Mudrick Capital Management L.P. v. QuarterNorth Energy Inc.

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

MUDRICK CAPITAL )
MANAGEMENT L.P., ET AL., )
)
Plaintiffs, )
)
v. ) C.A. No. 2024-0106-LWW
)
QUARTERNORTH ENERGY INC., )
ET AL., )
)
Defendants. )

MEMORANDUM OPINION

Date Submitted: February 19, 2024
Date Decided: February 26, 2024

Bradley R. Aronstam, Roger S. Stronach & Benjamin M. Whitney, ROSS
ARONSTAM & MORITZ LLP, Wilmington, Delaware; Jordan A. Goldstein,
Lauren J. Zimmerman & Babak Ghafarzade, SELENDY GAY PLLC, New York,
New York; Counsel for the Plaintiffs

Blake Rohrbacher, Matthew W. Murphy, John M. O’Toole, Edmond S. Kim,
Spencer V. Crawford & Margaret Rockey, RICHARDS, LAYTON & FINGER,
P.A., Wilmington, Delaware; Harry P. Susman, SUSMAN GODFREY L.L.P.,
Houston, Texas; Counsel for Defendants QuarterNorth Energy, Inc., Avenue Energy
Opportunities Fund II, L.P., the Franklin Defendants, and the Nuveen Defendants

Thomas W. Briggs, Jr. & Kirk Andersen, MORRIS NICHOLS ARSHT &
TUNNELL LLP, Wilmington, Delaware; Andrew K. Glenn, GLENN AGRE
BERGMAN & FUENTES LLP, New York, New York; Counsel for the Invesco
Defendants

WILL, Vice Chancellor
In a few days, QuarterNorth Energy, Inc. is set to close on a $1.6 billion

merger with Talos Energy Inc. QuarterNorth’s stockholders will receive

consideration of cash and Talos shares. The deal is—by all accounts—favorable for

QuarterNorth and its investors.

The plaintiffs, who are minority securityholders in QuarterNorth Energy, Inc.,

support the Talos merger. But they believe that the defendant majority investors are

improperly invoking drag-along rights in conjunction with it. In this action, the

plaintiffs allege that the Talos merger agreement is inconsistent with the terms of a

drag-along provision in QuarterNorth’s stockholders agreement. They also assert

that the drag-along provision does not apply to the plaintiffs who own only warrants.

The plaintiffs are not reasonably likely to succeed on these claims. The

merger agreement and drag-along sale notice appear consistent with the terms of the

stockholders agreement. It would also be unreasonable for the drag-along provision

to only apply to the narrow subset of investors that the plaintiffs insist are implicated.

The plaintiffs will, now or later, receive the merger consideration. They prefer

for their warrants to roll through post-closing so that they can decide when to

exercise them for cash and Talos shares. But money damages are an available (albeit

tricky) remedy if I later find they were improperly subjected to the drag-along sale.

Further, the balance of the equities disfavors the plaintiffs. To enjoin the drag-

along sale could put the Talos merger at risk, harming all QuarterNorth investors.

1
Preliminary injunctive relief is therefore unavailable. The plaintiffs may

pursue relief after the merger closes.

I. FACTUAL BACKGROUND

The background is drawn from the allegations in and exhibits to the Verified

Complaint (the “Complaint”), and affidavits and documents submitted by the parties

in connection with the plaintiffs’ motion for a preliminary injunction.

A. The Formation of QuarterNorth

QuarterNorth Energy Inc. (the “Company”) is a private corporation that holds

oil and gas leases and owns and operates production facilities in the Gulf of Mexico.1

It was formed on August 27, 2021 as part of a Chapter 11 reorganization plan for its

predecessor oil and gas production company, Fieldwood Energy LLC.2 As part of

the reorganization, Fieldwood sold certain deepwater assets to QuarterNorth.3

In exchange for these assets, QuarterNorth issued shares of Company

common stock (“Common Stock”) and subscription rights to Fieldwood’s first-lien

lenders and issued two tranches of warrants (“Warrants”) and subscription rights to

Fieldwood’s second-lien lenders.4 Fieldwood’s first-lien lenders include defendant

Avenue Energy Opportunities Fund II, L.P. and the groups of defendant funds

1
Verified Compl. (Dkt. 1) (“Compl.”) ¶¶ 34, 36.
2
Id. ¶ 34.
3
Id. ¶ 35.
4
Id.
2
referred to in the Complaint as the “Franklin Stockholder Defendants,” “Invesco

Stockholder Defendants,” and “Nuveen Stockholder Defendants” (together, the

“Drag-Along Defendants”).5 Fieldwood’s second-lien lenders include the plaintiffs

and some of the Drag-Along Defendants.6 The Warrants received by the second-

lien lenders have more than five years remaining before they expire.

