tat-prer14a_20201009.htm

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

(Amendment No. 1)

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 Pursuant to §240.14a-12

TRANSATLANTIC PETROLEUM LTD.

(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:

Common shares, par value $0.10 per share, of TransAtlantic Petroleum Ltd. (the “Company”) (“common shares”)

12.0% Series A Convertible Redeemable Preferred Shares, par value $0.01 per share, of the Company (the “preferred shares”)

 

(2)

Aggregate number of securities to which transaction applies:

76,704,473 common shares (including 368,916 common shares subject to vested and unvested restricted stock unit awards (“RSUs”) issued under the TransAtlantic Petroleum Ltd. 2019 Long-Term Incentive Plan (the “2019 Incentive Plan”) or the TransAtlantic Petroleum Ltd. 2009 Long-Term Incentive Plan (the “2009 Incentive Plan”))

921,000 preferred shares


 

(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):

The maximum aggregate value was determined based upon 76,704,473 common shares (including 368,916 common shares subject to vested and unvested RSUs issued under the 2019 Incentive Plan and the 2009 Incentive Plan) multiplied by the merger consideration of $0.13 per common share. In accordance with Section 14(g) of the Securities Exchange Act of 1934, as amended, a filing fee of $1,164 was previously paid in respect of 68,955,206 common shares (including 368,916 common shares subject to vested and unvested RSUs issued under the 2019 Incentive Plan and the 2009 Incentive Plan) to which the transaction applied based upon the filing fee of $129.80 per $1,000,000 that was in effect prior to October 1, 2020. A filing fee of $110 is being paid in connection with this filing, in respect of the additional 7,749,267 common shares to which the transaction applies based upon the current filing fee of $109.10 per $1,000,000. No consideration shall be paid for the preferred shares.

 

(4)

Proposed maximum aggregate value of transaction:

$9,971,581.49

 

(5)

Total fee paid:

$1,274

 

 

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: $1,164

 

(2)

Form, Schedule or Registration Statement No.: Schedule 14A - Preliminary Proxy Statement

 

(3)

Filing Party: TransAtlantic Petroleum Ltd.

 

(4)

Date Filed: September 22, 2020

 


PRELIMINARY SHAREHOLDER LETTER, SUBJECT TO COMPLETION,

DATED OCTOBER 9, 2020

 

TRANSATLANTIC PETROLEUM LTD.
c/o TransAtlantic Petroleum (USA) Corp.

16803 Dallas Parkway, Suite 200

Addison, Texas 75001

[●], 2020

Dear Common Shareholder:

You are cordially invited to attend a special meeting of the common shareholders of TransAtlantic Petroleum Ltd. (the “Company”) to be held at [●], Central Time, on [●], 2020 at [●]. The special meeting is being held for the following purposes, as more fully described in the accompanying proxy statement:

 

1.

To hold a vote on a proposal to adopt and approve the agreement and plan of merger, dated as of August 7, 2020 (as it may be amended from time to time, the “merger agreement”), by and among the Company, TAT Holdco LLC, a Texas limited liability company (“Parent”), and TAT Merger Sub LLC, a Texas limited liability company and wholly-owned subsidiary of Parent (“Merger Sub”), pursuant to which the Company shall be merged with and into Merger Sub with Merger Sub surviving as a Texas limited liability company and wholly-owned subsidiary of Parent (the “merger”), the related form of statutory merger agreement (the “statutory merger agreement”) required in accordance with Section 105 of the Companies Act 1981 of Bermuda, as amended (the “Companies Act”), and the transactions contemplated thereby, including the merger (collectively, the “merger proposal”); and

 

 

2.

To hold a vote on a proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt and approve the merger proposal (the “adjournment proposal”).

If the merger is completed, each common share, par value $0.10 per share, of the Company (“common shares”) that you own immediately prior to the effective time of the merger, other than as provided below, will be converted into the right to receive $0.13 in cash (the “merger consideration”), without interest and less applicable withholding taxes. The following common shares will not be converted into the right to receive the merger consideration in connection with the merger: (i) common shares owned by the Company or any of its wholly-owned subsidiaries immediately prior to the effective time of the merger and (ii) common shares whose holders have not voted in favor of adopting and approving the merger agreement and who have complied with all of the provisions of the Companies Act concerning the right of common shareholders to require appraisal of their common shares pursuant to Bermuda law, and who are not satisfied that they have been offered fair value for their common shares. If the merger is completed, each share of the Company’s 12.0% Series A Convertible Redeemable Preferred Shares, par value $0.01 per share (“preferred shares”), shall be canceled automatically and shall cease to exist, and no consideration shall be paid for those preferred shares.

Under the merger agreement and the Companies Act, the approval and adoption of the merger proposal requires the affirmative vote of 75% of the votes cast by holders of common shares as of the close of business on [●], 2020, the record date for the special meeting (the “record date”) at a duly convened meeting of the common shareholders at which a quorum is present.  Under the merger agreement, a quorum for purposes of the merger proposal requires at least two persons holding or representing by proxy more than 33.33% of the outstanding common shares. The merger agreement and the Companies Act also requires that the merger agreement and the statutory merger agreement be approved by the affirmative vote of 75% of the votes cast by holders of preferred shares, which was obtained on September 10, 2020 at a duly convened meeting of the Preferred Shareholder Group at which a quorum was present.

Following the completion of the merger, Parent will indirectly own all of the Company’s issued and outstanding common shares through Merger Sub, which will continue in existence as a wholly-owned subsidiary of Parent. As a


result, the Company will no longer have common shares listed on the NYSE American Exchange or the Toronto Stock Exchange and will no longer be required to file periodic and other reports with the Securities and Exchange Commission (the “SEC”) with respect to the common shares. After the merger, current common shareholders will no longer have an equity interest in the Company and will not participate in any potential future earnings of the Company. As described in the accompanying proxy statement, the proposed merger is a transaction by which the Company would be acquired by certain affiliates of the Company. Accordingly, such merger may be deemed to be a “going private transaction” under the rules of the SEC.

Shareholders of the Company representing 100% of the outstanding preferred shares (the “Preferred Shareholder Group”) entered into an agreement with Parent, pursuant to which, among other things, subject to the terms and conditions therein, the Preferred Shareholder Group agreed to vote, consent to or execute a written consent covering all of the preferred shares and all of the common shares, whether currently owned or subsequently acquired by them, approving the merger proposal and any other matters necessary for consummation of the merger and the other transactions contemplated by the merger agreement, and waiving any appraisal or rights to dissent in connection with the merger. The Preferred Shareholder Group, an affiliate of Parent, includes the following members of the Company’s Board of Directors (the “Board”) (and/or entities affiliated with such directors): N. Malone Mitchell 3rd, the Company’s Chairman of the Board and Chief Executive Officer; Jonathan T. Fite; and Randall I. Rochman.

Concurrently with the execution and delivery of the merger agreement, the members of the Preferred Shareholder Group entered into a contribution agreement with Parent pursuant to which, subject to the terms and conditions contained therein, in exchange for equity of Parent, each member of the Preferred Shareholder Group committed to transfer, contribute, directly or indirectly, and deliver to Parent immediately prior to the effective time of the merger all of such member’s preferred shares and such member’s pro rata share of cash to be used by Parent to fund the merger consideration and pay other costs and expenses that may be payable in connection with the merger.

Concurrently with the execution and delivery of the merger agreement, Parent and Merger Sub delivered a limited guaranty (the “guaranty”) from Dalea Partners, LP, an Oklahoma limited partnership and affiliate of Mr. Mitchell, in favor of the Company, which guarantees certain payment and performance obligations of Parent and Merger Sub in connection with the merger agreement.

The Board formed a special committee comprised entirely of independent and disinterested directors, consisting of Mel Riggs, Charles Campise, Kirk Krist and Greg Renwick (the “Special Committee”), to consider and negotiate the terms and conditions of the merger and to recommend to the Board whether to pursue the merger and, if so, on what terms and conditions. Because Mr. Riggs did not stand for re-election at the Company’s annual meeting, his last day as a director was June 5, 2020 and, therefore, did not participate in actions taken by the Special Committee after such date. Additionally, Mr. Krist did not become a member of the Special Committee until April 7, 2020 when he was appointed as a member of the Board.

The Special Committee voted unanimously to recommend to the Board that it, and thereafter the Board (other than Messrs. Mitchell, Rochman and Fite, each of whom abstained from voting) voted unanimously to (i) approve the merger, the merger agreement, the statutory merger agreement, the guaranty (collectively, the merger agreement, the statutory merger agreement and the guaranty, the “merger documents”) and declare that the transactions contemplated by the merger documents are procedurally fair to, and advisable and in the best interests of, the Company and its shareholders, including the Company’s unaffiliated shareholders, (ii) declare that the merger consideration is fair to, both from a financial point of view and otherwise, and advisable and in the best interests of the Company’s shareholders, including the Company’s unaffiliated shareholders, (iii) direct that the adoption and approval of the merger agreement and the statutory merger agreement be submitted to a vote at a special general meeting of the Company, (iv) approve the entry into the merger agreement and the statutory merger agreement (subject to approval of the Company’s shareholders), (v) submit the merger proposal to the Company’s shareholders for approval and adoption and (vi) recommend to the shareholders of the Company that they vote “FOR” the adoption of the merger proposal. In arriving at its recommendations, the Board and Special Committee carefully considered a number of factors described in the accompanying proxy statement. Such approval and recommendation by the Special Committee and the Board constitutes a determination pursuant to Section 106(2) of the Companies Act that the fair value of the common shares is the merger consideration.


In considering the recommendation of the Board, you should be aware that certain of the Company’s directors and executive officers have interests in the merger that are different from, or in addition to, the interests of the Company’s shareholders generally as further described in the accompanying proxy statement. You should also be aware that the Preferred Shareholder Group has interests in the merger that are different from, or in addition to, the interests of the Company’s unaffiliated shareholders, as further described in the accompanying proxy statement.

Any holder of common shares who does not vote in favor of the merger proposal or has not consented to it in writing will have the right to seek appraisal of the fair value of such holder’s common shares in lieu of receiving the merger consideration, but only if such holder does not vote in favor of the merger proposal and otherwise complies with the procedures of Section 106 of the Companies Act, which is the appraisal rights statute applicable to Bermuda companies. These appraisal rights are summarized in the accompanying proxy statement. The accompanying proxy statement constitutes notice to you from the Company of the availability of appraisal rights under the Companies Act.

While we still intend to hold the special meeting in person, we are actively monitoring the coronavirus (COVID-19) pandemic, and we are sensitive to the public health and travel concerns our shareholders may have and the protocols that federal, state and local governments may impose. In the event it is not possible or advisable to hold our special meeting in person, we will announce alternative arrangements for the meeting as promptly as practicable, which may include holding the meeting solely by means of remote communication.

Your vote is important. Whether or not you plan to attend the special meeting in person, to ensure the presence of a quorum and that your shares are represented at the special meeting, please vote via the Internet or by telephone as instructed in the accompanying proxy materials or complete, date and sign and return a proxy card as promptly as possible. Even if you plan to attend the special meeting, please take advantage of one of the advance voting options to ensure that your shares are represented at the special meeting. You may revoke your proxy at any time before it is voted by following the procedures described in the accompanying proxy statement. The merger cannot be completed unless the merger proposal is approved by an affirmative vote of 75% of the votes cast by holders of common shares as of the close of business on the record date at a duly convened meeting of the common shareholders of the Company at which a quorum is present.

Thank you for your continued support.

By Order of the Board of Directors,

 

 

 

Tabitha Bailey

Vice President, General Counsel and Corporate Secretary

 


PRELIMINARY NOTICE, SUBJECT TO COMPLETION, DATED OCTOBER 9, 2020

 

TRANSATLANTIC PETROLEUM LTD.

 

NOTICE OF SPECIAL MEETING OF COMMON SHAREHOLDERS

TO BE HELD ON [●], 2020

 

Dear Common Shareholder:

You are cordially invited to attend a special meeting of the common shareholders of TransAtlantic Petroleum Ltd. (the “Company”), which will be held at [●], Central Time, on [●], 2020 at [●]. The special meeting is being held for the following purposes, as more fully described in the accompanying proxy statement:

 

1.

To hold a vote on a proposal to adopt and approve the agreement and plan of merger, dated as of August 7, 2020 (as it may be amended from time to time, the “merger agreement”), by and among the Company, TAT Holdco LLC, a Texas limited liability company (“Parent”), and TAT Merger Sub LLC, a Texas limited liability company and wholly-owned subsidiary of Parent (“Merger Sub”), pursuant to which the Company shall be merged with and into Merger Sub with Merger Sub surviving as a Texas limited liability company and wholly-owned subsidiary of Parent (the “merger”), the related form of statutory merger agreement (the “statutory merger agreement”) required in accordance with Section 105 of the Companies Act 1981 of Bermuda, as amended (the “Companies Act”), and the transactions contemplated thereby, including the merger (collectively, the “merger proposal”); and

 

 

2.

To hold a vote on a proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt and approve the merger proposal (the “adjournment proposal”).

In addition, common shareholders will be asked to consider and vote upon any other matters that properly come before the special meeting or any adjournment, postponement or recess thereof.

The merger proposal and adjournment proposal are more fully described in the accompanying proxy statement, which the Company urges you to read carefully and in its entirety. Copies of the merger agreement and statutory merger agreement are attached as Annex A and Annex B to the accompanying proxy statement, respectively, which the Company also urges you to read carefully and in their entirety.

The board of directors of the Company (the “Board”) (other than N. Malone Mitchell 3rd, Randall I. Rochman, and Jonathon T. Fite, each of whom abstained from voting), based in part on the unanimous recommendation of a special committee comprised entirely of independent and disinterested directors, has approved and authorized the merger agreement and the statutory merger agreement and recommends a vote “FOR” the merger proposal and “FOR” the adjournment proposal. The Company does not expect a vote to be taken on any other matters at the special meeting or any adjournment, postponement or recess thereof. If any other matters are properly presented at the special meeting or any adjournment, postponement or recess thereof for consideration, however, the holders of the proxies will have discretion to vote on these matters in accordance with their best judgment.

Only shareholders that owned the Company’s common shares, par value $0.10 per share (“common shares”), at the close of business on [●], 2020 (the “record date”) are entitled to notice of and to vote at the special meeting and any adjournment, postponement or recess thereof.

Shareholders of the Company representing 100% of the Company’s 12.0% Series A Convertible Redeemable Preferred Shares, par value $0.01 per share (“preferred shares”) (the “Preferred Shareholder Group”) entered into an agreement with Parent, pursuant to which, among other things, subject to the terms and conditions therein, the Preferred Shareholder Group agreed to vote, consent to or execute a written consent covering all of the preferred shares and all common shares, whether currently owned or subsequently acquired by them, approving the merger proposal and any other matters necessary for consummation of the merger and the other transactions contemplated

 


by the merger agreement, and waiving any appraisal or rights to dissent in connection with the merger. The Preferred Shareholder Group, an affiliate of Parent, includes the following members of the Company’s Board (and/or entities affiliated with such directors): N. Malone Mitchell 3rd, Chairman of the Board and Chief Executive Officer of the Company; Jonathan T. Fite; and Randall I. Rochman.

Under the merger agreement and the Companies Act, the approval and adoption of the merger proposal requires the affirmative vote of 75% of the votes cast by holders of common shares as of the close of business on [●], 2020, the record date for the special meeting (the “record date”) at a duly convened meeting of the shareholders of the Company at which a quorum is present.  Under the merger agreement, a quorum for purposes of the merger proposal requires at least two persons holding or representing by proxy more than 33.33% of the outstanding common shares. The merger agreement and the Companies Act also requires that the merger agreement and the statutory merger agreement be approved by the affirmative vote of 75% of the votes cast by holders of preferred shares, which was obtained on September 10, 2020 at a duly convened meeting of the Preferred Shareholder Group at which a quorum was present.

Concurrently with the execution and delivery of the merger agreement, the members of the Preferred Shareholder Group entered into a contribution agreement with Parent pursuant to which, subject to the terms and conditions contained therein, in exchange for equity of Parent, each member of the Preferred Shareholder Group committed to transfer, contribute, directly or indirectly, and deliver to Parent immediately prior to the effective time of the merger all of such member’s preferred shares and such member’s pro rata share of cash to be used by Parent to fund the merger consideration and pay other costs and expenses that may be payable in connection with the merger.

Concurrently with the execution and delivery of the merger agreement, Parent and Merger Sub delivered a limited guaranty (the “guaranty”) from Dalea Partners, LP, an Oklahoma limited partnership and affiliate of Mr. Mitchell, in favor of the Company, which guarantees certain payment and performance obligations of Parent and Merger Sub in connection with the merger agreement.

In considering the recommendation of the Board, you should be aware that certain of the Company’s directors and executive officers have interests in the merger that are different from, or in addition to, the interests of the Company’s shareholders generally as further described in the accompanying proxy statement. You should also be aware that the Preferred Shareholder Group has interests in the merger that are different from, or in addition to, the interests of the Company’s unaffiliated shareholders, as further described in the accompanying proxy statement.

Any holder of common shares who does not vote in favor of the merger proposal or has not consented to it in writing will have the right to seek appraisal of the fair value of such holder’s common shares if the merger is completed in lieu of receiving the merger consideration, but only if such holder does not vote in favor of the merger proposal and otherwise complies with the procedures of Section 106 of the Companies Act, which is the appraisal rights statute applicable to Bermuda corporations. These appraisal rights are summarized in the accompanying proxy statement. The accompanying proxy statement constitutes notice to you from the Company of the availability of appraisal rights under the Companies Act.

While we still intend to hold the special meeting in person, we are actively monitoring the coronavirus (COVID-19) pandemic, and we are sensitive to the public health and travel concerns our shareholders may have and the protocols that federal, state and local governments may impose. In the event it is not possible or advisable to hold our special meeting in person, we will announce alternative arrangements for the meeting as promptly as practicable, which may include holding the meeting solely by means of remote communication.

Your vote is important. Whether or not you plan to attend the special meeting in person, to ensure the presence of a quorum and that your shares are represented at the special meeting, please vote via the Internet or by telephone as instructed in the accompanying proxy materials or complete, date and sign and return a proxy card as promptly as possible. Even if you plan to attend the special meeting, please take advantage of one of the advance voting options to ensure that your shares are represented at the special meeting. You may revoke your proxy at any time before it is voted by following the procedures described in the accompanying proxy statement. The merger cannot be completed unless the merger proposal is approved by an affirmative vote of 75% of the votes cast by holders of common shares as of the close of business on the record date at a duly convened meeting of the common shareholders of the Company at which a quorum is present.

 


The Company urges you to read the proxy statement and merger agreement carefully and in their entirety.

By Order of the Board of Directors,

 

 

Tabitha Bailey

Vice President, General Counsel and Corporate Secretary

 

[●], 2020

Neither the U.S. Securities and Exchange Commission nor any foreign or state securities commission has approved or disapproved the merger, passed upon the merits or fairness of the merger agreement or the transactions contemplated thereby, including the proposed merger, or passed upon the adequacy or accuracy of the information contained in this document or the accompanying proxy statement. Any representation to the contrary is a criminal offense.

The accompanying proxy statement and form of proxy are dated [], 2020 and are first being mailed to the Company’s common shareholders on or about [], 2020.

 

 

 

 


TABLE OF CONTENTS

 

SUMMARY TERM SHEET

1

The Special Meeting

2

The Merger

4

Recommendation of the Special Committee and the Board; Reasons for the Merger

5

Opinion of Seaport Gordian Energy LLC

5

Financing of the Merger

6

Interests of the Company’s Directors and Executive Officers in the Merger

6

Material U.S. Federal Income Tax Consequences of the Merger

7

The Merger Agreement

7

Limited Guaranty

11

Market Price of the Company’s Common Shares

11

Appraisal Rights

12

Delisting and Deregistration of the Company’s Common Shares

12

Additional Information

12

QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

13

SPECIAL FACTORS

21

Background of the Merger

21

Reasons for the Merger; Recommendation of the Special Committee; Recommendation of the Board; Fairness of the Merger

29

Opinion of Seaport Gordian Energy LLC

35

Certain Unaudited Prospective Financial Information Concerning the Company

42

Position of the Acquiring Group as to the Fairness of the Merger

44

Purposes and Reasons of Acquiring Group for the Merger

48

Plans for the Company After the Merger

50

Certain Effects of the Merger

50

Financing the Merger

52

Interests of the Company’s Directors and Executive Officers in the Merger

52

Material U.S. Federal Income Tax Consequences of the Merger

53

Regulatory Approvals

55

Delisting and Deregistration of the Company’s Common Shares

55

Fees and Expenses

55

Anticipated Accounting Treatment of the Merger

56

Rights of Appraisal

56

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

58

THE PARTIES TO THE MERGER

59

The Company

59

Parent

59

Merger Sub

59

i

 


THE SPECIAL MEETING

60

Date, Time and Place of the Special Meeting

60

Purpose of the Special Meeting

60

Record Date and Quorum

60

Attendance

61

Vote Required

61

Voting of Proxies

62

Revocability of Proxies

62

Voting by Directors and Executive Officers

63

Voting by the Acquiring Group

63

Solicitation of Proxies

63

Other Business

63

Questions and Additional Information

63

PROPOSAL 1: THE MERGER PROPOSAL

65

PROPOSAL 2: THE ADJOURNMENT PROPOSAL

66

THE MERGER AGREEMENT

67

Explanatory Note Regarding the Merger Agreement

67

Terms of the Merger Agreement

67

IMPORTANT ADDITIONAL INFORMATION REGARDING THE COMPANY

80

Executive Officers and Directors

80

Prior Public Offerings

82

Historical Consolidated Financial Information

82

Summary Financial Information

83

Other Company Information

84

Market Price of the Common Shares

84

Dividends

85

Purchase of Equity Securities by the Company

85

Other Transactions in the Company’s Securities

86

Security Ownership of Certain Beneficial Owners and Management

86

IMPORTANT ADDITIONAL INFORMATION REGARDING THE ACQUIRING GROUP

89

Background on the Acquiring Group; Additional Information Regarding Members of the Acquiring Group

89

NOTICE TO CANADIAN SHAREHOLDERS

91

OTHER BUSINESS

91

PROVISIONS FOR UNAFFILIATED SHAREHOLDERS

91

SHAREHOLDER PROPOSALS FOR 2021 ANNUAL MEETING

91

HOUSEHOLDING OF PROXY MATERIALS

93

WHERE YOU CAN FIND ADDITIONAL INFORMATION

94

 

 

ii

 


Annex:

 

Annex A             Merger Agreement

A-1

Annex B             Statutory Merger Agreement

B-1

Annex C             Opinion of Seaport Gordian Energy LLC

C-1

Annex D             Section 106 of the Companies Act 1981 of Bermuda, as amended

D-1

 

 

 

 

iii

 


PRELIMINARY PROXY STATEMENT, SUBJECT TO COMPLETION, DATED OCTOBER 9, 2020

 

SUMMARY TERM SHEET

 

The following summary highlights selected information in this proxy statement and may not contain all the information that may be important to you. Accordingly, we encourage you to read this proxy statement carefully and in its entirety, including the attached annexes, and the other documents to which we have referred you. You may obtain the information incorporated by reference in this proxy statement without charge by following the instructions set forth in the section entitled “Where You Can Find Additional Information” beginning on page 94 of this proxy statement. We have included page references in this summary to direct you to a more complete description of the topics presented below.

