the happening of specified events or the right to veto specified transactions. Similarly, the repurchase or redemption rights or liquidation preferences TPB might assign to holders of preferred stock could affect the residual value of the common stock.
TPB’s status as a “controlled company” could make its common stock less attractive to some investors or otherwise harm its stock price.
Because TPB qualifies as a “controlled company” under the corporate governance rules for NYSE-listed companies it is not required to have, and could elect in the future not to have, a majority of the TPB Board be independent, a compensation committee, or an independent nominating function. Accordingly, should the interests of TPB’s controlling stockholder differ from those of other stockholders, the other stockholders may not have the same protections afforded to stockholders of companies subject to all of the corporate governance rules for NYSE-listed companies. TPB’s status as a controlled company could make its common stock less attractive to some investors or otherwise harm its stock price.
The TPB Charter provides that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between TPB and TPB’s stockholders, which could limit TPB’s stockholders’ ability to obtain a favorable judicial forum for disputes with TPB or TPB’s directors, officers or employees.
TPB’s Charter provides that the Court of Chancery of the State of Delaware (“Court of Chancery”) is the exclusive forum for:
any derivative action or proceeding brought on behalf of TPB;
any action asserting a claim of breach of a fiduciary duty owed by any director, officer or other employee of TPB to TPB or TPB’s stockholders;
any action asserting a claim against TPB, its directors, officers or employees arising pursuant to any provision of the DGCL or the TPB Charter or TPB Bylaws; or
any action asserting a claim against TPB, its directors, officers or employees governed by the internal affairs doctrine,
except as to each of the above, for any claim as to which the Court of Chancery determines that there is an indispensable party not subject to the jurisdiction of the Court of Chancery (and the indispensable party does not consent to the personal jurisdiction of the Court of Chancery within ten days following such determination), which is vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery, or for which the Court of Chancery does not have subject matter jurisdiction.
To the fullest extent permitted by law, this exclusive forum provision will apply to state and federal law claims. However, this exclusive forum provision will not apply to suits brought to enforce any liability or duty created by the Securities Act of 1933, as amended (the “Securities Act”), or the Exchange Act or any other claim for which the federal courts have exclusive jurisdiction. To the extent that any such claims may be based upon federal law claims, Section 27 of the Exchange Act creates exclusive federal jurisdiction over all suits brought to enforce any duty or liability created by the Exchange Act or the rules and regulations thereunder. Furthermore, Section 22 of the Securities Act creates concurrent jurisdiction for federal and state courts over all suits brought to enforce any duty
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or liability created by the Securities Act or the rules and regulations thereunder. TPB stockholders cannot waive compliance with the federal securities laws and the rules and regulations thereunder. It is possible that a court of law could rule that the choice of forum provision contained in the TPB Charter is inapplicable or unenforceable if it is challenged in a proceeding or otherwise.
These exclusive forum provisions may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for disputes with TPB or TPB’s directors, officers or other employees, which may discourage lawsuits against TPB and TPB’s directors, officers and other employees. If a court were to find the exclusive forum provision in the TPB Charter to be inapplicable or unenforceable in an action, TPB may incur additional costs associated with resolving the dispute in other jurisdictions, which could seriously harm TPB’s business.
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FORWARD-LOOKING STATEMENTS
This proxy statement/prospectus contains forward-looking statements (including within the meaning of Section 21E of the Exchange Act, and Section 27A of the United States Securities Act of 1933, as amended (the “Securities Act”)) concerning TPB, SDI, the merger and other matters. These statements may discuss goals, intentions and expectations as to future plans, trends, events, results of operations or financial condition, or otherwise, based on current beliefs of the management of SDI, as well as assumptions made by, and information currently available to, management. Forward-looking statements generally include statements that are predictive in nature and depend upon or refer to future events or conditions, and include words such as “may,” “will,” “should,” “would,” “expect,” “plan,” “believe,” “intend,” “look forward,” “estimate,” “project,” “anticipate,” “could,” and other similar expressions among others. Statements that are not historical facts are forward-looking statements. Forward-looking statements are based on current beliefs and assumptions that are subject to risks and uncertainties and are not guarantees of future performance. These forward-looking statements should, therefore, be considered in light of various important factors, including those set forth in this joint proxy statement/prospectus. Actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties, which include, without limitation:
the risk that the conditions to the closing of the merger are not satisfied, including the failure to timely obtain stockholder approval for the transaction from each of SDI’s stockholders, and TPB, as the sole equityholder of merger sub;
the risk that the merger may be completed even though certain events occur prior to the closing that materially and adversely affect TPB or SDI;
uncertainties as to the timing of the consummation of the merger and the ability of each of TPB and SDI to consummate the merger;
the market price of TPB Common Stock following the merger may decline as a result of the merger;
risks related to the failure or delay in obtaining required approvals from any governmental or quasi-governmental entity necessary to consummate the merger;
during the pendency of the merger, SDI may not be able to enter into a business combination with another party under certain circumstances because of restrictions in the merger agreement, which could adversely affect its business;
unexpected costs, charges or expenses resulting from the merger;
potential adverse reactions or changes to business relationships resulting from the announcement or completion of the merger;
litigation relating to the merger could require TPB or SDI to incur significant costs and suffer management distraction, and could delay or enjoin the merger;
risks associated with the possible failure to realize certain anticipated benefits of the merger, including with respect to future financial and operating results;
the development or continued existence of markets for TPB’s products;
the impact of the COVID-19 crisis on customers and suppliers;
TPB’s ability to expand addressable markets;
industry trends in the markets in which TPB competes, including the demand for non-combustible products;
the maintenance of TPB’s existing licenses and timing or likelihood of regulatory filings and approvals;
the commercialization and pricing of TPB’s products;
the implementation and growth of TPB’s business model and strategic plans for TPB’s business and products;
the scope of protection TPB is able to establish and maintain for intellectual property rights covering TPB’s products;
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TPB’s ability to enter into strategic arrangements with distributors, retailers and other partners and the potential benefits of such arrangements;
the availability of wholesale distribution and other opportunities to expand TPB’s distribution channels and the potential benefits of such opportunities;
TPB’s successful integration of acquired businesses;
TPB’s estimates regarding expenses, capital requirements and needs for additional financing;
TPB’s financial performance; and
developments relating to TPB’s competitors and its industries.
Actual results and the timing of events could differ materially from those anticipated in such forward-looking statements as a result of these risks and uncertainties. Except as required by applicable law, SDI undertakes no obligation to revise or update any forward-looking statement, or to make any other forward-looking statements, whether as a result of new information, future events or otherwise.
For a discussion of the factors that may cause TPB’s actual results, performance or achievements to differ materially from any future results, performance or achievements expressed or implied in such forward-looking statements, or for a discussion of risk associated with the ability of TPB and SDI to complete the merger and the effect of the merger on the business of TPB, see the section titled Risk Factors,beginning on page 15.
Additional factors that could cause actual results to differ materially from those expressed in the forward-looking statements are discussed in reports filed with the SEC by TPB including the risk factors included in TPB’s most recent Annual Report on Form 10-K and Quarterly Reports on Form 10-Q filed with the SEC. See the section titled Where You Can Find More Informationbeginning on page 145.
If any of these risks or uncertainties materialize or any of these assumptions prove incorrect, the results of TPB could differ materially from the forward-looking statements. All forward-looking statements in this proxy statement/prospectus are current only as of the date on which the statements were made. SDI does not undertake any obligation to publicly update any forward-looking statement to reflect events or circumstances after the date on which any statement is made or to reflect the occurrence of unanticipated events.
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THE SPECIAL MEETING OF SDI’S STOCKHOLDERS
Date, Time and Virtual Place
The SDI special meeting will be held on July 9, 2020, commencing at 11:00 a.m. local time. In order to participate in the virtual meeting, such persons must access the meeting website www.virtualshareholdermeeting.com/SDI2020, and enter the 16-digit control number found on the proxy card provided to you with this proxy statement/prospectus. SDI is sending this proxy statement/prospectus to its stockholders in connection with the solicitation of proxies by the SDI Board for use at the SDI special meeting and any adjournments or postponements of the SDI special meeting. This proxy statement/prospectus is first being furnished to SDI’s stockholders on or about June 17, 2020.
Purpose of the SDI Special Meeting
The purpose of the SDI special meeting is:
1.
To approve the merger agreement, and the transactions contemplated thereby, including the merger, in accordance with the merger agreement.
2.
To approve, on an advisory basis, a resolution approving certain compensation that may be paid or become payable to named executive officers of SDI in connection with the merger;
3.
To consider and, if necessary, vote upon an adjournment of the SDI special meeting to solicit additional proxies if there are not sufficient votes in favor of Proposal No. 1.;
4.
To elect five directors of SDI to serve until SDI’s 2021 annual meeting of stockholders, and all until their respective successors are duly elected and qualified (provided that if Proposal No. 1 is approved and the merger is completed, SDI will be merged out of existence and will no longer have a board of directors, and there will be no SDI 2021 annual meeting of stockholders);
5.
To approve, on an advisory basis, a resolution regarding named executive officer compensation for 2019;
6.
To approve, on an advisory basis, a resolution regarding how frequently we will submit future advisory votes on executive officer compensation to our stockholders; and
7.
To transact such other business as may properly come before the SDI special meeting or any adjournment or postponement thereof.
Recommendations of the SDI Special Committee and the SDI Board
The SDI special committee has submitted its report and determination to the SDI Board and has unanimously (i) determined that the consummation of the merger and the other transactions contemplated by the merger agreement, on the terms and conditions substantially as set forth in the merger agreement, are advisable and are fair to, and in the best interests of, SDI and its stockholders, (ii) approved and declared advisable the merger and the other transactions contemplated by the merger agreement, (iii) approved the merger agreement and (iv) recommended that the SDI Board recommend the approval and adoption of the merger agreement by SDI’s stockholders.
The SDI Board has (i) determined that entry by SDI into the merger agreement, the merger and the other transactions contemplated by the merger agreement, are advisable and are fair to, and in the best interests of, SDI and its stockholders, (ii) approved and declared advisable the merger and the other transactions contemplated by the merger agreement, including the merger, and (iii) approved and authorized each of the transaction documents, including the merger agreement. The SDI Board recommends that SDI’s stockholders vote “FOR” Proposal No. 1 to approve the merger agreement and the transactions contemplated thereby.
The SDI Board has resolved that the SDI Board shall, if necessary, recommend the adjournment of the SDI special meeting to solicit additional proxies if there are not sufficient votes in favor of Proposal No. 1. The SDI Board recommends that, if necessary, SDI’s stockholders vote “FOR” Proposal No. 3 to adjourn the SDI special meeting, if necessary, to solicit additional proxies if there are not sufficient votes in favor of Proposal No. 1.
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Record Date and Voting Power
Only holders of record of SDI Common Stock at the close of business on the record date, June 2, 2020, are entitled to vote at, the SDI special meeting. There were approximately 229 holders of record of SDI Common Stock at the close of business on the record date. At the close of business on the record date, 16,583,307 shares of SDI Common Stock were issued and outstanding. On each matter to be voted upon, holders of SDI Class A Common Stock have one vote for each share of SDI Class A Common Stock you own as of the record date, and the holders of SDI Class B Common Stock have ten votes for each share of SDI Class B Common Stock owned as of the record date. See the section titled “Principal Stockholders of SDI” in this proxy statement/prospectus for information regarding persons known to SDI management to be the beneficial owners of more than 5% of the outstanding shares of SDI Common Stock.
Participating in the Virtual Meeting
Only stockholders who were holders of record of SDI Common Stock at the close of business on the record date, their duly appointed proxies, and invited guests may participate in the virtual meeting. In order to participate in the virtual meeting, such persons must access the meeting website at www.virtualshareholdermeeting.com/SDI2020, and enter the 16-digit control number found on the proxy card provided to you with this proxy statement/prospectus. Stockholders who attend the special meeting via live webcast will be able to participate, vote shares electronically and submit questions prior to and during the meeting.
Voting and Revocation of Proxies
The proxy accompanying this proxy statement/prospectus is solicited on behalf of the SDI Board for use at the SDI special meeting.
If you are a stockholder of record of SDI as of the record date referred to above, you may vote at the SDI special meeting or vote by proxy using the enclosed proxy card. Whether or not you plan to attend the SDI special meeting, SDI urges you to vote by proxy to ensure your vote is counted. You may still attend the SDI special meeting and vote if you have already voted by proxy. As a stockholder of record you may vote in any of the following ways:
to vote at the meeting, which will be held entirely online, registered holders and beneficial owners with shares held in street name (held in the name of a broker or other nominee) may vote online at the meeting by visiting Internet website: www.virtualshareholdermeeting.com/SDI2020, and entering the 16-digit control number included on the proxy card provided to you. Beneficial owners with shares held in street name must obtain a legal proxy from their broker or other nominee to vote online at the meeting;
to vote using the proxy card, simply mark, sign and date your proxy card and return it promptly in the postage-paid envelope provided. If you return your signed proxy card to SDI before the SDI special meeting, SDI will vote your shares as you direct on the proxy card; or
to vote by telephone or on the internet, dial the number on the proxy card or voting instruction form or visit the website on the proxy card or voting instruction form to complete an electronic proxy card. You will be asked to provide SDI’s number and control number from the enclosed proxy card. Your vote must be received by 11:59 p.m., Eastern time on July 8, 2020 to be counted.
If your shares of SDI Common Stock are held by your broker as your nominee, that is, in “street name,” the enclosed voting instruction card is sent by the institution that holds your shares. Please follow the instructions included on that proxy card regarding how to instruct your broker to vote your shares of SDI Common Stock. If you do not give instructions to your broker, your broker can vote your shares of SDI Common Stock with respect to “discretionary” items but not with respect to “non-discretionary” items. Discretionary items are proposals considered routine under certain rules applicable to brokers on which your broker may vote shares held in “street name” in the absence of your voting instructions. On non-discretionary items for which you do not give your broker instructions, your shares of SDI Common Stock will be treated as broker non-votes. It is anticipated that all proposals will be non-discretionary items.
All properly executed proxies that are not revoked will be voted at the SDI special meeting and at any adjournments or postponements of the SDI special meeting in accordance with the instructions contained in the proxy. If a holder of SDI Common Stock executes and returns a proxy and does not specify otherwise, the shares represented by that proxy will be voted “FOR” Proposal No. 1 to approve the merger agreement and the transactions contemplated
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thereby, including the merger; and “FOR” Proposal No. 2 to approve, if necessary, the adjournment of the SDI special meeting to solicit additional proxies if there are not sufficient votes in favor of Proposal No. 1 in accordance with the recommendation of the SDI Board.
SDI’s stockholders of record may change their vote at any time before their proxy is voted at the SDI special meeting in one of three ways. First, a stockholder of record of SDI can send a written notice to the Secretary of SDI stating that the stockholder would like to revoke its proxy. Second, a stockholder of record of SDI can submit new proxy instructions either on a new proxy card or by telephone or via the internet. Third, a stockholder of record of SDI can attend the SDI special meeting and vote virtually. Attendance alone will not revoke a proxy. If a stockholder of SDI of record or a stockholder who owns shares of SDI Common Stock in “street name” has instructed a broker to vote its shares of SDI Common Stock, the stockholder must follow directions received from its broker to change those instructions.
Required Vote
The presence, virtually or represented by proxy, at the SDI special meeting of the holders of a majority of the voting power of the outstanding shares of stock entitled to vote at the SDI special meeting is necessary to constitute a quorum at the meeting. Abstentions and broker non-votes will be counted towards a quorum.
The affirmative vote of holders of shares of SDI Common Stock representing at least a majority of the outstanding voting power of the SDI Common Stock, voting together as a single class, is required for approval of Proposal No. 1. The affirmative vote of the majority of the voting power of the shares of SDI Common Stock present virtually or represented by proxy and entitled to vote at the SDI special meeting, voting together as a single class, is required for approval of Proposals No. 2, 3 and 5. As to Proposal No. 4, the affirmative vote of the holders of a plurality of the shares of the SDI Common Stock present or represented by proxy at the meeting is required for the election of directors. Finally, as to Proposal No. 6, the option that receives the most votes cast by all stockholders will be deemed the frequency preferred by our stockholders for future advisory votes on executive compensation.
Votes will be counted by the inspector of election appointed for the SDI special meeting, who will separately count “FOR” and “AGAINST” votes, abstentions and broker non-votes, and in the case of the election of directors, “WITHHOLD” votes. Abstentions will be counted towards the vote total and will have the same effect as “AGAINST” votes for Proposal Nos. 1, 2, 3, and 5. Abstentions will have no effect of Proposal Nos. 4 and 6. For Proposal No. 1, broker non-votes will have the same effect as a vote “AGAINST” the proposal. Broker non-votes will have no effect on any of the other proposals, but will be used to determine whether a quorum is present at the SDI special meeting.
Solicitation of Proxies
In addition to solicitation by mail, the directors, officers, employees and agents of SDI may solicit proxies from SDI’s stockholders by personal interview, telephone, telegram or otherwise. SDI is responsible for their respective costs of printing and SDI is responsible for the cost of filing of this proxy statement/prospectus and the proxy card. SDI may also reimburse brokerage firms, banks and other agents for the cost of forwarding proxy materials to beneficial owners of SDI Common Stock. SDI has not retained a proxy solicitor with respect to the SDI special meeting.
Other Matters
As of the date of this proxy statement/prospectus, the SDI Board does not know of any business to be presented at the SDI special meeting other than as set forth in the notice accompanying this proxy statement/prospectus. If any other matters should properly come before the SDI special meeting, it is intended that the shares represented by proxies will be voted with respect to such matters in accordance with the judgment of the persons voting the proxies.
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THE MERGER
This section and the section titled “The Merger Agreement” in this proxy statement/prospectus describe the material aspects of the merger, including the merger agreement. While SDI believes that this description covers the material terms of the merger and the merger agreement, it may not contain all of the information that is important to you. You should read carefully this entire proxy statement/prospectus for a more complete understanding of the merger and the merger agreement, including the merger agreement attached as Annex A and the other documents to which you are referred herein. See the section titled “Where You Can Find More Information” in this proxy statement/prospectus.
Background of the Merger
The following chronology summarizes the key communications, meetings and events that led to the signing of the merger agreement. The following chronology does not purport to catalogue every conversation among our boards of directors, committees thereof or among the representatives of each company and other parties.
During the time periods covered by this section, the members of the SDI Board consisted of Messrs. Baxter, Estus, Glazek, Helms, Wurzer and Zimmerman. Mr. Wurzer was the sole member of the SDI special committee. During such time periods, the members of the TPB Board were Messrs. Glazek, Baxter and Zimmerman, as well as Lawrence S. Wexler, H.C. Charles Diao, Ashley Davis Frushone and Peggy H. Hebard. The members of the TPB special committee were Mmes. Frushone and Hebard.
All meetings described herein were held telephonically, unless otherwise noted.
Over the years, the SDI Board and management team engaged in periodic reviews of SDI’s long-term strategic plan with the goal of maximizing stockholder value. As part of this ongoing process, the SDI Board and management team have, from time to time, periodically evaluated potential strategic alternatives relating to SDI’s business and prospects. As part of this analysis, the SDI Board and management team considered such issues as, among other things, the risks, costs and uncertainty of remaining an independent public company, particularly given the limited operations of SDI other than its ownership of TPB Common Stock.
Beginning in March 2019 and continuing for the next several months, members of the SDI Board and management team continued this ongoing evaluation, focusing on a structure in which SDI would be merged with and into a wholly-owned subsidiary of TPB. In such a transaction, holders of SDI Common Stock would receive shares of TPB Common Stock.