B. The Warrant Agreements and Stockholder Agreement

To govern the issuances of Common Stock and Warrants, QuarterNorth

entered into several agreements dated as of August 27, 2021. It executed two

materially identical Warrant Agreements.7 It also executed a Stockholders

Agreement, which is binding on Warrant holders “even if not a signatory thereto.”8

The Warrant Agreements explain that each Warrant entitles the holder “to

purchase from the Company . . . , upon proper exercise and payment of the Exercise

Price in cash, a number of Warrant Shares equal to the then-applicable Warrant

5
Id.; see id. ¶¶ 22-24.
6
Id. ¶ 35; see id. ¶¶ 17-19; Pls.’ Opening Br. in Support of Their Mot. for a Prelim. Inj.
(Dkt. 24) (“Pls.’ Opening Br.”) 3 n.3.
7
See Compl. Exs. A-B (together, “Warrant Agreements”).
8
Compl. Ex. C (“Stockholders Agreement”) 1.
3
Share Number.”9 They also confirm that each Warrant is subject to “the provisions

of th[e] [Warrant Agreements] and the Stockholders Agreement.”10

The Warrant Agreements address the treatment of Warrants in the event of a

merger. Section 7(a) of the Warrant Agreements contemplates that the Warrants

would “roll through” after closing:

If a Reorganization occurs at any time on or prior to the Expiration Date
(or, if later, the settlement date for any exercise of Warrants), then,
following the effective time of such Reorganization, a Holder’s right to
receive Warrant Shares upon exercise of its Warrants shall be converted
into the right to receive upon exercise, with respect to each Warrant
Share that would have otherwise been deliverable hereunder, one Unit
of Reference Property . . . .11

In Section 7(b), QuarterNorth agreed to preserve appliable Warrant holders’ rights

if it entered into a merger:

The Company shall not consummate any Reorganization unless the
Company first shall have made appropriate provision to ensure that the
applicable provisions of [the Warrant Agreements] shall immediately
after giving effect to such Reorganization be assumed by and binding

9
Warrant Agreements § 5(c). The “Warrant Shares” are the shares of Common Stock
“deliverable upon proper exercise of the Warrants.” Id. § 3(a). The “Warrant Share
Number” is the number of shares of Common Stock received from the Company “upon
proper exercise and payment of the Exercise Price.” Id. The “Exercise Price” is $166.09
per Warrant Share. Id. § 5(b).
10
Id. § 3(c).
11
Id. § 7(a). “Reorganization” includes “any consolidation, merger, statutory share
exchange, business combination or similar transaction with a third party . . . in which the
Common Stock is converted into, is exchanged for or becomes the right to receive cash,
other securities or other property.” Id. § 1. “Unit of Reference Property” means “in respect
of any Reorganization, the kind and amount of Reference Property that a holder of one
Share (or the holder of one Unit of Reference Property in respect of a prior Reorganization,
as applicable) is entitled to receive upon the consummation of such Reorganization.” Id.
4
on the other party to the Reorganization (or the surviving entity,
successor, parent company and/or issuer of such Reference Property, as
appropriate) and applicable to any Reference Property deliverable upon
the exercise of Warrants . . . .12

The Stockholders Agreement contains a drag-along mechanism, which allows

the “Drag-Along Sellers” (defined as “holders of Common Stock and [] Warrants”

that own 50% or more of the Company’s Common Stock) to cause the remaining

“Other Stockholders” (defined as “each other holder of Common Stock and []

Warrants”) to join in certain transactions.13 It applies to any “Transfer” of Common

Stock, including a “sale of equity interests, merger or sale of all or substantially all

assets”—referred to as a “Drag-Along Sale.”14 Section 3.03(a) of the Stockholders

Agreement (the “Drag-Along Provision”) details the triggering and application of

these drag-along rights:

If holders of Common Stock and [] Warrants (the “Drag-Along
Sellers”) owning 50% or more of the Aggregate Common Stock
propose to Transfer shares of Common Stock held by them constituting
at least 50% of the Aggregate Common Stock, including through a sale
of equity interests, merger or sale of all or substantially all assets of the
Corporation (a “Drag-Along Sale”), the Drag-Along Sellers may at
their option (the “Drag-Along Rights”) require each other holder of
Common Stock and [] Warrants (the “Other Stockholders”) to:

(i) sell a number of shares of the Common Stock and [] Warrants
owned by such Other Stockholder equal to the Drag-Along Portion of

12
Id. § 7(b).
13
See Stockholders Agreement § 3.03(a)(i). The “Emergence Warrants” are the Warrants
issued by QuarterNorth. See supra note 4 and accompanying text.
14
Id. § 3.03(a).
5
such Other Stockholder to the Person to whom the Drag-Along Sellers
propose to sell their shares of Common Stock and/or [] Warrants (the
“Drag-Along Buyer”) and on the same terms and conditions as the
Drag-Along Sellers (provided that in the case of the [] Warrants, if the
Drag-Along Sellers do not require the exercise of [] Warrants pursuant
to Section 3.03(a)(iv), the consideration to be paid to the Other
Stockholders in respect of [] Warrants will be the amount that would
have been payable had the [] Warrants been exercised prior to the Drag-
Along Sale and sold as Common Stock minus the aggregate exercise
price payable for the exercise of the [] Warrants . . . );

(ii) if such Drag-Along Sale requires Stockholder approval, . . .
vote . . . all shares of Common Stock in favor of, and adopt, such Drag-
Along Sale . . . ;

(iii) subject to Section 3.03(d)(ii), execute and deliver all related
documentation and take such other action in support of the Drag-Along
Sale as shall reasonably be requested by the Corporation or the Drag-
Along Sellers . . . ;

(iv) exercise any [] Warrants held by the Other Stockholders (to
the extent exercisable) immediately prior to the consummation of the
Drag-Along Sale and in such case the shares of Common Stock issued
on conversion will be delivered in lieu of the [] Warrants . . . ;

(v) not deposit, and to cause their Related Persons not to deposit
. . . any shares of Common Stock or [] Warrants owned by such Other
Stockholder in a voting trust . . . ; and