 

Unless the context requires otherwise, references in this proxy statement to “we,” “us,” “our,” the “Company” or “TransAtlantic” refer to TransAtlantic Petroleum Ltd., a Bermuda exempted company, and, where appropriate, its subsidiaries; the term “Board” refers to the board of directors of the Company; and the term “Special Committee” refers to a special committee of the Board comprised entirely of independent and disinterested directors, consisting of Mel Riggs, Charles Campise, Kirk Krist and Greg Renwick. Because Mr. Riggs did not stand for re-election at the Company’s annual meeting, his last day as a director was June 5, 2020, and all references to the Special Committee relating to actions taken after such date exclude Mr. Riggs. Additionally, Mr. Krist did not become a member of the Special Committee until April 7, 2020, and all references to the Special Committee relating to actions taken prior to such date exclude Mr. Krist. We refer to TAT Holdco LLC, a Texas limited liability company, as “Parent” and TAT Merger Sub LLC, a Texas limited liability company, as “Merger Sub.” All references to the “Mitchell Group” refer to Longfellow Energy, LP (“Longfellow”), Dalea Partners, LP (“Dalea”), the Alexandria Nicole Mitchell Trust #2005, the Elizabeth Lee Mitchell Trust #2005, the Noah Malone Mitchell, 4th Trust #2005 and Stevenson Briggs Mitchell. Longfellow and Dalea are affiliates of N. Malone Mitchell 3rd, the Chairman of the Board and Chief Executive Officer of the Company (“Mr. Mitchell”). All references to the Preferred Shareholder Group” refer to the Mitchell Group, KMF Investments Partners, LP (an affiliate of Jonathon T. Fite, who is a member of our Board), West Investment Holdings, LLC (a former affiliate of Randall I. Rochman, who is a member of our Board), Randall I. Rochman and Betsy Rochman, which collectively own 100% of the Company’s outstanding preferred shares (as defined below). All references to the “Acquiring Group” refer to Parent, Merger Sub, the Preferred Shareholder Group, Mr. Mitchell, Amy Mitchell (“Mrs. Mitchell”) (spouse of Mr. Mitchell), Dalea Management, LLC (which is managed and owned by Mr. and Mrs. Mitchell and is the general partner of Dalea) and Deut 8, LLC (which is managed and owned by Mr. and Mrs. Mitchell and is the general partner of Longfellow). All references to the “merger” refer to the merger of the Company with and into Merger Sub, with Merger Sub continuing as the surviving wholly-owned subsidiary of Parent. All references to the “merger agreement” refer to the agreement and plan of merger, dated as of August 7, 2020, by and among the Company, Parent and Merger Sub, as it may be amended from time to time, a copy of which is included as Annex A to this proxy statement, and all references to the “statutory merger agreement” refer to the related form of statutory merger agreement required in accordance with Section 105 of the Companies Act 1981 of Bermuda, as amended (the “Companies Act”), a copy of which is included as Annex B to this proxy statement. Merger Sub, following the consummation of the merger, is sometimes referred to as the “surviving company.”

 

References in this proxy statement to “common shares” refer to the Company’s common shares, par value $0.10 per share, and references in this proxy statement to “preferred shares” refer to the Company’s 12.0% Series A Convertible Redeemable Preferred Shares, par value $0.01 per share.

 

Because members of the Preferred Shareholder Group will not convert their preferred shares into common shares for purposes of voting on the merger proposal at the special meeting, references in this proxy statement to beneficial ownership of common shares excludes beneficial ownership of common shares as a result a person’s ownership of preferred shares unless otherwise noted.

 

Parties to the Merger (Page 59)

 

TransAtlantic Petroleum Ltd.
c/o TransAtlantic Petroleum (USA) Corp.

16803 Dallas Parkway, Suite 200

Addison, Texas 75001
Telephone: (214) 220-4323

 

TransAtlantic Petroleum Ltd., a Bermuda exempted company, is an international oil and natural gas company engaged in acquisition, exploration, development, and production. Additional information about the Company is contained in its public filings,

1

 


certain of which are incorporated by reference herein. See “Where You Can Find Additional Information” beginning on page 94 of this proxy statement and “Parties to the Merger—The Company” beginning on page 59 of this proxy statement.

 

TAT Holdco LLC

16803 Dallas Parkway, Suite 200

Addison, Texas 75001
Telephone: (972) 590-9900

 

TAT Holdco LLC is a Texas limited liability company that is an affiliate of the Preferred Shareholder Group. Parent was formed on July 23, 2020, solely for the purpose of entering into the merger agreement and consummating the transactions contemplated by the merger agreement, including the merger. Parent has not carried on any activities on or prior to the date of this proxy statement other than those related to its formation and as contemplated by or related to the merger.

 

TAT Merger Sub LLC

16803 Dallas Parkway, Suite 200

Addison, Texas 75001
Telephone: (972) 590-9900

 

TAT Merger Sub LLC, a Texas limited liability company and wholly-owned subsidiary of Parent, was formed by Parent on July 24, 2020, solely for the purpose of entering into the merger agreement and completing the transactions contemplated thereby. Merger Sub has not carried on any activities on or prior to the date of this proxy statement other than those related to its formation and as contemplated by or related to the merger. Upon consummation of the merger, the Company will merge with and into Merger Sub, the separate corporate existence of the Company will cease and Merger Sub will continue as the surviving company and as a wholly-owned subsidiary of Parent.

 

The Special Meeting (Page 60)

 

Time, Place and Purpose of the Special Meeting (Page 60)

 

The special meeting will be held at [●], Central Time, on [●], 2020 at [●]. While we still intend to hold the special meeting in person, we are actively monitoring the coronavirus (COVID-19) pandemic, and we are sensitive to the public health and travel concerns our shareholders may have and the protocols that federal, state and local governments may impose. In the event it is not possible or advisable to hold our special meeting in person, we will announce alternative arrangements for the meeting as promptly as practicable, which may include holding the meeting solely by means of remote communication.

 

At the special meeting, holders of the Company’s common shares are being asked to consider and vote upon (i) a proposal to adopt and approve the merger agreement, pursuant to which the Company will be merged with and into Merger Sub with Merger Sub surviving as a Texas limited liability company and wholly-owned subsidiary of Parent, the related statutory merger agreement and the transactions contemplated thereby, including the merger, which we refer to as the “merger proposal” in this proxy statement, and (ii) a proposal to adjourn the special meeting, if necessary or advisable, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt and approve the merger proposal, which we refer to as the “adjournment proposal” in this proxy statement.

 

Record Date and Quorum (Page 60)

 

You are entitled to receive notice of, and to vote at, the special meeting if you were a record owner of our common shares at the close of business on [●], which the Board has fixed as the record date for the special meeting and which we refer to as the “record date” in this proxy statement. You will have one vote for each common share that you owned at the close of business on the record date. As of the close of business on the record date, there were [●] common shares outstanding and entitled to vote at the special meeting.

 

Under our amended bye-laws, which we refer to as the “bye-laws” in this proxy statement, at least two shareholders present in person or by proxy and entitled to vote representing the holders of not less than 10% of our issued common shares entitled to vote at such meeting constitutes a quorum for all purposes. However, in accordance with the merger agreement and the Companies Act 1981 of Bermuda (the “Companies Act”), a quorum for purposes of the merger proposal requires at least two persons in each class holding or representing by proxy more than 33.33% of the outstanding shares of each class of shares. Holders of common shares who abstain

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from voting on any proposal will be included as shares present at the special meeting for purposes of determining whether a quorum exists. Failure of a quorum to be represented at the special meeting will necessitate an adjournment or postponement of the special meeting and may subject the Company to additional expense.

 

Vote Required (Page 61)

 

Under the merger agreement and the Companies Act, the approval and adoption of the merger proposal requires the affirmative vote of 75% of the votes cast by holders of common shares as of the close of business on the record date at a duly convened meeting of the common shareholders of the Company at which a quorum is present (as discussed above). The merger agreement and the Companies Act also requires that the merger agreement and the statutory merger agreement be approved by the affirmative vote of 75% of the votes cast by holders of preferred shares, which was obtained on September 10, 2020 at a duly convened meeting of the Preferred Shareholder Group at which a quorum was present. If you fail to submit a proxy or to vote in person at the special meeting, or if you abstain or do not provide your bank, brokerage firm or other nominee with voting instructions, as applicable, this will have no effect on the merger proposal because your vote will not be counted as a vote cast.  As noted below, the Company’s directors and executive officers and each member of the Acquiring Group, which collectively own approximately 70.1% of the outstanding common shares (excluding any common shares issuable upon conversion of the preferred shares, which are not anticipated to be converted prior to the special meeting), have previously indicated that they intend to vote “FOR” the merger proposal. Assuming these individuals vote as previously indicated and assuming 100% of the outstanding common shares are cast on the merger proposal, then the merger proposal would be approved by the requisite vote if at least 16.4% of the outstanding common shares held by unaffiliated shareholders cast a vote “FOR” the merger proposal.

 

The approval of the adjournment proposal requires the affirmative vote of a majority of votes cast by holders of common shares. If you attend the special meeting or are represented by proxy and, in either case, abstain from voting, that abstention will have no effect on the adjournment proposal because your vote will not be counted as a vote cast. The failure to instruct your bank, brokerage firm or other nominee on how to vote your common shares will have no effect on the outcome of the vote to approve the adjournment proposal because your vote will not be counted as a vote cast.

 

Voting by the Company’s Directors and Executive Officers (Page 63)

 

At the close of business on the record date for the special meeting, the Company’s directors and executive officers (exclusive of common shares beneficially owned by Mr. Mitchell, Mr. Rochman and Mr. Fite or their affiliates) beneficially owned and had the right to vote 468,563 of our common shares in the aggregate, which represents approximately 0.6% of our common shares.

 

The directors and executive officers have informed the Company that they currently intend to vote all such common shares “FOR” the merger proposal and “FOR” the adjournment proposal.

 

Voting by the Acquiring Group

 

At the close of business on the record date for the special meeting, the Acquiring Group beneficially owned and had the right to vote 53,050,837 of our common shares in the aggregate, which represents approximately 69.5% of our common shares (with Mr. Mitchell, Mr. Rochman and Mr. Fite beneficially owning and having the right to vote, in the aggregate, 43,995,050 of our common shares, which represents approximately 57.6% of our common shares).

 

The Preferred Shareholder Group, which is part of the Acquiring Group, entered into an agreement, which we refer to as the “voting agreement,” with Parent, pursuant to which, among other things, subject to the terms and conditions therein, the Preferred Shareholder Group agreed to vote, consent to or execute a written consent covering all of the preferred shares and all common shares, whether currently owned or subsequently acquired by them, approving the merger proposal and any other matters necessary for consummation of the merger and the other transactions contemplated by the merger agreement, and waiving any appraisal or rights to dissent in connection with the merger.  See “Voting by Members of the Acquiring Group” beginning on page 49 of this proxy statement. In accordance with the voting agreement, the merger agreement and statutory merger agreement and the other transactions contemplated thereby were approved by preferred shareholders on September 10, 2020 at a duly convened meeting of the Preferred Shareholder Group at which a quorum was present.

 

The Acquiring Group has informed the Company that they currently intend to vote all their common shares “FOR” the merger proposal and “FOR” the adjournment proposal.

 

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Proxies and Revocation (Page 62)

 

Any common shareholder of record entitled to vote at the special meeting may submit a proxy by telephone, over the Internet or by returning the enclosed proxy card in the accompanying prepaid reply envelope, or may vote in person by appearing at the special meeting. If your common shares are held in “street name” through a bank, brokerage firm or other nominee, you should instruct your bank, brokerage firm or other nominee on how to vote your common shares in accordance with the procedures provided by your bank, brokerage firm or other nominee. Each of the merger proposal and the adjournment proposal is a non-routine proposal on which banks, brokerage firms and other nominees do not have discretion to vote any uninstructed shares.

 

You may change your vote or revoke your proxy at any time before it is voted at the special meeting by:

 

executing and returning a later-dated proxy at any time before a vote is taken at the special meeting;

 

submitting a proxy by telephone or over the Internet no later than 11:59 p.m., Eastern Time, on [●], [●], 2020 if you hold your common shares directly;

 

delivering a written notice of revocation of proxy prior to or during the special meeting; or

 

attending the special meeting and voting in person.

 

If you hold your common shares in “street name,” you may submit new voting instructions by contacting your bank, brokerage firm or other nominee. You may also vote in person at the special meeting if you bring a valid photo identification, proof of share ownership and a legal proxy or broker’s proxy card from your bank, brokerage firm or other nominee.

 

The Merger (Page 67)

 

The rights and obligations of the parties to the merger agreement are governed by the specific terms and conditions of the merger agreement and not by any summary or other information in this proxy statement. Therefore, the information in this proxy statement regarding the merger agreement and the merger is qualified in its entirety by reference to the merger agreement, a copy of which is attached as Annex A to this proxy statement and incorporated herein by reference. We encourage you to read the merger agreement carefully and in its entirety because it, together with the related statutory merger agreement, is the principal document governing the merger.

 

Structure of the Merger (Page 67)

 

If the merger is consummated, then at the effective time of the merger, which will be the date and time specified in the statutory merger agreement being the date the Texas certificate of merger is filed with the Texas Secretary of State or at such other subsequent date as the Company and Merger Sub may agree pursuant to the terms of the statutory merger agreement in accordance with the Companies Act and the Texas Business Organizations Code (“TBOC”), which time we refer to as the “effective time” in this proxy statement, the Company will merge with and into Merger Sub, the separate corporate existence of the Company will cease and Merger Sub will continue as the surviving company as a Texas limited liability company and as a wholly-owned subsidiary of Parent. As a result of the merger, the Company will cease to be a publicly traded company and a Bermuda incorporated company, the common shares will no longer be publicly traded and you will not own any shares of capital stock of the surviving company. As discussed below, concurrently with the execution and delivery of the merger agreement, the members of the Preferred Shareholder Group have entered into a contribution agreement, which we refer to as the “contribution agreement,” with Parent pursuant to which, subject to the terms and conditions contained therein, such members of the Preferred Shareholder Group committed to transfer, contribute, directly or indirectly, and deliver all of their preferred shares and such member’s pro rata share of cash to be used by Parent to fund the merger consideration and pay other costs and expenses that may be payable in connection with the merger in exchange for equity of Parent.

 

Merger Consideration (Page 67)

 

Upon the terms and subject to the conditions of the merger agreement, at the effective time, each common share that you own immediately prior to the effective time of the merger, will be converted into the right to receive $0.13 in cash, without interest and less applicable withholding taxes, which we refer to as the “merger consideration” in this proxy statement, other than (i) excluded shares and (ii) dissenting shares. “Excluded shares” refer to the (i) common shares owned by the Company or any of its wholly-owned subsidiaries immediately prior to the effective time of the merger and (ii) preferred shares, each of which will be canceled

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automatically and cease to exist as a result of the merger and no consideration will be paid for the excluded shares. “Dissenting shares” refer to the common shares whose holders have not voted in favor of adopting the merger agreement and who have complied with all of the provisions of the Companies Act concerning the right of holders of common shares to require appraisal of their common shares pursuant to Bermuda law, and who is not satisfied that they have been offered fair value for such common shares. The $0.13 per share to be paid as merger consideration in respect of each common share represents a discount of approximately 62% to the closing price of the Company’s common shares on August 6, 2020 on the NYSE American and the Toronto Stock Exchange.

 

Treatment of RSUs (Page 68)

 

In connection with the consummation of the merger, each outstanding restricted stock unit award, which we refer to as an “RSU,” granted under the TransAtlantic Petroleum Ltd. 2019 Long-Term Incentive Plan (the “2019 Incentive Plan”) or the TransAtlantic Petroleum Ltd. 2009 Long-Term Incentive Plan (the “2009 Incentive Plan”) will fully vest and be automatically canceled and converted into the right of each holder thereof to receive, at the effective time of the merger, an amount in cash equal to the product of (i) the total number of common shares subject to such RSU immediately prior to the effective time of the merger times (ii) the merger consideration. For more details about the treatment of outstanding RSUs, please see the section entitled “The Merger Agreement—Terms of the Merger Agreement—Treatment of RSUs” beginning on page 68 of this proxy statement.

 

Expected Timing of the Merger (Page 68)

 

We currently expect to consummate the merger during the [●] quarter of [●]. Since the merger is subject to consents, approvals, authorizations and other conditions, it is possible that factors outside the control of the Company or Parent could result in the merger being consummated at a later time, or not at all. There may be a substantial amount of time between the special meeting and the consummation of the merger. We expect to consummate the merger promptly following the receipt of all required approvals and the satisfaction or waiver of the other conditions precedent as described in the merger agreement.

 

Recommendation of the Special Committee and the Board; Reasons for the Merger (Page 29)

 

The Special Committee voted unanimously to recommend to the Board that it, and thereafter the Board (other than Messrs. Mitchell, Rochman and Fite, each of whom abstained from voting) voted unanimously to (i) approve the merger, the merger agreement, the statutory merger agreement, the guaranty (as defined herein) (collectively, the merger agreement, the statutory merger agreement and the guaranty, the “merger documents”) and declare that the transactions contemplated by the merger documents are procedurally fair to, and advisable and in the best interests of, the Company and its shareholders, including the Company’s unaffiliated shareholders, (ii) declare that the merger consideration is fair to, both from a financial point of view and otherwise, and advisable and in the best interests of the Company’s shareholders, including the Company’s unaffiliated shareholders, (iii) direct that the adoption of the merger agreement and the statutory merger agreement be submitted to a vote at a special general meeting of the Company, (iv) approve the entry into the merger agreement and the statutory merger agreement (subject to approval of the Company’s shareholders), (v) submit the merger proposal to the Company’s shareholders for approval and adoption and (vi) recommend to the shareholders of the Company that they vote “FOR” the adoption of the merger proposal. The Special Committee and the Board also recommend that you vote “FOR” approval of the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt and approve the merger proposal. For purposes of the Rule 13e-3 “going private” transaction described in this proxy statement, and as used in this proxy statement, “unaffiliated shareholders” means all shareholders of the Company other than any shareholders that are members of the Acquiring Group. The separate approval of a majority of the Company’s unaffiliated shareholders is not required under the merger agreement, the Companies Act or other applicable law to approve the merger proposal. For a description of the reasons considered by the Special Committee and the Board for their recommendations, see “Special Factors—Reasons for the Merger; Recommendation of the Special Committee; Recommendation of the Board; Fairness of the Merger” beginning on page 29 of this proxy statement.

 

The Board unanimously recommends that you vote “FOR” the merger proposal and “FOR” the adjournment proposal.

 

Opinion of Seaport Gordian Energy LLC (Page 35)

 

In connection with the merger, the Board and the Special Committee received a written opinion, dated August 7, 2020, from Seaport Gordian Energy LLC (“Seaport”) as to the fairness, from a financial point of view and as of the date of such opinion and based upon and subject to the factors and assumptions set forth therein, of the $0.13 in cash per common share proposed to be paid to the shareholders pursuant to the merger agreement.

 

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The full text of the written opinion of Seaport, which sets forth the assumptions made, procedures followed, matters considered, qualifications and limitations on the review undertaken in connection with the opinion, is attached to this proxy statement as Annex C. Seaport’s advisory services and opinion were provided for the information and assistance of the Board and the Special Committee in connection with their respective decisions and consideration of the proposed merger. The opinion did not constitute a recommendation to the Board or Special Committee and does not constitute a recommendation to the shareholders of the Company as to how any shareholder should vote with respect to the merger proposal or any other matter.

 

Pursuant to the engagement letter between the Company on behalf of the Special Committee and Seaport, Seaport received an initial fee of $100,000 for work related to the valuation of the Company. In connection with rendering its written opinion to the Special Committee, Seaport was paid a fixed fee of $250,000, no portion of which is contingent upon the conclusion expressed in the written opinion or the consummation of the merger.

 

For more information, see the section entitled “Special Factors—Opinion of Seaport Gordian Energy, LLC” beginning on page 35 of this proxy statement and Annex C to this proxy statement.

 

Financing of the Merger (Page 52)

 

Parent’s and Merger Sub’s obligations under the merger agreement are not subject to, or conditioned on, the receipt or availability of any funds or financing. Parent intends to fund the payment of the aggregate merger consideration with cash contributions from members of the Preferred Shareholder Group, which is part of the Acquiring Group, pursuant to the contribution agreement. For more information, see “Financing the Merger” beginning on page 52 of this proxy statement.

 

Interests of the Company’s Directors and Executive Officers in the Merger (Page 52)

 

In considering the recommendation of the Special Committee and the Board with respect to the merger proposal, you should be aware that certain of our directors and executive officers may be deemed to have interests in the transactions contemplated by the merger agreement that are different from, or in addition to, those of shareholders generally. The Special Committee and the Board were aware of and considered these interests during their respective deliberations on the merits of the merger and in making their decisions to approve, respectively, the merger agreement, the related statutory merger agreement and the transactions contemplated thereby, including the merger, and in recommending that the merger proposal be adopted by the Company’s shareholders. These interests, which are discussed in detail in the section entitled “Special Factors— Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 52 of this proxy statement, include the following:

 

Longfellow and Dalea, which are members of the Acquiring Group, are affiliates of Mr. Mitchell, Chairman of the Board and Chief Executive Officer of the Company. Each of (i) the beneficiaries of the Alexandria Nicole Mitchell Trust #2005, the Elizabeth Lee Mitchell Trust #2005, the Noah Malone Mitchell, 4th Trust #2005, which are members of the Acquiring Group, and (ii) Stevenson Briggs Mitchell, who is a member of the Acquiring Group, are children of Mr. Mitchell. KMF Investments Partners LP, also a member of the Acquiring Group, is an affiliate of Mr. Fite, a member of the Board. Also, Mr. Rochman, a member of the Board, and his wife Betsy Rochman, are part of the Acquiring Group. Each of these individuals will directly or indirectly own equity interests in Parent after the consummation of the merger. As a result of such interest in the merger, Mr. Mitchell, Mr. Rochman and Mr. Fite abstained from votes regarding the merger and alternatives thereto.

 

Each executive officer of the Company who holds unvested RSUs will, at the effective time of the merger, have such RSUs cancelled and converted into a right to receive an amount in cash equal to a product of (i) the total number of common shares subject to such RSU immediately prior to the effective time of the merger times (ii) the merger consideration.

 

The merger agreement provides that following the merger, for a period of not less than six years, Merger Sub will provide the Company’s directors and officers effective as of the effective time of the merger with a director and officer insurance policy that provides coverage for events occurring at or prior to the effective time of the merger that is no less favorable than the existing policy.