In November 2019, the Board and management team of SDI initiated and then the parties engaged in preliminary and informal conversations with certain members of the Board and management team of TPB regarding a potential combination transaction involving SDI and TPB.
On or about November 8, 2019, SDI submitted to TPB a preliminary, non-binding summary of terms outlining the basic framework of the merger.
On November 15, 2019, the TPB Board determined that it was advisable to consider the potential transaction involving SDI and established a special committee, consisting of Ashley Davis Frushone and Peggy H. Hebard as independent and disinterested members of the TPB Board. In connection with its appointment, the TPB special committee was authorized, among other things, to consider, evaluate and discuss the proposed merger, as well as potential alternatives thereto, on behalf of TPB and its stockholders, to negotiate the proposed transaction and/or any such alternative transactions on behalf of TPB and its stockholders, to terminate or reject the proposed transaction and/or any such alternative transactions, or, if the TPB special committee ultimately deemed it appropriate and advisable, to make recommendations to the full TPB Board with respect to the proposed transaction, matters related thereto, and alternative transactions. The TPB Board also authorized the TPB special committee to engage its own counsel and financial advisors.
During a meeting held on November 18, 2019, at which SDI was advised by representatives of SDI’s existing counsel, Morgan, Lewis & Bockius LLP (which is referred to as Morgan Lewis), the SDI Board determined that it would be advisable and in the best interests of SDI and its stockholders to pursue a merger with TPB. As part of this meeting, the SDI Board discussed the advisability of the formation of a special committee of independent directors to consider the potential transaction and related matters, and to report back to the Board from time to time with information regarding the potential transaction as it is developed. The Board further discussed that such special committee would engage its own counsel and financial advisor.
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Also on November 18, 2019, SDI issued a press release disclosing its intent to pursue a merger with TPB. The press release indicated that the transaction would be a statutory merger implemented via Delaware law and designed to constitute a tax-free “downstream reorganization” for U.S. federal income tax purposes, in which SDI would be merged with and into a wholly-owned subsidiary, with holders of SDI Common Stock receiving in return such stock shares of the TPB Common Stock. The press release further indicated that the SDI Board intended to form a special committee of independent directors to engage in discussions with TPB. Finally, the press release disclosed that prior to the consummation of the proposed merger, SDI planned to divest all of its assets and liabilities other than its interest in TPB, including the disposition of SDI’s interest in Maidstone Insurance Company (“Maidstone”), through a disposition to the New York State Department of Financial Services, and a disposition of SDI’s out-of-home advertising business conducted through its subsidiary Standard Outdoor LLC.
TPB also issued a press release on November 18, 2019, disclosing that SDI intended to pursue a corporate reorganization with TPB. The press release indicated that the transaction was expected to consist of a statutory merger implemented via Delaware law, which would be designed to constitute a tax-free “downstream reorganization” for U.S. federal income tax purposes, pursuant to which SDI would be merged with a wholly-owned subsidiary of TPB with the wholly-owned subsidiary of TPB as the survivor of the merger. The press release also indicated that the TPB Board had formed a special committee of independent directors to engage in discussions with SDI.
Beginning on November 25, 2019, the TPB special committee, with the assistance of Lathrop GPM LLP (which is referred to as Lathrop), commenced a process of identifying and interviewing advisors to evaluate a potential transaction with SDI.
On December 12, 2019, following several interviews and discussions with potential financial advisors, the TPB special committee engaged Duff & Phelps, LLC (which is referred to as Duff & Phelps) to, among other things, assist in negotiating the potential transaction and advise the TPB special committee as to whether the exchange ratio of the potential transaction was fair from a financial point of view to the stockholders of TPB. Duff & Phelps was selected by the TPB special committee to act as its financial advisor based on, among other things, its experience advising special committees subject to Delaware law and its experience regarding similarly situated transactions.
On December 17, 2019, the SDI Board acted by unanimous written consent to appoint the special committee contemplated at the November 18, 2019 meeting. The SDI special committee, consisting of Mr. Wurzer as an independent and disinterested director, engaged as its counsel Young Conaway Stargatt & Taylor, LLP (which is referred to as Young Conaway). Pursuant to its charter, the SDI special committee was authorized to consider the proposed merger as well as potential alternatives thereto, to negotiate the proposed transaction and/or any such alternative transactions and, if the SDI special committee ultimately deemed it appropriate and advisable, to make recommendations to the full SDI Board with respect to the proposed merger and/or any such alternative transactions. Thereafter, assisted by its counsel, the SDI special committee commenced a process of identifying and interviewing potential financial advisors.
On January 22, 2020, Young Conaway, on behalf of the SDI special committee, sent to Lathrop, on behalf of the TPB special committee, a non-binding term sheet proposing a merger agreement in which, among other things, all of the equity interests in SDI be purchased by a merger sub of TPB in exchange for a number of shares of TPB Common Stock equal to the number of shares of TPB Common Stock owned by SDI. The January 22 term sheet contemplated, among other things, that indebtedness of SDI at the time of closing would be assumed by TPB, that SDI’s majority stockholder, Standard General, would execute at the signing of the merger agreement a support agreement in favor of the transaction, and that the transaction would be subject to customary closing conditions.
On January 27, 2020, the TPB special committee engaged the law firm of Blank Rome LLP (which is referred to as Blank Rome) to advise the TPB special committee on aspects of Delaware law applicable to the potential transaction with SDI.
Following interviews and discussions with several potential financial advisor candidates, the SDI special committee determined to engage Houlihan Lokey Capital, Inc. (which is referred to as Houlihan Lokey) to participate in negotiations between the SDI special committee and the TPB special committee regarding certain financial aspects of the merger and to be prepared to provide, if requested by the SDI special committee, a written opinion as to whether the consideration to be received by holders of SDI Common Stock (excluding Standard General and certain affiliates thereof) in the potential merger was fair from a financial point of view. The SDI special committee also considered the relationship disclosure provided by Houlihan Lokey to the SDI special committee. Thereafter, Houlihan Lokey commenced advising the SDI special committee. Houlihan Lokey was selected by the SDI special
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committee to act as its financial advisor based on, among other things, Houlihan Lokey’s concurrent representation of SDI on the Standard Outdoor LLC matter, its experience advising special committees subject to Delaware law, its experience representing companies in the consumer, food and retail space and its track record of issuing fairness opinions in complex transactions.
Over the next few weeks, the TPB special committee had several meetings with its counsel and financial advisor to discuss the January 22, 2020 term sheet, including without limitation, terms regarding the exchange ratio, the indebtedness of SDI that would be assumed by TPB at the time of closing and transaction expense reimbursement from SDI. Throughout the discussions, Duff & Phelps informed the TPB special committee of the terms of comparable publicly available transactions and analysis regarding potential counter proposals. Lathrop and Blank Rome advised the TPB special committee on the Delaware law and other legal aspects of a potential transaction.
Additionally, during this period Young Conaway and Lathrop/Blank Rome engaged in a number of conversations regarding the proposed terms set forth in the January 22 draft of the non-binding term sheet and other considerations related to SDI’s proposal. In addition, the TPB special committee, through its financial advisor Duff & Phelps, as well as Lathrop, made a number of due diligence requests to SDI, through the SDI special committee, and SDI provided various materials and data in response to these requests.
On February 6, 2020, as a result of these discussions, Young Conaway, on behalf of the SDI special committee, sent to Lathrop and Blank Rome, on behalf the TPB special committee, a revised non-binding term sheet in which the primary change was to provide that in addition to the approval of the stockholders of both TPB and SDI, the consummation of the transaction would be subject to the approval of the holders of the majority of outstanding shares of TPB Common Stock not beneficially owned by SDI or any officer of TPB (as defined under Section 16 of the Exchange Act) having voted in favor of the adoption of the merger agreement. Ultimately, though the parties and their respective counsel discussed this provision on several occasions, this proposed condition became inapplicable once the parties determined that the approval of TPB stockholders was not required for the consummation of the merger.
On February 10, 2020, Young Conaway, on behalf of the SDI special committee, sent to Lathrop, on behalf the TPB special committee, a draft of an agreement and plan of merger for the transaction, in the preparation of which Morgan Lewis had participated, that reflected the material terms and conditions of the January 22 non-binding term sheet.
On February 18, 2020, the TPB special committee met with its legal and financial advisors to discuss a number of matters, including without limitation the benefits to TPB of proceeding with a transaction and a proposed response to the SDI proposal set forth in the February 10 draft merger agreement. The TPB special committee concluded that there were significant benefits to be derived by TPB’s stockholders from the possible transaction and authorized Lathrop to communicate a proposed response to the SDI proposal.
On February 19, 2020, Lathrop, on behalf the TPB special committee, sent to Young Conaway, on behalf of the TPB special committee, comments and revisions to SDI’s draft non-binding term sheet. The revisions proposed a reduction in the total number of shares of TPB Common Stock that would be issued to the SDI stockholders in the merger to an aggregate amount equal to (i) the total number of shares of TPB Common Stock owned by SDI as of the effective time of the Merger, multiplied by 0.90, minus (ii) the number of shares of TPB Common Stock calculated by dividing the Net Liabilities (as defined) of SDI as of the closing date by the 30-day VWAP of TPB Common Stock as of the day before the closing date. The revisions to the term sheet proposed that “Net Liabilities” would be defined as the total SDI liabilities, net of the total SDI assets (other than the TPB Common Stock owned by SDI), as determined by GAAP, assumed by TPB in connection with the Merger. The revisions also proposed, among other things, that: SDI would divest, prior to the closing of the merger, all of the assets and liabilities of Maidstone as well as all of its outdoor operations; if the merger agreement were to be terminated as a result of SDI accepting a superior proposal (to be defined in the merger agreement), TPB would receive a market break-up fee; at or before closing, SDI would pay for TPB’s fees and expenses (including those of TPB’s special committee) incurred in connection with the merger, including financial and legal expenses; SDI would indemnify TPB for breaches of SDI’s representations and warranties in the merger agreement; and SDI would deposit into an escrow, for a period of one year, a portion of the shares of TPB Common Stock to be issued in the merger having a value of $15,000,000 (based on a 30-day VWAP) to fund SDI’s indemnification and expense reimbursement obligations.
Over the next several days, counsel and advisors to SDI and TPB continued to interact regarding aspects of the transaction, including, among other things, with respect to details of the intended tax treatment of the transaction. In addition, members of the SDI special committee and TPB special committee engaged in numerous conversations and discussions over this period.
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On February 28, 2020, Lathrop, on behalf the TPB special committee, sent to Young Conaway, on behalf of the SDI special committee, comments and revisions to the proposed draft of the merger agreement. These revisions included the material terms proposed by TPB in its February 19, 2020 comments to the draft term sheet.
Over the next several days, counsel and advisors to the SDI special committee and to the TPB special committee continued to interact regarding aspects of the transaction, focusing on the proposed changes to the terms of the transaction reflected in TPB’s February 28, 2020 revised draft of the merger agreement. In addition, members of the SDI special committee and TPB special committee engaged in numerous conversations and discussions over this period.
On March, 3, 2020, counsel and the financial advisors to the TPB special committee and to the SDI special committee met to discuss the terms of TPB’s February 28, 2020 revised draft of the merger agreement.
Also on March 3, 2020, at a meeting of the SDI Board, the SDI special committee updated the SDI Board with respect to the progress of the transaction, including the revisions to the proposed terms reflected in TPB’s February 28, 2020 revised draft of the merger agreement. The SDI special committee indicated its view, with which the SDI Board concurred, that the revisions proposed by TPB were not acceptable, and that the SDI special committee would be working with its advisors to develop the terms of a counterproposal to the TPB special committee. Counsel and advisors to the SDI special committee and TPB special committee continued to interact regarding various aspects of the transaction, specifically the revisions to the terms proposed by TPB.
The SDI Board met again on March 10, 2020 and received a further update from the SDI special committee. Later that day, Young Conaway, on behalf of the SDI special committee, sent to Lathrop, on behalf of the TPB special committee, a revised draft of the merger agreement. The revisions reflected, among other things, that: the total number of shares of TPB Common Stock that would be issued to the SDI stockholders in the merger would be equal to the total number of shares of TPB Common Stock owned by SDI at the effective time of the merger (i.e., an exchange ratio of 1:1 rather than the 0.90:1 ratio proposed by TPB); the provisions proposed by TPB for addressing net liabilities would be removed, and in replacement thereof, SDI would agree that it would have no net liabilities at the time of closing; the proposed $15,000,000 escrow and indemnification provisions would be deleted; and that SDI would cover up to $250,000 of TPB’s reasonable transaction fees and expenses.
Over the next ten days, counsel and advisors to the SDI special committee and TPB special committee continued to interact regarding aspects of the transaction, focusing on the proposed changes to the terms of the transaction reflected in the revised draft of the merger agreement sent to TPB on March 10, 2020. In addition, members of the SDI special committee and TPB special committee engaged in numerous conversations and discussions over this period. In addition, SDI continued to provide information to TPB in response to due diligence inquiries and requests. Representatives of Morgan Lewis also worked with SDI to draft disclosure schedules to the merger agreement.
Following a meeting between the two special committees, on March 20, the TPB special committee proposed to the SDI special committee a merger agreement with an exchange ratio of 0.925:1, a payment by SDI of $1 million in respect of TPB transaction expenses and an agreement that SDI would have liabilities of no more than $25,000 on its balance sheet at the time of closing. Discussions over the weekend continued between the special committees and their respective advisors. On March 21, 2020 the SDI special committee proposed a merger agreement with an exchange ratio of 0.97:1 and an agreement that SDI would have liabilities of no more than $100,000 on its balance sheet at the time of closing. After consultation with its advisors, on March 22, 2020 the TPB special committee proposed to the SDI special committee a merger agreement with an exchange ratio of 0.945:1 and an agreement that SDI would have liabilities of no more than $25,000 on its balance sheet at the time of closing. On March 23, 2020, the SDI special committee suggested revised potential terms including an exchange ratio of 0.97:1, a payment by SDI of $1 million in respect of TPB transaction expenses, and an agreement that SDI would have liabilities of no more than $25,000 on its balance sheet at the time of closing.
On March 24, 2020, at a meeting of the SDI Board, the SDI special committee updated the SDI Board with respect to the progress of the transaction, including the revisions to the proposed terms reflected in TPB’s February 28, 2020 revised draft of the merger agreement. The SDI special committee advised the SDI Board that the two committees had discussed the general outlines of a merger during the ensuing period and summarized the discussions through March 23, 2020. In response to the summary from the SDI special committee, members of the SDI board asked questions concerning why the terms being discussed by the two committees did not align more closely with the
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original 1:1 exchange ratio that had first been proposed by the SDI special committee to TPB’s special committee. Members of the SDI board also asked questions as to the reasons the TPB special committee had cited for supporting less than a 1:1 exchange ratio, and requested that the SDI special committee hold further discussions with the TPB special committee regarding this point.
On March 25, 2020, after further consultation with its financial advisor and counsel, the SDI special committee communicated to the TPB special committee that the originally proposed exchange ratio of 1:1 was one that reflected the best interests of SDI and its stockholders. Later that day, the TPB special committee met with its counsel and financial advisors to discuss the TPB special committee’s March 25, 2020 conversation with the SDI special committee. The TPB special committee and its counsel determined that the terms of a proposal based on a 1:1 exchange ratio would be unacceptable and should be rejected.
On March 26, 2020, the TPB and SDI special committees met. The TPB special committee indicated it was not prepared to accept a proposal based on a 1:1 exchange ratio, and the parties subsequently discussed alternative potential terms in which the exchange ratio would be 0.99:1, there would be a payment of up to $500,000 in respect of transaction expenses by SDI, and SDI’s balance sheet would not have liabilities exceeding $25,000 at the time of closing.
On March 27, 2020, the SDI Board held a meeting at which the SDI special committee relayed the alternative potential terms discussed on March 26, 2020. The SDI Board indicated to the SDI special committee that it would support a transaction incorporating these terms. Later that day, the SDI special committee informed the TPB special committee that SDI would be interested in pursuing a transaction on those terms.
Also on March 27, 2020, the TPB special committee met with its counsel and financial advisors to discuss the potential terms discussed among the SDI special committee and the TPB special committee on March 26, 2020. It was determined that a proposal based on such terms would not be acceptable to the TPB special committee.
On March 28, 2020, the TPB special committee informed the SDI special committee that TPB could not proceed on the terms discussed by the TPB special committee and the SDI special committee on March 26. Throughout the weekend of March 28 and 29, 2020, discussions took place among members of the TPB special committee and the SDI special committee, and their respective representatives, in consultation respectively with members of the full boards of each company.
On March 29, 2020, the SDI special committee discussed with the TPB special committee a merger agreement contemplating among other things, the following potential terms: a 0.97:1 exchange ratio for the total number of shares of TPB Common Stock that would be issued to the SDI stockholders in the merger in proportion to the total number of shares of TPB Common Stock owned by SDI as of the effective time of the Merger, SDI retaining approximately $1,000,000 of net cash on its balance sheet at closing, no termination fee payable to SDI should TPB terminate the merger agreement to pursue an alternative transaction, and the SDI termination fee would be 2% of the equity value of SDI. Later on March 29, the SDI Board held a meeting at which the SDI special committee relayed the terms discussed with the TPB special committee earlier in the day. The SDI Board indicated to the SDI special committee that it could support a transaction consistent with these terms subject to satisfactory negotiation of definitive documents and continued discussions between the SDI special committee and its advisors.
Later on March 29, 2020, at a meeting of the TPB Board, the TPB special committee updated the TPB Board with respect to the progress of the transaction, which included a report on the revised terms the SDI special committee communicated to the TPB special committee earlier that day. The TPB special committee noted that they still needed to negotiate the terms of a definitive agreement and receive a financial analysis from its financial adviser before the TPB special committee would be in a position to recommend a transaction to the full TPB Board. Over the next several days, Young Conaway and Lathrop discussed the terms of the merger agreement.
On March 30, 2020, the TPB special committee held a meeting with its counsel and financial advisors. Duff & Phelps presented to the TPB special committee its preliminary financial analysis based on the current proposed exchange ratio in the merger agreement.
On April 2, 2020, representatives of Houlihan Lokey and Duff & Phelps met to further discuss proposed terms of the merger.
Over the next several days, Young Conaway, on behalf of the SDI special committee and Lathrop, on behalf of the TPB special committee, exchanged revised drafts of the merger agreement, focusing primarily on the exchange ratio
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and net cash and liabilities at SDI, and moving away from an expense reimbursement provision. Morgan Lewis also provided to Lathrop a draft of the disclosure schedules for the merger agreement and representatives of Morgan Lewis, Young Conaway and Lathrop worked to resolve remaining open items in the merger agreement and disclosure schedules.