(vi) waive, and refrain from exercising, any dissenters’ rights or
rights of appraisal under applicable Law at any time with respect to
such Drag-Along Sale.15

15
Id. § 3.03(a)(i)-(vi).
6
C. The Talos Merger

On January 15, 2024, QuarterNorth announced a merger agreement with

Talos Energy Inc. (the “Merger Agreement”) through which Talos is to acquire

QuarterNorth for $1.6 billion.16 A wholly owned subsidiary of Talos is to merge

into QuarterNorth, with QuarterNorth surviving as an indirect wholly owned

subsidiary of Talos.17 As consideration, QuarterNorth common stockholders are to

receive a combination of cash and Talos stock.18 Section 2.04 of the Merger

Agreement explains that each Warrant will be converted into the right to receive the

same merger consideration payable for Common Shares.19 The proposed deal

represents a significant increase to QuarterNorth’s market valuation on a per share

basis.20

On January 19, QuarterNorth issued a notice informing the Other

Stockholders (the “Drag-Along Sale Notice”) that the Drag-Along Defendants were

exercising their drag-along rights “[p]ursuant to Section 3.03 of the Stockholders

Agreement.”21 It explained that each Other Stockholder would be required to

16
Compl. ¶ 56; Compl. Ex. E at 3; see Compl. Ex. D (“Merger Agreement”).
17
Compl. ¶¶ 7, 57; see Merger Agreement Item 1.01.
18
Compl. ¶ 58; see Merger Agreement Item 1.01.
19
Merger Agreement § 2.04.
20
Compl. ¶ 60.
21
Compl. Ex. F (“Drag-Along Sale Notice”) 1; see Compl. ¶ 63.
7
“transfer all of the shares of Common Stock and [] Warrants owned by such Other

Stockholder in the Drag-Along Sale on the same terms and conditions as the Drag-

Along Sellers.”22

On January 30, QuarterNorth announced that a stockholder vote on the

merger would occur on February 20.23 The next week, QuarterNorth notified

its Common Stock and Warrant holders that the merger was expected to close

by the end of February, subject to certain conditions being satisfied.24

D. This Litigation

On February 7, the plaintiffs filed this action and sought injunctive relief.25 In

their Complaint, the plaintiffs allege that the Drag-Along Provision of the

Stockholders Agreement is being improperly invoked. Counts I and II of the six-

count Complaint seek to enjoin the Drag-Along Sellers from pursuing the proposed

Drag-Along Sale as to the plaintiffs and request related declaratory relief.26

Exemplifying the best traditions of the Delaware bar, the parties agreed to

expedite this matter and proceed towards a preliminary injunction hearing. 27 On

22
Drag-Along Sale Notice ¶ 1.
23
Compl. ¶ 84.
24
Id.; see Compl. Ex. K.
25
Dkt. 1.
26
Compl. ¶¶ 86-91, 94-101, 104-107.
27
See Dkt. 35.
8
February 12, the plaintiffs filed a motion for a preliminary injunction with an

opening brief and affidavits in support.28 The defendants filed an answering brief in

opposition to the motion on February 15, and the plaintiffs filed a reply brief on

February 17.29 On February 19, I heard oral argument on the motion, which was

taken under advisement.30

II. LEGAL ANALYSIS

A preliminary injunction is an “extraordinary form of relief.”31 It is only

available “where the movant[] demonstrate[s]: (1) a reasonable probability of

success on the merits at a final hearing; (2) an imminent threat of irreparable injury;

and (3) a balance of the equities that tips in favor of issuance of the requested

relief.”32 Although “[a] strong showing on one element may overcome a weak

showing on another element,” the failure to prove any element “will defeat the

application.”33 None support a grant of injunctive relief here.

28
Dkt. 24.
29
Dkts. 37, 39.
30
Dkt. 44.
31
Next Level Commc’ns, Inc. v. Motorola, Inc., 834 A.2d 828, 845 (Del. Ch. 2003).
32
HighTower Hldg., LLC v. Gibson, 2023 WL 1856651, at *5 (Del. Ch. Feb. 9, 2023)
(quoting Cabela’s LLC v. Wellman, 2018 WL 5309954, at *3 (Del. Ch. Oct. 26, 2018)).
33
Cantor Fitzgerald, L.P. v. Cantor, 724 A.2d 571, 579 (Del. Ch. 1998).
9
A. Reasonable Probability of Success

To demonstrate that they have a “reasonable probability” of success, the

plaintiffs must prove that they are “more likely than not entitled to relief.”34 The

plaintiffs argue that they are likely to prevail on Counts I and II of the Complaint.35

These claims center around the terms of the Stockholders Agreement and Warrant

Agreements in view of the proposed Drag-Along Sale.