 

The merger agreement provides that, from and after the effective time of the merger, the Merger Sub will indemnify each of the Company’s and its subsidiaries’ present and former officers and directors against all losses, claims, damages, liabilities, costs, expenses, judgments, fines, penalties and amounts paid in settlement in connection with any claim based

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on the act that such individual is or was the Company’s or one of its subsidiaries, officers or directors and arising out of or pertaining to any action or omission arising out of such parties service as a director, officer or employee of the Company or its subsidiaries occurring prior to or at the effective time of the merger.

 

Each member of the Special Committee received a fee equal to $1,000 for each meeting of the Special Committee (with the Chairman of the Special Committee receiving an additional $1,000 for each meeting of the Special Committee). The fees were payable without regard to whether the Special Committee ultimately recommended adoption of the merger agreement or whether the merger is consummated. The members of the Special Committee also were reimbursed for their reasonable out-of-pocket travel and other expenses in connection with their service on the Special Committee.

 

Additionally, the Company is a party to a service agreement with Longfellow, Riata Management, LLC (“Riata”), an entity owned by Mr. Mitchell, and other entities controlled by Mr. Mitchell (collectively, the “Riata Entities”), pursuant to which we and the Riata Entities provide each other, among other services, certain management consulting services, oil and natural gas services, and general accounting services and we pay, or are paid, for the actual costs of such services rendered plus the actual cost of reasonable expenses on a reasonable basis. In accordance with this service agreement, a portion of the salary, cash bonus, and benefits earned by certain of the Company’s employees, including its named executive officers, is paid by the Company, and the applicable Riata Entities reimburse the Company for the actual cost of the services performed by such employees, including named executive officers, for any of the Riata Entities.

 

Finally, in connection with the merger, members of the Preferred Shareholder Group, which is part of the Acquiring Group, will receive equity in Parent pursuant to the contribution agreement. Specifically, the Parent will be owned (i) 7.27% by KMF Investments Partners LP (an affiliate of Mr. Fite, who is a member of our Board), (ii) 10.86% by West Investment Holdings, LLC (a former affiliate of Mr. Rochman, who is a member of our Board), (iii) 1.63% by Mr. Rochman and his wife, and (iv) 80.24% by Mr. Mitchell (the Chairman of the Board and Chief Executive Officer of the Company) and his family members. It is not anticipated that any other current executive officers of the Company or members of the Board will own any interest in Parent or the surviving company following the consummation of the merger.

 

Material U.S. Federal Income Tax Consequences of the Merger (Page 53)

 

The exchange of common shares for cash pursuant to the merger generally will be a taxable event for U.S. federal income tax purposes. Each U.S. holder (as defined in the section entitled “Special Factors—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 53 of this proxy statement) whose common shares are converted into the right to receive cash in the merger will generally recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference, if any, between the amount of the cash received with respect to such shares and the U.S. holder’s adjusted tax basis in such shares. Gain or loss will be determined separately for each block of common shares (i.e., common shares acquired at the same cost in a single transaction). See “Special Factors—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 53 of this proxy statement for a discussion of certain material U.S. federal income tax consequences of the merger to certain U.S. holders and certain non-U.S. holders. The determination of the actual tax consequences of the merger to a shareholder of common shares will depend on the holder’s specific situation. Shareholders are urged to consult their tax advisors regarding the U.S. federal income tax consequences of the merger to them based on their particular circumstance, as well as tax consequences arising under the laws of any state, local or foreign taxing jurisdiction.

 

The Merger Agreement (Page 66)

 

A copy of the merger agreement is attached as Annex A to this proxy statement. The statutory merger agreement, together with the merger agreement, governs the legal effects of the merger under Bermuda law. A copy of the statutory merger agreement is attached as Annex B to this proxy statement. We encourage you to read the merger agreement and the statutory merger agreement carefully and in their entirety because they are the principal documents governing the merger. For further information regarding the merger agreement (including the statutory merger agreement), see the section entitled “The Merger Agreement” beginning on page 66 of this proxy statement.

 

Restrictions on Solicitations; Acquisition Proposals; Superior Proposals (Page 74)

 

The Company has agreed to cease any discussions or negotiations that were ongoing as of the date of the merger agreement with respect to any acquisition proposals (as defined in the section entitled “The Merger Agreement—Terms of the Merger Agreement—

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Restrictions on Solicitations; Acquisition Proposals; Superior Proposals” beginning on page 74 of this proxy statement). As discussed in “Special Factors—Background of the Merger,” the Company was not engaged in any discussion or negotiations with any other persons as of the date of the merger agreement with respect to any acquisition proposals.

 

The Company has agreed not to, and has agreed to cause each of its subsidiaries not to, and has agreed to direct its representatives not to, directly or indirectly:

 

solicit, initiate or knowingly encourage or take any other action to knowingly facilitate the submission of any proposal that constitutes or is reasonably likely to lead to an acquisition proposal;

 

engage in discussions or negotiations with, or furnish or disclose any non-public information relating to the Company or any of its subsidiaries to, any person that has made or indicated an intention to make a proposal that constitutes or is reasonably likely lead to an acquisition proposal;

 

withdraw, modify or amend the Board’s recommendation regarding the merger proposal in any manner adverse to Parent in any material respect;

 

approve, endorse or recommend any proposal that constitutes or is reasonably likely to lead to an acquisition proposal; or

 

enter into any agreement in principle, arrangement, understanding or contract relating to a proposal that constitutes or is reasonably likely to lead to an acquisition proposal.

 

The Company must notify Parent promptly (and not later than 48 hours) upon receipt of (i) any acquisition proposal or indication by any person considering making an acquisition proposal or (ii) any request for non-public information relating to the Company or any of its subsidiaries, other than requests for information in the ordinary course of business and unrelated to an acquisition proposal, including the identity of such person and a description of the material terms and conditions of such acquisition proposal, indication or request. The Company must also keep Parent reasonably informed on a prompt basis of the status of any such acquisition proposal, indication or request and any related communications to or by the Company and its representatives.

 

Notwithstanding the foregoing, or anything in the merger agreement to the contrary, prior to obtaining the requisite company vote (as defined in “The Merger Agreement—Terms of the Merger Agreement—The Company’s Shareholder Meeting”) with respect to the merger, in response to a bona fide written acquisition proposal, the Company and its representatives and the Board (acting through the Special Committee) are permitted to:

 

engage in discussions or negotiations with the person who has made an acquisition proposal (and its representatives) regarding such acquisition proposal; and

 

furnish or disclose any non-public information relating to the Company or any of its subsidiaries to the person who has made such acquisition proposal (and its representatives)

 

if, prior to taking any action described in the two bullets immediately above, the Board determines (i) in good faith, after consultation with its financial advisor and outside counsel, that such acquisition proposal constitutes, or is reasonably likely to result in, a superior proposal (as defined in “The Merger Agreement—Terms of the Merger Agreement—Restrictions on Solicitations; Acquisition Proposals; Superior Proposals” beginning on page 74 of this proxy statement) and (ii) after consultation with its outside counsel, that failing to engage in such discussions or negotiations or take such action would be inconsistent with the fiduciary duties of the Board under applicable law. Furthermore, if the Company and its representatives and the Board (acting through the Special Committee) furnish or disclose any non-public information to another person in reliance on the foregoing exception, the Company must cause any person receiving such information to enter into a confidentiality agreement and such information must be provided to Parent (if it has not previously been provided) prior to or substantially concurrently with the time such information is provided to such person.

 

Changes in the Recommendation of the Board and the Special Committee (Page 75)

 

Prior to obtaining the requisite company vote with respect to the merger proposal, in response to a bona fide written acquisition proposal, the Company and its representatives and the Board (acting through the Special Committee) are also permitted to (i) make an adverse recommendation change (as defined in “The Merger Agreement—Terms of the Merger Agreement—Changes in the

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Recommendation of the Board” beginning on page 75 of this proxy statement), (ii) approve, endorse or recommend such acquisition proposal, and (iii) cause or permit the Company to terminate the merger agreement in order to concurrently enter into an agreement regarding a superior proposal, if:

 

the Company receives from the person submitting such acquisition proposal an executed confidentiality agreement (which the Company may negotiate during the four (4) business day notice period described below) in a customary form; and

 

the Board determines (i) in good faith, after consultation with its financial advisor and outside counsel, that such acquisition proposal constitutes, or is reasonably likely to lead to, a superior proposal and (ii) after consultation with outside legal counsel, that failing to take such action would be inconsistent with the fiduciary duties of the Board under applicable law.

 

Notwithstanding the foregoing, the Board cannot make an adverse recommendation, change or approve, endorse or recommend such acquisition proposal, and the Company cannot terminate the merger agreement:

 

until after the fourth (4th) business day following Parent’s receipt of a notice of superior proposal from the Company advising Parent that the Board intends to take such action and specifying the reasons therefor, including the material terms and conditions of any superior proposal that is the basis of the proposed action by the Board and, if applicable, a statement that the Board intends to terminate the merger agreement, and

 

unless during such four (4) business day period following Parent’s receipt of a notice of superior proposal, in determining whether to make an adverse recommendation change, to endorse or recommend such acquisition proposal or to cause or permit the Company to so terminate the merger agreement, (i) the Company has offered to negotiate with (and, if accepted, negotiated with) Parent in making such commercially reasonable adjustments to the terms and conditions of the merger agreement as would enable the Company to proceed with the merger and the other transactions contemplated by the merger agreement, and (ii) the Board has determined, after considering the results of such negotiations and the revised proposals made by Parent, if any, that the superior proposal giving rise to such notice of superior proposal continues to be a superior proposal.

 

Conditions to the Completion of the Merger (Page 77)

 

The consummation of the merger is subject to the satisfaction or waiver of certain conditions, which are described in “The Merger Agreement—Terms of the Merger Agreement—Conditions to the Completion of the Merger” beginning on page 77 of this proxy statement. These conditions include, among others:

 

approval and adoption of the merger proposal by the requisite company vote (as defined in the merger agreement);

 

the absence of certain governmental injunctions or orders (whether temporary, preliminary or permanent), which is enacted, issued, promulgated or enforced by a governmental entity (excluding governmental entities outside of the United States, Canada and Bermuda) that restrain, enjoin or otherwise prohibit the consummation of the merger or the other transactions contemplated by the merger agreement;

 

receipt of all consents, approvals and other authorizations, in each case, of any governmental entity required to consummate the merger and the other transactions contemplated by the merger agreement, subject to certain excluded consents, provided, that such consents shall have been obtained free of any condition that would reasonably be expected to have material adverse effects as set forth in the merger agreement;

 

no more than 10% of the common shares owned by shareholders other than the entities in the Preferred Shareholder Group are dissenting shares;

 

the absence of a material adverse effect on the Company;

 

the receipt of all opinions required to be delivered, which shall not have been withdrawn, revoked or modified as of the effective time of the merger;

 

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the Company’s, Parent’s and Merger Sub’s performance in all material respects of their agreements, obligations and covenants in the merger agreement and delivery of all required deliverables and certifications; and

 

the accuracy of the representations and warranties of the Company, Parent and Merger Sub (subject to certain qualifications).

 

Termination of the Merger Agreement (Page 77)

 

Parent, Merger Sub and the Company may, by mutual written consent, terminate the merger agreement at any time prior to the effective time of the merger, whether before or after adoption of the merger proposal by the Company’s shareholders.

 

Either Parent or the Company may terminate the merger agreement at any time prior to the effective time, whether before or after the adoption of the merger proposal by the Company’s shareholders, as follows (provided that the following rights shall be unavailable to a party that has breached a representation, warranty, covenant or agreement set forth in the merger agreement and such breach has been a principal cause of, or results in, the failure to consummate the merger):

 

if the merger has not been consummated by February 3, 2021, which we refer to as the “outside date”, provided that the outside date may be extended by either Parent or the Company for up to an additional 120 days if necessary for purposes of obtaining any governmental consent required to consummate the merger and the other transactions contemplated by the merger agreement;

 

if the merger agreement and the statutory merger agreement have been submitted to the shareholders of the Company for approval and adoption at a duly convened Company shareholders meeting (or adjournment or postponement thereof) and the requisite company vote is not obtained;

 

if any law prohibits consummation of the merger; or

 

if any order restrains, enjoins or otherwise prohibits consummation of the merger, and such order has become final and nonappealable.

 

Parent may unilaterally terminate the merger agreement, and abandon the merger, at any time prior to the effective time, whether before or after adoption of the merger proposal by the Company’s shareholders as follows:

 

if the Board makes an adverse recommendation change, or publicly proposes to do so;

 

if (i) the Board approves, endorses or recommends a superior proposal, (ii) the Company enters into a definitive contract (other than a confidentiality agreement or similar agreement) relating to the consummation of a superior proposal, (iii) a tender offer or exchange offer for any issued and outstanding shares of the Company is commenced prior to obtaining the requisite company vote and the Board fails to recommend against acceptance of such tender offer or exchange offer by its shareholders (including, for these purposes, by taking no position with respect to the acceptance of such tender offer or exchange offer by its shareholders, which shall constitute a failure to recommend against acceptance of such tender offer or exchange offer) within ten (10) business days after commencement, or (iv) the Company or the Board publicly announces its intention to do any of the foregoing; or

 

if the Company breaches any of its representations, warranties, covenants or agreements contained in the merger agreement, which breach (i) would give rise to the failure of a closing condition regarding such representations, warranties, covenants or agreements and (ii) has not been cured (or is not capable of being cured) by the Company within thirty (30) days after the Company’s receipt of written notice of such breach from Parent.

 

The Company may unilaterally terminate the merger agreement, and abandon the merger, at any time prior to the effective time, whether before or after adoption of the merger proposal by the Company’s shareholders as follows:

 

in order to concurrently enter into an agreement regarding a superior proposal (subject to the conditions set forth in the merger agreement); or

 

10

 


if Parent breaches any of its representations, warranties, covenants or agreements contained in the merger agreement, which breach (i) would give rise to the failure of a closing condition regarding such representations, warranties, covenants or agreements and (ii) has not been cured (or is not capable of being cured) by Parent within thirty (30) days after Parent’s receipt of written notice of such breach from the Company.

 

See “The Merger Agreement—Terms of the Merger Agreement—Termination of the Merger Agreement” beginning on page 77 of this proxy statement.

 

Effect of Termination (Page 78)

 

If the merger agreement is validly terminated, the merger agreement will become null and void and have no effect, subject to certain specified provisions of the merger agreement that survive such termination, including, among others, the provisions relating to reimbursement of expenses and specific performance, and, subject to the provisions relating to the reimbursement of expenses, there will be no liability on the part of Parent, Merger Sub or the Company or any related party. However, subject to certain provisions of the merger agreement, nothing in the merger agreement will relieve any party from any losses arising out of its intentional and bad faith failure to perform its obligations or breach of its representations and warranties, or fraud in connection with, any provision of the merger agreement prior to the valid termination of the merger agreement (as described in the section entitled “The Merger Agreement—Terms of the Merger Agreement—Effect of Termination” beginning on page 78 of this proxy statement).

 

Expenses Following Termination (Page 79)

 

The merger agreement contains certain termination rights for both the Company and Parent. No termination fee is payable by the Company or Parent in connection with the termination of the merger agreement. The merger agreement provides that, upon termination of the merger agreement in connection with a superior proposal, the Company would be required to pay Parent within thirty (30) days of such termination for all reasonable, documented out-of-pocket fees and expenses, including reasonable attorney fees, incurred in furtherance of approval and consummation of the transactions contemplated by the merger agreement; provided, that in no event shall such reimbursement obligation of the Company exceed $350,000 in the aggregate. See “The Merger Agreement—Terms of the Merger Agreement—Expenses Following Termination” beginning on page 79 of this proxy statement.

 

Limited Guaranty

 

In connection with the execution of the merger agreement, Parent and Merger Sub delivered a limited guaranty, which we refer to as the “guaranty,” from Dalea, an affiliate of Mr. Mitchell, in favor of the Company and pursuant to which Dalea is guaranteeing certain payment and performance obligations of Parent and Merger Sub in connection with the merger agreement. See “Special Factors—Reasons for the Merger; Recommendation of the Special Committee; Recommendation of the Board; Fairness of the Merger” beginning on page 29 of this proxy statement.

 

Market Price of the Company’s Common Shares (Page 84)

 

The closing price of the Company’s common shares on the NYSE American on August 6, 2020, the last trading day prior to the public announcement that the Company, Parent and Merger Sub had entered into the merger agreement, was $0.34 per share. The $0.13 per share to be paid as merger consideration in respect of each common share represents a discount of approximately 62% to the closing price of the Company’s common shares on August 6, 2020 on the NYSE American.

 

On [●], 2020, the most recent practicable date before this proxy statement was mailed to our common shareholders, the closing price for our common shares on the NYSE American was $[●] per share.

 

The closing price of the Company’s common shares on the Toronto Stock Exchange on August 6, 2020, the last trading day prior to the public announcement that the Company, Parent and Merger Sub had entered into the merger agreement, was $0.45 Canadian dollars (“CA$”) per share. The $0.13 per share to be paid as merger consideration in respect of each common share represents a discount of approximately 62% to the closing price of the Company’s common shares on August 6, 2020 on the Toronto Stock Exchange.

 

On [●], 2020, the most recent practicable date before this proxy statement was mailed to our common shareholders, the closing price for our common shares on the Toronto Stock Exchange was $[●] per share.

 

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You are encouraged to obtain current market quotations for our common shares in connection with voting your common shares.

 

Appraisal Rights (Page 69)

 

Under Bermuda law, shareholders of record have rights of appraisal, pursuant to which those shareholders who do not affirmatively vote in favor of the merger proposal (which includes those who have not voted) and who are not satisfied that they have been offered fair value for their shares will be permitted to apply to the Supreme Court of Bermuda (the “Bermuda Court”) for an appraisal of the fair value of their shares within one month from the giving of the notice convening the special general meeting. For the avoidance of doubt, this proxy statement constitutes such notice. Due to the complexity of the appraisal process, shareholders who wish to seek appraisal of their shares are encouraged to seek the advice of legal counsel with respect to the exercise of appraisal rights. See “Special Factors—Rights of Appraisal” beginning on page 56 of this proxy statement and Annex D to this proxy statement.

 

Delisting and Deregistration of the Company’s Common Shares (Page 55)

 

If the merger is completed, the surviving company will be a privately-owned Texas limited liability company and there will be no public market for its common shares. Upon the completion of the merger, the Company’s common shares will no longer be quoted on the NYSE American or the Toronto Stock Exchange. In addition, the registration of the Company’s common shares under Section 12 of the Securities Exchange Act of 1934, as amended, which we refer to as the “Exchange Act,” will be terminated, and the Company will no longer file reports with the Securities and Exchange Commission, which we refer to as the “SEC,” on account of its common shares.

 

Additional Information

 

If you have questions about the special meeting or the merger after reading this document, you may contact the Company’s Corporate Secretary, TransAtlantic Petroleum Ltd., c/o TransAtlantic Petroleum (USA) Corp., 16803 Dallas Parkway, Suite 200, Addison, Texas, 75001, or call telephone number (214) 220-4323.

 

You can find more information about the Company in the periodic reports and other information the Company files with the SEC. This information is available at the SEC’s public reference facilities and at the website maintained by the SEC at www.sec.gov and on the Company’s website at http://www.transatlanticpetroleum.com/. For a more detailed description of the additional information available, see “Where You Can Find Additional Information” beginning on page 94 of this proxy statement. The references to our website address and the SEC’s website address do not constitute incorporation by reference of the information contained in these websites and should not be considered part of this document.

 

Neither the SEC nor any foreign or state securities commission has approved or disapproved the merger, passed upon the merits or fairness of the merger agreement or the transactions contemplated thereby, including the proposed merger, or passed upon the adequacy or accuracy of the information contained in this document. Any representation to the contrary is a criminal offense.

 

 

 

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QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING AND THE MERGER

The following questions and answers are intended to address briefly some commonly asked questions regarding the merger, the merger agreement and the special meeting. These questions and answers may not address all questions that may be important to you as a shareholder. Please refer to the section entitled “Summary” beginning on page 1 of this proxy statement and the more detailed information contained elsewhere in this proxy statement, including the annexes to this proxy statement and the documents referred to in this proxy statement, which you should read carefully and in their entirety. You may obtain the information incorporated by reference in this proxy statement without charge by following the instructions set forth in the section entitled “Where You Can Find Additional Information” beginning on page 94 of this proxy statement.

Q.

Why am I receiving this proxy statement and proxy card or voting instruction form?

A.

You are receiving this proxy statement and proxy card or voting instruction form because you owned common shares at the close of business on [●], 2020. This proxy statement describes matters on which we urge you to vote and is intended to assist you in deciding how to vote your common shares with respect to such matters.

Q.

When and where is the special meeting?

A.

The special meeting will be held at [●], Central Time, on [●], 2020. The special meeting will be held at [●]. While we still intend to hold the special meeting in person, we are actively monitoring the coronavirus (COVID-19) pandemic, and we are sensitive to the public health and travel concerns our shareholders may have and the protocols that federal, state and local governments may impose. In the event it is not possible or advisable to hold our special meeting in person, we will announce alternative arrangements for the meeting as promptly as practicable, which may include holding the meeting solely by means of remote communication.

Q.

What items will be voted upon at the special meeting?

A.

There are two matters scheduled for a vote at the special meeting:

 

A vote on a proposal to adopt and approve the merger agreement, the related statutory merger agreement and the transactions contemplated thereby, including the merger; and

 

 

A vote on a proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt and approve the merger proposal.

In addition, common shareholders will be asked to consider and vote upon any other matters that properly come before the special meeting or any adjournment, postponement or recess thereof.

Q.

Who will solicit proxies and pay for this proxy solicitation?

A.

This proxy solicitation is being made on behalf of the Company by the Board and management. Our directors, officers and employees of the Company may solicit proxies, either through personal contact or by mail, telephone, or other electronic means without additional compensation.  The Company will bear the cost of preparing, assembling and mailing the proxy material and of reimbursing brokers, nominees, fiduciaries and other custodians for out-of-pocket and clerical expenses of transmitting copies of the proxy material to the beneficial owners of common shares.  We have retained Broadridge Financial Solutions, Inc. to assist in the distribution of proxy materials at a cost that will not exceed approximately $26,000, plus reimbursement of certain costs and expenses. Additionally, brokerage houses, nominees, fiduciaries, and other custodians will be requested to forward soliciting materials to beneficial owners and will be reimbursed by the Company for their reasonable out-of-pocket expenses incurred in sending proxy materials to beneficial owners.

Q.

How does the Board recommend that I vote?

A.

The Board unanimously recommends that you vote (i) “FOR” approval of the merger proposal and (ii) “FOR” approval of the adjournment proposal.

Q.

What will happen if the merger is consummated?

A.

If the merger agreement is adopted by our shareholders and the other closing conditions under the merger agreement have been satisfied or waived, the Company will be merged with and into Merger Sub and Merger Sub will survive as a Texas

13

 


limited liability company and a wholly-owned subsidiary of Parent. If the merger is consummated, in accordance with applicable law, rules and regulations, our common shares will be delisted from the NYSE American Exchange and the Toronto Stock Exchange and deregistered under the Exchange Act, the common shares will no longer be publicly traded and the Company will no longer be required to file periodic reports with the SEC. Following consummation of the merger, shareholders will no longer have any interest in the Company’s future earnings or growth, other than members of the Preferred Shareholder Group, which is part of the Acquiring Group, who will receive equity in Parent pursuant to the contribution agreement.