On April 7, 2020, the SDI special committee held a meeting for the purpose of considering the proposed merger. The meeting was attended by the SDI special committee’s advisors, Houlihan Lokey and Young Conaway. Houlihan Lokey representatives reviewed with the SDI special committee Houlihan Lokey’s financial analysis summarized below under “—Opinion of the Financial Advisor to the SDI Special Committee” and rendered to the SDI special committee Houlihan Lokey’s oral opinion (which was subsequently confirmed by delivery of a written opinion, dated April 7, 2020, addressed to the SDI special committee) that, subject to the assumptions, limitations, qualifications and other matters stated in its written opinion, as of the date of the opinion, the per share merger consideration provided for in the merger pursuant to the merger agreement was fair, from a financial point of view, to the holders of SDI Common Stock other than Standard General and/or its affiliates and portfolio group and their respective officers and directors (which is referred to as the Unaffiliated Stockholders). For a detailed discussion of Houlihan Lokey’s opinion, please see “—Opinion of the Financial Advisor to the SDI Special Committee” beginning on page 48. Young Conaway provided the SDI special committee with a summary of the key terms of the merger agreement. The SDI special committee thereafter determined that all material open issues had been resolved in a manner satisfactory to the SDI special committee and in the best interests of the stockholders of SDI. The SDI special committee unanimously (i) determined that the merger agreement and the transactions contemplated thereby (including the merger) are advisable and fair to, and in the best interests of, SDI and SDI’s stockholders, (ii) approved and declared advisable the merger agreement and the transactions contemplated thereby (including the merger), (iii) resolved to recommend that the SDI Board approve and declare advisable the merger agreement and the transactions contemplated thereby (including the merger) and submit the merger agreement to the stockholders of SDI for adoption and (iv) approved the merger agreement, and the transactions contemplated thereby (including the merger) for purposes of Section 203 of the DGCL.
Also on April 7, 2020, the TPB special committee held a meeting with Lathrop, Blank Rome and Duff & Phelps for the purpose of considering the proposed merger. Duff & Phelps reviewed with the TPB special committee Duff & Phelps' financial analysis summarized below under “—Opinion of the Financial Advisor to the TPB Special Committee” and rendered to the TPB special committee Duff & Phelps’s oral opinion (which was subsequently confirmed by delivery of a written opinion, dated April 7, 2020, addressed to the TPB special committee) that, subject to certain assumptions, limitations and qualifications, the exchange ratio in the merger was fair from a financial point of view to the holders of TPB Common Stock. For a detailed discussion of Duff & Phelps’ opinion, please see“—Opinion of the Financial Advisor to the TPB Special Committee” beginning on page 53. Lathrop reviewed with the TPB special committee a variety of matters, including the material terms of the merger agreement, the reasons for entering into the merger and the risks of the merger discussed previously by the TPB special committee. At the conclusion of the discussions, the TPB special committee, based on all relevant factors, unanimously (i) determined that the merger agreement and the transactions contemplated thereby are fair, advisable, and in the best interests of the TPB stockholders, (ii) approved the merger agreement and the transactions contemplated thereby and (iii) resolved to recommend that the TPB Board adopt, approve and declare advisable the merger agreement and the transactions contemplated thereby.
Later that afternoon, following the close of NYSE American, the SDI Board, based on the recommendation of the SDI special committee, by unanimous vote, (i) determined that the merger agreement and the transactions contemplated thereby (including the merger) are advisable and fair to, and in the best interests of, SDI and SDI’s stockholders, (ii) approved and declared advisable the merger agreement and the transactions contemplated thereby (including the merger), (iii) directed that the merger agreement be submitted to the stockholders of SDI for adoption, (iv) resolved to recommend that the stockholders of SDI approve the adoption of the merger agreement and (v) approved the merger agreement, and the transactions contemplated thereby (including the merger) for purposes of Section 203 of the DGCL.
That evening, at a meeting of the TPB Board, after considering all factors, including the terms of the merger agreement, the financial analysis of Duff & Phelps and the TPB special committee’s unanimous recommendation, the TPB Board (i) determined that the merger agreement and the transactions contemplated thereby are fair, advisable, and in the best interests of TPB and its stockholders and (ii) approved the merger agreement and the transactions contemplated thereby (including the merger).
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Shortly thereafter, SDI and TPB executed the merger agreement.
On April 8, 2020, before the markets opened, SDI and TPB announced that they had entered into the merger agreement.
SDI Reasons for the Merger
In the course of reaching its decision to approve the merger, the SDI Board consulted with SDI’s senior management, financial and tax advisors and legal counsel, reviewed a significant amount of information and considered a number of factors, including, among others:
the in-depth knowledge of and familiarity with the business, operations, financial condition and prospects of TPB, SDI’s primary asset, that was developed by SDI as a significant stockholder of TPB, and the belief that TPB Common Stock represents an attractive long term investment opportunity;
the potential to provide its current stockholders with greater liquidity by owning stock in a public company, provided, however, there can be no certainty on the timing or amount of any liquidity;
the expectation that the merger with TPB would be a time- and cost-effective means to access liquidity for its stockholders;
the SDI Board’s belief that no alternatives to the merger were reasonably likely to create greater value for SDI’s stockholders;
the expectation that the merger will eliminate the discount in the trading price of SDI shares and TPB assets in a “sum of the parts” valuation;
the belief that (i) the merger is more favorable to SDI stockholders than the potential value that would result from SDI continuing as a stand-alone company, (ii) it was unlikely that an alternative transaction with TPB or any other counterparty would provide superior value to the SDI stockholders and (iii) the terms of the merger agreement would not preclude or deter a willing and financially capable third party, were one to exist, from making a superior proposal with respect to SDI following the announcement of the merger agreement;
the terms and conditions of the merger agreement, including, without limitation, the following:
the determination that the expected relative percentage ownership of TPB’s stockholders and SDI’s stockholders in the combined organization was appropriate based, in the judgment of the SDI Board, on the SDI Board’s assessment of the approximate valuations of TPB and SDI;
the expectation that the merger will be treated as a reorganization for U.S. federal income tax purposes;
the limited number and nature of the conditions of the obligation of TPB to consummate the merger; and
the belief that the other terms of the merger agreement, including the parties’ representations, warranties and covenants, and the conditions to their respective obligations, were reasonable in light of the entire transaction;
the shares of TPB Common Stock issued to SDI’s stockholders will be registered on a Form S-4 registration statement and will become freely tradable for SDI’s stockholders who are not affiliates of SDI;
the merger may enable certain stockholders of SDI to increase the value of their current shareholding; and
the likelihood that the merger will be consummated on a timely basis.
The SDI Board also considered a number of uncertainties and risks in its deliberations concerning the merger and the other transactions contemplated by the merger agreement, including the following:
the possibility that the merger might not be consummated in a timely manner or at all and the potential adverse effect of the public announcement of the merger on the reputation of SDI and the ability of SDI to obtain financing in the future in the event the merger is not completed;
the expenses to be incurred in connection with the merger and related administrative challenges associated with combining the companies;
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the fact that the representations and warranties of SDI in the merger agreement do not survive the closing of the merger and the potential risk of liabilities that may arise post-closing; and
various other risks associated with the combined organization and the merger, including the risks described in the section titled “Risk Factors” in this proxy statement/prospectus.
Opinion of the Financial Advisor to the SDI Special Committee
On April 7, 2020, Houlihan Lokey verbally rendered its opinion to the special committee (which was subsequently confirmed in writing by delivery of Houlihan Lokey’s written opinion addressed to the special committee dated April 7, 2020), as to the fairness, from a financial point of view, to the Unaffiliated Stockholders, of the Stock Merger Consideration provided for in the merger pursuant to the merger agreement.
Houlihan Lokey’s opinion was directed to the SDI special committee (in its capacity as such) and only addressed the fairness, from a financial point of view, to the Unaffiliated Stockholders, of the Stock Merger Consideration provided for in the merger pursuant to the merger agreement and did not address any other aspect or implication of the merger or any other agreement, arrangement or understanding. The summary of Houlihan Lokey’s opinion in this proxy statement/prospectus is qualified in its entirety by reference to the full text of its written opinion, which is attached as Annex B to this proxy statement/prospectus and describes the procedures followed, assumptions made, qualifications and limitations on the review undertaken and other matters considered by Houlihan Lokey in connection with the preparation of its opinion. However, neither Houlihan Lokey’s opinion nor the summary of its opinion and the related analyses set forth in this proxy statement/prospectus are intended to be, and do not constitute, advice or a recommendation to the SDI special committee, the SDI Board, any security holder of SDI or any other person as to how to act or vote with respect to any matter relating to the merger.
In arriving at its opinion, Houlihan Lokey, among other things:
1.
reviewed the following agreements and documents:
a.
Draft, dated April 7, 2020, of the merger agreement;
2.
reviewed certain publicly available business and financial information relating to SDI and TPB that Houlihan Lokey deemed to be relevant;
3.
reviewed certain information relating to the current and future operations, financial condition and prospects of SDI made available to Houlihan Lokey by SDI, including (a) the number of shares of TPB Common Stock anticipated to be received by SDI on a pro forma basis in connection with the divestiture of Standard Outdoor, LLC, a subsidiary of SDI, and (b) financial projections prepared by the management of SDI relating to annual public company costs and other corporate expenses expected to be incurred by SDI each year absent the transaction, all as prepared by the management of SDI (which we refer to as the Company Projections);
4.
spoke with certain members of the managements of SDI and TPB and certain of their and the special committee’s representatives and advisors regarding the respective businesses, operations, financial condition and prospects of SDI and TPB, the merger and related matters;
5.
reviewed the current and historical market prices and trading volume for certain of SDI’s and TPB’s publicly traded securities, and the current and historical market prices of the publicly traded securities of certain other companies that Houlihan Lokey deemed relevant; and
6.
conducted other financial studies, analyses and inquiries and considered such other information and factors as Houlihan Lokey deemed appropriate.
Houlihan Lokey relied upon and assumed, without independent verification, the accuracy and completeness of all data, material and other information furnished, or otherwise made available, to it, discussed with or reviewed by it, or publicly available, and does not assume any responsibility with respect to such data, material and other information. In addition, management of SDI advised Houlihan Lokey, and Houlihan Lokey assumed, that the Company Projections reviewed by Houlihan Lokey were reasonably prepared in good faith on bases reflecting the best currently available estimates and judgments of such management as to the matters covered thereby, and Houlihan Lokey expressed no opinion with respect to such projections or the assumptions on which they are based. Furthermore, upon the advice of the managements of SDI and TPB, Houlihan Lokey relied upon and assumed,
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without independent verification, that there had been no change in the business, assets, liabilities, financial condition, results of operations, cash flows or prospects of SDI or TPB since the respective dates of the most recent financial statements and other information, financial or otherwise, provided to Houlihan Lokey that would be material to its analyses or opinion, and that there was no information or any facts that would make any of the information reviewed by Houlihan Lokey incomplete or misleading. Houlihan Lokey noted in its opinion that the management of TPB does not prepare financial projections in the ordinary course and had not prepared financial projections in connection with the merger other than a budget for calendar year 2020, which, according to the management of TPB, is consistent with public guidance provided. At the direction of the management of SDI, Houlihan Lokey relied upon TPB’s stock price as an appropriate basis on which to evaluate TPB.
Houlihan Lokey relied upon and assumed, without independent verification, that (a) the representations and warranties of all parties to the merger agreement and all other related documents and instruments that are referred to therein were true and correct, (b) each party to the merger agreement and such other related documents and instruments would fully and timely perform all of the covenants and agreements required to be performed by such party, (c) all conditions to the consummation of the merger would be satisfied without waiver thereof, and (d) the merger would be consummated in a timely manner in accordance with the terms described in the merger agreement and such other related documents and instruments, without any amendments or modifications thereto. Houlihan Lokey also assumed, with the consent of the special committee, that the merger would qualify as a tax-free transaction.
Houlihan Lokey relied upon and assumed, without independent verification, that (a) the merger would be consummated in a manner that complies in all respects with all applicable federal and state statutes, rules and regulations, and (b) all governmental, regulatory, and other consents and approvals necessary for the consummation of the merger would be obtained and that no delay, limitations, restrictions or conditions would be imposed or amendments, modifications or waivers made that would result in the disposition of any assets of SDI or TPB or otherwise have an effect on the merger, or SDI or TPB or any expected benefits of the merger that would be material to Houlihan Lokey’s analyses or opinion. In addition, Houlihan Lokey relied upon and assumed, without independent verification, that the final form of the merger agreement would not differ in any respect from the draft of the merger agreement identified above. In addition, the management of SDI directed Houlihan Lokey to assume that 1.2 million shares of TPB Common Stock would be sold by SDI prior to the consummation of the merger in order to settle certain liabilities of SDI (which transaction we refer to as the Debt Settlement Transaction).
Furthermore, in connection with its opinion, Houlihan Lokey was not requested to make, and did not make, any independent appraisal or evaluation of any of the assets, properties or liabilities (fixed, contingent, derivative, off-balance-sheet or otherwise) of SDI, TPB or any other party, nor was Houlihan Lokey provided with any such appraisal or evaluation. Houlihan Lokey expressed no opinion or view as to any aspect of SDI’s decision to engage in the Debt Settlement Transaction or the terms of the Debt Settlement Transaction. Houlihan Lokey did not estimate, and expressed no opinion regarding, the liquidation value of any entity or business.
Houlihan Lokey did not undertake an independent analysis of any potential or actual litigation, regulatory action, possible unasserted claims or other contingent liabilities, to which SDI or TPB was or may have been a party or was or may have been subject, or of any governmental investigation of any possible unasserted claims or other contingent liabilities to which SDI or TPB was or may have been a party or was or may have been subject.
Furthermore, Houlihan Lokey expressed no opinion or view as to the effects on the merger, SDI or TPB of the unusual volatility recently experienced, as of the date of Houlihan Lokey’s opinion, by the credit, financial and stock markets or any potential changes or developments in such markets or volatility. In addition, Houlihan Lokey noted in its opinion that there was significant uncertainty as to the potential direct and indirect business, financial, economic and market implications and consequences of the spread of the coronavirus and associated illnesses and the actions and measures that countries, central banks, international financing and funding organizations, stock markets, businesses and individuals may take to address the spread of the coronavirus and associated illnesses including, without limitation, those actions and measures pertaining to fiscal or monetary policies, legal and regulatory matters and the credit, financial and stock markets (which effects we collectively refer to as the Pandemic Effects), and Houlihan Lokey expressed no opinion or view as to the potential effects of the Pandemic Effects on Houlihan Lokey’s analysis, its opinion, the transaction, SDI or TPB. Houlihan Lokey was not requested to, and did not, (a) initiate any discussions with, or solicit any indications of interest from, third parties with respect to the merger, the securities, assets, business or operations of SDI or any other party, or any alternatives to the merger or (b) advise the SDI special committee, the SDI Board or any other party with respect to alternatives to the merger.
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Houlihan Lokey’s opinion was necessarily based on financial, economic, market and other conditions as in effect on, and the information made available to Houlihan Lokey as of, the date of its opinion. Houlihan Lokey did not undertake, and is under no obligation, to update, revise, reaffirm or withdraw its opinion, or otherwise comment on or consider events occurring or coming to its attention after the date of its opinion. Houlihan Lokey did not express any opinion as to what the value of the SDI Common Stock or the TPB Common Stock actually would be when exchanged or issued, respectively, pursuant to the merger or the price or range of prices at which the SDI Common Stock or the TPB Common Stock may be purchased or sold, or otherwise be transferable, at any time. Houlihan Lokey assumed that the TPB Common Stock to be issued in the merger to the Unaffiliated Stockholders would be listed on the New York Stock Exchange.
Houlihan Lokey’s opinion was furnished for the use of the SDI special committee (in its capacity as such) in connection with its evaluation of the merger and may not be used for any other purpose without Houlihan Lokey’s prior written consent. Houlihan Lokey acknowledged that, in connection with its consideration of the merger, the SDI Board reviewed and considered Houlihan’s opinion provided to the SDI special committee. Houlihan Lokey’s opinion was not intended to be, and does not constitute, a recommendation to the SDI special committee, the SDI Board, any security holder or any other party as to how to act or vote with respect to any matter relating to the merger or otherwise.
Houlihan Lokey was not requested to opine as to, and its opinion does not express an opinion as to or otherwise address, among other things: (a) the underlying business decision of the SDI special committee, the SDI Board, SDI, its security holders or any other party to proceed with or effect the merger (or any related transactions), (b) the terms of any arrangements, understandings, agreements or documents related to, or the form, structure or any other portion or aspect of, the merger or otherwise (other than the Stock Merger Consideration to the extent expressly specified in Houlihan Lokey’s opinion), (c) the fairness of any portion or aspect of the merger to the holders of any class of securities, creditors or other constituencies of SDI, or to any other party, except if and only to the extent expressly set forth in Houlihan Lokey’s opinion, (d) the relative merits of the merger as compared to any alternative business strategies or transactions that might be available for SDI or any other party, (e) the fairness of any portion or aspect of the merger to any one class or group of SDI’s or any other party’s security holders or other constituents vis-à-vis any other class or group of SDI’s or such other party’s security holders or other constituents (including, without limitation, the allocation of any consideration amongst or within such classes or groups of security holders or other constituents), (f) whether or not SDI, its security holders or any other party is receiving or paying reasonably equivalent value in the merger, (g) the solvency, creditworthiness or fair value of SDI, TPB or any other participant in the merger, or any of their respective assets, under any applicable laws relating to bankruptcy, insolvency, fraudulent conveyance or similar matters, or (h) the fairness, financial or otherwise, of the amount, nature or any other aspect of any compensation to or consideration payable to or received by any officers, directors or employees of any party to the merger, any class of such persons or any other party, relative to the Stock Merger Consideration or otherwise.
Furthermore, Houlihan Lokey did not express any opinion, counsel or interpretation in matters that require legal, regulatory, accounting, insurance, tax or other similar professional advice. Houlihan Lokey assumed that such opinions, counsel or interpretations had been or would be obtained from the appropriate professional sources. Furthermore, Houlihan Lokey relied, with the consent of the SDI special committee, on the assessments by the SDI special committee, the SDI Board, SDI and their respective advisors, as to all legal, regulatory, accounting, insurance, tax and other similar matters with respect to SDI and the merger or otherwise.
In performing its analyses, Houlihan Lokey considered general business, economic, industry and market conditions, financial and otherwise, and other matters as they existed on, and could be evaluated as of, the date of its opinion. No company, transaction or business used in Houlihan Lokey’s analyses for comparative purposes is identical to SDI or the proposed merger and an evaluation of the results of those analyses is not entirely mathematical. As a consequence, mathematical derivations (such as the high, low, mean and median) of financial data are not by themselves meaningful and in selecting the ranges of multiples to be applied were considered in conjunction with experience and the exercise of judgment. The estimates contained in the financial forecasts prepared by the management of SDI and the implied reference range values indicated by Houlihan Lokey’s analyses are not necessarily indicative of actual values or predictive of future results or values, which may be significantly more or less favorable than those suggested by the analyses. In addition, any analyses relating to the value of assets,
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businesses or securities do not purport to be appraisals or to reflect the prices at which businesses or securities actually may be sold, which may depend on a variety of factors, many of which are beyond the control of SDI. Much of the information used in, and accordingly the results of, Houlihan Lokey’s analyses are inherently subject to substantial uncertainty.
Houlihan Lokey’s opinion was only one of many factors considered by the SDI special committee in evaluating the proposed transaction. Neither Houlihan Lokey’s opinion nor its analyses were determinative of the Stock Merger Consideration or of the views of the SDI special committee or management with respect to the merger or the Stock Merger Consideration. Under the terms of its engagement by SDI, neither Houlihan Lokey’s opinion nor any other advice or services rendered by it in connection with the proposed merger or otherwise, should be construed as creating, and Houlihan Lokey should not be deemed to have, any fiduciary duty to, or agency relationships with, the SDI Board, SDI, TPB, any security holder or creditor of SDI or TPB or any other person, regardless of any prior or ongoing advice or relationships. The type and amount of consideration payable in the merger were determined through negotiation between SDI and TPB, and the decision to enter into the merger agreement was solely that of the SDI special committee.