“Delaware adheres to the ‘objective’ theory of contracts,” meaning that “a

contract’s construction should be that which would be understood by an objective,

reasonable third party.”36 The court must read the contract “as a whole, giving

meaning to each term and avoiding an interpretation that would render any term

‘mere surplusage.’”37 “When a contract is clear and unambiguous, the court will

give effect to the plain meaning of the contract’s terms and provisions.” 38 “An

unreasonable interpretation produces an absurd result or one that no reasonable

person would have accepted when entering the contract.”39

34
C&J Energy Servs., Inc. v. City of Miami Gen. Emps.’ & Sanitation Emps.’ Ret. Trust,
107 A.3d 1049, 1067 (Del. 2014).
35
See Compl. ¶¶ 86-91, 94-101, 104-107; Pls.’ Opening Br. 15.
36
Weinberg v. Waystar, Inc., 294 A.3d 1039, 1044 (Del. 2023).
37
Sunline Com. Carriers, Inc. v. CITGO Petroleum Corp., 206 A.3d 836, 846 (Del. 2019).
38
Manti Hldgs., LLC v. Authentix Acq. Co., Inc., 261 A.3d 1199, 1208 (Del. 2021) (citing
Osborn ex rel. Osborn v. Kemp, 991 A.2d 1153, 1159-60 (Del. 2010)).
39
Osborn, 991 A.2d at 1160.
10
1. Whether the Merger Agreement and Drag-Along Sale Notice Are
Consistent with the Relevant Contracts
The Drag-Along Provision in Section 3.03(a) of the Stockholders Agreement

applies where “holders of Common Stock and [] Warrants” with “50% or more of

the Aggregate Common Stock” (defined as the Drag-Along Sellers) propose to

“Transfer shares of Common Stock,” including through “a sale of equity interests,

merger or sale of all or substantially all assets.”40 If the provision is triggered, the

Drag-Along Sellers may force Other Stockholders to take (or refrain from taking)

certain actions.41 The Drag-Along Sellers can, “at their option,” cause Other

Stockholders to: (i) “sell” Common Stock and Warrants on the same terms as the

Drag-Along Sellers; (ii) “vote” shares under certain conditions; (iii) “execute and

deliver” documentation related to the Drag-Along Sale; (iv) “exercise” Warrants

“immediately prior to the consummation of the Drag-Along Sale”; (v) “not deposit”

shares or Warrants in a voting trust or subject them to any arrangements or

agreements; and (vi) “waive, and refrain from exercising, any dissenters’ rights or

rights of appraisal.”42

The Drag-Along Sale Notice requires the Other Stockholders to take some of

the actions enumerated in Section 3.03(a): to “vote,” “execute and deliver”

40
Stockholders Agreement § 3.03(a).
41
See id. § 3.03(a)(i)-(vi).
42
Id.
11
documentation, “not deposit” Common Stock or Warrants, and “waive” dissenters’

or appraisal rights.43 It also contemplates the “transfer [of all other] shares of

Common Stock and [] Warrants owned by [an] Other Stockholder in the Drag-Along

Sale on the same terms and conditions as the Drag-Along Sellers.”44

A “transfer” is not one of the six actions enumerated in the Drag-Along

Provision that the Drag-Along Sellers can impose on Other Stockholders. Thus, the

plaintiffs contend that the Drag-Along Sale Notice contravenes the Stockholders

Agreement and amounts to a conversion of equity that is prohibited by Sections 7(a)

and (b) of the Warrant Agreements.45 The plaintiffs are not reasonably likely to

succeed on these arguments.

First, the Merger Agreement tracks the Stockholders Agreement. Section 2.04

of the Merger Agreement states:

[P]ursuant to Section 3.03(a)(i) of the Stockholders Agreement, each
Company Warrant will automatically, and without any further act of the
holder thereof, be converted immediately prior to Closing into the right
to receive the amount that would have been payable had such Company
Warrant been exercised immediately prior to the Closing and converted
into the right to receive . . . the Per Share Consideration . . . minus the

43
Drag-Along Sale Notice ¶¶ 2-5.
44
Id. ¶ 1.
45
See Pl.’s Opening Br. 18-19; Pls.’ Reply Br in Further Supp. of Pls.’ Mot. for a Prelim.
Inj. (Dkt. 39) (“Pls.’ Reply Br.”) 4.
12
aggregate exercise price payable for the exercise of such Company
Warrant[.]46
The plaintiffs read this language as requiring the Warrants to be treated as exercised,

even though the Drag-Along Sale Notice does not specifically mention the exercise

of Warrants.47

But Section 3.01(a)(i) includes a proviso after the text permitting the Drag-

Along Sellers to cause Other Stockholders to “sell” Common Stock and Warrants.

It provides that, if the Drag-Along Sellers do not force the exercise of Other

Stockholders’ Warrants in the Drag-Along Sale, they may require the Other

Stockholders to accept the consideration that would have been received if the Other

Stockholders had exercised their Warrants before the Drag-Along Sale and sold

them as Common Stock (minus the exercise price).48 Section 2.04 of the Merger

Agreement is in accord.

Second, the “transfer” contemplated by the Drag-Along Sale Notice is

effectively a “sale” under Section 3.01(a)(i) of the Stockholders Agreement. A

“sale” is “[t]he transfer of property or title for a price.”49 The operative paragraph

46
Merger Agreement § 2.04. “Per Share Consideration” means, subject to withholdings
under Section 2.10, “the amount equal to (a) the Per Share Cash Consideration plus (b) the
Per Share Parent Stock Consideration.” Id. § 1.01.
47
See Pls.’ Opening Br. 4, 19.
48
Stockholders Agreement § 3.01(a)(i); see supra note 15 and accompanying text.
49
Sale, BLACK’S LAW DICTIONARY (11th ed. 2019); see also Calpine Corp. v. Bank of N.Y.,
895 A.2d 880, 895 (Del. Ch. 2005) (describing a “‘sale’ as the ‘transfer of property or title
13
in the Drag-Along Sale Notice describes a “transfer” of Common Stock and

Warrants “on the same terms and conditions as the Drag-Along Sellers.”50 These

“terms and conditions” include the transfer of Common Stock and Warrants for a

price—the merger consideration—that is the same obtained by the Drag-Along

Sellers from Talos (the Drag-Along Buyer).51 This comports with Section 3.03(a)(i)

of the Stockholders Agreement.