Q.

What will I receive in the merger is consummated?

A.

Upon consummation of the merger, holders of common shares (other than excluded shares and dissenting shares) will be entitled to receive the merger consideration of $0.13 per common share in cash, without interest and less any applicable withholding taxes, for each common share owned immediately prior to the effective time of the merger. For example, if you own 100 common shares, you will receive $13.00 in cash in exchange for your common shares, less any applicable withholding taxes. The $0.13 per share to be paid as merger consideration in respect of each common share represents a discount of approximately 62% to the closing price of the Company’s common shares on August 6, 2020 on the NYSE American and the Toronto Stock Exchange.

Upon consummation of the merger, each outstanding RSU shall fully vest and be canceled and shall entitle the holder thereof to receive, at the effective time of the merger, an amount in cash equal to the product of (i) the total number of common shares subject to such RSU immediately prior to the effective time of the merger times (ii) the merger consideration, less applicable taxes required to be withheld with respect to such payment.

If the merger is consummated, each preferred share will be canceled automatically and shall cease to exist, and no merger consideration shall be paid for those preferred shares. Pursuant to the terms of the contribution agreement, the members of the Preferred Shareholder Group, which is part of the Acquiring Group, will receive equity of Parent in exchange for contributing their preferred shares and such member’s pro rata share of cash to be used by Parent to fund the merger consideration and pay other costs and expenses that may be payable in connection with the merger to Parent immediately prior to the effective time of the merger.

Q.

How does the merger consideration compare to the market price of our common shares prior to announcement of the merger?

A.

The $0.13 per share to be paid in respect of each common share represents a discount of approximately 62% to the closing price per common share of $0.34 on August 6, 2020 on the NYSE American, the last trading day before the announcement that the Company, Parent and Merger Sub had entered into the merger agreement. The $0.13 per share to be paid as merger consideration in respect of each common share represents a discount of approximately 62% to the closing price per common share of CA$0.45 on August 6, 2020 on the Toronto Stock Exchange, the last trading day before the announcement that the Company, Parent and Merger Sub had entered into the merger agreement.

On [●], 2020, the most recent practicable date before this proxy statement was mailed to our common shareholders, the closing price for our common shares on the NYSE American was $[●] per common share. On [●], 2020, the most recent practicable date before this proxy statement was mailed to our common shareholders, the closing price for our common shares on the Toronto Stock Exchange was $[●] per share.

You are encouraged to obtain current market prices of our common shares in connection with voting your common shares.

Q.

When do you expect the merger to be completed?

A.

We currently expect to consummate the merger during the [●] quarter of calendar year 20[●]. Since the merger is subject to consents, approvals and other conditions, it is possible that factors outside the control of the Company or Parent could result in the merger being consummated at a later time, or not at all. There may be a substantial amount of time between the special meeting and the consummation of the merger. We expect to consummate the merger promptly following the receipt of all required approvals and the satisfaction or waiver of the other conditions precedent as described in the merger agreement.

Q.

What happens if the merger is not consummated?

A.

If the merger agreement is not adopted by our common shareholders or if the merger is not consummated for any other reason, our holders of common shares will not receive any payment for their common shares pursuant to the merger

14

 


agreement. Instead, we will remain a stand-alone, publicly traded company, and our common shares will continue to be listed and traded on the NYSE American Exchange and the Toronto Stock Exchange. Under specified circumstances, we may be required to reimburse certain of Parent’s and its affiliates’ expenses upon termination of the merger agreement (as described in the section entitled “The Merger Agreement—Terms of the Merger Agreement—Expenses Following Termination” beginning on page 79 of this proxy statement).

Q.

What conditions must be satisfied to complete the merger?

A.

The Company, Parent and Merger Sub are not required to complete the merger unless a number of conditions are satisfied or waived. These conditions include, among others: the receipt of shareholder approval; the absence of any law or order that is in effect and restrains, enjoins or otherwise prohibits the consummation of the merger or the transactions contemplated by the merger agreement; and the receipt of all consents, approvals and other authorizations of any governmental entity required to consummate the merger and the other transactions contemplated by the merger agreement. For a more complete summary of the conditions that must be satisfied or waived prior to the completion of the merger, see “The Merger Agreement—Terms of the Merger Agreement—Conditions to the Completion of the Merger” beginning on page 77 of this proxy statement.

Q.

Is the merger expected to be taxable to common shareholders?

A.

Yes. The exchange of common shares for the per share merger consideration of $0.13 in cash pursuant to the merger generally will be a taxable event for U.S. federal income tax purposes. Each U.S. holder (as defined in the section entitled “Special Factors—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 53 of this proxy statement) whose common shares are converted into the right to receive cash in the merger will generally recognize gain or loss for U.S. federal income tax purposes in an amount equal to the difference, if any, between the amount of the cash received with respect to such shares and the U.S. holder’s adjusted tax basis in such shares. Gain or loss will be determined separately for each block of common shares (i.e., common shares acquired at the same cost in a single transaction). See “Special Factors—Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 53 of this proxy statement for a discussion of certain material U.S. federal income tax consequences of the merger to certain U.S. holders and certain non-U.S. holders. The determination of the actual tax consequences of the merger to a holder of common shares will depend on the shareholder’s specific situation. Shareholders are urged to consult their tax advisors regarding the U.S. federal income tax consequences of the merger to them based on their particular circumstance, as well as tax consequences arising under the laws of any state, local or foreign taxing jurisdiction.

Q.

Do any of our directors and executive officers have interests in the merger that may differ from or be in addition to my interests as a shareholder?

A.

In considering the recommendation of the Special Committee and the Board with respect to the merger proposal, you should be aware that certain of our directors and executive officers may be deemed to have interests in the transactions contemplated by the merger agreement that are different from, or in addition to, those of shareholders generally (as discussed in the section entitled “Special Factors— Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 52 of this proxy statement). For example, Longfellow and Dalea, which are members of the Acquiring Group, are affiliates of Mr. Mitchell, Chairman of the Board and Chief Executive Officer of the Company. Each of (i) the beneficiaries of the Alexandria Nicole Mitchell Trust #2005, the Elizabeth Lee Mitchell Trust #2005, the Noah Malone Mitchell, 4th Trust #2005, which are members of the Acquiring Group, and (ii) Stevenson Briggs Mitchell, who is a member of the Acquiring Group, are children of Mr. Mitchell. KMF Investments Partners LP, also a member of the Acquiring Group, is an affiliate of Mr. Fite, a member of the Board. Also, Mr. Rochman, a member of the Board, and his wife Betsy Rochman, are part of the Acquiring Group. Each of these individuals will directly or indirectly own equity interests in Parent after the consummation of the merger. Specifically, the Parent will be owned (i) 7.27% by KMF Investments Partners LP (an affiliate of Mr. Fite, who is a member of our Board), (ii) 10.86% by West Investment Holdings, LLC (a former affiliate of Mr. Rochman, who is a member of our Board), (iii) 1.63% by Mr. Rochman and his wife, and (iv) 80.24% by Mr. Mitchell (the Chairman of the Board and Chief Executive Officer of the Company) and his family members. It is not anticipated that any other current executive officers of the Company or members of the Board will own any interest in Parent or the surviving company following the consummation of the merger. Additionally, the Company is a party to a service agreement with the Riata Entities, which includes Longfellow, Riata, an entity owned by Mr. Mitchell, and other entities controlled by Mr. Mitchell, pursuant to which we and the Riata Entities provide each other, among other services, certain management consulting services, oil and natural gas services, and general accounting services and we pay, or are paid, for the actual costs of such services rendered plus the actual cost of reasonable expenses on a reasonable basis. In accordance with this service agreement, a portion of the salary, cash bonus, and benefits earned by certain of the Company’s employees, including its named executive officers, is paid by the Company, and the applicable Riata Entities reimburse the Company for the actual cost of the services performed by such employees, including named executive officers, for any of the Riata Entities. The Special Committee and the Board were aware of and considered these interests during their respective deliberations on the

15

 


merits of the merger and in making their decisions to approve, respectively, the merger agreement, the related statutory merger agreement and the transactions contemplated thereby, including the merger and in recommending that the merger proposal be adopted by the Company’s shareholders. See “Special Factors— Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 52 of this proxy statement.

Q.

Who will own the Company after the merger?

A.

After the merger, the Company will cease to exist and Merger Sub will survive as a Texas limited liability company and a wholly-owned subsidiary of Parent, an entity affiliated with the Preferred Shareholder Group. Pursuant to the contribution agreement, members of the Preferred Shareholder Group will receive equity of Parent in exchange for contributing their preferred shares and such member’s pro rata share of cash to be used by Parent to fund the merger consideration and pay other costs and expenses that may be payable in connection with the merger to Parent immediately prior to the effective time of the merger.

Q.

Who may attend the special meeting in person?

A.

All holders of record of our common shares as of the close of business on record date, or their duly appointed proxies, and our invited guests may attend the special meeting. Shareholders of record will be verified against an official list available in the registration area at the meeting.

If you hold common shares in “street name” (that is, in a brokerage account or through a bank or other nominee) and you plan to vote in person at the special meeting, you will need to bring a valid photo identification, proof of share ownership and a legal proxy or broker’s proxy card from your bank, brokerage firm or other nominee.

We reserve the right to deny admittance to anyone who cannot adequately show proof of share ownership as of the close of business on the record date.

While we still intend to hold the special meeting in person, we are actively monitoring the coronavirus (COVID-19) pandemic, and we are sensitive to the public health and travel concerns our shareholders may have and the protocols that federal, state and local governments may impose. In the event it is not possible or advisable to hold our special meeting in person, we will announce alternative arrangements for the meeting as promptly as practicable, which may include holding the meeting solely by means of remote communication.

Q.

Can I participate if I am unable to attend the special meeting?

A.

If you are unable to attend the special meeting in person, we urge you to vote your common shares in advance by submitting a proxy by telephone, over the Internet or by completing, signing, dating and returning the proxy card in the accompanying prepaid reply envelope, or by following the instructions provided to you by your bank, brokerage firm or other nominee if you hold your common shares in “street name.” The special meeting will not be broadcast telephonically or over the Internet.

Q.

When will the shareholder’s list be available for examination?

A.

A complete list of the shareholders of record at the close of business on the record date will be available at the Company’s principal place of business located at 16803 Dallas Parkway, Suite 200, Addison, Texas, 75001, for examination by shareholders of record beginning on [●], 2020 and will continue to be available during ordinary business hours unless notice of closure of the register is given in accordance with the Companies Act.

Q.

Who may vote?

A.

A holder of common shares may vote on the merger proposal and adjournment proposal if such holder was a record owner of common shares at the close of business on the record date. Each common share is entitled to one vote. As of the close of business on the record date, there were [●] common shares outstanding and entitled to vote on the merger proposal and the adjournment proposal at the special meeting.

Q.

How do I submit a proxy or vote?

A.

If you are a shareholder of record (that is, if your common shares are registered in your name with Computershare Trust Company, N.A. (“Computershare”), our transfer agent), there are four ways to submit your proxy or vote:

16

 


 

Vote your shares by proxy by calling 1-800-690-6903, 24 hours a day, seven days a week until 11:59 p.m., Eastern Time, on [●], [●], 2020. Please have your proxy card in hand when you call (the telephone voting system has easy-to-follow instructions and provides confirmation that the system has properly recorded your vote);

 

 

Vote your shares by proxy by visiting the website www.proxyvote.com, 24 hours a day, seven days a week until 11:59 p.m., Eastern Time, on [●], [●], 2020. Please have your proxy card in hand when you access the website (the website has easy-to-follow instructions and provides confirmation that the system has properly recorded your vote);

 

 

Vote your shares by proxy by completing, signing, dating and returning the proxy card in the accompanying prepaid reply envelope (if you vote by telephone or over the Internet, you do not need to return your proxy card by mail); or

 

 

Vote your shares by attending the special meeting in person and depositing your proxy card or completing a ballot that will be distributed at the special meeting.

Submission of proxies by telephone or over the Internet is convenient, saves postage and mailing costs and is recorded immediately, minimizing the risk that postal delays may cause proxies to arrive late and therefore not be counted.

Even if you plan to attend the special meeting in person, you are encouraged to submit a proxy. You may still vote your common shares in person at the meeting even if you have previously submitted a proxy. If you are present at the meeting and desire to vote in person, your previous proxy will not be counted.

Q.

What if I hold my common shares in “street name”?

A.

You should follow the voting directions provided by your bank, brokerage firm or other nominee. You may complete and mail a voting instruction card to your bank, brokerage firm or other nominee or, in most cases, submit voting instructions by telephone or over the Internet to your bank, brokerage firm or other nominee. If you provide specific voting instructions by mail, telephone or over the Internet, your bank, brokerage firm or other nominee will vote your common shares as you have directed. Please note that if you wish to vote in person at the special meeting, you will need to bring a valid photo identification, proof of share ownership and a legal proxy or broker’s proxy card from your bank, brokerage firm or other nominee.

Q.

Will my common shares held in “street name” or another form of record ownership be combined for voting purposes with common shares I hold of record?

A.

No. Because any common shares you may hold in “street name” will be deemed to be held by a different shareholder than any common shares you hold of record, any common shares so held will not be combined for voting purposes with common shares you hold of record. Similarly, if you own common shares in various registered forms, such as jointly with your spouse, as trustee of a trust or as custodian for a minor, you will receive, and will need to complete, sign, date and return, a separate proxy card for those common shares because they are held in a different form of record ownership. Common shares held by a corporation or business entity must be voted by an authorized officer of the entity. Common shares held in an individual retirement account must be voted under the rules governing the account.

Q.

Can I change my mind after I submit my proxy?

A.

Yes. If you are a shareholder of record, you may revoke your proxy at any time before it is voted at the special meeting by:

 

executing and returning a later-dated proxy at any time before a vote is taken at the special meeting;

 

 

submitting a subsequent proxy by telephone or over the Internet no later than 11:59 p.m., Eastern Time, on [●], [●], 2020 (only the most recent proxy will be counted);

 

 

delivering a written notice of revocation of proxy prior to or during the special meeting; or

 

 

attending the special meeting and voting in person.

If you hold common shares in “street name,” you may submit new voting instructions by contacting your bank, brokerage firm or other nominee. You may also vote in person at the special meeting if you bring a valid photo identification, proof of share ownership and a legal proxy or broker’s proxy card from your bank, brokerage firm or other nominee.

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Q.

Who will count the votes?

A.

A representative of Broadridge Financial Solutions, Inc. will count the votes and will serve as the independent inspector of election.

Q.

Where can I find the voting results of the special meeting?

A.

We intend to announce preliminary voting results at the special meeting and publish final results in a Current Report on Form 8-K that will be filed with the SEC following the special meeting. All reports that we file with the SEC are publicly available when filed.

Q.

What does it mean if I receive more than one proxy card?

A.

It means that you have multiple accounts with brokers or our transfer agent. Please vote all of the shares held in each such account.

Q.

Will my shares be voted if I do not submit my proxy?

A.

If you are the shareholder of record and you do not vote in person at the special meeting or submit a proxy, your common shares will not be voted. If you fail to submit a proxy or to vote in person at the special meeting, this will have no effect on the merger proposal or the adjournment proposal because your vote will not be counted as a vote cast. Banks, brokerage firms or other nominees are precluded under stock exchange rules from exercising their voting discretion with respect to approving non-routine matters, such as the merger proposal and the adjournment proposal. As a result, absent specific instructions from the beneficial owner of such common shares, banks, brokerage firms or other nominees are not empowered to vote those common shares on non-routine matters, which we refer to generally as “broker non-votes” in this proxy statement. The failure to provide instructions to your bank, brokerage firm or other nominee on how to vote your common shares will have no effect on the merger proposal or the adjournment proposal because your vote will not be counted as a vote cast.

Q.

May shareholders ask questions at the special meeting?

A.

Yes. Our representatives will answer shareholders’ questions of general interest following the special meeting consistent with the rules distributed at the special meeting.

Q.

What constitutes a quorum for the special meeting?

A.

Under our bye-laws, at least two shareholders present in person or by proxy and entitled to vote representing the holders of not less than 10% of our issued common shares entitled to vote at such meeting constitutes a quorum for all purposes. However, in accordance with the merger agreement and the Companies Act, a quorum for purposes of the merger proposal requires at least two persons in each class holding or representing by proxy more than 33.33% of the outstanding shares of each class of shares. Shareholders present in person or represented by proxy and entitled to vote at the special meeting will be counted for purposes of determining whether a quorum exists. Holders of common shares who abstain from voting on any proposal will be included as shares present at the special meeting for purposes of determining whether a quorum exists.

If your common shares are held in “street name” through a bank, brokerage firm or other nominee and you instruct your bank, brokerage firm or other nominee on how to vote your common shares in accordance with the procedures provided by your bank, brokerage firm or other nominee, then your common shares will be included in determining the number of shares present or represented at the special meeting for purposes of determining whether a quorum exists. If your common shares are held in “street name” through a bank, brokerage firm or other nominee and you fail to instruct your bank, brokerage firm or other nominee on how to vote your common shares, and your bank, brokerage firm or other nominee does not submit a proxy or attend the special meeting on your behalf then your common shares will not be included in determining the number of common shares present or represented at the special meeting for purposes of determining whether a quorum exists.

Failure of a quorum to be represented at the special meeting will necessitate an adjournment or postponement of the special meeting and may subject the Company to additional expense.

Q.

What vote is required to approve each proposal?

A.

For the merger proposal, you may vote “FOR,” “AGAINST” or “ABSTAIN.” Under the merger agreement and the Companies Act, the approval and adoption of the merger proposal requires the affirmative vote of 75% of the votes cast by

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holders of common shares as of the close of business on the record date at a duly convened meeting of the shareholders of the Company at which a quorum is present. If you fail to submit a proxy or to vote in person at the special meeting, or if you abstain or do not provide your bank, brokerage firm or other nominee with voting instructions, as applicable, this will have the no effect on the merger proposal because your vote will not be counted as a vote cast. The separate approval of a majority of the Company’s unaffiliated shareholders is not required under the merger agreement, the Companies Act or other applicable law to adopt and approve the merger proposal.

For the adjournment proposal, holders of common shares may vote “FOR,” “AGAINST” or “ABSTAIN.” The approval of the adjournment proposal requires the affirmative vote of a majority of votes cast by holders of common shares. If you fail to submit a proxy or to vote in person at the special meeting, or if you abstain or do not provide your bank, brokerage firm or other nominee with voting instructions, as applicable, this will have the no effect on the adjournment proposal because your vote will not be counted as a vote cast.

Whether or not you plan to attend the special meeting in person, to ensure the presence of a quorum and that your shares are represented at the special meeting, please vote via the Internet or by telephone as instructed in the proxy materials or complete, date and sign and return a proxy card as promptly as possible.

The Preferred Shareholder Group, which is part of the Acquiring Group, entered into the voting agreement with Parent, pursuant to which, among other things, subject to the terms and conditions therein, the Preferred Shareholder Group agreed to vote, consent to or execute a written consent covering all of the preferred shares and all of the common shares, whether currently owned or subsequently acquired by them, approving the merger proposal and any other matters necessary for consummation of the merger and the other transactions contemplated by the merger agreement, and waiving any appraisal or rights to dissent in connection with the merger. In addition to the approval of the merger proposal by common shareholders, the merger agreement and the Companies Act also requires that the merger agreement and the statutory merger agreement be approved by the affirmative vote of 75% of the votes cast by holders of preferred shares, which was obtained on September 10, 2020 at a duly convened meeting of the Preferred Shareholder Group at which a quorum was present.

Q.

Will any other matters be voted on at the special meeting?

A.

As of the date of this proxy statement, our management is not aware of any other matters that will be presented for consideration at the special meeting other than those matters discussed in this proxy statement.

Q.

What happens if I sell my common shares before the special meeting?

A.

The record date for shareholders entitled to vote at the special meeting is earlier than both the date of the special meeting and the consummation of the merger. If you transfer your common shares after the record date but before the special meeting, unless special arrangements (such as provision of a proxy) are made between you and the person to whom you transfer your common shares and each of you notifies the Company in writing of such special arrangements, you will retain your right to vote such common shares at the special meeting but will transfer the right to receive the merger consideration to the person to whom you transfer your common shares.

Q.

What do I need to do now?

A.

Even if you plan to attend the special meeting in person, after carefully reading and considering the information contained in this proxy statement, please submit your proxy promptly to ensure that your common shares are represented at the special meeting. If you hold your common shares in your own name as the shareholder of record, please submit a proxy for your common shares by (i) completing, signing, dating and returning the enclosed proxy card in the accompanying prepaid reply envelope, (ii) using the telephone number printed on your proxy card or (iii) using the Internet proxy instructions printed on your proxy card. If you decide to attend the special meeting and vote in person, your vote by ballot will revoke any proxy previously submitted. If you are a beneficial owner of common shares and hold such shares in “street name,” please refer to the instructions provided by your bank, brokerage firm or other nominee to see which of the above choices are available to you.

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Q.

Should I send in my common share certificates now?

A.

If you are a registered shareholder, you should have received a letter of transmittal. In order to receive the merger consideration following completion of the merger, you must complete and sign the letter of transmittal and deliver it, together with the certificate representing your common shares and the other documents specified in the letter of transmittal, to Computershare Trust Company of Canada, which is acting as the paying agent in the merger (the “Paying Agent”), in accordance with instructions in the letter of transmittal. The letter of transmittal contains procedural information relating to the merger and should be reviewed carefully.

If your common shares are held in “street name” by your bank, brokerage firm or other nominee, you will receive instructions from your bank, brokerage firm or other nominee as to how to effect the surrender of your “street name” common shares in exchange for the merger consideration. Please ensure you follow the directions provided by your broker on how to instruct your broker to vote your shares and deliver your letter of transmittal.

Q.

Am I entitled to exercise appraisal rights under the Companies Act instead of receiving the merger consideration for my common shares?

A.

Any holder of common shares who does not vote in favor of the merger proposal or has not consented to it in writing will have the right to seek appraisal of the fair value of such holder’s common shares in lieu of receiving the merger consideration, but only if such holder does not vote in favor of the merger proposal and otherwise complies with the procedures of Section 106 of the Companies Act, which is the appraisal rights statute applicable to Bermuda companies. For additional information, see the section entitled “Appraisal Rights” beginning on page 69 of this proxy statement. For the full text of Section 106 of the Companies Act, see Annex D to this proxy statement. Because of the complexity of the Companies Act relating to appraisal rights, if you wish to exercise your appraisal rights, we encourage you to seek the advice of legal counsel.

Q.

Who can help answer my other questions?

A.