Financial Analyses
In preparing its opinion to the SDI special committee, Houlihan Lokey performed a variety of analyses, including those described below. The summary of Houlihan Lokey’s analyses is not a complete description of the analyses underlying Houlihan Lokey’s opinion. The preparation of such an opinion is a complex process involving various quantitative and qualitative judgments and determinations with respect to the financial, comparative and other analytical methods employed and the adaptation and application of these methods to the unique facts and circumstances presented. As a consequence, neither Houlihan Lokey’s opinion nor its underlying analyses is readily susceptible to summary description. Houlihan Lokey arrived at its opinion based on the results of all analyses undertaken by it and assessed as a whole and did not draw, in isolation, conclusions from or with regard to any individual analysis, methodology or factor. While the results of each analysis were taken into account in reaching Houlihan Lokey’s overall conclusion with respect to fairness, Houlihan Lokey did not make separate or quantifiable judgments regarding individual analyses. Accordingly, Houlihan Lokey believes that its analyses and the following summary must be considered as a whole and that selecting portions of its analyses, methodologies and factors, without considering all analyses, methodologies and factors, could create a misleading or incomplete view of the processes underlying Houlihan Lokey’s analyses and opinion.
The following is a summary of the material financial analyses performed by Houlihan Lokey in connection with the preparation of its opinion and reviewed with the special committee on April 7, 2020. The order of the analyses does not represent relative importance or weight given to those analyses by Houlihan Lokey. The analyses summarized below include information presented in tabular format. The tables alone do not constitute a complete description of the analyses. Considering the data in the tables below without considering the full narrative description of the analyses, as well as the methodologies underlying, and the assumptions, qualifications and limitations affecting, each analysis, could create a misleading or incomplete view of Houlihan Lokey’s analyses.
For purposes of its analyses, Houlihan Lokey reviewed a number of financial and operating metrics, including:
VWAR— the ratio between share prices of SDI and TPB, computed as the volume-weighted average price for the SDI Common Stock over the volume-weighted average price for the TPB Common Stock for a particular period.
VWAP— the volume-weighted average price for the applicable security for a particular period.
Estimated standalone operating expense figures for SDI were based on estimates prepared and provided to Houlihan Lokey by SDI’s management. Equity value and shares outstanding or held by SDI were based on publicly available information and information provided by the management of SDI.
Adjusted Net Asset Value Analysis
Houlihan Lokey performed an adjusted net asset value analysis of SDI on a standalone basis in order to calculate an implied adjusted net asset value per share reference range (on a standalone basis).
As part of the adjusted net asset value analysis of SDI the implied market value of the TPB Common Stock held by SDI was calculated by multiplying the percent ownership of SDI in TPB (based on the total diluted number of shares
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of TPB Common Stock outstanding prior to the merger) of 50.7% by the TPB diluted market capitalization, which was calculated by multiplying the total diluted number of shares of TPB Common Stock outstanding prior to the merger (approximately 19.7 million shares of TPB Common Stock) by the five-day VWAP for the TPB Common Stock as of April 3, 2020 of $20.87, per publicly available sources.
SDI’s net liabilities as provided by the management of SDI, were subtracted from the implied market value of TPB Common Stock held by SDI to calculate the implied SDI base net asset value as of April 3, 2020 on a standalone basis. Houlihan Lokey subtracted from the base net asset value as of April 3, 2020 a range of the estimated standalone operating expenses of SDI of $6.3 million to $30 million, based upon the midpoint of selected discount rate range equal to 10.5%, to calculate the implied adjusted net asset value reference range, which was divided by 16.6 million shares of SDI Common Stock outstanding as of April 3, 2020 to calculate the per share reference range (on a standalone basis) of $9.59 per share to $11.01 per share.
In order to derive the adjusted per share merger consideration, Houlihan Lokey subtracted the number of shares of TPB Common Stock that it was directed by the management of SDI to assume would be sold by SDI prior to the closing of the merger to settle SDI’s net liability balance as of March 31, 2020 and certain transaction expenses, as provided by the management of SDI, from the number of shares of TPB common stock held by SDI. To calculate the pro forma number of shares of TPB Common Stock held by SDI’s stockholders following the merger, Houlihan Lokey multiplied the net number of shares of TPB Common Stock held by SDI by the ratio of the number of shares of TPB Common Stock to be received by SDI in connection with the merger per the merger agreement. The pro forma shares of TPB Common Stock held by SDI following the merger was then divided by the total pro forma diluted number of shares of TPB Common Stock outstanding to calculate SDI’s pro forma diluted ownership of TPB of 43.8%. Houlihan Lokey multiplied SDI’s pro forma diluted ownership of TPB by the diluted market capitalization of TPB based on the five-day VWAP of TPB’s Common Stock as of April 3, 2020 of $20.87 to calculate the implied adjusted pro forma net asset value, which was divided by 16.6 million diluted shares of SDI Common Stock outstanding as of April 3, 2020 to calculate the adjusted per share merger consideration equal to $10.80 per share.
Selected Implied Merger Premium Information
Houlihan Lokey also calculated select premiums or discounts indicated by the pro forma shares of TPB Common Stock held by SDI following the merger divided by the number of shares of SDI Common Stock immediately prior to the merger (to arrive at the illustrative aggregate merger exchange ratio of 0.511), as compared to the VWARs for SDI Common Stock relative to the TPB Common Stock. Houlihan Lokey reviewed the publicly available VWARs for the SDI Common Stock relative to the TPB Common Stock as of April 3, 2020, as set forth in the table below. Houlihan Lokey then calculated the implied premium or discount in the merger over the selected VWAR, as applicable, as of April 3, 2020, which reflected the premium or discount of the illustrative aggregate merger exchange ratio of 0.511 divided by the selected VWAR, as applicable, as of April 3, 2020, as set forth in the table below.
Houlihan Lokey reviewed the publicly available VWARs for the SDI Common Stock relative to the TPB Common Stock as of November 15, 2019, the last trading day prior to SDI’s first announcement on November 18, 2019 of pursuit of a TPB reorganization transaction and the intent to dispose of Standard Outdoor LLC. In addition, Houlihan Lokey calculated the implied premium or discount in the merger over the selected VWAR, as applicable, as of November 15, 2019, which reflected the premium or discount of the illustrative aggregate merger exchange ratio of 0.511 divided by the selected VWAR, as applicable, as of November 15, 2019, as set forth in the table below.
The resulting data were as follows:
 
VWAR On the
Selected Date
5-Day
VWAR
10-Day
VWAR
20-Day
VWAR
30-Day
VWAR
Selected Market Trading Metric (As of April 3, 2020)
0.463x
0.500x
0.436x
0.462x
0.482x
Implied Premium (Discount) in Merger Over Selected Market Trading Metric (As of April 3, 2020)
10.3%
2.2%
17.2%
10.6%
5.9%
Selected Market Trading Metric - Unaffected (As of November 15, 2019)
0.411x
0.417x
0.432x
0.476x
0.483x
Implied Premium (Discount) in Merger Over Selected Unaffected Market Trading Metric (As of November 15, 2019)
24.2%
22.3%
18.2%
7.2%
5.7%
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Miscellaneous
Houlihan Lokey was engaged by the SDI special committee to participate in negotiations between the SDI special committee and TPB regarding certain financial aspects of the merger and to provide an opinion to the SDI special committee as to the fairness, from a financial point of view, to the Unaffiliated Stockholders, of the Stock Merger Consideration provided for in the merger pursuant to the merger agreement. SDI engaged Houlihan Lokey based on Houlihan Lokey’s experience and reputation. Houlihan Lokey is regularly engaged to provide financial advisory services in connection with mergers and acquisitions, financings, and financial restructurings. Pursuant to its engagement by the SDI special committee, Houlihan Lokey is entitled to an aggregate fee of $650,000 for its services, an initial portion of which became payable upon the execution of Houlihan Lokey’s engagement letter, a further portion of which became payable upon the delivery of Houlihan Lokey’s opinion and the balance of which is contingent upon the successful completion of the merger. SDI has also agreed to reimburse Houlihan Lokey for certain expenses and to indemnify Houlihan Lokey, its affiliates and certain related parties against certain liabilities and expenses, including certain liabilities under the federal securities laws, arising out of or related to Houlihan Lokey’s engagement.
In the ordinary course of business, certain of Houlihan Lokey’s employees and affiliates, as well as investment funds in which they may have financial interests or with which they may co-invest, may acquire, hold or sell, long or short positions, or trade or otherwise effect transactions, in debt, equity, and other securities and financial instruments (including bank loans and other obligations) of, or investments in, SDI, TPB or any other party that may be involved in the merger and their respective affiliates or security holders or any currency or commodity that may be involved in the merger.
Houlihan Lokey also acted as financial advisor to the special committee in connection with a transaction involving SDI, Standard General and Standard Outdoor LLC (which transaction we refer to as the Standard Outdoor transaction) and has received and expects to receive fees for such services. Houlihan Lokey and certain of its affiliates have in the past provided and are currently providing investment banking, financial advisory and/or other financial or consulting services and other commercial and investment banking products and services to Standard General and/or its affiliates and portfolio group and their respective officers and directors (which we refer to as the SG Group), for which Houlihan Lokey and its affiliates have received, and may receive, compensation, including, among other things, (i) having acted as financial advisor to White Energy, Inc., a member of the SG Group, in connection with its sale of its food ingredient and ethanol businesses, which transaction closed in April 2019, (ii) having acted as financial advisor to Standard General in connection with a strategic transaction, which closed in June 2018, (iii) having acted as financial advisor to the special committee, of which SG Group is a member, of a company in connection with its evaluation of a potential transaction and (iv) currently providing certain valuation advisory services to Standard General for portfolio valuation purposes. Houlihan Lokey and certain of its affiliates may provide investment banking, financial advisory and/or other financial or consulting services to SDI, members of the SG Group, other participants in the merger or certain of their respective affiliates or security holders in the future, for which Houlihan Lokey and its affiliates may receive compensation. In addition, Houlihan Lokey and certain of its affiliates and certain of Houlihan Lokey’s and its affiliates’ respective employees may have committed to invest in private equity or other investment funds managed or advised by Standard General, other participants in the merger or certain of their respective affiliates or security holders, and in portfolio companies of such funds, and may have co-invested with members of the SG Group, other participants in the merger or certain of their respective affiliates or security holders, and may do so in the future. Furthermore, in connection with bankruptcies, restructurings, distressed situations and similar matters, Houlihan Lokey and certain of its affiliates may have in the past acted, may currently be acting and may in the future act as financial advisor to debtors, creditors, equity holders, trustees, agents and other interested parties (including, without limitation, formal and informal committees or groups of creditors) that may have included or represented and may include or represent, directly or indirectly, or may be or have been adverse to, SDI, members of the SG Group, other participants in the merger or certain of their respective affiliates or security holders, for which advice and services Houlihan Lokey and its affiliates have received and may receive compensation.
Opinion of the Financial Advisor to the TPB Special Committee
On December 12, 2019, Duff & Phelps was engaged to provide independent financial advisory services to the TPB special committee and, as part of the engagement, the TPB special committee requested that Duff & Phelps provide an opinion to the TPB special committee as to the fairness, from a financial point of view, to the stockholders of TPB of the Exchange Ratio in the merger.
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On April 7, 2020, Duff & Phelps rendered its oral opinion to the TPB special committee in connection with its consideration of the merger, which was subsequently confirmed in a written opinion dated April 7, 2020, to the effect that, subject to the limitations, exceptions, assumptions and qualifications set forth therein, as of such date, the Exchange Ratio in the merger was fair from a financial point of view to the stockholders of TPB. In this section of the proxy statement/prospectus, the term “Exchange Ratio” refers to (i) .97 multiplied by the number of shares of TPB Common Stock owned by SDI as of the effective time of the merger, divided by (ii) the number of shares of SDI Common Stock outstanding as of the effective time of the merger (excluding shares to be canceled pursuant to Section 1.5(a)(i) of the merger agreement) plus the number of shares of SDI Common Stock underlying all SDI restricted stock awards and restricted stock unit awards that will vest (and were not previously outstanding) in connection with the merger.
The full text of Duff & Phelps’ opinion is included as Annex C to this proxy statement/prospectus and describes the assumptions made, procedures followed, matters considered and limitations on the review undertaken by Duff & Phelps. The summary of Duff & Phelps’ opinion in this proxy statement is qualified in its entirety by reference to the full text of the opinion. The opinion was furnished for the use and benefit of the TPB special committee in connection with its consideration of the merger and may also be relied upon by the TPB Board, but is not intended to, and does not, confer any rights or remedies upon any other person, and is not intended to be used, and may not be used, for any other purpose without Duff & Phelps’ prior written consent, except to the extent specifically permitted by the opinion. Neither Duff & Phelps’ opinion nor the summary of its opinion and the related analyses set forth in this proxy statement/prospectus is intended to be or constitutes advice or a recommendation to the TPB special committee or the TPB Board with respect to the merger.
Duff & Phelps’ opinion (i) does not address the fairness of any aspect of the merger other than the Exchange Ratio, (ii) does not address the merits of the underlying business decision to enter into the merger versus any alternative strategy or transaction, (iii) does not address any transaction related to the merger, (iv) is not a recommendation as to how the TPB special committee or the TPB Board should vote or act with respect to any matters relating to the merger, or whether to proceed with the merger or any related transaction, and (v) does not indicate that the Exchange Ratio is the best possibly attainable under any circumstances. The decision as to whether to proceed with the merger or any related transaction may depend on an assessment of factors unrelated to the financial analysis on which Duff & Phelps’ opinion was based.
In connection with its opinion, Duff & Phelps made such reviews, analyses and inquiries as it deemed necessary and appropriate under the circumstances. Duff & Phelps also took into account its assessment of general economic, market and financial conditions, as well as its experience in securities and business valuation, in general, and with respect to similar transactions, in particular. Duff & Phelps’ procedures, investigations, and financial analysis with respect to the preparation of its opinion included, but were not limited to, the items summarized below:
reviewed the following documents:
TPB’s annual report and audited financial statements on Form 10-K filed with the Securities and Exchange Commission (“SEC”) for the year ended December 31, 2019;
SDI’s annual report and audited financial statements on Form 10-K filed with the SEC for the year ended December 31, 2019;
Other internally prepared financial data concerning SDI, including a balance sheet pro forma for the sale of SDI’s outdoor advertising business and wind-down of its insurance business, which SDI has identified as being the most current financial statements available;
The SDI Investor Presentation dated August 2019;
A draft of the Membership Interest Purchase Agreement related to the sale of SDI's outdoor advertising business dated February __, 2020; and
The April 7, 2020 draft of the merger agreement;
discussed the information referred to above and the background and other elements of the merger, TPB and SDI with the TPB special committee and its representatives;
reviewed the historical trading prices and trading volumes of the TPB Common Stock and SDI Common Stock;
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performed certain comparative analyses of selected downstream stock-for-stock merger transactions that Duff & Phelps deemed relevant; and
conducted such other analyses and considered such other factors as Duff & Phelps deemed appropriate.
In performing its analyses and rendering its opinion, Duff & Phelps, with TPB’s consent:
relied upon the accuracy, completeness, and fair presentation of all information, data, advice, opinions and representations obtained from public sources or provided to it from private sources, including TPB and its management and representatives, the TPB special committee and its representatives, and SDI and its representatives, and did not independently verify such information;
relied upon the fact that the TPB special committee and TPB have been advised by counsel as to all legal matters with respect to the merger, including whether all procedures required by law to be taken in connection with the merger have been duly, validly and timely taken;
assumed that information supplied and representations made by TPB management and SDI management are substantially accurate regarding TPB, SDI and the merger;
assumed that the representations and warranties made in the merger agreement are accurate in all material respects;
assumed that the final versions of all documents reviewed by Duff & Phelps in draft form conform in all material respects to the drafts reviewed;
assumed that there has been no material change in the assets, liabilities, financial condition, results of operations, stock price, business, or prospects of TPB or SDI since the date of the most recent financial statements and other information made available to Duff & Phelps, and that there is no information or facts that would make the information reviewed by Duff & Phelps incomplete or misleading;
assumed that all of the conditions required to implement the merger will be satisfied and that the merger will be completed in accordance with the merger agreement without any amendments thereto or any waivers of any terms or conditions thereof; and
assumed that all governmental, regulatory or other consents and approvals necessary for the consummation of the merger will be obtained without any adverse effect on TPB or the contemplated benefits expected to be derived in the merger.
In its analysis and in connection with the preparation of its opinion, Duff & Phelps made numerous assumptions with respect to industry performance, general business, market and economic conditions and other matters, many of which are beyond the control of any party involved in the merger. To the extent that any of the foregoing assumptions insofar as they affect the merger or any of the facts on which the Duff & Phelps opinion was based prove to be untrue in any material respect, Duff & Phelps has advised the TPB special committee that the Duff & Phelps opinion cannot and should not be relied upon.
Duff & Phelps prepared its opinion effective as of the date of such opinion. Duff & Phelps’ opinion was necessarily based upon market, economic, financial and other conditions as they existed and could be evaluated as of the date of the opinion, and Duff & Phelps disclaimed any undertaking or obligation to advise any person of any change in any fact or matter affecting its opinion which may come or be brought to the attention of Duff & Phelps after the date of the opinion.
Duff & Phelps’ opinion noted that the credit, financial and stock markets had been experiencing unusual volatility. In rendering its opinion, Duff & Phelps expressed no opinion or view as to any potential effects of such volatility on TPB, SDI or the merger.
Duff & Phelps did not make any independent evaluation of TPB’s or SDI’s solvency or conduct any independent appraisal or physical inspection of any specific assets or liabilities (contingent or otherwise), nor has Duff & Phelps been furnished with any such evaluations or appraisals. The opinion should not be construed as a valuation opinion, credit rating, solvency opinion, analyses of TPB’s or SDI’s credit worthiness, tax advice, or accounting advice. Duff & Phelps has not been requested to, and did not, (i) initiate any discussions with, or solicit any indications of interest from, third parties with respect to the merger, the assets, businesses or operations of TPB, or any alternatives to the
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merger, (ii) negotiate the terms of the merger, and therefore, Duff & Phelps has assumed that such terms are the most beneficial terms, from TPB’s perspective, that could, under the circumstances, be negotiated among the parties to the merger agreement and the merger, or (iii) advise the TPB special committee or any other party with respect to alternatives to the merger.
Duff & Phelps is not expressing any opinion as to the market price or value of the TPB Common Stock (or anything else) after the announcement or the consummation of the merger. Duff & Phelps has not made, and assumes no responsibility to make, any representation, or render any opinion, as to any legal matter.
In rendering its opinion, Duff & Phelps did not express any opinion with respect to the amount or nature of any compensation to any of TPB’s officers, directors, or employees, or any class of such persons, or with respect to the fairness of any such compensation.
Set forth below is a summary of the material financial analyses performed by Duff & Phelps in connection with providing its opinion to the TPB special committee. While this summary describes the analyses and factors that Duff & Phelps deemed material in its presentation to the TPB special committee, it is not a comprehensive description of all analyses and factors considered by Duff & Phelps. The preparation of a fairness opinion is a complex process that involves various determinations as to appropriate and relevant methods of financial analysis and the application of these methods to the particular circumstances. Therefore, neither its opinion nor Duff & Phelps’ underlying analysis is susceptible to partial analysis or summary description. In arriving at its opinion, Duff & Phelps did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. Accordingly, Duff & Phelps’ analyses must be considered as a whole and selecting portions of its analyses and of the factors considered by it in rendering its opinion, without considering all analyses and factors, could create a misleading or incomplete view of the evaluation process underlying its opinion. The conclusion reached by Duff & Phelps was based on all analyses and factors taken as a whole, and also on the application of Duff & Phelps’ own experience and judgment. Although Duff & Phelps reviewed a number of other transactions in connection with the merger, Duff & Phelps did not identify any transaction it believed was directly comparable to the merger, and, accordingly, in rendering its opinion, Duff & Phelps has relied solely on an analysis designed specifically for the merger.