The plaintiffs reject the notion that the transfer discussed in the Drag-Along

Notice is equivalent to a sale, arguing that a “conversion” of equity does not

implicate “an actual sale and an actual buyer” of the interests.52 Individual shares

of stock are not, however, “sold” in a typical merger. They are converted into the

right to receive merger consideration.53

for a price’” (citation omitted)), aff’d in part, rev’d in part sub nom. Wilm. Trust Co. v.
Calpine Corp., 906 A.2d 807 (Del. 2005) (TABLE); Willis v. City of Rehoboth Beach, 2005
WL 1953028, at *5 (Del. Super. June 24, 2005) (same).
50
Drag-Along Sale Notice ¶ 1.
51
The Drag-Along Sale Notice states that the transfer of securities will be conducted
pursuant to the Merger Agreement, which contemplates the transfer of the securities for a
price. See id.; Merger Agreement Item 1.01.
52
Pls.’ Reply Br. 5.
53
See generally Swift v. Houston Wire & Cable Co., 2021 WL 5763903, at *1 (Del. Ch.
Dec. 3, 2021) (“At the Effective Time, each issued and outstanding share of [the
company’s] common stock would be cancelled and converted into the right to receive
merger consideration of $5.30 in cash.”); In re P3 Health Gp. Hldgs., LLC, 2022 WL
16548567, at *12 (Del. Ch. Oct. 31, 2022) (“[W]hen the merger became effective, the []
units were converted into the right to receive a mixture of cash and stock in [the buyer].”);
Aspen Advisors LLC v. United Artists Theatre Co., 861 A.2d 1251, 1257 (Del. 2004) (“In
14
Section 2.03 of the Merger Agreement provides that shares of QuarterNorth

stock will be “converted into the right to receive the Per Share Consideration.”54

Although the Drag-Along Sale Notice outlines a “transfer” for shares of Common

Stock, the plaintiffs only challenge its application to the Warrants. The only

difference is that the proviso of Section 3.03(a)(i) treats the Warrants as if they were

converted twice: first into shares of Common Stock pre-closing, and then into the

right to receive merger consideration.55

Finally, the transfer (or conversion) of the Warrants is not barred by the

Warrant Agreements. The plaintiffs claim that the transaction documents run afoul

of the roll-through right and protections afforded by Sections 7(a) and (b) of the

Warrant Agreements.56 To be sure, the Warrant Agreements contemplate that

Warrants roll through in the event of a merger.57 But they also confirm that the

Stockholders Agreement, which contains the Drag-Along Provision, is binding on

the Merger, each outstanding publicly owned share of [the seller’s] stock was converted
into the right to receive $14.00 in cash.”).
54
Merger Agreement § 2.03(a); see supra note 46 (defining “Per Share Consideration”).
55
See Stockholders Agreement § 3.03(a)(i); see also Aspen Advisors LLC v. United Artists
Theatre Co., 843 A.2d 697, 708 (Del. Ch. 2004) (“The most obvious reading of the
Warrants is that they grant Warrantholders the right to receive the same merger
consideration that they would have received if they had converted immediately before the
[m]erger.”), aff’d, 861 A.2d 1251 (Del. 2004).
56
See Pls.’ Reply Br. 4, 14-15.
57
Warrant Agreements § 7(a).
15
Warrant holders.58 Section 3.03(a) of the Stockholders Agreement likewise

addresses the treatment of Warrants in a merger.59

The Warrant Agreements can be read harmoniously with the Stockholders

Agreement. The Drag-Along Provision is not automatically exercised in the event

of a merger.60 If it were not invoked, Warrants would roll through in a merger as

“the right to receive upon exercise” the merger consideration under Section 7(a) of

the Warrant Agreements.61 But if the Drag-Along Provision were triggered, Section

7(a) of the Warrant Agreements would no longer be an “applicable provision” under

Section 7(b) that the Company must contract to protect in a merger agreement.62

2. Whether the Drag-Along Provision Applies to Plaintiffs Who
Only Hold Warrants
The plaintiffs argue that, even if the Drag-Along Sale Notice and Merger

Agreement comport with the Stockholders Agreement, the Drag-Along Provision

cannot apply to certain minority investors. Section 3.03(a) of the Stockholders

58
See id. § 3(c).
59
See Stockholders Agreement § 3.03(a)(i), (iv), (v).
60
See Jason Breen, Amy L. Simmerman, Brad Sorrels & Jason B. Schoenberg, Client
Advisory: How to Navigate the Decision of Exercising Drag-Along Rights During an M&A
Process, WILSON SONSINI (Sept. 27, 2022), https://www.wsgr.com/en/insights/how-to-
navigate-the-decision-of-exercising-drag-along-rights-during-an-manda-
process.html#3 (“Although one would think that triggering drag-along provisions in
connection with a sale transaction would occur often given the protections it affords, these
provisions are rarely utilized.”).
61
Warrant Agreements § 7(a).
62
Id. § 7(b).
16
Agreement defines the Other Stockholders who can be dragged as “each other holder

of Common Stock and [] Warrants.”63 The plaintiffs read the provision to exclude

those who hold only Warrants (i.e., no shares of Common Stock).64 Their argument

turns on the construction of the word “and” in the definition of Other Stockholders.65

The meaning of the word “and” seems straightforward. Yet it has spawned a

“lively debate” across jurisdictions over its use “in legal drafting.”66 In Weinberg v.