If you have additional questions about the merger, need assistance in submitting your proxy or voting your common shares, or need additional copies of the proxy statement or the enclosed proxy card, please contact the Company’s Corporate Secretary, by mail at TransAtlantic Petroleum Ltd., c/o TransAtlantic Petroleum (USA) Corp., 16803 Dallas Parkway, Addison, Texas, 75001 or by telephone at (214) 220-4323 for shareholders, banks and brokers. If your bank, brokerage firm or other nominee holds your shares, you should also call your bank, brokerage firm or other nominee for additional information.

 

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SPECIAL FACTORS

Background of the Merger

 

From June 2014 to January 2016, the price of Brent crude fell from over $110 per barrel to less than $30 per barrel.  From January 2016 to October 2018, the price of Brent crude recovered to over $80 per barrel, only to fall again to approximately $25 per barrel in March 2020.  From June 2014 until the end of 2017, the Board and the Company's senior management evaluated various potential strategic alternatives relating to the Company's business, including business combinations with other international oil and gas companies, strategic partnerships such as joint ventures in the development of oil and gas, and acquisitions and other potential strategic transactions such as sales of assets, all with a view toward enhancing shareholder value.  

 

In addition, since mid-2015, the Company has sought a reserves-based credit facility, term loans and privately-placed third-party debt to increase its liquidity and to fund expanded exploration and production activities.  However, due to a number of factors, including the location of the Company’s primary operations in Turkey near the border with Syria, the hydrocarbon license structure in Turkey, geopolitical risks, civil unrest, and risks of government appropriation and sanctions, among other risks, the Company has been unable to obtain meaningful third-party credit facilities or other indebtedness to expand its business.

 

As a result, since mid-2015, the Company has had constrained liquidity due to numerous factors including Brent crude prices consistently below $70 per barrel resulting in lower oil revenue and persistent operating losses, the inability to obtain traditional third-party sources of liquidity, and the requirement by DenizBank, A.S. (“DenizBank”) that personal assets of Mr. Mitchell, Selami Erdem Uras, and Gundem Turizm Yatirim ve Isletmeleri A.S. (which is owned by Mr. Mitchell, Mr. Mitchell’s children, and Mr. Uras) (together, the “Pledgors”) be pledged as collateral for the Company’s term loans.  These factors, plus other factors including the November 2024 deadline to redeem $46.1 million of preferred shares and the June 2025 expiration of the Company’s Selmo production lease, led the Company on January 16, 2018, to form a special committee of the Board  (the “2018 Special Committee”) to market the Company and explore strategic alternatives to increase shareholder value. The members of the 2018 Special Committee were Bob Alexander, Brian Bailey, Mel Riggs and Randy Rochman.  Mr. Rochman resigned from the 2018 Special Committee in July 2018.  

 

The 2018 Special Committee engaged Tudor Pickering Holt & Co. (“Tudor Pickering”) to act as its financial advisor.  During the period from February to April 2018, Tudor Pickering contacted over 90 potential buyers, and the Company entered into 12 confidentiality agreements and provided due diligence materials to these interested parties.  During that time, the price of Brent crude ranged from approximately $62 to approximately $75 per barrel.  

 

In April 2018, the Company made management presentations to 10 of these interested parties.  The Company received two proposals to acquire certain of the Company’s assets.  One proposal was to acquire the Company’s Temrez exploration licenses located in part in the Thrace Basin’s Basin Center Gas Accumulation (“BCGA”) in northeastern Turkey for $37.5 million in cash, subject to due diligence and receipt of necessary approvals.  At the time, the BCGA was believed to be a high-impact natural gas reservoir in the Thrace Basin. This proposal would have triggered a 22% corporate income tax and a 15% withholding tax on the distribution of the sale proceeds from the selling subsidiary to the parent entity. After due diligence review, the potential acquirer reduced the offer price and required the Company to renegotiate a third-party agreement with respect to the Temrez licenses. Taking into account the tax consequences of the sale and the costs of the required renegotiations, the Special Committee estimated that the Company would receive less than $18 million following the completion of the proposed transaction. Therefore, in the 2018 Special Committee’s subjective opinion, the offer price for the Temrez exploration license was insufficient.  The other proposal was to acquire the Company’s Southeastern exploration and production licenses for $70.0 million in cash, subject to due diligence and receipt of necessary approvals. This proposal also would have triggered a 22% corporate income tax and a 15% withholding tax on the distribution of the sale proceeds from the selling subsidiary to the parent entity. In the 2018 Special Committee’s subjective opinion, the offer price for the Company’s southeastern exploration and production licenses, which accounted for substantially all of the Company’s crude oil production and revenue, was insufficient, especially in light of the tax consequences of the sale. Furthermore, selling these exploration and production licenses would have left the Company without any meaningful oil and gas production or cash flow to continue operations.    

 

Additionally, in August 2018, the Company received a non-binding offer from Mr. Mitchell and his affiliates to acquire the entire Company, for $147.8 million in cash or approximately $1.59 per fully diluted share, subject to receiving financing for the purchase.  The non-binding offer from Mr. Mitchell and his affiliates to acquire the entire Company was the only offer that the 2018 Special Committee received to acquire the entire Company.  On November 9, 2018, Mr. Mitchell notified the 2018 Special Committee that he was withdrawing his non-binding offer after he was unable to obtain acceptable financing, but would continue attempts to secure financing.  At that time, the price of Brent crude was approximately $69 per barrel.  

 

The 2018 Special Committee did not enter into a letter of intent or any other agreement (i) with respect to any third-party proposals, due to a combination of low offer prices and adverse tax consequences and (ii) with respect to the proposal from Mr. Mitchell, due to the financing condition.  On November 9, 2018, due to the lack of meaningful interest in the acquisition of the

21

 


Company or its assets, the 2018 Special Committee terminated the marketing process and terminated the engagement of Tudor Pickering.  The Board determined that continuing to explore and develop the Company’s drilling inventory and high-impact exploration acreage, including the BCGA, was the best opportunity to maximize shareholder value.

 

During the first nine months of 2019, the Company engaged in continual discussions with many US, Turkish, regional, and global banks seeking a new reserves-based credit facility to increase its liquidity and expand its exploration and development opportunities.  In the fourth quarter of 2019 and continuing into the first quarter of 2020, the Company was engaged in advanced discussions with the Middle East region of a leading global bank for a reserves-based credit facility. The Company was simultaneously engaged in discussions with DenizBank regarding an extension to the amortization schedule for the Company’s term loan.  Both of these financing options required as part of their pre-closing due diligence a finalized year-end 2019 reserve report for the Company, which was not obtained until March 3, 2020.  Neither of these efforts were successful primarily due to the collapse in Brent crude prices from approximately $61 per barrel on October 1, 2019 to approximately $15 per barrel on March 31, 2020.  In addition, DenizBank required the Pledgors to pledge their personal assets as collateral for the term loan extension during the term of such extension, which they were unwilling to do.  The combination of a decline in Brent crude prices and the Company’s inability to secure additional financing limited the Company’s ability to further explore or develop its drilling inventory or pay dividends on the preferred shares in cash.

In addition, during 2019, (i) third parties drilled several wells in an attempt to prove the value of the BCGA in the Thrace Basin, (ii) a third party drilled a well in an attempt to prove the value of the deep Bedinan formation in Southeast Turkey, and (iii) the Company drilled a well in the Southeast Bahar to test the Dadas sands.  However, none of the wells proved the value of the applicable unproven high-impact and resource plays.

  

On December 12, 2019, Mr. Mitchell and certain of his affiliates filed a statement on Schedule 13D disclosing (i) the acquisition of 326,000 preferred shares and 7,363,053 common shares from Nokomis Capital Master Fund, L.P., and (ii) their intent to pursue the acquisition of all the Company’s equity.  At that time, the price of Brent crude was approximately $60 per barrel.

On December 13, 2019, Mr. Mitchell sent a letter (the “December 13 Letter”) to the Board (i) announcing his intent to attempt to secure the funding necessary for Mr. Mitchell, his affiliates, and potentially one or more third parties to engage in a transaction with the Company to acquire all of the Company’s equity, and (ii) requesting that the Board engage in discussions regarding a potentially acceptable price in order to increase the probability of success of the fundraising efforts.  The December 13 Letter did not include an offer to acquire the Company.

 

On December 16, 2019, the Board held a meeting, at which all directors were present, during which it formed the Special Committee giving this committee the exclusive power to (i) evaluate any strategic alternatives, which could include, among others and without limitation, the sale of the Company (any such alternative and the transaction, if any, relating thereto hereinafter referred to as a “Strategic Alternative”), (ii) determine the appropriateness of any such Strategic Alternative and determine whether any such Strategic Alternative should or should not be pursued by the Company, and (iii) if necessary or appropriate in the judgment of the Special Committee, negotiate and/or respond to any terms, provisions and conditions relating to any such Strategic Alternative, in all cases on behalf of the Company and its shareholders. The Board agreed that, unless recommended, approved, and authorized by the Special Committee, the Board would not recommend, authorize, or approve any Strategic Alternative. The Board explicitly empowered the Special Committee to retain, at the Company's expense, independent legal counsel, financial advisors, and other professional advisors of the Special Committee’s choice. The Board directed the Company to pay all expenses incurred by the Special Committee and its members, including the fees and expenses of the independent professional advisors to the Special Committee.

 

Following its formation, on December 16, 2019, the Special Committee met and discussed the timeline for engaging third-party advisors.  In light of (i) the lack of any third-party interest in acquiring the entire Company during the Company’s failed 2018 strategic alternatives process, (ii) the lack of any meaningful improvement in the Company’s prospects or in Brent crude prices since the termination of the 2018 strategic alternatives process, (iii) the costs associated with retaining a third-party advisor, (iv) the time and expense associated with a marketing process and any potential transaction, and (v) the Company’s near-term liquidity concerns, the Special Committee decided to abstain from engaging any third-party advisors or soliciting third-party proposals until such time as a party approached the Company or the Special Committee with an offer to purchase the Company or some or all of its assets.  

 

Also on December 16, 2019, the Company filed a Form 8-K disclosing that Mr. Mitchell had advised the Company’s Board that he intended to attempt to secure the funding necessary to acquire all of the common shares not already owned by Mr. Mitchell and his affiliates.  From December 16, 2019 until entering into the merger agreement on August 7, 2020, notwithstanding multiple public disclosures of Mr. Mitchell’s offers to acquire the Company, the Company did not receive any indications of interest from third parties to acquire the Company or any of its assets.  

 

In March 2020, Brent crude oil prices declined to approximately $25 per barrel as a result of market concerns about the economic impact from the coronavirus (“COVID-19”) as well as the inability of OPEC and Russia to agree on a perceived need to implement

22

 


further productions cuts in response to weaker worldwide demand.  During March 2020, the futures forward curve for Brent crude indicated that prices would continue at or near the current depressed prices for an extended period. As a result, the Company reduced its planned capital expenditures to those necessary for production lease maintenance and those projecting a return on invested capital at then current prices. In order to mitigate the impact of reduced prices on the Company’s 2020 cash flows and liquidity, the Company implemented significant cost reduction measures to reduce operating costs and general and administrative expenses. As part of this process, the Company prioritized funding operating expenditures over general and administrative expenditures, whenever possible.

 

On March 9, 2020, the Company unwound its three-way collar contract with DenizBank, which hedged approximately 1,000 barrels of oil per day (“Bbl/d”) of the Company’s oil production in Turkey. The three-way collar contract had a Brent floor of $55.00, a Brent ceiling of $72.90, and a Brent long call of $80.00, and was in place through April 30, 2020. The Company also unwound its swap contract with DenizBank, which hedged approximately 1,000 Bbl/d of the Company’s oil production in Turkey. The swap contract had a Brent strike price of $60.30 and was in place through December 31, 2020. In connection with these transactions, the Company received approximately $6.5 million. The Company used these proceeds to pay down the Company’s term loan with DenizBank (the “DenizBank loan”) to reduce interest expense, which left approximately $10.6 million outstanding under the DenizBank loan.

 

On March 25, 2020, the Company filed its Annual Report on Form 10-K for 2019 and included a going concern assumption due to risks and uncertainties regarding the Company’s ability to generate sufficient revenue at then current oil prices to pay its debt obligations and accounts payable starting in the third or fourth quarter of 2020.  As a result, the Company reported substantial doubt about its ability to continue as a going concern.  Furthermore, at current Brent crude oil prices, the Company did not have sufficient cash flow from operations or other sources of liquidity to fund the exploration and development of the Company’s drilling inventory to maintain or increase its oil production, which would result in reduced production over time as the production of oil from the Company’s existing wells naturally declined.    

 

On April 3, 2020, the Company entered into a new swap contract, which hedged approximately 2,000 Bbl/d, which represented approximately 87% of the Company’s production of oil. The swap contract expires in February 2021, has an ICE Brent Index strike price of $36.00 per barrel, and is settled monthly.  This swap contract allowed the Company to continue operating, but (i) limited upside potential if oil prices recovered from then recent lows and (ii) did not provide sufficient cash flow from operations to fund the exploration and development of the Company’s drilling inventory to maintain or increase its oil production.  As a result of entering into the new swap contract, the Company forecasted that it could pay its debt obligations and accounts payable until the first quarter of 2021 and that substantial doubt about the Company’s ability to continue as a going concern still existed.

 

During the period from April to May 2020, the difference between the price received for the Company’s crude oil production and the hedged price (referred to as the “basis differential”) increased from an average of $2.44 and $0.17 per barrel in 2018 and 2019 to an average of $6.90 per barrel in April 2020 and an average of $8.34 per barrel in May 2020.  The widening of the differential between the realized prices and the hedged prices rendered the April 2020 hedge less effective and resulted in lower revenues.  As a consequence of the reduced revenues, the Company forecasted that it could pay its debt obligations and accounts payable until between the third quarter of 2020 and the first quarter of 2021 and that substantial doubt about the Company’s ability to continue as a going concern still existed.  

 

On April 5, 2020, Mr. Robert Alexander, a member of the Board and Special Committee, passed away. On April 6, 2020, to fill the vacancy created by the death of Mr. Alexander, the Board appointed Mr. Krist as a director and a member of the Special Committee effective April 7, 2020.

 

On April 14, 2020, the Special Committee received a non-binding letter of intent from the Mitchell Group (the “April 14 LOI”) to acquire all of the Company’s common shares for a fixed purchase price of $1.8 million (or $0.029 per outstanding common share). Because the proposed purchase price was a fixed amount, rather than a per share amount, the per common share consideration would most likely have been reduced by any issuances by the Company of dividends on its preferred shares in common shares prior to closing.  Due to the Company’s constrained liquidity position, the Company expected to pay the majority of future quarterly dividends on the preferred shares in common shares for the foreseeable future.  As a result, the Company’s common shareholders would have suffered significant dilution from future non-cash dividends on the preferred shares.

 

The April 14 LOI noted that the Mitchell Group had extended an invitation to the holders of the remaining approximately twenty percent (20%) of the outstanding preferred shares to participate in the proposed acquisition in an amount equal to their pro rata percentage of total outstanding preferred shares, and was in discussions with the other preferred shareholders regarding the same.

 

On April 16, 2020, the Special Committee met with its legal advisors—the Company’s general counsel, Akin Gump Strauss Hauer & Feld LLP (“Akin Gump”), and Conyers Dill & Pearman (“Conyers”)—to discuss, among other things, the duties of the Special Committee, the April 14 LOI, procedural safeguards that the Special Committee could put in place, and the appropriate timeline to engage a financial advisor.  During this meeting, the Special Committee concluded that the proposed $1.8 million purchase

23

 


price was insufficient, rejected the April 14 LOI, and declined to engage a financial advisor until it received a higher proposed purchase price. The Special Committee authorized Mr. Riggs, the chairman of the Special Committee, to communicate the Special Committee’s decision to Mr. Mitchell.

 

On April 16, 2020, Mr. Riggs relayed the Special Committee’s decision to Mr. Mitchell. Mr. Mitchell requested that the Special Committee respond in writing. Additionally, Mr. Mitchell proposed that the Special Committee engage an investment bank to opine on the sufficiency of the Mitchell Group’s proposed purchase price, and that if no transaction is consummated between the Mitchell Group and the Company, the Mitchell Group would bear the costs incurred for the investment bank.

 

On April 17, 2020, the Special Committee met with its legal advisors and discussed Mr. Mitchell’s response and decided to prepare a formal rejection letter and a draft of a reimbursement agreement providing for an unconditional obligation of the Mitchell Group to reimburse the Company for up to $350,000 of fees and expenses related to the hiring of Seaport Global in the event the Company terminated discussions with the Mitchell Group.

 

On April 18, 2020, the Special Committee delivered a letter to the Mitchell Group that noted that the proposed purchase price was insufficient and rejected the April 14 LOI and delivered the Special Committee’s form of reimbursement agreement.

On April 20, 2020, the Mitchell Group sent the Special Committee a revised draft of the reimbursement agreement providing that the obligation of the Mitchell Group to reimburse the Company for the actual out-of-pocket fees and expenses of the investment banking firm be conditioned upon a determination by the investment banking firm that the purchase offer contained in the April 14 LOI was materially less than the value of the Company based upon oil and gas prices on April 14, 2020.  On April 21, 2020, the Special Committee met and determined that the reimbursement agreement should not be accepted as proposed by the Mitchell Group because it did not contain an unconditional reimbursement obligation.  In addition, as previously decided, the Special Committee declined to engage a financial advisor at the current proposed purchase price.

 

Also on April 21, 2020, the Special Committee received a revised letter of intent from the Mitchell Group (the “April 21 LOI”) to acquire all of the Company’s common shares for a fixed purchase price of $6.85 million (or $0.11 per outstanding common share). Because the proposed purchase price was a fixed amount, rather than a per share amount, the per common share consideration would have been reduced by any issuances by the Company of dividends on its preferred shares in common shares prior to closing.  Due to the Company’s constrained liquidity position, the Company expected to pay the majority of future quarterly dividends on the preferred shares in common shares for the foreseeable future.   As a result, the Company’s common shareholders would have suffered significant dilution from future non-cash dividends on the preferred shares.  The April 21 LOI again noted that the Mitchell Group had extended an invitation to the holders of the remaining approximately twenty percent (20%) of the outstanding preferred shares to participate in the proposed acquisition in an amount equal to their pro rata percentage of total outstanding preferred shares and was in discussions with the other preferred shareholders regarding the same.

 

On April 22, 2020, the Mitchell Group filed a statement on Schedule 13D disclosing the April 21 LOI.  At that time, the price of Brent crude was approximately $14 per barrel.  

 

On April 23, 2020, the Special Committee met with its legal advisors and discussed the April 21 LOI. The Special Committee agreed to proceed with hiring a financial advisor and, after consideration of proposals from multiple financial advisors, decided to proceed with negotiations with Seaport.   The Special Committee decided to notify Mr. Mitchell that the Special Committee did not intend to enter into an exclusivity agreement at this time and would wait to negotiate any other transaction terms until there was an agreement on price.

 

The Company filed a Form 8-K on April 23, 2020, publicly disclosing the April 21 LOI and the intent to hire a financial advisor. On April 27, 2020, the Special Committee met with its legal advisors and (i) discussed revisions to the engagement letter with Seaport, and (ii) confirmed that the transaction proposed in the April 21 LOI would not trigger a change of control redemption of the preferred shares due to an exception to the definition of a change of control that permits a transaction with Mr. Mitchell and his affiliates.

 

On April 29, 2020, the Special Committee entered into an engagement agreement with Seaport whereby Seaport agreed to (i) assist the Special Committee in the evaluation of corporate and balance sheet related shareholder value enhancing alternatives, which assistance included, without limitation, providing the Special Committee with a preliminary estimated valuation of the Company and its assets as a going concern, and (ii) render an opinion as to the fairness, from a financial point of view, of a potential corporate sale or merger transaction, if requested by the Special Committee. The Special Committee selected Seaport as its financial advisor because Seaport is a recognized financial advisory firm that has substantial experience in similar transactions and was familiar with the Company’s assets and operations from prior capital raising and strategic transactions with the Company.  The Special Committee determined that after taking into account the conclusion of Seaport, at the time of such selection, there were no relationships or interests in connection with the proposed merger that would limit the ability of Seaport to perform its obligations as financial advisor to the Special Committee.

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On May 21, 2020, the Special Committee met with its advisors to receive an update on the process. At this meeting, the Special Committee reviewed a presentation prepared by Seaport, which summarized (i) the Company’s history, relative performance, 2020 upcoming events, balance sheet and capitalization, equity ownership, and financial projections; (ii) market valuation, including valuation with respect to historical EBITDA analysis, review of selected comparable transactions, and projected valuation based on EBITDA analysis; (iii) the Company’s assets and oil and gas reserves, price sensitivity analysis, and related valuation summary; and (iv) analysis of the April 21 LOI, including dividend dilution analysis.  Seaport and the Special Committee then had a discussion on potential revisions to the April 21 LOI, and the Special Committee requested that Seaport suggest specific revisions to the Special Committee at the next meeting. For more information, see “—Opinion of Seaport Gordian Energy LLC—Preliminary Discussion Materials—May 21, 2020 Preliminary Discussion Materials.”

 

On May 23, 2020, the Special Committee met with its advisers to review a presentation prepared by Seaport, which summarized (i) amounts that would be received by the Mitchell Group, other holders of Series A Preferred shares, and unaffiliated common shareholders in different scenarios, (ii) EBITDA valuation estimates, (iii) PDP PV-10 valuation estimates, (iv) the April 21 LOI terms and concerns relating thereto, (v) negotiating tools that the Special Committee could employ, and (vi) updated analysis of the Company’s assets and oil and gas reserves. For more information, see “—Opinion of Seaport Gordian Energy LLC—Preliminary Discussion Materials—May 23, 2020 Preliminary Discussion Materials.”

Following the presentation, Seaport requested input from the Company’s legal advisors as to options for formulas and structures for a potential transaction. The legal advisors then discussed potential transaction and pricing structures and the potential risks associated with such structures. After discussion, the Special Committee determined that the price for any transaction structure should be a fixed price per share to eliminate the uncertainty as to the dilutive effects of future non-cash dividends on the preferred shares and alleviate potential public confusion regarding the price. The Special Committee determined to request a meeting with the Mitchell Group and Seaport to provide the Special Committee’s feedback on the April 21 LOI. The Special Committee also considered whether to engage Seaport to actively market the Company to third parties. In light of (i) the lack of third-party interest in a strategic transaction since the Form 8-K filing on December 16, 2019, (ii) Seaport’s analysis with respect to recent market comparable transactions and view that third party interest in a transaction with the Company was unlikely, (iii) the Company’s failed marketing process in 2018, (iv) the time and costs associated with a marketing process and any potential transaction, and (v) the Company’s near-term liquidity concerns, the Special Committee declined to engage Seaport to market the Company.  At that time, the price of Brent crude was approximately $34 per barrel.  

On May 26, 2020, the Special Committee met with Seaport, Mr. Mitchell, and Noah M. Mitchell 4th. At this meeting, the parties reviewed a presentation prepared by Seaport, which summarized the Special Committee’s concerns with the April 21 LOI terms, value considerations, and potential revisions to the April 21 LOI. After the presentation, Mr. Mitchell indicated that the Mitchell Group would prepare a revised letter of intent for the Special Committee’s review. For more information, see “—Opinion of Seaport Gordian Energy LLC—Preliminary Discussion Materials—May 27, 2020 Preliminary Discussion Materials.”