The financial analyses summarized below include information presented in tabular format. In order for Duff & Phelps’ financial analyses to be fully understood, the tables must be read together with the text of each summary. The tables alone do not constitute a complete description of the financial analyses undertaken by Duff & Phelps. Considering the data below without considering the full narrative description of the financial analyses, including the methodologies and assumptions underlying the analyses, could create a misleading or incomplete view of Duff & Phelps’ financial analyses.
Historical Trading Analysis
Duff & Phelps reviewed the historical trading ranges of the SDI Common Stock and TPB Common Stock, and the aggregate discount implied by the market capitalization of SDI and the aggregate market value of SDI’s holdings of TPB Common Stock, for various periods before and after November 18, 2019, the date of the public announcement of SDI’s plans to pursue a corporate reorganization with TPB, to provide Duff & Phelps with background and perspective for how shares of SDI Common Stock and TPB Common Stock have historically traded on a standalone basis and relative to each other. Duff & Phelps noted that the per share price of SDI Common Stock includes the value of other assets and liabilities held by SDI, including cash, Standard Outdoor (an outdoor advertising business), Pillar General (an insurance business), and debt. The SDI Investor Presentation dated August 2019 contained additional disclosure of values associated with other assets at SDI, including cash of $6.0 million, the investment in Standard Outdoor of $17.3 million, the investment in Pillar General of $0, and debt of $23.8 million. The other SDI assets and liabilities net to negative $0.5 million. Thus, when calculating the aggregate discount, Duff & Phelps ascribed the full observed value differential as being related to the TBP Common Stock held by SDI.
Duff & Phelps noted that for the period from January 1, 2018 to November 15, 2019, the aggregate discount ranged between a low of $4.6 million and a high of $193.6 million. Duff & Phelps also noted that for the period November 18, 2019 to April 6, 2020, the aggregate discount ranged between a low of $5.4 million and high of $59.4 million.
Duff & Phelps noted that on November 15, 2019, the last trading day on which the SDI Common Stock traded prior to the November 18, 2019 public announcement of SDI’s pursuit of a corporate reorganization transaction, the value
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of a share of SDI Common Stock was $10.89. Duff & Phelps also noted that on November 15, 2019, the last trading day on which TPB Common Stock traded prior to the November 18, 2019 public announcement of SDI’s pursuit of a corporate reorganization transaction, the value of a share of TPB Common Stock was $26.45. The trading values for SDI Common Stock and TPB Common Stock on November 15, 2019 imply an aggregate discount of $78.5 million.
Duff & Phelps noted that on April 6, 2020, the value of a share of SDI Common Stock was $10.48 and the value of a share of TPB Common Stock was $20.81. The trading values for SDI Common Stock and TPB Common Stock on April 6, 2020 imply an aggregate discount of $31.0 million.
Selected Transaction Analysis
Duff & Phelps analyzed certain publicly available information relating to the selected transaction below, each of which involved the acquisition by a publicly traded company of its principal stockholder in a stock-for-stock transaction. Duff & Phelps calculated the illustrative (discount) / premium received by the stockholders of each principal stockholder in each of the transactions, based on publicly available information, including analyses performed by financial advisors and publicly disclosed on the transactions.
Date
Completed
Principal Shareholder Acquired by the
Publicly Traded Company
Publicly Traded Company/ Acquiror
Illustrative (Discount) /
Premium Receved by
Shareholders of the
Principal Shareholder
4/15/2019
Liberty Expedia Holdings
Expedia Group Inc.
(0.5)% - (2.5)%(1)
5/26/2011
Retail Ventures Inc.
DSW Inc.
(9.3)% - (11.6)%(2)
4/22/2009
Smith Investment Company
A.O. Smith Corporation
(1.5)%
11/9/2006
Fidelity National Financial, Inc.
Fidelity Information Services
0.0%
4/18/2006
American BioScience, Inc.
American Pharmaceutical Partners, Inc.
0.0%
11/22/2000
Seagate Technology, Inc.
VERITAS Software Corporation
(14.6)%
8/15/1997
Durwood, Inc.
AMC Entertainment, Inc.
0.0%
1/24/1995
Petrie Stores Corporation
Toys “R” Us, Inc.
(8.3)%
(1)
Discount based on analysis performed by Moelis to compare the unaffected and affected adjusted net asset value of Liberty Expedia Holdings, per the Form PREM14A filed on May 2, 2019.
(2)
Discount based on analysis performed by Goldman Sachs to compare the intrinsic value of Retail Ventures to the share consideration to be received in the transaction, per the Form 42483 filed on April 12, 2011.
None of the selected transactions or the companies involved are, of course, identical to TPB or SDI or the merger and Duff & Phelps does not have access to non-public information regarding those companies. Accordingly, a complete analysis cannot be limited to a quantitative review of the selected transactions analysis and involves complex considerations and judgments concerning differences in financial and operating characteristics of such companies and targets, as well as other factors that could affect the illustrative (discount) / premium.
Exchange Ratio Analysis
The Exchange Ratio will equal a total number of shares of TPB Common Stock equal to 97% of the total number of shares of TPB Common Stock owned by SDI divided by the total number of SDI shares outstanding (excluding shares to be canceled pursuant to Section 1.5(a)(i) of the merger agreement) plus the number of shares of SDI Common Stock underlying all SDI restricted stock awards and restricted stock unit awards that will vest (and were not previously outstanding) in connection with the merger. This represents a 3% discount to a one-for-one exchange. As of the date of Duff & Phelps’ opinion, SDI owned 9.8 million shares of TPB Common Stock and there were 16.6 million shares of SDI outstanding.
Prior to the closing of the merger, SDI has completed the sale of its outdoor business and the wind-down of its insurance business, leaving SDI with other assets and liabilities consisting principally of cash and debt. To satisfy $25 million of debt at SDI, an assumed 1.2 million shares of TPB Common Stock are sold based on the value of a share of TPB Common Stock of $20.81 on April 6, 2019. As a result, the pro forma number of shares of TPB Common Stock owned by SDI is 8.6 million (9.8 million shares of TPB Common Stock owned by SDI less 1.2 million shares of TPB Common Stock sold to settle SDI debt).
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As a result of the 3% discount to a one-for-one exchange imbedded in the calculation of the Exchange Ratio, upon the consummation of the merger, the total number of TPB Common Stock outstanding will decrease by 0.3 million shares (equal to 3% of the pro forma 8.6 million shares of TPB Common Stock held by SDI). Duff & Phelps estimated the economic benefit of the Exchange Ratio to TPB common stockholders by multiplying the number of shares that will be cancelled as a result of the Exchange Ratio by the value of a share of TPB Common Stock as of November 15, 2019, the last trading day on which the SDI Common Stock traded prior to the November 18, 2019 public announcement of SDI’s pursuit of a corporate reorganization transaction, and April 6, 2020. Based on this analysis, Duff & Phelps estimated the economic benefit of the Exchange Ratio to TPB common stockholders to be in the range of $5.4 million to $6.9 million.
Other Matters
Duff & Phelps is a premier global valuation and corporate finance advisor with expertise in complex valuation, dispute and legal management consulting, M&A, restructuring, and compliance and regulatory consulting. Duff & Phelps reports that, since 2005, it has rendered over 900 fairness opinions in transactions aggregating more than $370 billion and is regularly engaged in the valuation of businesses and securities in the preparation of fairness opinions in connection with mergers, acquisitions and other strategic transactions.
TPB’s engagement letter with Duff & Phelps provides that, for its services, Duff & Phelps is entitled to receive $350,000 due and payable as follows: $175,000 in cash upon execution of the engagement letter to serve as financial advisor to the TPB special committee; and the remaining $175,000 in cash upon Duff & Phelps having rendered an opinion, regardless of the conclusion reached by Duff & Phelps in the opinion. No portion of Duff & Phelps’ fee is contingent upon either the conclusion expressed in the opinion or whether the merger is successfully consummated. Furthermore, Duff & Phelps is entitled to be paid additional fees at Duff & Phelps’ standard hourly rates for certain time incurred should Duff & Phelps be called upon to support its findings subsequent to the delivery of its opinion. TPB has also agreed to reimburse Duff & Phelps for its out-of-pocket expenses and reasonable fees and expenses of counsel, consultants and advisors retained by Duff & Phelps in connection with the engagement. TPB has also agreed to indemnify Duff & Phelps for certain liabilities arising out of its engagement. The terms of the fee arrangement with Duff & Phelps, which the TPB special committee and Duff & Phelps believe are customary in transactions of this nature, were negotiated at arm’s length between the TPB special committee and Duff & Phelps.
The issuance of Duff & Phelps’ opinion was approved by its fairness review committee.
Other than this engagement, during the two years preceding the date of the opinion, Duff & Phelps has not had any material relationship with any party to the merger for which compensation has been received or is intended to be received.
Interests of SDI Directors and Executive Officers in the Merger
In considering the recommendation of the SDI Board with respect to the merger agreement and the other matters to be acted upon by SDI’s stockholders at the SDI special meeting, SDI’s stockholders should be aware that certain members of the SDI Board and certain of SDI’s executive officers have interests in the merger that may be different from, or in addition to, the interests of other SDI stockholders. These interests may present them with actual or potential conflicts of interest, and these interests, to the extent material, are described below.
The SDI special committee was aware of these potential conflicts of interest and considered them, among other matters, in reaching their respective decisions to approve the merger agreement and the merger, and to recommend, as applicable, that SDI’s stockholders approve the proposals to be presented to SDI stockholders for consideration at the SDI special meeting as contemplated by this proxy statement/prospectus.
In connection with the closing of the merger, the vesting of 10,851 restricted shares of SDI Common Stock held by Mr. Tobin, an executive officer of SDI, and the vesting of restricted 2,249 restricted shares held by each of Messrs. Helms, Wurzer and Zimmerman, non-employee directors of SDI, will be accelerated such that all such restricted shares are fully vested. As set forth below in “The Merger - Compensation to Named Executive Officers of SDI in Connection with the Merger” below, which is incorporated herein by reference, the value of such restricted shares is $128,259 for the shares owned by Mr. Tobin. Using the same per share value of $11.82 as used to calculate the value of such shares to Mr. Tobin, the value to each of Messrs. Helms, Wurzer and Zimmerman of the 2,249 restricted shares that will vest is $26,583.
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Ownership Interests
The affirmative vote of holders of (i) the majority of the aggregate voting power of the votes cast at the SDI special meeting and (ii) the majority of the voting power of the outstanding shares of SDI Common Stock, voting together as a single class, is required for approval of Proposal No. 1. The affirmative vote of the majority of the voting power of the SDI shares present virtually, or represented by proxy duly authorized at the SDI special meeting is required for approval of Proposal No. 2. Abstentions will have the same effect as votes “AGAINST” Proposal Nos. 1 and 2.
The table below sets forth information regarding the beneficial ownership of SDI Common Stock as of April 15, 2020, by SDI’s directors and named executive officers.
Name and Address of
Beneficial Owner
Amount and Nature of
Beneficial Ownership of
Class  A Common Stock(1)
Amount and Nature of
Beneficial Ownership of
Class B Common Stock(1)
Total
Beneficial
Ownership
Percent
of
Class A
Percent
of
Class B
Gregory H.A. Baxter
38,279
*
*
*
Ian Estus
81,277
*
*
*
Edward J. Sweeney
*
*
*
Bradford A. Tobin
34,913
*
*
*
David M. Wurzer
7,974
3,050
*
*
*
Thomas F. Helms, Jr.
116,341
272,624
2.3%
1.3%
3.5%
David Glazek
*
*
*
Arnold Zimmerman
2,097
*
*
*
*
Represents less than 1%.
(1)
Unless otherwise indicated, each of the stockholders has sole voting and investment power with respect to the securities shown to be owned by such stockholder. The inclusion herein of securities listed as beneficially owned does not constitute an admission of beneficial ownership.
Director Positions Following the Merger
In connection with the merger, there will be no change to the directors of TPB.
Treatment of SDI Equity Awards and SDI Stock Options
At the effective time, in connection with the merger, each share of SDI Common Stock underlying restricted stock awards and restricted stock unit awards will be converted into the right to receive the applicable portion of the Stock Merger Consideration, as applicable, less applicable taxes and withholdings. Each SDI stockholder’s aggregate portion of merger consideration will be rounded up to the next whole share of TPB Common Stock.
There will be no outstanding options to purchase SDI Common Stock as of the date of the closing of the merger.
Compensation to Named Executive Officers of SDI in Connection with the Merger
This section sets forth the information required by Item 402(t) of Regulation S-K regarding the compensation that is based on or otherwise relates to the mergers and that is payable or may become payable to SDI’s named executive officers, who are Messrs. Baxter, Sweeney and Tobin. This compensation is referred to as “golden parachute compensation” by the applicable SEC disclosure rules.
Please note that the amounts indicated below are estimates based on the material assumptions described in this proxy statement/prospectus and the notes to the table below, which may or may not actually occur, and do not reflect compensation actions that could occur after the date of this proxy statement/prospectus and before the closing of the mergers. As a result, the actual amounts, if any, which may become payable to a named executive officer may differ in material respects from the amounts set forth below. Furthermore, for purposes of calculating such amounts and in accordance with the requirements of the applicable SEC disclosure rules, Liberty has assumed:
An assumed closing date for the merger of July 10, 2020;
A price per share of SDI common stock of $11.82, which equals the average closing price of the SDI common stock over the first five business days following April 8, 2020, which was the date of the first public announcement of the signing of the merger agreement. We refer to this price as the “assumed SDI per share price.”
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Golden Parachute Compensation
Name
Cash
Equity(1)
Perquisites/
Benefits
Total
Gregory H.A. Baxter
$—
$
$—
$
Edward J. Sweeney
$—
$
$—
$
Bradford A. Tobin
$—
$128,259
$—
$128,259
(1)
Includes the accelerated vesting of 10,851 restricted shares owned by Mr. Tobin.
For a description of the arrangements pursuant to which the foregoing payments and benefits are to be made, see the descriptions set forth in “The Merger—Interests of SDI Directors and Executive Officers in the Merger—Treatment of SDI Equity Awards and SDI Stock Options” above, which is incorporated herein by reference.
Indemnification and Insurance
Under the merger agreement, from the effective time through the sixth anniversary of the date on which the effective time occurs, each of TPB and the surviving company shall indemnify and hold harmless each person who is now, or has been at any time prior to the date of the merger agreement, or who becomes prior to the effective time, a director or officer of TPB or SDI and their respective subsidiaries (excluding, in the case of SDI, TPB), respectively (collectively referred to as the D&O Indemnified Parties), against all claims, losses, liabilities, damages, judgments, fines and reasonable fees, costs and expenses, including attorneys’ fees and disbursements, incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, arising out of or pertaining to the fact that the D&O Indemnified Party is or was a director or officer of TPB or of SDI, whether asserted or claimed prior to, at or after the effective time, in each case, to the fullest extent permitted under applicable law. Each D&O Indemnified Party will be entitled to advancement of expenses incurred in the defense of any such claim, action, suit, proceeding or investigation from each of TPB and the surviving company, jointly and severally, upon receipt by TPB or the surviving company from the D&O Indemnified Party of a request therefor; provided that any person to whom expenses are advanced provides an undertaking to TPB, to the extent then required by the DGCL, to repay such advances if it is ultimately determined that the person is not entitled to indemnification.
Under the merger agreement, the provisions of the TPB Charter and TPB Bylaws with respect to indemnification, advancement of expenses and exculpation of present and former directors and officers of TPB that are presently set forth in the TPB Charter and TPB Bylaws shall not be amended, modified or repealed for a period of six years from the effective time in a manner that would adversely affect the rights thereunder of individuals who, at or prior to the effective time, were officers or directors of TPB. The certificate of formation, limited liability company agreement and other similar documents, which we refer to as the surviving company organizational documents, shall contain, and TPB shall cause the surviving company organizational documents to so contain, provisions no less favorable with respect to indemnification, advancement of expenses and exculpation of present and former managers and officers as those presently set forth in the TPB Charter and TPB Bylaws.
Under the merger agreement, from and after the effective time, (i) the surviving company shall fulfill and honor in all respects the obligations of SDI to its D&O Indemnified Parties as of immediately prior to the consummation of the merger pursuant to any indemnification provisions under the SDI Charter, SDI Bylaws or other similar documents, and pursuant to any indemnification agreements between SDI and its D&O Indemnified Parties, with respect to claims arising out of matters occurring at or prior to the effective time and (ii) TPB shall fulfill and honor in all respects the obligations of TPB to its D&O Indemnified Parties as of immediately prior to the consummation of the merger pursuant to any indemnification provisions under the TPB Charter, TPB Bylaws or other similar documents, and pursuant to any indemnification agreements between TPB and its D&O Indemnified Parties, with respect to claims arising out of matters occurring at or prior to the effective time.
Under the merger agreement, from and after the effective time, TPB shall maintain directors’ and officers’ liability insurance policies, with an effective date as of the date that the merger is consummated, on commercially available terms and conditions and with coverage limits no less favorable to TPB than in effect as of the date of the merger agreement (provided, that TPB may substitute therefor policies of at least the same coverage containing terms and conditions which are no less advantageous). In addition, SDI shall purchase, prior to the effective time, a six year prepaid “tail policy” for the non-cancellable extension of the directors’ and officers’ liability coverage of SDI’s
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existing directors’ and officers’ insurance policies for a claims reporting or discovery period of at least six years from and after the effective time with respect to any claim related to any period of time at or prior to the effective time.
Under the merger agreement, from and after the effective time, TPB shall pay expenses, including reasonable attorneys’ fees, that are incurred by the persons referred to in the foregoing paragraphs in connection with their successful enforcement of the rights provided to those persons in the foregoing paragraphs.
Form of the Merger
The merger agreement provides that at the effective time, SDI will be merged with and into merger sub and the separate existence of SDI will cease. Upon the consummation of the merger, merger sub will continue as the surviving company in the merger and will be a wholly-owned subsidiary of TPB.
Merger Consideration
At the effective time, each share of SDI Common Stock outstanding immediately prior to the effective time (excluding certain shares to be canceled pursuant to the merger agreement) will be automatically converted into the right to receive the applicable portion of the Stock Merger Consideration, in each case calculated in accordance with and as set forth in more detail in the merger agreement. Each SDI stockholder’s aggregate portion of Stock Merger Consideration will be rounded up to the next whole share of TPB Common Stock.
The “Stock Merger Consideration” means 9,679,550 shares of TPB Common Stock, assuming that SDI will own 9,978,918 shares of TPB Common Stock immediately prior to the closing of the merger, which is the number of shares of TPB Common Stock owned by SDI as of the date of this proxy statement/prospectus. This number of shares does not reflect any sales of shares of TPB Common Stock SDI may make in order to generate amounts it may need to satisfy its net liabilities exceeding $25,000, as required by the merger agreement. Should SDI make any such sales, the number of shares of TPB Common Stock owned by SDI’s stockholders after the merger would be reduced accordingly. See “What will SDI’s stockholders and option holders receive in the merger?” beginning on page 2 for more detail.