Waystar, Inc., the Delaware Supreme Court undertook a meticulous exploration of

the word’s usage.67 The court outlined “two avenues of interpretation—the

‘conjunctive or disjunctive’ path and the ‘joint or several’ path.”68

“And” is ordinarily conjunctive; “or” is ordinarily disjunctive.69 Courts

usually interpret “and” as conjunctive unless it produces “an absurd or unreasonable

result” or upsets the “parties’ intent and reasonable expectations.”70 Here, the parties

63
Stockholders Agreement § 3.03(a) (emphasis added).
64
See Pls.’ Opening Br. 20-22.
65
The plaintiffs initially alleged that the Drag-Along Defendants could not be Drag-Along
Sellers since those owning “stock and warrants hold less than 50% of the Company’s
common stock.” Compl. ¶ 93. After discovery, this argument was withdrawn. See Pls.’
Opening Br. 13-14.
66
See Waystar, 294 A.3d at 1058 (detailing various courts’ interpretations of “and”); see
also Pulsifer v. United States, 143 S. Ct. 978 (2023) (granting certiorari to resolve a circuit
split over the construction of “and” in a statute).
67
294 A.3d 1039.
68
Id. at 1044-45.
69
Id. at 1045 (citing Silverman v. Silverman, 206 A.3d 825, 832 n.35 (Del. 2019)).
70
Id.
17
agree that the “and” in the definition of Other Stockholders is conjunctive.71 Neither

reads the word as providing that Other Stockholders are either Common stock or

Warrant holders. Nor do I.

Instead, the parties’ interpretations diverge over whether “and” is joint or

several. The “several ‘and’ denotes A and B, jointly or severally”; the “joint ‘and’

denotes A and B, jointly but not severally.”72 To use an example from Waystar,

offering a guest “a yogurt, a muffin, and a bagel” would mean that one could take

any, all, or none of the items. In that example, the “and” is several. If it were joint,

the guest would be required to take all three of the items.73 The joint approach would

be inconsistent with common English usage (absent a particularly overbearing host).

A joint “and” in the definition of Other Stockholders would mean that the

Drag-Along Provision applies only to a subset of minority investors that

simultaneously own two kinds of securities: Common Stock and Warrants. A

several “and” would mean that it applies to holders of Common Stock, Warrants, or

both.74 The joint construction, advanced by the plaintiffs, is unlikely to apply. It is

unsupported by the plain terms and context of Section 3.03(a) of the Stockholders

71
Defs.’ Answering Br. in Opp’n to Pls.’ Mot. for Prelim. Inj. (Dkt. 37) 22 n.13; Pls.’
Opening Br. 20.
72
Waystar, 294 A.3d at 1046.
73
See id. at 1059.
74
See Pls.’ Opening Br. 20-21.
18
Agreement, is inconsistent with other parts of the Drag-Along Provision, and risks

an unreasonable result.

a. The Terms of Section 3.03(a)
Drag-along provisions are common in stockholder agreements and enable a

majority to force the closing of a change-of-control transaction.75 They “often

require that minority stockholders take actions that are reasonably necessary to close

a merger,” such as “voting in favor of the merger or providing written consent.”76

Section 3.03(a) of the Stockholders Agreement does just that. If the Drag-Along

Sellers trigger the drag-along mechanism by proposing a transaction, they may cause

Other Stockholders to take certain enumerated actions.

The specific actions contemplated by the Drag-Along Provision support a

several interpretation of the word “and” in the definition of Other Stockholders.

Some of the actions described in the Drag-Along Provision are specific to holders of

Common Stock. Section 3.03(a)(ii) of the Stockholders Agreement permits the

Drag-Along Sellers to require Other Stockholders to vote “all shares of Common

Stock” they own or exercise voting power over in favor of a Drag-Along Sale.77

Some of the actions described in the Drag-Along Provision are specific to Warrant

75
See SV Inv. P’rs, LLC v. ThoughtWorks, Inc., 7 A.3d 973, 991-92 (Del. Ch. 2010).
76
Manti Hldgs., 261 A.3d at 1224.
77
Stockholders Agreement § 3.03(a)(ii).
19
holders. Section 3.03(a)(iv) allows the Drag-Along Sellers to require Other

Stockholders to “exercise any [] Warrants . . . immediately prior to the

consummation of the Drag-Along Sale.”78 And some apply to holders of both

Warrants and Common Stock. Under Section 3.03(a)(i), the Drag-Along Sellers

may require Other Stockholders to “sell a number of shares of the Common Stock

and [] Warrants owned by such Other Stockholder” to the buyer “to whom the Drag-

Along Sellers propose to sell their shares of Common Stock and/or [] Warrants . . .

on the same terms and conditions as the Drag-Along Sellers.”79 This provision

contemplates that the Drag-Along Sellers can drag stockholders in a sale of Common

Stock, Warrant holders in sale of Warrants, or both.