 

On May 27, 2020, the Special Committee met with Seaport and its legal advisors to provide an update on the meeting with Mr. Mitchell. Mr. Riggs previously had informed the Company of his decision not to stand for reelection to the Company’s board in June 2020.  Therefore, at this meeting, in light of Mr. Riggs’ upcoming departure from the Board and the Special Committee, the Special Committee elected Mr. Krist to replace Mr. Riggs as Chairman of the Special Committee.

 

On May 28, 2020, the Special Committee received a revised letter of intent from the Mitchell Group (the “May 28 LOI”) to acquire all of  the Company’s common shares for a purchase price of (i) $0.11 per share, plus (ii) per share variable consideration consisting of a pro rata portion of (a) any undrawn amounts of a working capital line of credit provided by the Mitchell Group (described below) plus (b) Company working capital in excess of $3.0 million on the closing date (the sum of (a) and (b), the “Variable Consideration”). The May 28 LOI provided that the Mitchell Group would provide a working capital line of credit of up to $5.75 million. Because the Variable Consideration was a fixed amount, rather than a per share amount, the amount of Variable Consideration per common share would have been reduced by any issuances by the Company of dividends on its preferred shares in common shares prior to closing.  Due to the Company’s constrained liquidity position, the Company expected to pay all future quarterly dividends on the preferred shares in common shares for the foreseeable future. The May 28 LOI again noted that the Mitchell Group had extended an invitation to the holders of the remaining approximately twenty percent (20%) of the outstanding preferred shares to participate in the proposed acquisition in an amount equal to their pro rata percentage of total outstanding preferred shares, and was in discussions with the other preferred shareholders regarding the same.

 

On May 29, 2020 and June 1, 2020, the Special Committee met with Seaport and its legal advisers to discuss the May 28 LOI and the Company’s public disclosure regarding negotiations with the Mitchell Group.

 

On June 2, 2020, the Special Committee sent a revised letter of intent to the Mitchell Group (the “June 2 LOI”). The June 2 LOI, among other things, removed the exclusivity provision, included a purchase price of $0.17 per common share, removed the working

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capital line of credit and Variable Consideration, added a go-shop provision, limited the representations, warranties, and closing conditions, extended the closing date, and added a right to specific performance for the Company.

 

On June 3, 2020, the Company filed a current report on Form 8-K disclosing the May 28 LOI and the Special Committee’s rejection of the May 28 LOI.  

 

Also on June 3, 2020, the Special Committee received a revised letter of intent from the Mitchell Group (the “June 3 LOI”) to acquire all of the Company’s common shares for a purchase price of $0.078 per share. The June 3 LOI removed the go-shop provision, reduced the time between signing of the LOI and the closing date, and removed the right to specific performance for the Company.

 

On June 4, 2020 and June 9, 2020, the Special Committee met with Seaport and its legal advisers to discuss the revisions in the June 3 LOI and prepare for an upcoming meeting with the Mitchell Group. In June 2020, the basis differential had narrowed to an average of $0.74 per barrel, and the Company forecasted that it could pay its debt obligations and accounts payable until between the fourth quarter of 2020 and the first quarter of 2021 and that substantial doubt about the Company’s ability to continue as a going concern still existed.

 

On June 11, 2020, the Special Committee met with Mr. Mitchell and Noah M. Mitchell 4th to discuss the June 3 LOI with the primary focus being the transaction structure and purchase price. The Special Committee and Mr. Mitchell agreed that the Mitchell Group would submit a revised letter of intent to acquire all of the Company’s common shares and would submit a separate letter of intent for a working capital loan, which would allow the Company to borrow amounts from the Mitchell Group in order to address the Company’s anticipated working capital shortfall.  At that time, the price of Brent crude was approximately $38 per barrel.  

 

On June 15, 2020, the Special Committee received a revised letter of intent from the Mitchell Group (the “June 15 LOI”) to acquire all of the Company’s common shares that was substantively identical to the June 3 LOI.

 

On June 16, 2020, the Special Committee met with Seaport and its legal advisers to discuss the meeting on June 11, 2020 and the June 15 LOI. The Special Committee noted that it expected the June 15 LOI to propose an increased purchase price but the June 15 LOI proposed a purchase price identical to the June 3 LOI.  The Special Committee, together with its advisors, discussed potential responses to the June 15 LOI. Following this meeting, the Special Committee sent a letter to the Mitchell Group rejecting the June 15 LOI because the purchase price of $0.078 per common share in the June 15 LOI was unacceptable to the Special Committee.  

 

On June 17, 2020, the Special Committee received a letter of intent from the Mitchell Group (the “June 17 Loan LOI”) for a working capital loan to the Company. Pursuant to the June 17 Loan LOI, the Mitchell Group would lend the Company up to $8 million under a secured credit facility (the “Credit Facility”) which would be made available to the Company in accordance with mutually agreed milestones. Entry into the working capital loan would be subject to the simultaneous entry into a merger agreement with the Mitchell Group.  Upon termination of the merger agreement, any remaining availability under the Credit Facility would terminate and any outstanding loans thereunder would mature and be payable. Pursuant to the June 17 Loan LOI, the Credit Facility would be guaranteed by TransAtlantic Worldwide, Ltd. and TransAtlantic Petroleum (USA) Corp. and secured by a first priority perfected security interest (subject to customary exclusions and permitted liens) in the equity of TransAtlantic Worldwide, Ltd. and TransAtlantic Petroleum (USA) Corp. and all of the assets of the Company (the “collateral”). The Credit Facility would bear interest at a fixed rate of 12% per annum payable monthly.  

 

The Special Committee scheduled an in-person meeting with the Mitchell Group for June 22, 2020 to negotiate the remaining open items in the June 15 LOI and the June 17 Loan LOI.

 

On June 20, 2020, in anticipation of the June 22,2020 meeting, the Special Committee met with its legal advisors to discuss the June 15 LOI and the June 17 Loan LOI. The Special Committee again noted that the purchase price of $0.078 per common share in the June 15 LOI was unacceptable to the Special Committee. After discussion, the Special Committee determined that the potential conflict of interest of Mr. Mitchell as chief executive officer and owner of the lender would need to be addressed in the June 17 LOI in order to ensure that actions of Mr. Mitchell, as officer of both the Company and Lender, could not unilaterally cause a default under the loan agreement for the Credit Facility.

 

On June 22, 2020, the Special Committee, the Company’s general counsel Ms. Bailey, Mr. Mitchell, Noah M. Mitchell 4th, and Mr. Mitchell’s general counsel Michael Haynes, met to negotiate the remaining open issues in the June 15 LOI and the June 17 Loan LOI. The parties agreed that the purchase price for the acquisition of the Company’s common shares would be a fixed price of $0.13 per common share. Additionally, the parties agreed to revisions that addressed the potential conflict of interest of Mr. Mitchell as chief executive officer and owner of the lender in order to ensure that Mr. Mitchell could not unilaterally cause a default under the loan agreement for the Credit Facility. Specifically, the loan agreement includes a limitation on events of default, such that no event of default shall occur if the action taken (or omitted to be taken) was authorized, approved, or directed by, or taken (or omitted to be

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taken) by an employee or representative of the Company with the knowledge of, Mr. Mitchell. Additionally, Mr. Mitchell, an affiliate of the Lender, abstained from voting as a director on the approval of the loan agreement.

 

From June 22, 2020 through June 29, 2020, the Special Committee, the Mitchell Group, and their legal advisors finalized the language for the letter of intent for the acquisition of all of the Company’s common shares and the letter of intent for the Credit Facility.

 

On June 30, 2020, the Company entered into a non-binding letter of intent for a potential transaction (the “Acquisition LOI”) pursuant to which a subsidiary of a new entity (the “Buyer”) to be formed by the Mitchell Group would acquire all of the outstanding common shares of the Company for a fixed purchase price of $0.13 per common share. Also on June 30, 2020, the Company entered into a non-binding letter of intent with the Mitchell Group pursuant to which Dalea Investment Group, LLC (an affiliate of Mr. Mitchell) (the “Lender”) would provide a working capital loan to the Company of up to $8 million.

 

On July 2, 2020, the Company filed a current report on Form 8-K disclosing the entry into the Acquisition LOI and the Loan LOI.  At that time, the price of Brent crude was approximately $43 per barrel.  

 

On July 16, 2020, the Special Committee received drafts (the “July 16 draft loan documents”) of the loan and security agreement and the guarantee from the Mitchell Group.

 

On July 17, 2020, the Special Committee received a draft (the “July 17 draft merger agreement”) of the merger agreement from the Mitchell Group.

 

On July 22, 2020, the Special Committee met with its legal advisers to review the July 16 draft loan documents and July 17 draft merger agreement.

 

On July 26, 2020, the Special Committee provided the Mitchell Group with a revised draft (the “July 26 draft merger agreement”) of the merger agreement. Among other things, the July 26 draft merger agreement reduced the scope of the Company representations and warranties, added a solvency representation with respect to the Buyer parties, added language to the conduct of business covenant providing that a breach of the covenant could only be triggered by actions explicitly approved by a majority of the Board and opposed by Mr. Mitchell, deleted a closing condition that each holder of preferred shares shall have waived all dissenter’s rights, added a closing condition that Seaport’s fairness opinion shall not have been withdrawn, revoked, or modified, deleted a closing condition that no more than 2% of the common shares shall be dissenting shares, and added language that provided that the Buyer parties may not rely on actions authorized, approved or directed by Mr. Mitchell to form the basis for not consummating the transaction.

 

Also on July 26, 2020, the Special Committee provided the Mitchell Group with revised drafts (the “July 26 draft loan documents”) of the loan agreement and the guarantee. Among other things, the July 26 draft loan documents noted that the budget definition and related definitions, representations, covenants, conditions, and milestones were to be discussed directly between the Company and the Lender; carved out the effects of COVID-19 from the definition of material adverse change; deleted affirmative covenants for existence, compliance with law, litigation, further assurances, collateral, material agreements, insurance,  business and operations, and OFAC and anti-money laundering laws; deleted negative covenants for affiliate transactions, ERISA, material agreements, OFAC and anti-money laundering laws, and negative pledge agreements; added language to provide that no event of default shall occur unless the event was approved by the Board and opposed by Mr. Mitchell; and deleted events of default in the event of judgments against the Company or the guarantors, injunctions that restrain the Company or guarantors from performing under the loan agreement, default under guarantee, cross-default to other debt, breach of representations and warranties, breach of laws, and default under other loan documents or material agreements.

 

On July 28, 2020, the Special Committee, Mr. Mitchell, Noah M. Mitchell 4th, Ms. Bailey, Mr. Haynes, representatives of KMF Investments Partners, LP, and a representative of West Investment Holdings, LLC and Randy and Betsy Rochman met to address the open items in the July 26 draft merger agreement and the July 26 draft loan documents. With respect to the merger agreement, the parties discussed, among other things, the following revisions to the July 26 draft merger agreement: (i) revisions to the limitation to the conduct of business covenant to provide that a breach may occur based on an act or omission that is effectuated by an employee of the Company outside the employee’s scope of authority; (ii) addition of a closing condition that no more than 10% of the common shares owned by shareholders other than the Preferred Shareholder Group shall be dissenting shares; and (iii) revisions to the definition of company material adverse effect to provide that (a) the following events would not constitute a company material adverse effect: any acts or omissions authorized, approved, or directed by Mr. Mitchell and any dissenting rights asserted by a dissenting holder wherein the cumulative professional fees and costs to defend or resolve such proceedings are reasonably expected to be less than $450,000 in the aggregate, and (b) each of the following events would constitute a company material adverse effect: any adoption of additional currency controls within the country of Turkey, any increase of tax rates associated with converting Turkish Lira to U.S. Dollars or vice versa, or any increase of tax rates on expatriating cash out of the country of Turkey.

 

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With respect to the loan agreement, the parties discussed the following revisions to the July 26 draft loan documents: (i) addition of affirmative covenants for existence, compliance with laws, litigation, further assurances, collateral, material agreements, insurance, business and operations, OFAC and anti-money laundering laws; (ii) addition of negative covenants for material agreements, OFAC and anti-money laundering laws, and negative pledge agreements; (iii) agreement that the Company and the Lender will use reasonable efforts to agree to budget modifications as needed (with a permitted 10% variance in a prior budget to the extent a new budget is not agreed to by both parties); (iv) revision to the limitation on events of default, such that no event of default shall occur if the action was authorized, approved, or directed by, or taken by an employee with the knowledge of, Mr. Mitchell; (v) addition of events of default in the event of invalidity of lien, judgments and attachments, judgments against the Company or the guarantors, injunctions that restrain the Company or guarantors from performing under the loan agreement, default under guarantee, cross-default to other debt, and default under other loan documents or material agreements; and (vi) addition of conditions for loan advances, including filing of the proxy statement associated with the approval of the merger agreement, continued pursuit of approval of the proxy statement by the SEC, sending notice of the special meeting to the Company’s shareholders, and continued pursuit of obtaining the votes necessary for approval of the merger agreement.

 

From July 29, 2020 through August 7, 2020, the Special Committee, the Mitchell Group, and their legal advisors finalized the language for the merger agreement and the loan documents.

 

On August 6, 2020 and August 7, 2020, the Special Committee met with Seaport and its legal advisors to review Seaport’s final presentation, which included an overview of the transaction timeline; Company considerations that Seaport considered as part of its analysis; bankruptcy analysis; a Company ownership summary; Company financial projections; market valuation analysis, including analysis of comparables, analysis of reserves, and Black-Scholes option analysis; engineering and geological information, a summary of the valuation impact from declining EBITDA; and dilution analysis.  

 

On August 7, 2020, Seaport delivered its fairness opinion to the Special Committee and the Board. Following this presentation, the Special Committee voted unanimously to recommend to the Board that it, and thereafter the Board (other than Messrs. Mitchell, Rochman and Fite, each of whom abstained from voting) voted unanimously to (i) approve the merger, the merger agreement, the statutory merger agreement, the guaranty (as defined herein) (collectively, the merger agreement, the statutory merger agreement and the guaranty, the “merger documents”) and declare that the transactions contemplated by the merger documents are procedurally fair to, and advisable and in the best interests of, the Company and its shareholders, including the Company’s unaffiliated shareholders, (ii) declare that the merger consideration is fair to, both from a financial point of view and otherwise, and advisable and in the best interests of the Company’s shareholders, including the Company’s unaffiliated shareholders, (iii) direct that the adoption of the merger agreement and the statutory merger agreement be submitted to a vote at a special general meeting of the Company, (iv) approve the entry into the merger agreement and the statutory merger agreement (subject to approval of the Company’s shareholders), (v) submit the merger proposal to the Company’s shareholders for approval and adoption and (vi) recommend to the shareholders of the Company that they vote FOR the adoption of the merger proposal.

 

After this vote, on August 7, 2020, the Company and the counterparties thereto entered into the merger agreement and the loan agreement, and the Company filed a current report on Form 8-K and issued a press release announcing the execution of the merger agreement and the loan agreement.

 

On August 21, 2020, at a Board meeting of the Company, Mr. Mitchell proposed revisions to the loan agreement, whereby the Pledgors would propose to provide additional capital support to the Company in the form of extending pledges of personal collateral (“DenizBank pledges”) for the DenizBank loan beyond February 2021 in furtherance of a potential option to extend the DenizBank loan and obtain reduced amortization payments payable by the Company.  As a condition to extending pledges of personal collateral beyond February 2021, the Pledgors would require the Company to provide a security interest in the collateral to the Pledgors. The members of the Special Committee noted that they would review documents provided by the Lender.

 

On August 22, 2020, the Special Committee received a draft (the “August 22 draft loan agreement”) of an Amended and Restated Loan and Security Agreement (the “A&R loan agreement”) from the Lender, which provided that (i) the Lender would use commercially reasonable efforts to cause the DenizBank pledges to extend beyond February 2021 in furtherance of extending the maturity date of the DenizBank loan and (ii) the Company would grant a security interest in the collateral to the Lender on behalf of the Pledgors.

 

On August 28, 2020, the Special Committee met with its legal advisors to review the August 22 draft loan agreement. After discussion, the Special Committee concluded that the practical effect of the proposed A&R loan agreement would be to avoid or reduce the amount that would need to be borrowed from Lender, which is at a higher rate of interest than the DenizBank loan and, therefore, would be a financially preferable option to improving the Company’s liquidity. The Special Committee also agreed that the following revisions, among others, would need to be made to the August 22 draft loan agreement: (i) addition of signature page to require the Pledgors to be signatories to the A&R loan agreement, (ii) addition of an agreement that the Company would not be party to disagreements among the Lender and the Pledgors regarding the collateral, (iii) addition of agreement that the security interest in

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the collateral would not be granted to the Pledgors until DenizBank and the Company enter into an agreement to extend the maturity date of the DenizBank loan in exchange for the extension of the DenizBank pledges beyond February 2021, (iv) addition of agreement that the security interest in the collateral would be released when the DenizBank pledges are no longer in effect, and (v) deletion of an event of default in the event that the DenizBank pledges are in effect on the maturity date.

 

Following the meeting on August 28, 2020, the Special Committee sent a revised draft (the “August 28 draft loan agreement”) to the Lender, which reflected the revisions discussed at the Special Committee meeting on August 28, 2020.

 

On September 8, 2020, the Special Committee received a revised draft (the “September 8 draft loan agreement”) of the A&R loan agreement, which, among other things, added of an event of default in the event that the DenizBank Pledges are in effect on the maturity date.

 

From September 8, 2020 through September 15, 2020, the Special Committee, the Mitchell Group, and their legal advisors finalized the language of the A&R loan agreement.

 

On September 17, 2020, the Special Committee voted unanimously to recommend to the Board that it, and on September 22, 2020, the Board (other than Messrs. Mitchell, Rochman and Fite, each of whom abstained from voting) voted unanimously to, approve the A&R loan agreement.

 

Reasons for the Merger; Recommendation of the Special Committee; Recommendation of the Board; Fairness of the Merger

 

Both the Special Committee and the Board believe, based on their consideration of the factors described below, that the merger agreement and the transactions contemplated by it, including the merger, are substantively and procedurally fair to the Company and its shareholders, including the Company’s unaffiliated common shareholders.

 

The Special Committee

 

The Special Committee, with the advice and assistance of its outside legal and financial advisors, evaluated the merger, the terms and conditions of the merger agreement and the transactions contemplated thereby. Over the course of four months, the Special Committee held a number of meetings and led negotiations with the members of the Acquiring Group. At a meeting held on August 7, 2020, the Special Committee unanimously determined that the (i) the terms and conditions of the merger and the merger documents are procedurally fair to, and advisable and in the best interests of, the Company and its shareholders, including the Company’s unaffiliated shareholders, and (ii) the merger consideration is fair to, both from a financial point of view and otherwise, and advisable and in the best interests of the Company’s shareholders, including the Company’s unaffiliated shareholders. The Special Committee further unanimously resolved to recommend that (i) the Board approve the merger and the merger documents, (ii) the Board approve entry into the statutory merger agreement (subject to approval of the Company’s shareholders), (iii) the Board submit the merger, the merger agreement and the statutory merger agreement to the Company’s shareholders for approval and adoption with the fair value per share stated in the notice of special general meeting contained in any proxy statement for the purposes of section 106(2)(b) of the Companies Act as an amount equal to the merger consideration, and (iv) the Company’s shareholders vote in favor of the approval and adoption of the merger, the merger agreement and the statutory merger agreement.

 

In evaluating the proposed merger agreement and the transactions contemplated thereby, including the merger, the Special Committee consulted with the Special Committee’s outside legal and financial advisors, consulted with the executive officers of the Company, and considered a number of factors, including, but not limited to, the following material factors (not necessarily in order of relative importance):

 

 

the fact that, as a condition to the closing of the merger, the merger agreement must be adopted by the Company’s shareholders, which allows for an informed vote by the shareholders on the merits of the merger;

 

 

the fact that the merger consideration consists solely of cash, providing the Company’s common shareholders with certainty of value and liquidity upon consummation of the merger, and allowing the Company’s common shareholders to immediately realize a certain and fair value for their common shares and eliminating any uncertainty in valuing the consideration to be received by such common shareholders and allowing common shareholders the ability to pursue other investment alternatives;

 

 

recent and historical market prices for the Company’s common shares, which is discussed in further detail below, as compared to the merger consideration, including the fact that the merger consideration of $0.13 per share represents an approximate discount of 62% to the trading price for the Company’s common shares on the NYSE American on August 6, 2020, the last trading day before the announcement of the merger;

 

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the Special Committee’s belief that the market price of the Company’s common shares did not reflect the Company’s liquidity issues, going concern assumption and limited prospects due to the precipitous decline in Brent crude prices due to a number of factors, including, among others, limited equity research coverage, lack of market awareness regarding the content of the Company’s filings with the SEC, confusion on treatment of the preferred shares as debt versus equity, and a perceived market view that Mr. Mitchell will continue to provide his personal assets to backstop the Company’s debt and invest additional capital into the Company;

 

 

the Special Committee’s belief, based on negotiations with the Acquiring Group, that the Acquiring Group’s offer of $0.13 per common share in cash was the highest per common share consideration that the Acquiring Group would be willing to offer to acquire the unaffiliated common shares;

 

 

the fact that no third-party acquiror had indicated an interest in acquiring the Company despite (i) extensive third-party marketing efforts by a respected investment banker in 2018 and (ii) several filings with the SEC from April to August 2020 that the Company was in non-exclusive negotiations regarding a sale of the Company;

 

 

the fact that any potential third-party acquiror would trigger a change of control under the preferred shares, requiring the Company to redeem the preferred shares for at least $46.5 million of cash, which exceeded Seaport’s average enterprise value for the Company of $42.1 million;

 

 

the fact that the Company would exhaust its cash position by the end of 2020 without the infusion of new capital or collateral;

 

 

the fact that even with the $8.0 million loan from Dalea Investment Group, LLC, an affiliate of Mr. Mitchell, and after considering cash on hand, projected future cash flow from operations, and the Company’s swap contract with DenizBank through February 2021, the Company’s current liquidity position is severely constrained and substantial doubt exists regarding the Company’s ability to continue as a going concern;

 

 

the fact that oil and gas production levels and projected future commodity prices do not provide adequate cash flow to fund additional development net of operating expenses and debt retirement;

 

 

the fact that absent additional exploration and development, oil and gas production will continually decline, further reducing revenues and exacerbating the Company’s liquidity issues;

 

 

the fact that given the limited financial liquidity of the Company and its inability to pay cash dividends to the preferred shareholders for the foreseeable future, the Company’s shareholders would continue to be diluted by dividends paid to preferred shareholders in the form of common shares;

 

 

the fact that without additional sources of capital, the Company does not have adequate internally generated cash flow forecasted to repay its liabilities before its most valuable oil and gas production licenses expire in Turkey;

 

 

the belief that the value to unaffiliated common shareholders of the Company continuing as a public company would not be as great as the merger consideration, due to the public market’s emphasis on short term results and the potential risks and uncertainties associated with the near-term prospects of the Company;

 

 

the financial analyses provided by Seaport and reviewed with the Special Committee as well as the written opinion of Seaport, dated August 7, 2020, to the Board and the Special Committee as to, as of such date, the fairness, from a financial point of view, to the holders of common shares as it relates to the merger consideration to be received by such shareholders in the merger pursuant to the merger agreement. See “Opinion of Seaport Gordian Energy LLC” beginning on page 35 of this proxy statement;

 

 

the fact that the Special Committee retained Akin Gump, a nationally recognized legal advisor, and Seaport, a nationally recognized financial advisor, each of which has experience in transactions similar to the merger, and that these legal and financial advisors were involved throughout the process and updated the Special Committee directly and regularly; and

 

 

the Special Committee’s review of the structure of the merger agreement and the financial and other terms of the merger agreement, including, among others, the following specific terms of the merger agreement:

 

 

o

the limited and customary conditions to the parties’ obligations to complete the merger, and the commitment by Parent and Merger Sub to use their commercially reasonable efforts to take or cause to be taken certain actions to consummate the merger;

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o

the fact that there are no unusual requirements or conditions to the merger, increasing the likelihood that the merger will be consummated and that the consideration to be paid to the unaffiliated common shareholders of the Company in the merger will be received;

 

 

o

the absence of a financing condition in the merger agreement;

 

 

o

the fact that Dalea is providing the guaranty in favor of the Company, pursuant to which Dalea is guaranteeing certain payment and performance obligations of Parent and Merger Sub in connection with the merger;

 

 

o

subject to compliance with the merger agreement and prior to the time our shareholders approve the merger proposal, the ability of the Company, its representatives and the Board (acting through the Special Committee) to participate in discussions or negotiations with, or provide non-public information to, any person in response to an unsolicited acquisition proposal for the Company, if the Special Committee has determined in good faith (i) after consultation with its financial advisor and outside legal counsel that such acquisition proposal constitutes, or is reasonably likely to lead to a superior proposal and (ii) after consultation with its outside legal counsel that the failure to take such action would be inconsistent with its fiduciary duties under applicable law;

 

 

o

the ability of the Board, subject to certain conditions, to change its recommendation with respect to the merger proposal;

 

 

o

the Company’s ability to specifically enforce Parent’s and Merger Sub’s obligations under the merger agreement in certain circumstances, including their obligations to consummate the merger;

 

 

o

the customary nature of the representations, warranties and covenants of Parent and Merger Sub in the merger agreement; and

 

 

o

the availability of appraisal rights under Bermuda law to the Company’s shareholders who do not vote in favor of the merger proposal and comply with all of the required procedures under Section 106 of the Companies Act, which is the appraisal rights statute applicable to Bermuda companies.