Conversion of Shares; Exchange Procedures
The conversion of SDI Common Stock into the right to receive the Stock Merger Consideration will occur automatically at the effective time of the merger.
Prior to the completion of the merger, TPB will appoint EQ Shareowner Services or such other bank or trust company reasonably acceptable to SDI and enter into an exchange agent agreement with such exchange agent on terms reasonably acceptable to SDI.
Promptly following the effective time of the merger, the exchange agent will mail to each record holder of SDI Common Stock a letter of transmittal and instructions for surrendering the record holder’s share certificates in exchange for certificates representing the TPB Common Stock issuable to each such holder pursuant to the merger. SDI stockholders who hold their shares in book entry form also will receive instructions for the exchange of their shares for the Stock Merger Consideration from the exchange agent. Those holders of SDI Common Stock who properly surrender their SDI stock certificates (or uncertificated shares) in accordance with the exchange agent’s instructions will receive (a) the TPB Common Stock issuable to each such holder pursuant to the merger and (b) dividends or other distributions, if any, to which they are entitled under the terms of the merger agreement. Following the completion of the merger, SDI will not register any transfers of SDI common shares on its share transfer books.
SDI, TPB, merger sub and the exchange agent will each be entitled to deduct and withhold from the consideration to which a holder is entitled under the terms of the merger agreement, if any, such amounts as it is required to deduct or withhold under any United States federal, state, local, or foreign tax law. If SDI, TPB, merger sub or the exchange agent withholds any amounts, these amounts will be treated for all purposes of the merger as having been paid to the holders from whom they were withheld.
Any portion of the Stock Merger Consideration payable pursuant to the merger agreement and supplied to the exchange agent which remains unclaimed by the holders of SDI Common Stock for one year after the effective time of the merger will be returned to TPB upon demand. Thereafter, a holder of SDI Common Stock must look only to TPB for payment of the applicable Stock Merger Consideration to which the holder is entitled under the terms of the merger agreement.
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Effective Time of the Merger
The merger agreement requires the parties to consummate the merger as promptly as practicable (and in any event within two business days) after all of the conditions to the consummation of the merger contained in the merger agreement are satisfied or waived. The merger will become effective upon the filing of a certificate of merger with the Secretary of State of the State of Delaware or at such later time as is agreed by TPB and SDI and specified in the certificate of merger, and which time is referred to herein as the effective time. SDI cannot predict the exact timing of the consummation of the merger.
Tax Treatment of the Merger
TPB and SDI intend the merger to qualify as a “reorganization” within the meaning of Section 368(a) of the Code. TPB and SDI have agreed to use their reasonable best efforts to cause the merger to qualify as a reorganization under Section 368(a) of the Code, and to not take any action or cause any action to be taken which action would reasonably be expected to prevent the merger from so qualifying. For a description of certain of the considerations regarding U.S. federal tax consequences of the merger, see the section titled The Merger—Material U.S. Federal Income Tax Consequences of the Mergerbelow.
Material U.S. Federal Income Tax Consequences of the Merger
The following discussion is a summary of the material U.S. federal income tax consequences of the merger to U.S. Holders (as defined below) who exchange their SDI Common Stock for TPB Common Stock in the merger, but does not purport to be a complete analysis of all potential tax effects. The effects of other U.S. federal tax laws, such as estate and gift tax laws, and any applicable state, local or non-U.S. tax laws are not discussed. This discussion is based on the Code, U.S. Treasury Regulations promulgated thereunder, judicial decisions, and published rulings and administrative pronouncements of the Internal Revenue Service, or the IRS, in each case in effect as of the date hereof. These authorities may change or be subject to differing interpretations. Any such change or differing interpretation may be applied retroactively in a manner that could adversely affect a U.S. Holder. Neither TPB nor SDI has sought or intends to seek any rulings from the IRS regarding the matters discussed below. There can be no assurance the IRS or a court will not take a position regarding the tax consequences of the merger contrary to that discussed below. This discussion assumes that the merger will be consummated in accordance with the merger agreement and as described in this proxy statement/prospectus.
This discussion is limited to U.S. Holders that hold SDI Common Stock as a “capital asset” within the meaning of Section 1221 of the Code (generally, property held for investment). This discussion does not address all U.S. federal income tax consequences relevant to a U.S. Holder’s particular circumstances, including the impact of the alternative minimum tax or the Medicare contribution tax on net investment income. In addition, it does not address tax consequences relevant to SDI stockholders subject to special rules, including, without limitation:
U.S. expatriates and former citizens or long-term residents of the United States;
persons whose functional currency is not the U.S. dollar;
persons holding SDI Common Stock as part of a hedge, straddle or other risk reduction strategy or as part of a conversion transaction or other integrated investment;
banks, insurance companies, mutual funds and other financial institutions;
real estate investment trusts or regulated investment companies;
brokers, dealers or traders in securities;
“controlled foreign corporations,” “passive foreign investment companies,” and corporations that accumulate earnings to avoid U.S. federal income tax;
S corporations, partnerships or other entities or arrangements treated as partnerships or disregarded entities for U.S. federal income tax purposes (and investors therein);
persons for whom SDI Common Stock constitutes “qualified small business stock” within the meaning of Section 1202 of the Code or “Section 1244 stock” for purposes of Section 1244 of the Code;
tax-exempt organizations or governmental organizations;
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persons subject to special tax accounting rules as a result of any item of gross income with respect to SDI Common Stock being taken into account in an “applicable financial statement” (as defined in the Code);
persons deemed to sell SDI Common Stock under the constructive sale provisions of the Code;
persons who acquired their SDI Common Stock pursuant to the exercise of warrants or conversion rights under convertible instruments;
persons who acquired their SDI Common Stock in a transaction subject to the gain rollover provisions of Section 1045 of the Code;
persons who hold or received SDI Common Stock pursuant to the exercise of any employee stock option or otherwise as compensation;
persons who have at any time actually or constructively owned more than 5% of SDI Common Stock; and
persons who hold their SDI Common Stock through tax-qualified retirement plans.
If an entity or arrangement treated as a partnership for U.S. federal income tax purposes holds SDI Common Stock, the tax treatment of a partner in the partnership will depend on the status of the partner, the activities of the partnership and certain determinations made at the partner level. Accordingly, partnerships holding SDI Common Stock and the partners in such partnerships should consult their tax advisors regarding the U.S. federal income tax consequences to them.
THIS DISCUSSION IS FOR INFORMATION PURPOSES ONLY AND IS NOT TAX ADVICE. HOLDERS SHOULD CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE U.S. FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY TAX CONSEQUENCES OF THE MERGER ARISING UNDER THE U.S. FEDERAL ESTATE OR GIFT TAX LAWS OR UNDER THE LAWS OF ANY STATE, LOCAL OR NON-U.S. TAXING JURISDICTION OR UNDER ANY APPLICABLE INCOME TAX TREATY.
For purposes of this discussion, a U.S. Holder is a beneficial owner of SDI Common Stock that, for U.S. federal income tax purposes, is or is treated as:
an individual who is a citizen or resident of the United States;
a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state thereof, or the District of Columbia;
an estate, the income of which is subject to U.S. federal income tax regardless of its source; or
a trust that (i) is subject to the primary supervision of a U.S. court and the control of one or more “United States persons” (within the meaning of Section 7701(a)(30) of the Code) over all of its substantial decisions or (ii) has a valid election in effect to be treated as a United States person for U.S. federal income tax purposes.
U.S. Federal Income Tax Consequences of the Merger to U.S. Holders of SDI Common Stock
It is a condition to TPB’s obligation to consummate the merger that TPB receive an opinion from Lathrop GPM LLP, dated as of the closing date, to the effect that the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. It is a condition to SDI’s obligation to consummate the merger that SDI receive an opinion from Morgan, Lewis & Bockius LLP, dated as of the closing date, to the effect that the merger will qualify as a “reorganization” within the meaning of Section 368(a)(1)(A) of the Code. Subject to the representations, assumptions and exclusions in such tax opinions, in the opinion of Morgan, Lewis & Bockius LLP and Lathrop GPM LLP, the merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code. In rendering their opinions, counsels assume that the statements and facts concerning the merger set forth in this proxy statement/prospectus and in the merger agreement are true and accurate in all respects, and that the merger will be completed in accordance with this proxy statement/prospectus and the merger agreement. Counsels’ opinions also assume the truth and accuracy of certain representations and covenants as to factual matters made by SDI, TPB and merger sub in tax representation letters provided to counsel. In addition, counsels base their tax opinions on the law
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in effect on the date of the opinions and assume that there will be no change in applicable law between such date and the time of the merger. If any of these assumptions is incorrect, incomplete or inaccurate, or is violated, the validity of the opinions described above may be affected and the tax consequences of the merger could differ from those described in this proxy statement/prospectus.
An opinion of counsel represents counsel’s best legal judgment but is not binding on the IRS or any court, and there can be no certainty that the IRS will not challenge the conclusions reflected in the opinions or that a court would not sustain such a challenge. Neither TPB nor SDI intends to obtain a ruling from the IRS with respect to the tax consequences of the merger. If the IRS were to successfully challenge the “reorganization” status of the merger, the tax consequences would differ materially from those described in this proxy statement/prospectus.
Accordingly, subject to the tax treatment of the receipt by a U.S. Holder of SDI Common Stock of one whole share of TPB Common Stock in lieu of a fractional share by virtue of the aggregate portion of their Stock Merger Consideration being rounded up to the next whole share of TPB Common Stock (as discussed below in the section titled “The Merger—Material U.S. Federal Income Tax Consequences of the Merger—Tax Treatment of Whole Share Received In Lieu of Fractional Share”), on the basis of the opinions described above the tax consequences to U.S. Holders of SDI Common Stock will be as follows:
a U.S. Holder of shares of SDI Common Stock will not recognize any gain or loss upon the exchange of shares of SDI Common Stock for shares of TPB Common Stock in the merger;
a U.S. Holder of shares of SDI Common Stock will have an aggregate tax basis in the shares of TPB Common Stock received in the merger equal to the aggregate tax basis of the shares of SDI Common Stock surrendered in exchange therefor;
a U.S. Holder of shares of SDI Common Stock will have a holding period for the shares of TPB Common Stock received in the merger that includes its holding period for its shares of SDI Common Stock surrendered in exchange therefor; and
if a U.S. Holder of shares of SDI Common Stock acquired different blocks of shares of SDI Common Stock at different times or at different prices, then the the tax basis and holding period of each block of shares of TPB Common Stock received in the merger will be determined on a block-for-block basis depending on the basis and holding period of each block of shares of SDI Common Stock exchanged for such shares of TPB Common Stock. A U.S. Holder that acquired different blocks of SDI Common Stock at different times or at different prices should consult their tax advisors regarding the allocation of the tax basis and holding period of the shares of TPB Common Stock received in the merger.
Tax Treatment of Whole Share Received In Lieu of Fractional Share
Notwithstanding the foregoing, there is uncertainty as to how certain authorities testing a Code Section 368(a) reorganization for a value-for-value exchange should apply to the receipt by a U.S. Holder of SDI Common Stock of one whole share of TPB Common Stock in lieu of a fractional share by virtue of the aggregate portion of their Stock Merger Consideration being rounded up to the next whole share of TPB Common Stock. These authorities generally treat the excess of the fair market value of shares of stock received in certain Code Section 368(a) reorganizations over the fair market value of the shares of stock exchanged therefor as not eligible for tax nonrecognition treatment, but instead treat such excess amount as compensation, a gift, a payment to satisfy an obligation, an inducement to enter into the transaction or a payment for whatever other purpose the facts indicate. As such, it is possible that the value of a whole share of TPB Common Stock received by a U.S. Holder of SDI Common Stock in the merger (due to the rounding convention in lieu of fractional shares) in excess of the value of the SDI Common Stock exchanged therefor in the merger could be treated as taxable income or gain to such U.S. Holder of SDI Common Stock, potentially taxed at ordinary income rates (depending on each U.S. Holder’s relevant facts and circumstances). In this case, the aggregate tax basis and holding period of such whole share of TPB Common Stock generally should be bifurcated between the portion of such share considered received for SDI Common Stock in the merger and the portion of such share considered received as an excess value amount treated as taxable income or gain. The portion of such whole share of TPB Common Stock considered received for SDI Common Stock in the merger should be treated in the manner discussed above under “The Merger—Material U.S. Federal Income Tax Consequences of the Merger— U.S. Federal Income Tax Consequences of the Merger to U.S. Holders of SDI Common Stock.” The portion of such whole share of TPB Common Stock considered an excess value amount treated as taxable income or gain should have an aggregate tax basis equal to such excess value amount and should have a holding period beginning as of the date of the receipt of TPB Common Stock.
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It is alternatively possible that the foregoing authorities testing a Code Section 368(a) reorganization for a value-for-value exchange should not cause a U.S. Holder of SDI Common Stock to recognize taxable income or gain with respect to their receipt of one whole share of TPB Common Stock in lieu of a fractional share by virtue of the aggregate portion of their Stock Merger Consideration being rounded up to the next whole share of TPB Common Stock. This view is based in part on (i) the relatively low precedential weight of the Section 368(a) value for value authorities, and (ii) analogous authorities under Section 305 of the Code that generally disregard certain deviations from value-for-value principles for a distribution or exchange in lieu of the issuance of a fractional share for administrative convenience (i.e. the purpose of which is to save the distributing or exchanging company the trouble, expense and inconvenience of issuing and transferring fractional shares (or scrip representing fractional shares), and not to give any particular group of shareholders or any particular shareholder an increased interest in the assets or earnings and profits of SDI). The aforementioned Section 305 administrative convenience authority, although not directly applicable to the rounding up of fractional shares in the merger, establishes a benchmark that if a distribution of a total amount of cash to shareholders in lieu of fractional shares is five percent or less of the total fair market value of the stock distributed, the distribution of cash will be considered to be for such a non-problematic administrative convenience. SDI and TPB have each represented to Morgan, Lewis & Bockius LLP and Lathrop GPM LLP that the distribution of one whole share of TPB Common Stock in lieu of a fractional share in the merger is being implemented for administrative convenience only to save TPB the trouble, expense and inconvenience of issuing and transferring fractional shares (or scrip representing fractional shares), and not to give any particular group of shareholders or any particular shareholder an increased interest in the assets or earnings and profits of TPB, and that the excess of the aggregate fair market value of the whole shares of TPB Common Stock to be distributed in lieu of fractional shares in the merger over the aggregate fair market value of the shares of SDI Common Stock exchanged therefor will be less than one percent of the total fair market value of the TPB Common Stock as of the consummation of the merger at the Effective Time. These representations provide a factual basis for supporting a view, under the authorities described in this paragraph, that a U.S. Holder of SDI Common Stock should not recognize taxable income or gain in respect of their receipt of one whole share of TPB Common Stock in lieu of a fractional share by virtue of the aggregate portion of their Stock Merger Consideration being rounded up to the next whole share of TPB Common Stock. A U.S. Holder of SDI Common Stock not recognizing taxable income or gain in respect of their receipt of one whole share of TPB Common Stock in lieu of a fractional share by virtue of the aggregate portion of their Stock Merger Consideration being rounded up to the next whole share of TPB Common Stock should be treated with respect to their receipt of a whole share of TPB Common Stock in lieu of a fractional share in the manner discussed above under “The Merger—Material U.S. Federal Income Tax Consequences of the Merger— U.S. Federal Income Tax Consequences of the Merger to U.S. Holders of SDI Common Stock.”
Due to the uncertainty described above, Morgan, Lewis & Bockius LLP and Lathrop GPM LLP have not rendered an opinion with respect to the U.S. federal income tax treatment of the receipt of one whole share of TPB Common Stock in lieu of a fractional share by virtue of the aggregate portion of a stockholder’s Stock Merger Consideration being rounded up to the next whole share of TPB Common Stock. U.S. Holders of SDI Common Stock should therefore consult their tax advisors concerning the treatment of any whole share of TPB Common Stock received in lieu of a fractional share by virtue of the aggregate portion of their Stock Merger Consideration being rounded up to the next whole share of TPB Common Stock.
Information Reporting and Backup Withholding
A U.S. Holder may be subject to information reporting and backup withholding when such holder receives cash in the merger. Certain U.S. Holders are exempt from backup withholding, including corporations and certain tax-exempt organizations.
A U.S. Holder will be subject to backup withholding (currently imposed at a rate of 24%) if such holder is not otherwise exempt and:
the holder fails to furnish the holder’s taxpayer identification number, which for an individual is ordinarily his or her social security number;
the holder furnishes an incorrect taxpayer identification number; or
the applicable withholding agent is notified by the IRS that the holder previously failed to properly report payments of interest or dividends.
To avoid backup withholding, a U.S. Holder that does not otherwise establish an exemption should timely complete and return an IRS Form W-9. U.S. Holders exempt from backup withholding (including corporations and certain
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tax-exempt organizations) may be required to timely comply with certification requirements and identification procedures in order to establish an exemption from information reporting and backup withholding or otherwise avoid backup withholding.
Backup withholding is not an additional tax. Any amounts withheld under the backup withholding rules may be allowed as a refund or a credit against a U.S. Holder’s U.S. federal income tax liability, provided the required information is timely furnished to the IRS. U.S. Holders should consult their tax advisors regarding their qualification for an exemption from backup withholding and the procedures for obtaining such an exemption. In the event of backup withholding see your tax advisor to determine if you are entitled to any tax credit, tax refund or other tax benefit as a result of such backup withholding.
U.S. HOLDERS OF SDI COMMON STOCK SHOULD CONSULT THEIR TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER, INCLUDING THE APPLICABLE U.S. FEDERAL, STATE, LOCAL AND NON—U.S. INCOME AND OTHER TAX CONSEQUENCES, AND ANY TAX REPORTING REQUIREMENTS OF THE MERGER AND RELATED TRANSACTIONS IN LIGHT OF THEIR PARTICULAR CIRCUMSTANCES.
NYSE Stock Market Listing
The TPB Common Stock currently is listed on NYSE, under the symbol “TPB.” TPB has agreed to use commercially reasonable efforts to:
maintain its existing listing on NYSE;
to the extent required by the rules and regulations of NYSE, to prepare and submit to NYSE a notification form for the listing of the shares of TPB Common Stock to be issued in connection with the merger, and to cause those shares to be approved for listing (subject to official notice of issuance); and
to the extent required by the rules of the NYSE, to file an initial listing application for the TPB Common Stock on NYSE and to cause the NYSE listing application to be conditionally approved prior to the effective time.
In addition, under the merger agreement, each party’s obligation to complete the merger is subject to the satisfaction or waiver by each of the parties, at or prior to the merger, of various conditions, including that the shares of TPB Common Stock to be issued in the merger shall have been approved for listing (subject to official notice of issuance) on NYSE as of the closing of the merger.
Anticipated Accounting Treatment
The merger will be accounted for as an equity reorganization of TPB under which the stockholders of SDI become direct stockholders of TPB. Pursuant to the merger agreement, SDI stockholders will exchange their shares in SDI for shares in TPB. At the time of the merger, it is expected that SDI’s only material assets will be shares of TPB Common Stock and that SDI will have no material liabilities which would be required to be disclosed in its financial statements.
Appraisal Rights
No dissenters’ or appraisal rights will be available with respect to the merger under the DGCL.