Further, Section 3.03(a)(iv) of the Stockholders Agreement allows the Drag-

Along Sellers to require the exercise of “any [] Warrants held by the Other

Stockholders.”80 If Other Stockholders must hold both Common Stock and

Warrants, the inclusion of the word “any” would be nonsensical.81 By the plaintiffs’

logic, Other Stockholders must own Warrants.82 The plaintiffs would have me read

78
Id. § 3.03(a)(iv).
79
Id. § 3.03(a)(i) (emphasis added).
80
Id. § 3.03(a)(iv) (emphasis added).
81
Osborn, 991 A.2d at 1159.
82
See Compl. ¶ 4.
20
“any” as “every.” But if “any” Warrant meant “every” Warrant, the phrase “held by

the Other Stockholders” would be surplusage.83

b. The Role of the Drag-Along Provision
The plaintiffs’ interpretation of Other Stockholders would undermine the

structure and function of the Drag-Along Provision. If a minority investor held

Common Stock but not Warrants, the Drag-Along Sellers would be unable to cause

it to vote in favor of a Drag-Along Sale. If the investor held Warrants but not

Common Stock, the Drag-Along Sellers could not cause it to exercise its Warrants

before a Drag-Along Sale. Instead, only the subset of minority investors with

Warrants and Common Stock would be subject to the drag-along mechanism.84

This approach would impose an illogical (and seemingly arbitrary) distinction

between the parties that can and cannot be dragged.85 The Drag-Along Provision

would not result in a completed merger or sale. Instead, the remaining holders with

only Common Stock or Warrants would maintain outsize influence simply because

they lack both types of securities.

83
Stockholders Agreement § 3.03(a)(iv); see Capella Hldgs., LLC v. Anderson, 2017 WL
5900077, at *7 (Del. Ch. Nov. 29, 2017).
84
The plaintiffs argue that the “even if the Drag-Along Sale were proper as to some
Plaintiffs, it cannot bind the Warrant-Only Plaintiffs.” Pls.’ Opening Br. 20. This
argument is flawed under the plaintiffs’ own position that the Drag-Along Provision only
applies to holders of both Common Stock and Warrants.
85
See Manti Hldgs., 261 A.3d at 1208 (citing Osborn, 991 A.2d at 1160).
21
The plaintiffs believe that their interpretation of Section 3.03(a) of the

Stockholders Agreement imposes “rough justice” by requiring “an alignment of

interest to avoid . . . significant stockholders [from] entering into a deal that

prejudices Warrant holders.”86 But as the plaintiffs acknowledge, the Drag-Along

Defendants include owners of Common Stock and Warrants.87 In any event, the

plaintiffs’ view that the Drag-Along Provision is meant to protect Warrant holders—

not to drag along minority investors—is unsupported by Stockholders Agreement’s

plain terms.

c. Other Terms of the Drag-Along Provision

To read the “and” in the definition of Other Stockholders as joint, rather than

several, is also inconsistent with other portions of the Drag-Along Provision.88

For example, Section 3.03(b) refers to the “consideration to be paid in

exchange for the shares of Common Stock or [] Warrants pursuant to [] Section 3.03”

as including “any securities and due receipt thereof by any holder of Common Stock

86
Feb. 19, 2024 Prelim. Inj. Hr’g Tr. (Dkt. 50) 17.
87
Pls.’ Opening Br. 20. Further, Section 3.03(d)(iii) of the Stockholders Agreement
provides that the Other Stockholders will receive “the same form of consideration . . . as is
received by the Drag-Along Sellers.” Stockholders Agreement § 3.03(d)(iii).
88
See Stonewall Ins. Co. v. E.I. du Pont de Nemours & Co., 996 A.2d 1254, 1260 (Del.
2010) (“[A] single clause or paragraph of a contract cannot be read in isolation, but must
be read in context.” (quoting Cheseroni v. Nationwide Mut. Ins. Co., 402 A.2d 1215, 1217
(Del. Super. 1979), aff’d, 410 A.2d 1015 (Del.1980))).
22
or [] Warrants.”89 The “or” in the latter phrase would be illogical if the plaintiffs’

construction of Other Stockholders applied. In the plaintiffs’ view, there could be

no such thing as an Other Stockholder with Common Stock or Warrants.

Additionally, Section 3.03(d)(i) states that a “Drag-Along Sale must include

all Other Stockholders.”90 This requirement would be meaningless under the

plaintiffs’ interpretation, which would not ensure a successful drag because only a

subset of minority investors would be affected.

B. Irreparable Harm

A showing of imminent, irreparable harm is necessary for preliminary

injunctive relief to issue.91 Irreparable harm is “generally defined as harm for which

there can be no remedy at law, which is ‘typically taken to mean that an award of

compensatory damages will not suffice.’”92 An injury may also be irreparable if “a

later money damage award would involve speculation” or be so inadequate that it

would amount to a denial of justice.93

89
Stockholders Agreement § 3.03(b) (emphasis added).
90
Id. § 3.03(d)(i).
91
See Hollinger Int’l, Inc. v. Black, 844 A.2d 1022, 1090 (Del. Ch. 2004), aff’d, 872 A.2d
559 (Del. 2005).
92
AM Gen. Hldgs. LLC v. Renco Gp., Inc., 2012 WL 6681994, at *4 (Del. Ch. Dec. 21,
2012) (quoting Donald J. Wolfe, Jr. & Michael A. Pittenger, Corporate and Commercial
Practice in the Delaware Court of Chancery § 10.02(b)(4), at 10–17 (2012)).
93
Hollinger Int’l, 844 A.2d at 1022; see also Renco Gp., 2012 WL 6681944, at *4.
23
The plaintiffs assert that if the Drag-Along Sale is not enjoined, they will lose

the “unique and incalculable value” of optionality associated with their Warrants.94