 

In addition to the factors above, the Special Committee also considered the current market prices, historical market prices, going concern value and liquidation value, each as presented to them by Seaport and described in more detail below.

 

Current Market Prices. The Special Committee considered current market prices, as presented by Seaport, in evaluating the proposed merger agreement and the transactions contemplated thereby. For example, at its August 7, 2020 meeting, the Special Committee discussed the implied value of the proposed merger by comparing the transaction value of $0.13 per common share to the current market value of the Company (which was $0.31 per common share as of August 3, 2020) as well as to other standard oil and gas valuation tools prepared by Seaport, such as discounted cash flows (with PDP PV-10 being $0.24 per common share and PDP PV-25 being $(0.07) per common share) and an average of a number of market metrics (with the value based on composite metrics being $(0.14) per common share). At its August 7, 2020 meeting, the Special Committee also considered a reserve value sensitivity analysis presented by Seaport that compared the market value of the Company at current market prices to various commodity price scenarios for the Company’s reserves as well as various discount factors. Finally, during the August 7, 2020 meeting, the Special Committee considered Seaport’s valuation of comparable companies to the Company based on current market prices, which is discussed below under “—Opinion of Seaport Gordian Energy LLC.” The Special Committee also considered the fact that the merger consideration of $0.13 per share represents an approximate discount of 62% to the trading price for the Company’s common shares on the NYSE American on August 6, 2020, the last trading day before the announcement of the merger. However, as discussed above, the Special Committee believed that the market price of the Company’s common shares did not accurately reflect the Company’s liquidity issues, going concern assumption and limited prospects due to the precipitous decline in Brent crude prices due to the factors described above.

 

Historical Market Prices. Given the high correlation between stock price changes and commodity price changes, past performance and historical valuations were not deemed as comparable to current market values given the oscillation in oil prices. For this reason, Seaport indicated that historical market prices did not provide a material basis for Seaport’s opinion.  Nonetheless, the Special Committee did consider historical market price performance, as presented by Seaport, in evaluating the proposed merger agreement and the transactions contemplated thereby. For example, on May 21, 2020, the Special Committee reviewed a presentation from Seaport that set forth the Company’s relative performance since January 1, 2016 as compared to the S&P exploration and production (“E&P”) Index and Brent crude oil prices. Additionally, during this meeting, the Special Committee considered a year-to-date stock performance chart using

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historic market prices as compared to Brent crude oil prices, which considered the impact of the April 20, 2020 offer from the Mitchell Group. During this meeting, the Special Committee also considered additional analysis from Seaport that used historic market data to not only show the Company’s historic stock prices, but its historic total enterprise value to last twelve month EBITDA as well as the Company’s total enterprise value to next twelve month EBITDA. Total enterprise value was calculated on a continuous basis based on historic market prices.  This data was utilized to show the valuation disparity compared to U.S. E&P companies. This information was updated and considered by the Special Committee when it was presented by Seaport as part of Seaport’s August 7, 2020 financial presentation. Finally, during the May 21, 2020 meeting, the Special Committee reviewed and considered future high and low share prices prepared by Seaport based on a range of EBITDA multiples of last twelve month EBITDA compared to historic actual prices, which predicted a range of value into the future as EBTIDA continued to decline. This information was also provided to the Special Committee as part of Seaport’s August 7, 2020 financial presentation.

 

Going Concern Valuation. The Special Committee considered the Company’s going concern value, as presented by Seaport, in evaluating the proposed merger agreement and the transactions contemplated thereby. The going concern value of the Company was discussed extensively throughout Seaport’s August 7, 2020 financial presentation.  For example, in analyzing the implied value of the transaction, the transaction value was compared to a several other valuation metrics, including a discounted cash flow valuation and a market composite driven valuation, both of which are closer indications of the going concern value of the Company using current market information. Additionally, when considering the financial projections of the Company, much of the discussion revolved around the “going concern” issues of the Company, including the exhaustion of cash and liquidity by the fourth quarter of 2020, the inability to repay the preferred shares at maturity and the impact of license or concession expirations. The Special Committee also considered the fact that Seaport utilized various standard industry metrics to derive a going concern current valuation for the Company based on the average blended valuation of all metrics evenly weighted. The Special Committee compared this value to both the market value of the Company as well as the proposed transaction value. The Special Committee also considered how the six-month change in reserve value resulted in a material reduction in value to the going concern value of the Company.  Finally, the Special Committee considered the implied going concern range of values for the Company in Seaport’s August 7, 2020 financial presentation based on its last twelve months EBITDA and a range of market multiples.

 

Liquidation Valuation. The Special Committee considered the Company’s liquidation value, as presented by Seaport, in evaluating the proposed merger agreement and the transactions contemplated thereby. For example, in Seaport’s August 7, 2020 financial presentation, when future production and cash flows were assumed to run at the current commodity strip and a 25% discounted rate was utilized, this was described to be a best case liquidation scenario while the value based on composite metrics showed a lesser valuation. The Special Committee considered that neither metric provided the Company the ability to repay its liabilities. Additionally, in reviewing the reserve value sensitivity analysis in Seaport’s August 7, 2020 financial presentation, the Special Committee considered that: (i) the combination of price deck and discount rates highlighted a range of potential liquidation values for the Company, many of which were below a valuation necessary to repay liabilities, and (ii) the change in liquidation value between mid-year and end-of-year 2020 reduced value as a result of production reducing reserves. Finally, in reviewing the select precedent transactions in Seaport’s August 7, 2020 financial presentation, the Special Committee considered recent small U.S. liquids weighted transactions and noted that the trimmed mean value for the Company would result in a liquidation value of $30 million as compared to the transaction value of $68.4 million.

 

Net Book Valuation. The Special Committee did not specifically consider the net book value of the Company because net book value is not a relevant metric used in the valuation of oil and gas companies as the metric is heavily influenced by the capital structure, profitability of the Company, and cost basis less depreciation, depletion and amortization of the assets. Net book value does not typically adjust to commodity price changes rapidly nor is a good indicator of future commodity prices that are key to valuation of oil and gas companies.

 

Share Repurchases. In evaluating the proposed merger agreement and the transactions contemplated thereby, the Special Committee did not consider prior repurchases of common shares made by the Company during the past two years because there were no such repurchases.

 

Firm Offers. In evaluating the proposed merger agreement and the transactions contemplated thereby, the Special Committee did not consider any firm offer during the past two years because the Special Committee was not aware of any firm offer during the past two years by any person, other than the Acquiring Group, for the merger or consolidation of the Company with or into another company, the sale or other transfer of all or any substantial part of the assets of the Company or a purchase of the Company’s securities that would enable the holder to exercise control of the Company.

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The Special Committee also considered a number of factors that are discussed below relating to the procedural safeguards that it believes were and are present to ensure the fairness of the merger. The Special Committee believes the following factors support its determinations and recommendations and provide assurance of the procedural fairness of the merger to the Company’s unaffiliated shareholders:

 

 

the Special Committee consisted entirely of independent and disinterested directors not affiliated with the Acquiring Group;

 

 

the Board delegated to the Special Committee the exclusive power and authority to retain its own legal and financial advisors, to consider and negotiate the terms and conditions of the proposed transaction with the Acquiring Group, (ii) examine the advantages and disadvantages of a proposed transaction and (iii) recommend to the Board whether to pursue the proposed transaction and, if so, on what terms and conditions;

 

 

other than their receipt of Board fees and, as applicable, Special Committee fees (none of which are contingent upon the consummation of the merger or the Special Committee’s or the Board’s recommendation or approval of the merger), and their interests described in “Special Factors— Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 52 of this proxy statement, the members of the Special Committee have no financial interest in the merger that is different from, or in addition to, the interests of the unaffiliated common shareholders;

 

 

the Special Committee was deliberate in its process, taking four months to analyze and evaluate the Mitchell Group’s proposals and to negotiate the terms of the proposed merger with the Mitchell Group, and later the entire Acquiring Group; and

 

 

the terms and conditions of the merger agreement, including the Company’s ability to terminate after February 3, 2021 if the merger has not occurred prior to such date, which allows the Company to ensure that the merger is consummated as negotiated by the Special Committee.

 

The Special Committee also considered a variety of potentially negative factors in its deliberations concerning the merger agreement and the transactions contemplated thereby, including, but not limited to, the following (not necessarily in order of relative importance):

 

 

the fact that the $0.13 per share of merger consideration to be paid in respect of each common share represents a discount of approximately 62% to the closing price per common share of $0.34 on August 6, 2020 on the NYSE American, the last trading day before the announcement that the Company, Parent and Merger Sub had entered into the merger agreement;

 

 

the fact that, subsequent to the consummation of the merger, the Company will no longer exist as an independent public company and that the nature of the transaction as a cash transaction would prevent the unaffiliated common shareholders from participating in any value creation the business could generate, as well as any future appreciation in the Company’s value;

 

 

the fact that the Company will be prohibited from initiating, soliciting, or knowingly encouraging or facilitating the making of, an alternative acquisition proposal, from participating in any discussions or negotiations regarding, or providing any confidential or non-public information to any person relating to an acquisition proposal, or otherwise knowingly facilitating any effort or attempt to make an acquisition proposal, subject to certain exceptions;

 

 

the fact that Parent’s and Merger Sub’s obligations to consummate the merger are subject to certain conditions, and the possibility that such conditions may not be satisfied, including as a result of events outside the Company’s control;

 

 

the fact that if the merger is not consummated the Company’s directors and officers will have expended extensive time and effort and will have experienced significant distractions from their work during the pendency of the transaction;

 

 

the fact that under the terms of the merger agreement, the Company has agreed that it will conduct its business in the ordinary course and that subject to Parent’s consent, the Company will not take a number of specific actions related to the conduct of its business, and the possibility that these terms may limit the Company’s ability to pursue business opportunities that it would otherwise pursue;

 

 

the fact that the Company has incurred and will continue to incur significant transaction costs and expenses in connection with the potential transaction, regardless of whether the merger is consummated;

 

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the fact that if the Company terminates the merger agreement under certain circumstances relating to superior proposals, the Company must reimburse Parent for all reasonable, documented out-of-pocket fees and expenses, including reasonable attorney fees, incurred in furtherance of approval and consummation of the transactions contemplated by the merger agreement, subject to a cap of $350,000 in the aggregate; and

 

 

the fact that the merger consideration will be taxable to the Company’s taxpaying shareholders.

 

The Special Committee acknowledges that neither the merger agreement nor the Companies Act requires the approval of a majority of the Company’s unaffiliated shareholders. However, in addition to the procedural factors noted above, the Special Committee believes that the merger is procedurally fair to the Company’s unaffiliated shareholders based on the fact that the merger was approved by the Special Committee and a majority of the directors of the Company who are not employees of the Company. Additionally, the Special Committee engaged Seaport to deliver an opinion regarding the fairness of the merger consideration from a financial point of view. The Special Committee concluded that the potential benefits it expects the unaffiliated common shareholders to achieve as a result of the merger outweigh the risks and potentially negative factors relevant to the merger.

The Company did not retain an unaffiliated representative acting solely on behalf of the Company’s unaffiliated shareholders for the purpose of negotiating the terms of the merger or preparing a report covering the fairness of the merger. However, the Board formed the Special Committee, which is comprised entirely of independent and disinterested directors, to consider and negotiate the terms and conditions of the merger and to recommend to the Board whether to pursue the merger and, if so, on what terms and conditions. Additionally, the Board explicitly empowered the Special Committee to retain, at the Company's expense, independent legal counsel, financial advisors, and other professional advisors of the Special Committee’s choice. The Board directed the Company to pay all expenses incurred by the Special Committee and its members, including the fees and expenses of the independent professional advisors to the Special Committee. Although there was no third party that acted independently on behalf of the unaffiliated shareholders, the Special Committee protected the interests of the unaffiliated shareholders by making a recommendation regarding the merger that they deemed fair to the unaffiliated shareholders. Therefore, the Special Committee’s role in the negotiation of the merger was sufficient to protect the interests of unaffiliated shareholders.

The foregoing discussion of the information and factors considered by the Special Committee is not intended to be exhaustive but includes the material factors considered by the Special Committee. In view of the variety of factors considered in connection with its evaluation of the merger, the Special Committee did not find it practicable to, and did not, quantify or otherwise assign relative weights to, the specific factors considered in reaching its determination and recommendation. In addition, individual directors may have given different weights to different factors. The Special Committee did not undertake to make any specific determination as to whether any factor or any particular aspect of any factor supported or did not support its ultimate decision. The Special Committee based its recommendation on the totality of the information presented. Accordingly, the Special Committee has decided that it is in the best interest of the Company and the unaffiliated common shareholders to undertake the merger at this time for the reasons described above.

The foregoing discussion of the information and factors considered by the Special Committee is forward-looking in nature. This information should be read in light of the factors set forth in the section entitled “Cautionary Note Regarding Forward-Looking Statements” beginning on page 58 of this proxy statement.

 

Recommendation of the Board

 

On August 7, 2020, based primarily on the unanimous recommendation of the Special Committee, as well as on the basis of the other factors described above, the Board (other than Messrs. Mitchell, Rochman and Fite, each of whom abstained from voting) voted unanimously to:

 

 

approve the merger, the merger agreement, and the guaranty and declare that the transactions contemplated by the merger documents are procedurally fair to, and advisable and in the best interests of, the Company and its shareholders, including the Company’s unaffiliated shareholders;

 

 

declare that the merger consideration is fair to, both from a financial point of view and otherwise, and advisable and in the best interests of the Company’s shareholders, including the Company’s unaffiliated shareholders;

 

 

direct that the adoption of the merger agreement and the statutory merger agreement be submitted to a vote at a special general meeting of the Company;

 

 

approve the entry into the merger agreement and the statutory merger agreement (subject to approval of the Company’s shareholders);

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submit the merger proposal to the Company’s shareholders for approval and adoption; and

 

 

recommend to the shareholders of the Company that they vote “FOR” the adoption of the merger proposal.

 

The Board unanimously recommends that you vote “FOR” the merger proposal.

 

The Board believes, based on its considerations of the factors described above, that the merger agreement and the transactions contemplated by the merger agreement, including the merger, are substantively and procedurally fair to the Company and its shareholders, including the Company’s unaffiliated common shareholders. In accepting the Special Committee’s recommendations and concluding that the merger agreement and the transactions contemplated by the merger agreement, including the merger, are in the best interests of the Company and its shareholders, including the Company’s unaffiliated shareholders, the Board considered and relied upon the same factors and considerations that the Special Committee relied upon, as described above, and adopted as its own analysis the Special Committee’s analyses and conclusions in their entirety. Other than the merger agreement, the statutory merger agreement and the transactions contemplated thereby, the Board is not aware of any firm offer made by any person during the two years prior to the date of the merger agreement for (i) a merger or consolidation of the Company with another company, or vice versa, (ii) the sale or transfer of all or any substantial part of the assets of the Company, or (iii) a purchase of the Company’s securities that would enable such person to exercise control of the Company.

 

Opinion of Seaport Gordian Energy LLC

 

On August 7, 2020, Seaport delivered its written opinion to the Board and the Special Committee as to, as of such date, the fairness, from a financial point of view, to the holders of common shares as it relates to the merger consideration to be received by such shareholders in the merger pursuant to the merger agreement.

 

Seaport’s opinion was provided for the benefit of the Board and the Special Committee (in each case, solely in its capacity as such), in connection with and for the purposes of the Board’s and the Special Committee’s consideration of the merger. The opinion only addressed the fairness, from a financial point of view, to the holders of common shares as it relates to the merger consideration to be received by such shareholders in the merger pursuant to the merger agreement and did not address any other term or aspect of the merger agreement or the merger. The summary of Seaport’s opinion in this proxy statement 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 and describes the assumptions made, qualifications and limitations on the review undertaken and other matters considered by Seaport in connection with the preparation of its opinion. However, neither Seaport’s opinion nor the summary of its opinion and the related analyses set forth in this proxy statement are intended to be, and do not constitute, advice or a recommendation to the Special Committee, the 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. The decision as to whether to proceed with the proposed merger or any related transaction may depend on an assessment of factors unrelated to the financial analysis on which Seaport’s opinion was based.

 

Seaport’s opinion was addressed to the Special Committee and was prepared for their collective consideration, in conjunction with other information, and for that purpose only. The Special Committee used Seaport’s opinion in connection with their decision-making and Seaport does not know how much weight such opinion may have had, relative to other information, with each of the members of the Special Committee. Seaport’s presentation and opinion was not prepared for the common shareholders, who may vary in sophistication, experience and knowledge with respect to the Company, the industry and geopolitical nature of Turkey, but was prepared for members of the Special Committee who are familiar with the circumstances and facts surrounding the Company, its working capital needs, the industry and Turkey. The shareholders did not participate in the discussions and explanations of materials, analysis, assumptions and other information included in Seaport’s presentations and opinion. Shareholders did not have a contractual relationship with Seaport and were not a party to the engagement agreement between Seaport and the Company, and, as a result, Seaport only had a duty to the Company and not to the shareholders. The shareholders may rely on the fact that the Special Committee engaged Seaport to assist them with their decision-making.

 

The availability of Seaport’s defense that shareholders of the Company are not entitled to rely on Seaport’s opinion as a matter of Bermuda law would be resolved by a Bermuda court of competent jurisdiction provided such defense was properly asserted in a matter over which the Bermuda court had jurisdiction. The question of availability of such a defense would have no effect on the rights and responsibilities of the Company to its shareholders under Bermuda law. Finally, the availability of such a Bermuda law defense would have no effect on the rights and responsibilities of either Seaport or the Company under the federal securities laws.

 

In connection with its opinion, Seaport, among other things:

 

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reviewed all relevant public filings and press releases including, but not limited to, financial statements, reserve reports, SEC filings, press releases and presentations including those directly related to the merger;

 

 

analyzed certain internal financial statements and other financial and operating data (including financial projections) of the Company prepared by management;

 

 

discussed with the management of the Company the operations and future business prospects of the Company and the anticipated future consequences of the transaction;

 

 

discussed the financial condition of the Company with management and its ability to meet its future liquidity needs;

 

 

reviewed the December 31, 2019 DeGolyer and MacNaughton reserve database and updated production forecasts for existing wells based on the most recent production rates and pricing differentials provided by the Company as well as lease operating expense (“LOE”) inputs based on provided lease operating statements (“LOS”);

 

 

created a volumetric reserve model based upon Company-provided data in order to classify and quantify producing and upside locations into reserve categories for the purpose of including them in the reserve database;

 

 

created and evaluated estimates of the oil and gas reserves of the Company under various pricing scenarios and discount rates;

 

 

compared financial and production estimates to other publicly-traded companies and certain transactions that Seaport determined were relevant;

 

 

analyzed the impact of dilution to common shareholders based upon various share prices to demonstrate the dilutive impact of the common share dividends paid to the preferred shareholders;

 

 

utilized various valuation techniques that Seaport believes are customarily used in investment banking practice for developing fairness opinions as they pertain to the oil and gas industry including reserve analysis, equity comparables, transaction comparables, and Black-Scholes options analysis; and

 

 

performed such other analysis and provided such other services as Seaport has deemed appropriate.

 

Seaport’s opinion was subject to the following additional qualifications and limitations, with the Board’s and the Special Committee’s consent:

 

 

Seaport relied on the accuracy and completeness of the information, including but not limited to reserve reports, reserve data, financial reports, and financial projections, provided by the Company in connection with the preparation of the opinion, and the opinion is based on this information;

 

 

Seaport did not assume any responsibility for independent verification of the accuracy and/or completeness of any of the provided information;

 

 

the Company’s management assured Seaport that they are not aware of any relevant information that was omitted or undisclosed to Seaport;

 

 

although Seaport conducted its analysis and projections as it pertains to oil and gas reserves, the initial production data used in connection with those forecasts was provided by the Company and deemed reasonable and suitable for the analysis;

 

 

as it relates to the internal financial projections provided by the Company, Seaport assumed that these forecasts were reasonably prepared and reflect the most appropriate estimates for the Company’s performance;

 

 

Seaport did not make any assumptions as to future market trends in the oil and gas industry in terms of commodity prices used in its analysis and relied on Brent futures pricing as well as Company provided estimates for gas pricing in Turkey, which, due to the possibility of significant future volatility, could have a material impact on Seaport’s opinion;

 

 

Seaport did not assume any obligation to conduct any physical inspection of the properties or facilities of the Company; and

 

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Seaport assumed that the representations and warranties contained in the merger agreement and all related documents are true, correct, and complete in all material respects.