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THE MERGER AGREEMENT
The following is a summary of the material terms of the merger agreement. A copy of the merger agreement is attached as Annex A to this proxy statement/prospectus and is incorporated by reference into this proxy statement/prospectus. The merger agreement has been attached to this proxy statement/prospectus to provide you with information regarding its terms. It is not intended to provide any other factual information about TPB, SDI or merger sub. The following description does not purport to be complete and is qualified in its entirety by reference to the merger agreement. You should refer to the full text of the merger agreement for details of the merger and the terms and conditions of the merger agreement.
The merger agreement contains representations and warranties that TPB and merger sub, on the one hand, and SDI, on the other hand, have made to one another as of specific dates. These representations and warranties have been made for the benefit of the other parties to the merger agreement and may be intended not as statements of fact but rather as a way of allocating the risk to one of the parties if those statements prove to be incorrect. In addition, the assertions embodied in the representations and warranties of SDI are qualified by information in a confidential disclosure letter provided by SDI to TPB in connection with signing the merger agreement. While TPB and SDI do not believe that this disclosure letter contains information required to be publicly disclosed under the applicable securities laws, other than information that has already been so disclosed, the disclosure letter does contain information that modifies, qualifies and creates exceptions to the representations and warranties set forth in the attached merger agreement. Accordingly, you should not rely on the representations and warranties as current characterizations of factual information about TPB or SDI, because they were made as of specific dates, may be intended merely as a risk allocation mechanism between TPB, merger sub and SDI and are modified by the disclosure letter.
General
Under the merger agreement, at the effective time, SDI shall merge with and into merger sub. Upon consummation of the merger, SDI will cease to exist and merger sub will survive as a wholly-owned subsidiary of TPB.
Merger Consideration
At the effective time, each share of SDI Common Stock outstanding immediately prior to the effective time (excluding certain shares to be canceled pursuant to the merger agreement) will be automatically converted into the right to receive the applicable portion of the Stock Merger Consideration, in each case calculated in accordance with and as set forth in more detail in the merger agreement.
The Stock Merger Consideration will consist of a total number of shares of TPB Common Stock equal to 97% of the total number of shares of TPB Common Stock owned by SDI as of the effective time, as described in more detail in “The Merger—Merger Consideration.” As of the date of this proxy statement/prospectus, SDI owns 9,978,918 shares of TPB Common Stock. However, there can be no assurance that SDI will continue to own such number of shares of TPB Common Stock. In order to raise the capital needed, along with its existing cash on hand, to retire substantially all of its liabilities prior to the closing of the merger as required by the merger agreement, including $25.0 million of indebtedness under a term loan agreement, SDI may consider a variety of transactions, including a sale of a portion of its shares of TPB Common Stock. SDI estimates that it will have net liabilities at the effective time, assuming the merger closes on July 10, 2020, of approximately $24.4 million. If SDI chooses to sell a portion of its shares of TPB Common Stock to satisfy this condition of the merger agreement, then SDI would need to sell approximately 1.0 million shares of TPB Common Stock, assuming a sale price of $24.00, which is within the range of closing prices of TPB Common Stock in the trading days leading up to June 9, 2020. Assuming such sale occurs and further assuming that there will be 16.6 million shares of SDI Common Stock outstanding as of immediately prior to the closing of the merger, each share of SDI Common Stock will be exchanged for 0.5232 shares of TPB Common Stock. SDI may make additional sales of TPB Common Stock prior to the merger for other purposes. Should it do so, SDI will use the proceeds of any such sales to purchase outstanding shares of SDI Common Stock from funds managed by Standard General, such that the number of shares of TPB Common Stock to be issued in the merger to each stockholder of TPB other than Standard General will not be affected by any such additional sales. Any such purchases of SDI Common Stock from Standard General will be at a price designed to reflect the market value of the shares of TPB Common Stock that would otherwise have been issued to Standard General had the shares of SDI Common Stock not been repurchased.
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Treatment of SDI Options
At the effective time, the merger agreement provides that each unexercised SDI Stock Option that is outstanding immediately prior to the effective time under the SDI Equity Plan shall be cancelled and have no further force or effect. However, there were no outstanding SDI Stock Options as of the date of the merger agreement, nor will there be any as of the effective date.
Conditions to the Completion of the Merger
Each party’s obligation to complete the merger is subject to the satisfaction or waiver by each of the parties to the merger agreement, at or prior to the merger, of various conditions, which include the following:
the registration statement on Form S-4, of which this proxy statement/prospectus is a part, must have been declared effective by the SEC in accordance with the Securities Act and must not be subject to any stop order or proceeding, or any proceeding threatened by the SEC, seeking a stop order with respect to the registration statement that has not been withdrawn;
there must not have been issued, and remain in effect, any temporary restraining order, preliminary or permanent injunction, judgment, or other order or decree by any tribunal, court or other governmental body of competent jurisdiction or law which has the effect of preventing, making illegal, or prohibiting the consummation of the merger, and there must not be pending any legal proceeding by any governmental body of competent jurisdiction seeking to prohibit the consummation of the merger;
the affirmative vote of a majority of the aggregate voting power of outstanding shares of SDI Common Stock voting as a single class;
the affirmative vote (or written consent) of TPB, as the sole equityholder of merger sub;
the shares of TPB Common Stock to be issued in the merger pursuant to the merger agreement must have been approved for listing, subject to official notice of issuance, on NYSE as of the closing; and
the applicable approvals, clearances, or waiting periods, and any extensions thereof, under the HSR Act or any foreign competition laws that are applicable to the merger.
In addition, each party’s obligation to complete the merger is subject to the satisfaction or waiver by that party of the following additional conditions:
the other party to the merger agreement must have performed or complied with in all material respects all of the party’s agreements and covenants required to be performed or complied with by it under the merger agreement at or prior to the effective time;
the other party must have delivered certain certificates and other documents required under the merger agreement for the closing of the merger; and
the party must have received the opinion of its legal counsel, dated as of the closing date of the merger, to the effect that the merger will be treated, for U.S. federal income tax purposes, as a reorganization within the meaning of Section 368(a) of the Code.
In addition, the obligation of TPB and merger sub to complete the merger is further subject to the satisfaction or waiver of the following conditions:
the representations and warranties of SDI regarding certain matters related to due organization and subsidiaries, authority, required stockholder votes, capitalization, ownership of shares, and financial advisors of SDI in the merger agreement must be true and correct in all material respects on the date of the merger agreement and on the closing date of the merger with the same force and effect as if made on the date on which the merger is to be completed or, if such representations and warranties address matters as of a particular date, then as of that particular date;
certain representations and warranties of SDI related to capitalization and equity awards or options must be true and correct in all respects as of the date of the merger agreement and on the closing date of the merger (other than, as of the closing date, inaccuracies that are de minimis in the aggregate on the closing date) with the same force and effect as if made on the date on which the merger is to be completed;
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the remaining representations and warranties of SDI in the merger agreement must be true and correct on the date of the merger agreement and on the closing date of the merger with the same force and effect as if made on the date on which the merger is to be completed or, if such representations and warranties address matters as of a particular date, then as of that particular date, except in each case, or in the aggregate, where the failure to be so true and correct would not reasonably be expected to have a SDI material adverse effect (without giving effect to any references therein to any SDI material adverse effect or other materiality qualifications);
since the date of the merger agreement, there must not have occurred a SDI material adverse effect, which means any effect, change, event, circumstance or development that is or would be reasonably expected to be materially adverse to the business, assets, or liabilities of SDI and its subsidiaries, taken as a whole, or any effect, change, event, circumstance or development that is or would reasonably be expected to be materially adverse to the business, assets, or liabilities of SDI and its subsidiaries, taken as a whole, but excluding the ownership of capital stock of TPB; and
TPB shall have received each of the following, which must be in full force and effect:
letters of resignation and waivers of certain claims from each member of the SDI Board (or equivalent governing body) and each officer of SDI and each of its subsidiaries (excluding TPB and its subsidiaries);
evidence that SDI has purchased the required D&O tail insurance policy;
evidence that SDI has paid all indebtedness not included in its estimate of net liabilities delivered to TPB prior to closing;
evidence that the liquidator of Maidstone Insurance Company does not intend to take further action against SDI or its subsidiaries; and
evidence that that certain license agreement dated May 1, 2018 between SDI and Standard General has been terminated or expired in accordance with its terms.
In addition, the obligation of SDI to complete the merger is further subject to the satisfaction or waiver of the following conditions:
the representations and warranties of TPB regarding certain matters related to due organization and subsidiaries, authority, and financial advisors in the merger agreement must be true and correct in all material respects on the date of the merger agreement and on the closing date of the merger with the same force and effect as if made on the date on which the merger is to be completed or, if such representations and warranties address matters as of a particular date, then as of that particular date; and
the remaining representations and warranties of TPB in the merger agreement must be true and correct on the date of the merger agreement and on the closing date of the merger with the same force and effect as if made on the date on which the merger is to be completed or, if such representations and warranties address matters as of a particular date, then as of that particular date, except in each case, or in the aggregate, where the failure to be so true and correct would not reasonably be expected to have a TPB material adverse effect (without giving effect to any references therein to any TPB material adverse effect or other materiality qualifications).
Representations and Warranties
The merger agreement contains customary representations and warranties of TPB and SDI for a transaction of this type relating to, among other things:
corporate organization and power, and similar corporate matters;
subsidiaries;
organizational documents;
authority to enter into the merger agreement and the related agreements;
votes required for completion of the merger and approval of the proposals that will come before the SDI special meeting;
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except as otherwise specifically disclosed pursuant to the merger agreement, the fact that the consummation of the transactions contemplated by the merger agreement would not contravene or require the consent of any third party; and
financial advisors.
The merger agreement contains further customary representations and warranties of TPB for a transaction of this type relating to, among other things:
valid issuance of shares of TPB Common Stock; and
the receipt by the TPB special committee of Duff & Phelps, LLC’s fairness opinion.
The merger agreement contains further customary representations and warranties of SDI for a transaction of this type relating to, among other things:
capitalization and ownership of shares;
financial statements;
absence of material changes or events;
absence of undisclosed liabilities;
title to assets;
real property and leaseholds;
intellectual property;
the validity of material contracts to which SDI is a party and the absence of certain violations, defaults or breaches of such contracts;
regulatory compliance, permits and restrictions;
legal proceedings and orders;
tax matters;
employee and labor matters and benefit plans;
environmental matters;
insurance;
whether any brokerage or finder’s fee or other fee or commission has been paid or promised in connection with the merger;
transactions with affiliates;
compliance with anti-bribery laws; and
the receipt by the SDI special committee of Houlihan Lokey’s fairness opinion.
The representations and warranties are, in many respects, qualified by materiality and knowledge, and will not survive the merger, but their accuracy forms the basis of one of the conditions to the obligations of TPB and SDI to complete the merger.
Acquisition Proposals
SDI
SDI agreed that, notwithstanding anything contained in the merger agreement to the contrary, prior to obtaining the required SDI stockholder vote, in response to a bona fide SDI Acquisition Proposal by any person, SDI may: (i) provide information in response to a request therefor (including nonpublic information regarding SDI or any of its subsidiaries) to the person who made such SDI Acquisition Proposal and (ii) participate in any discussions or negotiations with any such person regarding such SDI Acquisition Proposal, in each case, if, and only if, prior to taking any action described in clauses (i) or (ii) above, the SDI Board determines in good faith after consultation with its outside legal counsel that, (x) based on the information then available and after consultation with its financial
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advisor, such SDI Acquisition Proposal either constitutes an SDI Superior Offer or could reasonably be expected to result in an SDI Superior Offer and (y) that the failure to take such action could be inconsistent with the fiduciary duties of the SDI Board to the stockholders of SDI stockholders under applicable Law.
If SDI or any representative of SDI receives an SDI Acquisition Proposal or SDI Acquisition Inquiry at any time during the pre-closing period, then SDI shall promptly (and in no event later than twenty-four (24) hours after SDI becomes aware of such SDI Acquisition Proposal or SDI Acquisition Inquiry) advise TPB orally and in writing of such SDI Acquisition Proposal or SDI Acquisition Inquiry (including the identity of the person making or submitting such SDI Acquisition Proposal or SDI Acquisition Inquiry, and the material terms thereof). SDI shall keep TPB reasonably informed with respect to the status and material terms of any such SDI Acquisition Proposal or SDI Acquisition Inquiry and any material modification or proposed material modification thereto.
“SDI Acquisition Inquiry” means an inquiry, indication of interest or request for information (other than an inquiry, indication of interest or request for information made or submitted by the other party to such party) that would reasonably be expected to lead to an SDI Acquisition Proposal.
“SDI Acquisition Proposal” means any offer or proposal, whether written or oral (other than an offer or proposal made or submitted by or on behalf of TPB or any of its affiliates) contemplating or otherwise relating to any SDI Acquisition Transaction.
“SDI Acquisition Transaction” means any transaction or series of related transactions involving:
any merger, consolidation, amalgamation, share exchange, business combination, issuance or acquisition of securities, reorganization, recapitalization, tender offer, exchange offer or similar transaction: (i) in which SDI is a constituent entity, (ii) in which any individual, entity, governmental entity, or “group,” as defined under applicable securities laws, directly or indirectly acquires beneficial or record ownership of securities representing more than 20% of the outstanding securities of any class of voting securities of SDI or (iii) in which SDI issues securities representing more than 20% of the outstanding securities of any class of voting securities of such party or any of its subsidiaries; or
any sale, lease, exchange, transfer, license, acquisition, or disposition of any business or businesses or assets that constitute or account for 20% or more of the consolidated book value or the fair market value of the assets of SDI and its subsidiaries, as applicable, taken as a whole.
“SDI Superior Offer” means an unsolicited bona fide written SDI Acquisition Proposal that is on terms and conditions that the SDI Board, as applicable, determines in good faith, based on such matters that it deems relevant (including the likelihood of consummation thereof), as well as any written offer by SDI to amend the terms of the merger agreement, and following consultation with its outside legal counsel and outside financial advisors, if any, are more favorable, from a financial point of view, to SDI’s stockholders than the terms of the contemplated transactions.
TPB
TPB agreed that, notwithstanding anything contained in the merger agreement to the contrary, prior to the effective time, in response to a bona fide TPB Acquisition Proposal by any person, TPB may: (i) provide information in response to a request therefor (including nonpublic information regarding TPB or any of its subsidiaries) to the person who made such TPB Acquisition Proposal and (ii) participate in any discussions or negotiations with any such person regarding such TPB Acquisition Proposal, in each case, if, and only if, prior to taking any action described in clauses (i) or (ii) above, the TPB Board determines in good faith after consultation with its outside legal counsel that, (x) based on the information then available and after consultation with its financial advisor, such TPB Acquisition Proposal either constitutes a TPB Superior Offer or could reasonably be expected to result in an TPB Superior Offer and (y) that the failure to take such action could be inconsistent with the fiduciary duties of the TPB Board to the TPB stockholders under applicable Law.
If TPB or any representative of TPB receives a TPB Acquisition Proposal or TPB Acquisition Inquiry at any time during the pre-closing period, then TPB shall promptly (and in no event later than twenty-four (24) hours after TPB becomes aware of such TPB Acquisition Proposal or TPB Acquisition Inquiry) advise SDI orally and in writing of such TPB Acquisition Proposal or TPB Acquisition Inquiry (including the identity of the person making or submitting such TPB Acquisition Proposal or TPB Acquisition Inquiry, and the material terms thereof). TPB shall keep SDI reasonably informed with respect to the status and material terms of any such TPB Acquisition Proposal or TPB Acquisition Inquiry and any material modification or proposed material modification thereto.
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“TPB Acquisition Inquiry” means an inquiry, indication of interest, or request for information (other than an inquiry, indication of interest or request for information made or submitted by the other party to such party) that would reasonably be expected to lead to a TPB Acquisition Proposal.
“TPB Acquisition Proposal” means any offer or proposal, whether written or oral contemplating or otherwise relating to any TPB Acquisition Transaction.
“TPB Acquisition Transaction” means any transaction or series of related transactions involving:
any merger, consolidation, amalgamation, share exchange, business combination, issuance or acquisition of securities, reorganization, recapitalization, tender offer, exchange offer or similar transaction: (i) in which TPB is a constituent entity, (ii) in which any individual, entity, governmental entity, or “group,” as defined under applicable securities laws, directly or indirectly acquires beneficial or record ownership of securities representing more than 20% of the outstanding securities of any class of voting securities of TPB or (iii) in which TPB issues securities representing more than 20% of the outstanding securities of any class of voting securities of such party or any of its subsidiaries; or
any sale, lease, exchange, transfer, license, acquisition, or disposition of any business or businesses or assets that constitute or account for 20% or more of the consolidated book value or the fair market value of the assets of TPB and its subsidiaries, as applicable, taken as a whole.
“TPB Superior Offer” means an unsolicited bona fide written TPB Acquisition Proposal that is on terms and conditions that the TPB Board, as applicable, determines in good faith, based on such matters that it deems relevant (including the likelihood of consummation thereof), as well as any written offer by TPB to amend the terms of the merger agreement, and following consultation with its outside legal counsel and outside financial advisors, if any, are more favorable, from a financial point of view, to TPB’s stockholders than the terms of the contemplated transactions.
Change in Board Recommendation
SDI Superior Offer
Except as expressly permitted in the merger agreement, neither the SDI Board nor any committee thereof shall (i) withdraw, modify or qualify, or propose publicly to withdraw, modify or qualify, the recommendation by the SDI Board of the merger agreement to the SDI stockholders, (ii) take any public action or make any public statement in connection with the meeting of the SDI stockholders that is substantively inconsistent with such recommendation or (iii) approve or recommend, or publicly propose to approve or recommend, or fail to recommend against, any bona fide Acquisition Proposal (any of the actions described in clauses (i), (ii) or (iii), a “SDI Change of Recommendation”). Notwithstanding the foregoing, the SDI Board may make an SDI Change of Recommendation, if and only if, each of the following conditions is satisfied:
(a)
SDI receives an unsolicited SDI Acquisition Proposal that constitutes a SDI Superior Offer and such SDI Superior Offer has not been withdrawn;
(b)
SDI determines in good faith (after consultation with outside legal counsel), that in light of an SDI Superior Offer the failure to effect such SDI Change of Recommendation could cause it to violate its fiduciary duties to SDI stockholders under applicable law;
(c)
TPB has received written notice from SDI at least one (1) business day prior to such SDI Change of Recommendation, which notice shall (1) state expressly that SDI has received an SDI Acquisition Proposal which the SDI Board has determined is a SDI Superior Offer and that SDI intends to effect a SDI Change of Recommendation and the manner in which it intends or may intend to do so and (2) include the identity of the person making such SDI Acquisition Proposal and a copy (if in writing) and summary of material terms of such SDI Acquisition Proposal; and
(d)
During the pre-closing period, SDI and its advisors have negotiated in good faith with TPB (provided that TPB desires to negotiate) to make adjustments in the terms and conditions of the merger agreement such that such SDI Acquisition Proposal would no longer constitute an SDI Superior Offer.