If the Warrants roll through post-closing as contemplated by the Warrant

Agreements, the plaintiffs can choose when to exercise them for the merger

consideration of cash and Talos shares. But if the Drag-Along Sale proceeds, the

plaintiffs aver that it would be “unduly difficult and speculative” to calculate the

present value of that lost opportunity.95

The plaintiffs acknowledge that they will—at some point—receive the merger

consideration. The key issue is when they will receive it, which affects the timing

of recognizing losses or gains in their positions.96 The tax consequences of

recognition of cash or effects of dilution could, however, be remedied through

money damages. Although quantifying any losses may be challenging, “[t]he law

does not require certainty . . . so long as the court has a basis to make a responsible

estimate of damages.”97

94
Pls.’ Opening Br. 24.
95
Id. at 25.
96
See Compl. ¶ 69.
97
Red Sail Easter Ltd. P’rs, L.P. v. Radio City Music Hall Prods., Inc., 1992 WL 251380,
at *7 (Del. Ch. Sept. 29, 1992).
24
The plaintiffs rely on Boesky v. CX Partners, L.P. as the primary authority for

their argument that the loss of a strategic opportunity is unquantifiable.98 There, the

court assessed whether a proposed distribution plan for a defunct partnership

contravened the express terms of its partnership agreement.99 A noteholder sought

injunctive relief to protect its right under the agreement to prevent any distribution

to limited partners while the partnership remained in default on the notes.100

Chancellor Allen concluded that the proposed distribution plan would be a “clear

violation” of the entity’s obligation to the noteholder, and viewed the noteholder’s

loss of bargained-for leverage as an injury for which “no money damage award could

reliably be calculated to compensate.”101

But no such bargained-for leverage is at risk of being lost here.102 The

Warrant holders negotiated Warrant Agreements that allowed the Warrants to roll

through a merger. But they also agreed that the Stockholders Agreement applied,

98
1988 WL 42250, at *7, 14 (Del. Ch. Apr. 28, 1988).
99
Id. at *10. The proposed modifications changed the pro-rata distribution plan under the
agreement to a non-pro-rata plan that, given the liabilities of the partnership and its lack of
adequate funds to return all of the capital contributions of all the relevant partners, would
result in a breach of the agreement. Id.
100
Id. at *14.
101
Id. at *15.
102
See supra notes 56-62 and accompanying text.
25
which includes a Drag-Along Provision that could cause them to sell or exercise

their Warrants.

C. Balance of the Equities
The final element of the injunction test requires the court to undertake a

“pragmatic balancing of the equities . . . based on the facts of this case.” 103 An

injunction is only available if the plaintiff demonstrates that the “failure to grant the

injunction will cause it greater harm than granting the injunction will cause the other

party.”104 This element presents the clearest cut basis to deny the plaintiffs’ request

for preliminary injunctive relief.

The plaintiffs insist that they “do not seek to enjoin the merger from closing”

but only to prevent their “forced participation in the Drag-Along Sale.”105 I do not

doubt their intentions. But to enjoin the Drag-Along Sale puts the $1.6 billion

merger at risk.

Section 8.01(b)(i)(A) of the Merger Agreement states that “[t]he obligation of

[Talos] to consummate the Closing is subject to the satisfaction of . . . the

Fundamental Warranties of [QuarterNorth] contained in this Agreement.”106

103
In re Smurfit-Stone Container Corp. S’holder Litig., 2011 WL 2028076, at *26 (Del.
Ch. May 20, 2011).
104
Id. (cleaned up).
105
Pls.’ Opening Br. 26.
106
Merger Agreement § 8.01(b)(i)(A).
26
“Fundamental Warranties” is a defined term, which includes “the representations

and warranties contained in . . . Section 3.03.”107 Section 3.03, in turn, states that

“the Transaction will constitute a Drag-Along Sale, [and] each Company Warrant

will automatically, and without any further act of the holder thereof, be converted

immediately prior to Closing . . . .”108 If the Drag-Along Sale is enjoined, then

Section 3.03 of the Merger Agreement may be unmet and Talos could have grounds

not to close.

The plaintiffs’ loss of control over when they receive the merger consideration

is significantly outweighed by the potential loss of the merger—a transaction

deemed desirable by most of QuarterNorth’s investors.109 The equities therefore do

not support an injunction.110

III. CONCLUSION

For the reasons set forth above, the plaintiffs’ motion for a preliminary

injunction is denied.

107
Id. § 1.01.
108
Id. § 3.03(a)(i)-(ii).
109
See Dkt. 46 (reporting that just over 93% of QuarterNorth’s outstanding stockholders
voted in favor of the merger on February 20).
110
See Smurfit-Stone, 2011 WL 2028076, at *26 (explaining that the equities weighed
against an injunction where it “would create a risk that [the company’s] stockholders could
lose out on th[e] [t]ransaction altogether”); In re Delphi Fin. Gp. S’holder Litig., 2012 WL
729232, at *20 (Del. Ch. Mar. 6, 2012) (denying a motion for a preliminary injunction
including because a “renegotiated deal may yield . . . a loss of the [m]erger entirely”).
27