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TPB Superior Offer
Except as expressly permitted by the merger agreement, neither the TPB Board nor any committee thereof shall approve or recommend, or publicly propose to approve or recommend, or fail to recommend against, any bona fide TPB Acquisition Proposal (any such action, a “TPB Change of Recommendation”). Notwithstanding the foregoing, the TPB Board may make a TPB Change of Recommendation, if and only if, each of the following conditions is satisfied:
(a)
TPB receives an unsolicited TPB Acquisition Proposal that constitutes a TPB Superior Offer and such TPB Superior Offer has not been withdrawn;
(b)
TPB determines in good faith (after consultation with outside legal counsel), that in light of a TPB Superior Offer the failure to effect such TPB Change of Recommendation could cause it to violate its fiduciary duties to TPB stockholders under applicable law;
(c)
SDI has received written notice from TPB at least one business day prior to such TPB Change of Recommendation, which notice shall (1) state expressly that TPB has received a TPB Acquisition Proposal which the TPB Board has determined is a TPB Superior Offer and that TPB intends to effect a TPB Change of Recommendation and the manner in which it intends or may intend to do so and (2) include the identity of the person making such TPB Acquisition Proposal and a copy (if in writing) and summary of material terms of such SDI Acquisition Proposal; and
(d)
During the pre-closing period, TPB and its advisors have negotiated in good faith with SDI (provided that SDI desires to negotiate) to make adjustments in the terms and conditions of the merger agreement such that such TPB Acquisition Proposal would no longer constitute a TPB Superior Offer.
Covenants; Conduct of Business Pending the Merger
SDI has agreed that, except as permitted by the merger agreement, as expressly required under the merger agreement, or as required by applicable law, during the period commencing on the date of the merger agreement and continuing until the earlier to occur of the closing of the merger and the termination of the merger agreement, which period we refer to as the pre-closing period, SDI will, and will cause its subsidiaries to, conduct its business and operations in the ordinary course consistent with past practices and in compliance in all material respects with all applicable laws and the requirements of all contracts to which SDI or any of its subsidiaries is a party or for which any of the assets of SDI or its subsidiaries is subject.
SDI has also agreed that, subject to certain limited exceptions, it will not, and will cause its subsidiaries to not, during the pre-closing period:
declare, accrue, set aside or pay any dividend or make any other distribution in respect of any shares of its capital stock or repurchase, redeem or otherwise reacquire any shares of capital stock or other securities (except for shares of SDI Common Stock from terminated employees, directors or consultants of SDI);
except pursuant to the valid exercise of SDI’s outstanding options on the date of the merger agreement, in accordance with their terms as existing on the date of the merger agreement, sell, issue, grant, pledge or otherwise dispose of, encumber, or authorize any of the foregoing with respect to any capital stock or other security of SDI or any of its subsidiaries; modify, waive or amend terms, or the rights of any holder of any outstanding capital stock or other security of SDI or any of its subsidiaries, including to reduce or alter the consideration to be paid to SDI upon the exercise of any equity interest; grant any new option for SDI Class A Common Stock or SDI Class B Common Stock of SDI; or accelerate, amend or change the period of exercisability or vesting of any outstanding SDI option or similar right or authorize any cash payment in exchange for any outstanding SDI option or similar right, except as specifically authorized by the merger agreement;
except as required to give effect to anything in contemplation of the closing of the merger, amend or otherwise change any of the organizational documents of SDI or its subsidiaries, or effect or be a party to any merger, consolidation, share exchange, business combination, recapitalization, reclassification, repurchase or redemption of shares, stock split, reverse stock split or similar transaction except as related to the transactions contemplated by the merger agreement;
form any subsidiary or acquire any equity interest or other interest in any other entity or enter into a joint venture with any other entity;
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lend money to any person; incur or guarantee any indebtedness; assume, endorse, guarantee, or otherwise become responsible for (contingently or otherwise), the obligations of any person; make any loans, advances or capital contributions; make any capital expenditures or commitments; or enter into or amend any contract with respect to any of the foregoing;
other than as required by applicable law or the terms of any SDI employee benefit plan as in effect on the date of the merger agreement, subject to certain exceptions: adopt, terminate, establish or enter into any employee benefit plan; cause or permit any employee benefit plan to be amended in any material respect; pay any bonus or make any profit-sharing or similar payment to, or increase the amount of the wages, salary, commissions, benefits or other compensation or remuneration payable to, any of its directors, officers, or employees; increase or accelerate the compensation payable or to become payable (including bonus grants and retention payments) or increase or accelerate the vesting of any benefits provided, or pay or award any payment or benefit, to any of its directors, officers, employees or consultants; increase the severance or change of control benefits offered to any current or new directors, officers, or employees; or terminate or give notice of termination to any officer or any employee whose annual base salary is or is expected to be more than $50,000 per year, other than any termination for cause;
recognize any labor union, labor organization or similar entity, except as otherwise required by law and after advance notice to TPB;
acquire any material asset or property (including any real property, whether via acquisition or lease) or sell, lease or otherwise irrevocably dispose of any of its material assets or properties (including any real property and any right or interest in any leases by which SDI possesses real property), or grant any encumbrance with respect to such assets or properties;
sell, assign, transfer, or otherwise dispose of, purchase or otherwise acquire or obtain, or grant or receive any license, sublicense or other rights under any intellectual property rights;
make, change or revoke any material tax election, fail to pay any income or other material tax as such tax becomes due and payable, file any amendment making any material change to any tax return, settle or compromise any income or other material tax liability, enter into any tax allocation, sharing, indemnification or other similar agreement or arrangement (other than customary commercial contracts entered into in the ordinary course of business, the principal subject matter of which is not taxes), request or consent to any extension or waiver of any limitation period with respect to any claim or assessment for any income or other material taxes (other than pursuant to an extension of time to file any tax return granted in the ordinary course of business of not more than six months), or adopt or change any material accounting method in respect of taxes;
enter into, amend, breach or consent to the termination of any material contract, amend, modify, waive or consent to the termination of any of SDI’s or its subsidiaries’ rights under any material contract, or waive, release or consent to the termination of any claims or rights of material value to SDI or any of its subsidiaries under any material contract;
other than incurrence or payment of any SDI transaction expenses, make any expenditures, incur any liabilities or discharge or satisfy any liabilities, in each case, in amounts that exceed $50,000 in the aggregate;
other than as required by law or GAAP, take any action to change accounting policies or procedures;
initiate, settle, or take any action not required in connection with any legal proceeding;
terminate, cancel, amend, modify, allow to lapse or fail to renew any insurance coverage policy maintained by SDI or any of its subsidiaries that is not promptly replaced by a comparable amount of insurance coverage;
file a petition in bankruptcy, make an assignment for the benefit of creditors or file a petition seeking reorganization or arrangement or other action under federal or state bankruptcy laws; or
agree, resolve or commit to do any of the foregoing.
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SDI has also agreed that, without TPB’s written consent, to be granted or withheld at TPB’s sole discretion, SDI will not, prior to the effective time, offer to transfer or transfer any of the capital stock of TPB, including any shares of TPB Common Stock.
Other Agreements
The parties have agreed to use commercially reasonable efforts to cause to be taken all actions necessary to consummate the merger and the other transactions contemplated by the merger agreement. In connection therewith, each party has agreed to:
as promptly as practicable make all filings and other submissions, if any, and give all notices, if any, required to be made and given in connection with the merger and the other transactions contemplated by the merger agreement;
use reasonable best efforts to obtain each consent, if any, reasonably required to be obtained, pursuant to applicable law or contract, or otherwise, in connection with the merger and the other transactions contemplated by the merger agreement or for a contract to remain in full force and effect;
use commercially reasonable efforts to lift any injunction prohibiting, or any other legal bar to, the merger or the other transactions contemplated by the merger agreement; and
use commercially reasonable efforts to satisfy the conditions precedent to the consummation of the transactions contemplated by the merger agreement.
Pursuant to the merger agreement, TPB and SDI have further agreed that:
TPB will use its commercially reasonable efforts to (i) maintain the listing of its common stock on NYSE until the effective time; (ii) to the extent required by the rules and regulations of NYSE, to prepare and submit to NYSE a notification form for the listing of the shares of TPB Common Stock to be issued in connection with the merger and to cause such shares to be approved for listing (subject to official notice of issuance); and (iii) to the extent required by NYSE rules and regulations, to file an initial listing application for TPB Common Stock on NYSE and to cause such listing application to be conditionally approved prior to the effective time;
TPB will maintain directors’ and officers’ liability insurance policies, with an effective date as of the date of the closing of the merger, on commercially available terms and conditions with coverage limits no less favorable to TPB than in effect as of the date of the merger agreement; and
SDI will purchase, prior to the effective time, a six year prepaid “tail policy” for the non-cancellable extension of the directors’ and officers’ liability coverage of SDI’s existing directors’ and officers’ insurance policies for a claims reporting or discovery period of at least six years from and after the effective time with respect to any claim related to any period of time at or prior to the effective time.
Termination and Termination Fee
The merger agreement may be terminated prior to the effective time, whether before or after the required stockholder approvals to complete the merger have been obtained, as set forth below:
by mutual written consent of TPB and SDI;
by either TPB or SDI if the merger shall not have been consummated by September 1, 2020, subject to possible extension as described herein, which date we refer to as the end date; provided, however, that the right to terminate the merger agreement will not be available to any party whose action or failure to act has been a principal cause of the failure of the merger to occur on or before the end date and such action or failure to act constitutes a breach of the merger agreement; and provided, further, that in the event a request for additional information has been made by any governmental body, or in the event the SEC has not declared the registration statement on Form S-4, of which this proxy statement/prospectus is a part, effective under the Exchange Act by at least 60 calendar days prior to the end date, then either SDI or TPB will be entitled to extend the end date for an additional 60 calendar days by written notice to the other party;
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by either TPB or SDI if a tribunal, court or other governmental body of competent jurisdiction has issued a final and nonappealable judgment, order, decree or ruling, or has taken any other action that has the effect of permanently restraining, enjoining or otherwise preventing or prohibiting the merger or any of the other transactions contemplated by the merger agreement;
by either TPB or SDI if the SDI special meeting, including any adjournments and postponements thereof, has been held and completed and SDI’s stockholders have taken a final vote and the required SDI stockholder vote has not been obtained; provided, that SDI may not terminate the merger agreement pursuant to this provision if the failure to obtain the approval of SDI’s stockholders was caused by the action or failure to act of SDI and such action or failure to act constitutes a material breach by SDI or merger sub of the merger agreement;
by TPB or SDI if the other party has breached any of its representations, warranties, covenants or agreements contained in the merger agreement or if any representation or warranty of the other party has become inaccurate, in either case such that the conditions to the closing of the merger would not be satisfied as of time of such breach or inaccuracy, but only if party seeking to terminate is not itself in material breach of any representation, warranty, covenant or agreement contained in the merger agreement, and if such breach or inaccuracy is curable, then only after the expiration of a 15-day period commencing upon delivery of written notice of such breach or inaccuracy and the party’s intention to terminate;
by SDI, at any time prior to the proper approval of Proposal Nos. 1 and 2 at the SDI special meeting, in order to enter into a definitive agreement to consummate a superior offer; provided that SDI has complied in all material respects with obligations relating to a superior offer as set forth in the merger agreement; and
by TPB, at any time prior to the proper approval of Proposal Nos. 1 and 2 at the SDI special meeting, in order to enter into a definitive agreement to consummate a superior offer, provided that TPB has complied in all material respects with obligations relating to a superior offer as set forth in the merger agreement.
In the event that SDI, at any time prior to the proper approval of Proposal Nos. 1 and 2 at the SDI special meeting, terminates the merger agreement in order to enter into a definitive agreement to consummate a superior offer, SDI must pay TPB a termination fee in the amount of $3,000,000.
Amendment
The merger agreement may be amended by SDI, TPB and merger sub with the approval of their respective boards of directors or other governing bodies at any time, whether before or after obtaining the required votes of the stockholders of SDI or TPB, provided that after the approval of the merger agreement by a party’s stockholders, no amendment will be made without the further approval of the stockholders if the further approval of the stockholders is required by law.
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MATTERS BEING SUBMITTED TO A VOTE OF SDI’S STOCKHOLDERS
Proposal No. 1: Approval of the Merger Agreement and the Merger
At the SDI special meeting, SDI’s stockholders will be asked to approve the merger agreement and the transactions contemplated thereby, including the merger. Immediately after the merger, assuming that SDI will own 9,978,918 shares of TPB Common Stock immediately prior to the closing of the merger, which is the number of shares of TPB Common Stock owned by SDI as of the date of this proxy statement/prospectus, SDI’s stockholders as of immediately prior to the effective time are expected to own approximately 50.48% of the outstanding capital stock of TPB and 50.48% of the voting power of TPB. The terms of, reasons for and other aspects of the merger agreement, including the merger, are described in detail in the other sections in this proxy statement/prospectus. These percentages do not reflect any sales of shares of TPB Common Stock SDI may make in order to generate amounts it may need to satisfy its net liabilities exceeding $25,000, as required by the merger agreement. Should SDI make any such sales, the percentage ownership of TPB Common Stock by, and voting power of, SDI’s stockholders after the merger would be reduced accordingly. See “What will SDI’s stockholders and option holders receive in the merger?” beginning on page 2 for more detail.
Required Vote
Proposal No. 1, the approval of the merger, requires the affirmative vote of holders of shares of SDI Common Stock representing at least a majority of the outstanding voting power of the SDI Common Stock, voting together as a single class. Abstentions and broker non-votes will have the same effect as a vote “AGAINST” this Proposal, but will be used to determine whether a quorum is present at the SDI special meeting.
THE SDI BOARD UNANIMOUSLY RECOMMENDS THAT SDI’S STOCKHOLDERS VOTE “FOR” PROPOSAL NO. 1 TO APPROVE THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE MERGER.
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Proposal No. 2: Advisory Resolution Regarding Certain Compensation that May be Paid or Become Payable to Named Executive Officers of SDI in connection with the Merger
Section 14A of the Exchange Act requires that SDI’s stockholders be provided the opportunity to vote to approve, on an advisory non-binding basis, the compensation arrangements in place at SDI triggered by the merger for our named executive officers, as disclosed in the section of this proxy statement/prospectus entitled “The Merger—Interests of SDI Directors and Executive Officers in the Merger—Compensation to Named Executive Officers of SDI in Connection with the Merger” beginning on page 59 . This proposal gives SDI stockholders the opportunity to express their views on the compensation that our named executive officers are contractually entitled to receive that is based on or otherwise relates to the merger.
We are asking our stockholders to indicate their approval of the various payments which our named executive officers are contractually entitled to receive in connection with the merger. These payments are set forth in the section entitled “The Merger—Interests of SDI Directors and Executive Officers in the Merger—Compensation to Named Executive Officers of SDI in Connection with the Merger” beginning on page 59 of this proxy statement/prospectus and the accompanying footnotes. The various plans and arrangements pursuant to which these compensation payments may be made have previously formed part of SDI’s overall compensation program for its named executive officers, which has been disclosed to our stockholders. These historical arrangements were adopted and approved by the compensation committee of the SDI Board (“SDI Compensation Committee”), which is composed solely of non-management directors, and are believed to be reasonable and in line with marketplace norms.
Accordingly, we are seeking approval of the following resolution at the special meeting:
“RESOLVED, that the stockholders of SDI approve, solely on an advisory basis, the executive compensation that may be paid to SDI’s named executive officers in connection with the merger, as disclosed pursuant to Item 402(t) of Regulation S-K in the section entitled “The Merger—Interests of SDI Directors and Executive Officers in the Merger—Compensation to Named Executive Officers of SDI in Connection with the Merger” in SDI’s proxy statement/prospectus for the special meeting, including the associated narrative discussion, and the agreements or understandings pursuant to which such compensation may be paid or become payable.”
The vote on this proposal is a vote separate and apart from the vote on the proposal to approve the merger agreement. Accordingly, you may vote to approve this proposal and not the proposal to approve the merger agreement, and vice
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versa. Stockholders should note that this non-binding proposal regarding certain merger-related executive compensation arrangements is merely an advisory vote which will not be binding on SDI or the SDI Board. Further, the underlying plans and arrangements are contractual in nature and not, by their terms, subject to stockholder approval. Accordingly, regardless of the outcome of the advisory vote, if the merger is consummated our named executive officers will be eligible to receive the various change of control payments in accordance with the terms and conditions applicable to those payments.
Required Vote
Proposal No. 2, approval of an advisory resolution regarding certain compensation that may be paid or become payable to named executive officers of SDI in connection with the merger, requires the affirmative vote of holders of the majority of the voting power of the shares of SDI Common Stock present virtually or represented by proxy and entitled to vote at the SDI special meeting. Abstentions will be counted towards the vote total and will have the same effect as a vote “AGAINST” this Proposal. For this Proposal, broker non-votes will have no effect and will not be counted towards the vote total, but will be used to determine whether a quorum is present at the SDI special meeting.
THE SDI BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” APPROVAL OF THE ADVISORY RESOLUTION REGARDING CERTAIN COMPENSATION THAT MAY BE PAID OR BECOME PAYABLE TO NAMED EXECUTIVE OFFICERS OF SDI IN CONNECTION WITH THE MERGER.
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Proposal No. 3: Proposal to Adjourn the SDI Special Meeting to Solicit Additional Proxies if there are not Sufficient Votes in Favor of the Merger
Although it is not currently expected, the SDI Special Meeting may be adjourned for the purpose of soliciting additional proxies. Any adjournment may be made without notice, other than an announcement made at the special meeting, if the adjournment is not for more than 30 days.
The proposal to adjourn the special meeting requires the affirmative vote of the majority of the voting power of the shares of SDI Common Stock present virtually or represented by proxy and entitled to vote at the SDI special meeting, voting as a single class, if a quorum is present. In the absence of a quorum, the holders of a majority of the aggregate voting power of the SDI Common Stock, voting as a single class, present at the SDI Special Meeting or represented by proxy and entitled to vote on the matter, may adjourn the special meeting. Any signed proxies received by SDI will be voted in favor of an adjournment in these circumstances, although a proxy voted “AGAINST” the proposal for the adjournment of the SDI Special Meeting will not be voted in favor of an adjournment for the purpose of soliciting additional proxies. SDI stockholders who have already sent in their proxies may revoke them prior to their use at the reconvened SDI Special Meeting following such adjournment, in the manner described above.
The failure to instruct your bank, broker or other nominee how to vote your shares will not have any effect on the proposal to adjourn the special meeting if necessary or appropriate to continue to solicit additional proxies. No proxy that is specifically marked against adoption of the merger agreement will be voted in favor of the proposal to adjourn the special meeting unless it is specifically marked “FOR” the proposal to adjourn the special meeting.
The vote on this proposal is a vote separate and apart from the vote on the proposal to approve the merger agreement. Accordingly, you may vote to approve this proposal and not the proposal to approve the merger agreement, and vice versa.
Required Vote
Proposal No. 3, approval of a proposal to adjourn the SDI special meeting to solicit additional proxies if there are not sufficient votes in favor of the merger, requires the affirmative vote of holders of the majority of the voting power of the shares of SDI Common Stock present virtually or represented by proxy and entitled to vote at the SDI special meeting. Abstentions will be counted towards the vote total and will have the same effect as a vote “AGAINST” this Proposal. For this Proposal, broker non-votes will have no effect and will not be counted towards the vote total, but will be used to determine whether a quorum is present at the SDI special meeting.
THE SDI BOARD UNANIMOUSLY RECOMMENDS A VOTE “FOR” APPROVAL OF THE PROPOSAL TO ADJOURN THE SPECIAL MEETING IF NECESSARY OR APPROPRIATE TO SOLICIT ADDITIONAL PROXIES.
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Proposal No. 4: Election of Directors
The SDI Board currently consists of six members. In accordance with the SDI Charter and SDI Bylaws, the SDI Board consists of a single class, with directors serving for a term of one year and until their successors are duly elected and qualified. Effective as of the meeting, the SDI Board will be reduced by one to five directors, and at the meeting, five individuals will be elected as directors to serve until SDI’s annual meeting of stockholders in 2021 and until their successors are duly elected