 

Material Financial Analyses

 

In reaching its opinion, Seaport applied and considered the results of valuation methods that Seaport believes are customarily used in developing fairness opinions for oil and gas companies within the investment banking practice.  The following is a summary of the material financial analysis utilized by Seaport in connection with providing its opinion and does not claim to be a complete description of the analysis underlying the Seaport opinion.

 

Publicly Traded Equity Comparables Analysis

 

Seaport used publicly available information in order to identify the following comparable companies for its analysis: Lukoil PJSC, MOL Hungarian Oil & Gas, OMV AG, Energean Plc, Serinus Energy Plc, Enwell Energy Plc, JFX Oil & Gas Plc, Gulf Keystone Petroleum Limited, ShaMaran Petroleum Corp., Genel Energy Plc, and Valeura Energy Inc. Given a lack of directly comparable companies operating in Turkey, Seaport expanded its screening criteria to include large international exploration and production companies, as well as other regional operators and operators in Israel, Ukraine, and Kurdistan. Seaport utilized like-sized companies in terms of enterprise value, but also included substantially larger companies in order to get a more general sense of where international oil and gas companies are trading in the market.

 

The implied values based on comparable company analysis generated the multiple ranges below. In order to eliminate outlier multiples, Seaport concentrated on a trimmed mean by excluding values falling outside of the 1st and 3rd quartiles, as reflected below.

 

 

 

Enterprise Value /

 

 

2020E EBITDA
(x)

 

2021E EBITDA
(x)

 

2020E Production
($/Boed)

 

2021E Production
($/Boed)

Average

 

9.2x

 

3.1x

 

$24,200

 

$20,700

1st Quartile

 

3.6x

 

2.6x

 

$12,000

 

$11,600

3rd Quartile

 

5.3x

 

3.6x

 

$39,800

 

$26,200

Trimmed Average

 

4.5x

 

2.9x

 

$23,900

 

$20,100

 

Net Asset Value Analysis

 

Seaport conducted a net asset valuation based on the oil and gas reserves provided by the Company and further analyzed by Seaport. For oil price, Seaport used a Brent Oil Strip Price as of July 27, 2020, where averages were used for 2020, 2021, 2022, 2023, and then held flat based on the average of all price quotes from 2024+.  Brent Oil Strip Pricing as of July 27, 2020: $44.27 per barrel of oil for 2020; $46.37 per barrel of oil for 2021; $48.23 per barrel of oil for 2022; $49.86 per barrel of oil 2023; $52.97 per barrel of oil for 2024 and after.  Natural gas prices in Turkey are set annually by the government so a flat price of $5.40 per MMBtu was used throughout the life of Seaport’s reserve analysis. Estimates regarding differentials were provided by the Company. Seaport evaluated each well’s decline and forecasted future production based on its best estimates for future production. Operating expenses were determined based on trailing twelve-month LOS provided by the Company

 

Because of the lack of capital available to the Company to continue development of the Company’s oil and gas assets, Seaport limited its valuation analysis to only proved developed producing reserves (“PDP”).  Seaport used discount rates of 15% to 25% in order to arrive at the net asset values below. The discounted cash flows associated with the PDPs do not include any adjustment for overhead costs, interest expenses, dividends, or cost of hedging.

 

 

 

 

 

 

 

Discount Rate

 

 

 

 

 

 

15%

 

25%

Proved Developed Producing ($MM)

 

 

 

 

$59.46

 

$47.08

 

Comparable Transactions Analysis

 

Given a lack of available public data on international transactions in Turkey, Seaport utilized various comparable transactions in the U.S. in order to determine valuation metrics. Because of the current commodity price environment, most transactions completed in 2020 have allocated all value to production, with little to no value attributed to acreage value. As a result, Seaport used publicly

available transaction data in order to determine valuation ranges based on a $ per daily Boe metric. Seaport used the 1st and 3rd quartiles of the data analyzed in order to determine the range of valuation metrics shown below.

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Enterprise Value /

 

 

 

 

 

 

 

 

$ / Daily Boe

1st Quartile

 

 

 

 

 

 

 

$5,056

3rd Quartile

 

 

 

 

 

 

 

$30,837

 

 

TransAtlantic Valuation Summary

 

Utilizing the publicly available equity comparables analysis, net asset value analysis, and the comparable transactions analysis discussed above, Seaport was able to derive the following enterprise value estimates for the Company:

 

TransAtlantic Metric

 

Valuation Technique

 

Value

 

Multiple Range

 

Implied Enterprise Value

2020E EBITDA ($MM)

 

Equity Comparables

 

$10.35

 

3.6x -

 

$37.3

 

 

 

 

 

 

5.3x

 

$54.9

2021E EBITDA ($MM)

 

Equity Comparables

 

$6.94

 

2.6x -

 

$18.0

 

 

 

 

 

 

3.6x

 

$25.0

2020E Production (MBoed)

 

Equity Comparables

 

2.23

 

$12,000 -

 

$26.7

 

 

 

 

 

 

$39,800

 

$88.6

2021E Production (MBoed)

 

Equity Comparables

 

1.86

 

$11,600 -

 

$21.5

 

 

 

 

 

 

$26,200

 

$48.7

Current Production (MBoed)

 

Transaction Comparables

 

2.19

 

$5,100 -

 

$11.1

 

 

 

 

 

 

$30,800

 

$67.3

PDP Present Value ($MM)

 

Net Asset Value

 

N/A

 

25%

 

$47.1

 

 

 

 

 

 

15%

 

$59.5

Average Enterprise Value

 

 

 

 

 

 

 

$42.1

 

The above analysis suggesting an average enterprise value based on market comparables of $42.1 million compares to the transaction value of $60.9 million.  The market comparable average enterprise value equates to a negative share price of $0.14 per common share adjusting for repayment of liabilities and preferred shares compared to the transaction value of $0.13 per common share.

 

Other Valuation Analysis

 

In order to validate the valuation analysis performed above, Seaport utilized Black-Scholes options analysis in order to value the common shares from the perspective that they are effectively an option on the price of oil. The following assumptions were used in this analysis:

 

 

Underlying Price: $36 million (based on indicative valuation of approximately $42 million; adjusted for bank debt and hedge liability);

 

 

Strike Price: $46.1 million (face value of preferred shares);

 

 

Risk-Free Interest Rate: 0.22%;

 

 

Expected Life of Option: 1 to 5 years;

 

 

Volatility: 50% to 100% (using Brent crude prices, six-month to two-year volatilities range from 50% to over 100%, which are considered to be very high and reflect the enormous turmoil in the energy sector); and

 

 

Dividend Yield: 17.93% (based on 14% blended interest - average of cash and non-cash rate).

 

These inputs generated a theoretical value attributable to the equity of the Company of between $2.0 and $9.6 million, or $0.03 to $0.14 per common share, excluding the dilution resulting from any future common share dividends paid to the preferred shareholders.  Adding in one and two future common share dividends paid to the preferred shareholders at an assumed per share price of $0.31 would reduce the range to $0.03 – $0.13 and $0.02 – $0.12 per common share, respectively. This valuation technique was not used in Seaport’s valuation analysis above and instead was used more for illustrative purposes.  These ranges compare to a Transaction Value

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of $0.13 per common share.

 

Additional Information

 

Additionally, Seaport evaluated the Company’s proved producing reserves at July 1, 2020 factoring in various commodity prices and using various discount factors and determined that a $0.13 offer per common share generates a rate of return on the producing assets of approximately 14% at Brent Oil Strip Pricing as of July 27, 2020, excluding any general and administrative costs or cost of capital.

 

By contrast, Seaport evaluated the remaining producing reserves to be produced as of January 1, 2021. Factoring in various commodity prices, various discount factors and the projected year-end financial statements of the Company, Seaport determined that, after taking into account two additional common share dividends paid to the preferred shareholders, a $0.13 offer per common share generates a rate of return on the producing assets of approximately 9% at Brent Oil Strip Pricing as of July 27, 2020, excluding any general and administrative costs or cost of capital.

 

Preliminary Discussion Materials

 

In addition to the material financial analyses described above contained in Seaport’s August 7, 2020 financial presentation to the Special Committee in connection with Seaport’s opinion, dated August 7, 2020, as summarized above, Seaport also provided, for informational purposes, preliminary discussion materials to the Special Committee as summarized below.

 

The preliminary financial considerations and other information in the preliminary discussion materials reflected market data as of dates proximate to such materials and were based on financial, economic, monetary, market and other conditions and circumstances as in effect on, and information made available to Seaport as of, the date of such materials. Accordingly, to the extent preliminary financial analyses or information were included in such preliminary discussion materials, such preliminary financial analyses or information may have differed from the August 7, 2020 financial presentation as a result of, among other things, changes in the Company’s internal financial forecasts, estimates and assumptions, such financial, economic, monetary, market and other conditions and circumstances and other information. Seaport also continued to refine various aspects of such preliminary financial considerations and other information. The August 7, 2020 financial presentation superseded the preliminary discussion materials. The preliminary discussion materials did not constitute an opinion of, or recommendation by, Seaport with respect to a possible transaction or otherwise.

 

May 21, 2020 Preliminary Discussion Materials

The May 21, 2020 preliminary discussion materials included market data showing that, as of the date of the preliminary discussion materials, historic small cap U.S. E&P valuations had average total enterprise values to last twelve month EBITDA multiples of 5.2x for the previous two years, with small cap U.S. E&P companies being currently valued at a two year low of 3.2x EBITDA.  Based upon a projected next twelve month consensus average EBITDA, the small cap U.S. E&P companies were currently valued at 4.3x next twelve month EBITDA, which was substantially consistent with the two year average multiple of 4.2x. Given the decline in commodity prices, using last twelve month EBITDA was deemed to be less comparable than the use of next twelve month EBITDA where the valuation metrics have been more consistent.  The Company’s current forward multiple has increased to approximately 15x next twelve month EBITDA as compared with small cap U.S. E&P companies currently being valued at a 4.3x next twelve month EBITDA.

In the May 21, 2020 preliminary discussion materials, Seaport also identified the following comparable companies for its analysis based upon publicly available information: Lukoil PJSC, MOL Hungarian Oil & Gas, OMV AG, Energean Plc, Serinus Energy Plc, Enwell Energy Plc, JFX Oil & Gas Plc, Gulf Keystone Petroleum Limited, ShaMaran Petroleum Corp., Genel Energy Plc, and Valeura Energy Inc. Given a lack of directly comparable companies operating in Turkey, this list includes large international exploration and production companies, as well as other regional operators and operators in Israel, Ukraine, and Kurdistan. Seaport utilized like-sized companies in terms of enterprise value, but also included substantially larger companies in order to get a more general sense of where international oil and gas companies were trading in the market. In the May 21, 2020 preliminary discussion materials, all pricing associated with Seaport’s comparable analysis was conducted as of market close on May 18, 2020 (whereas pricing associated with Seaport’s comparable analysis in the August 7, 2020 financial presentation was conducted as of August 3, 2020).

 

 

Enterprise Value /

 

 

2020E EBITDA
(x)

 

2021E EBITDA
(x)

 

2020E Production
($/Boed)

 

2021E Production
($/Boed)

Average

 

8.4x

 

2.3x

 

$21,600

 

$24,300

39

 


1st Quartile

 

1.9x

 

1.6x

 

$8,000

 

$14,100

3rd Quartile

 

4.8x

 

4.0x

 

$37,500

 

$29,900

Trimmed Average

 

4.1x

 

3.0x

 

$22,500

 

$20,700

In the May 21, 2020 preliminary discussion materials, Seaport used the reserve database provided by the Company for the reserve analysis in the presentation. The reserves of the Company were run using an effective date of May 1, 2020 and annual averages based on monthly strip pricing as of May 13, 2020: $31.9 Oil / $7.25 Gas for 2020; $37.33 Oil / $7.33 Gas for 2021; $41.42 Oil / $7.39 Gas for 2022; $44.75 Oil / $7.44 Gas for 2023; $44.75 Oil / $7.46 Gas for 2024 with Botas Gas Exchange prices provided by the Company. Pricing was held flat after 2024 at the annual average for 2024 of 44.75 Oil / $7.46 Gas. Seaport also recalculated each field’s volumetric production in order to compare to the initial volumetric estimates provided by the Company.

TransAtlantic Reserve Summary - By Reserve Category

Category

Net Oil
(MBbl)

Net Gas
(MMcf)

Equivalent (Mboe)

% Oil

Investment
($MM)

PV-10
($MM)

PDP

  3,461

  451

  3,536

98%

$0.7

$55.2

PDNP

  1,220

  2,977

  1,716

71%

$2.3

$30.5

PUD

  1,583

  -

  1,583

100%

$16.5

$5.2

Total Proved

  6,264

  3,428

  6,835

92%

$19.5

$90.9

PROB

  2,130

  480

  2,210

96%

$10.2

$26.4

Total 2P

  8,394

  3,908

  9,045

93%

$29.7

$117.3

POSS

  2,854

  630

  2,959

96%

$11.2

$38.2

Total 3P

  11,248

  4,538

  12,004

94%

$40.9

$155.4

Seaport also looked at the effect that various flat price decks had on EBITDA and PDP PV-10 estimates. The EBITDA estimates were sourced from the Company-provided financial model and PDP PV-10 estimates were sourced from the provided reserve database. These cases were run at strip pricing as of May 13, 2020 as well as $35, $40, $45, $50, $55, and $60 constant oil price cases.

PDP PV-10 ($MM)

 

Current Strip
(as of May 13, 2020)

$35 Oil

$40 Oil

$45 Oil

$50 Oil

$55 Oil

$60 Oil

 

$55.3

$39.8

$51.3

$63.1

$75.1

$87.1

$99.3

 

 

 

 

 

 

 

 

EBITDA ($MM)

 

Current Strip

$35 Oil

$40 Oil

$45 Oil

$50 Oil

$55 Oil

$60 Oil

2020 EBITDA

$7.9

$5.7

$9.7

$13.7

$17.6

$21.6

$25.6

2021 EBITDA

$3.1

$1.9

$5.2

$8.6

$11.9

$15.3

$18.6

2022 EBITDA

$3.7

$0.5

$3.2

$6.0

$8.7

$11.5

$14.2

May 23, 2020 Preliminary Discussion Materials

Seaport analyzed the offer price in order to further understand the corresponding cash flow inflows and outflows to the Mitchell Group, other preferred holders, as well as unaffiliated holders. This analysis was conducted as the Company stood as of May 23, 2020, as well as with the impact of 10% dilution from additional common share dividends paid to the holders of the preferred shares.

Investor Group

Mitchell
Group

Other Preferred
Holders

Unaffiliated
Holders

Shares

 

 

 

Common Ownership

          30,958,277

           5,370,724

          26,019,999

Adjusted Common Ownership(1)

          35,946,197

           6,617,704

          26,019,999

 

 

 

 

Percentage

 

 

 

Preferred Ownership

80.0%

20.0%

0.0%

40

 


Common Ownership

49.7%

8.6%

41.7%

Adjusted Common Ownership(1)

52.4%

9.6%

37.9%

(1) Adjusted for the impact of a 10% dilutive dividend

 

 

 

 

 

 

Scenario I: Stock Purchase Offer

 

 

Outflow

$        (6,850,000)

$                    -  

$                    -  

Inflow

$         3,401,245

$           590,057

$         2,858,699

Net

$        (3,448,755)

$           590,057

$         2,858,699

 

 

 

 

Scenario II: Impact of 10% Dilution (Stock Dividend)

 

Outflow

$        (6,850,000)

$                    -  

$                    -  

Inflow

$         3,590,222

$           660,961

$         2,598,817

Net

$        (3,259,778)

$           660,961

$         2,598,817

 

 

 

 

Scenario III: Quarterly Cash Dividend

 

 

Inflow

$         1,106,400

$           276,600

$                    -  

Seaport analyzed the estimated total enterprise valuation and associated market capitalization based on 5.0x last twelve month EBITDA and 4.0x next twelve month EBITDA based on $35, $40, $45, $50, $55, and $60 flat oil price cases. This analysis was conducted to demonstrate that the estimated value of the Company does not exceed the mandatory redemption price of the preferred shares ($46.1 million) until the $55 flat oil case. This same analysis was run based on the reserve analysis at $35, $40, $45, $50, $55, and $60 flat oil price cases. Reserves were rolled forward to YE2020 and YE2021 to demonstrate the future value at the various pricing cases shown to better understand the impacts on valuation.

Seaport ran the Company-provided reserve database at an effective date of May 1, 2020 using strip pricing as of May 22, 2020: $37.48 Oil / $7.25 Gas for 2020; $40.62 Oil / $7.33 Gas for 2021; $43.38 Oil / $7.39 Gas for 2022; $45.93 Oil / $7.44 Gas for 2023; $45.93 Oil / $7.46 Gas for 2024 with Botas Gas Exchange prices provided by the Company. Pricing was held flat after 2024 at the annual average for 2024 of $45.93 Oil / $7.46 Gas. The pricing update resulted in PDP PV-10 increasing to approximately $61 million, compared to approximately $55 million from the presentation given on May 21, 2020.

May 26, 2020 Preliminary Discussion Materials

The May 26, 2020 preliminary discussion materials contained, among other things, information regarding the proposal from the Mitchell Group and value considerations. There was no quantitative analysis in this presentation supplement. The qualitative discussion was to assist the Special Committee by laying out the key terms of the proposal as well as identifying issues and concerns as well as options that may need to be considered in regards to future proposals.

 

Other Matters

 

Seaport, as an associated person of Seaport Global Securities LLC and Gordian Group, LLC, acted as financial advisor to the Special Committee to assist the Special Committee in the evaluation of corporate and balance sheet related shareholder value enhancing alternatives, which assistance would include providing the Special Committee with an estimated valuation of the Company and its assets as a going concern and rendering an opinion with respect to any potential sale or merger transaction, if requested by the Special Committee. The information provided above under “—Material Financial Analyses,” “—Additional Information,” and “—Preliminary Discussion Materials” summarizes the material aspects of the analyses requested by the Special Committee during the course of Seaport’s engagement.

 

Seaport received an initial fee of $100,000, which will be allocated among its members equally, for work related to the valuation of the Company. With respect to the opinion, Seaport was paid a fixed fee of $250,000, which will be allocated among its members equally, upon rendering the opinion. No portion of such fee was contingent upon the conclusion expressed in the opinion or whether the merger is successfully completed. The Company has also agreed to reimburse Seaport for certain out-of-pocket and incidental expenses and to indemnify Seaport and its members for certain liabilities arising out of its engagement as financial advisor. In the ordinary course of business, Seaport and its members may actively trade the public securities of the Company for their own account and for the account of their customers and, accordingly, may at any time hold a long or short position in such securities; provided, that with respect to all information concerning or related to the Company, the merger agreement or the merger, Seaport’s investment banking and financial advisory services personnel are obligated to hold such information in strict confidence and such information will remain confidential and will not be used in connection with trading activities involving the Company’s securities.

 

41

 


Certain Unaudited Prospective Financial Information Concerning the Company

 

The Company does not, as a matter of general practice, publicly disclose financial projections, due to the unpredictability of the underlying assumptions and estimates inherent in preparing financial projections. However, the Company has elected to provide the unaudited prospective financial information set forth below (the “Company Projections”) in order to provide its shareholders access to selected non-public unaudited prospective financial information that was prepared in connection with the evaluation of the merger and was provided to Seaport in order for it to prepare its financial analyses and its opinion rendered to the Board and the Special Committee on August 7, 2020. The Company Projections were reasonably prepared on bases reflecting the best then-currently available estimates and judgments of the management of the Company as to the matters covered thereby.

 

In preparing the Company Projections, the Company’s management used commodity price assumptions set forth in the tables below. The Brent crude oil price assumptions are based on the forward strip as of July 27, 2020 adjusted for commodity derivative contracts in place as of that date. The Company has swap contracts in place for 1,975 Bbl/day at a $36 weighted average price for the period July 1, 2020 through February 28, 2021.

 

 

 

 

 

4Q20E

 

 

1Q21E

 

 

2Q21E

 

 

3Q21E

 

 

4Q21E

 

 

 

Commodity Prices

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brent oil ($/Bbl)

 

$

36.37

 

 

$

39.33

 

 

$

46.37

 

 

$

46.37

 

 

$

46.37

 

 

 

Natural gas ($/MMBtu)

 

$

5.40

 

 

$

5.40

 

 

$

5.40

 

 

$

5.40

 

 

$

5.40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2020E

 

 

2021E

 

 

2022E

 

 

2023E

 

 

2024E

 

 

2025E

 

 

 

Commodity Prices

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Brent oil ($/Bbl)

 

$

36.37

 

 

$

44.61

 

 

$

48.23

 

 

$

49.86

 

 

$

52.97

 

 

$

52.97

 

 

 

Natural gas ($/MMBtu)

 

$

5.40

 

 

$

5.40

 

 

$

5.40

 

 

$

5.40

 

 

$

5.40

 

 

$

5.40

 

 

 

 

In addition to commodity price assumptions, the Company Projections are based on various other assumptions, including, but not limited to, the following:

 

Production under the Selmo production lease ceasing in June 2025 concurrent with the expiration of that lease;

 

Drilling and completion activities being timed to achieve an approximate minimum cash balance of $3 million;

 

Three wells were assumed to be drilled and completed in the projection period, including one well in each of the Bahar Bedinan, Bahar Hazro, and Yeniev fields during 2023, with management estimates of these drilling and completion costs for these wells being at $3.5 million, $3.8 million, and $2.5 million, respectively;

 

No wells being drilled in 2021 or 2022 due to cash limitations;

 

Recompletion activities focused on behind pipe (PDNP) reserves within existing wells being scheduled based on the economic limit (ECL) of the existing producing reserves, with capital and associated production as follows (in millions): 2020: $0.1; 2021: $0.4; 2022: $0.2; 2023: $0.2, 2024: $0.2, and 2025: $0.3;

 

Water-flood recompletions and facility expenditures planned in the Arpatepe field taking place starting the fourth quarter of 2020, and continuing through 2021, with the capital allocated to this project estimated at $1.2 million;

 

No exploration wells being drilled during the projection period;

 

All drilling and completion activities terminating effective January 1, 2024 to conserve cash for the November 2024 maturity of the preferred shares;

 

Type curves for new wells coming on stream at management’s P90 reserve case;

 

Due to cash limitations, all dividends on the preferred shares being paid in common shares during the projection period;

 

The preferred shares being mandatorily redeemed at par on November 4, 2024, with cash projected as negative as of the redemption date as a result of such redemption; and

42

 


 

Working capital sources / (uses) (in millions) being as follows: 2021: $(0.3); 2022: $(0.3); 2023: $1.6, 2024: $(2.3), and 2025: $1.4.

You should note that the prospective financial information constitutes forward-looking statements, and that the prospective financial information was not prepared with a view toward public disclosure. Inclusion of this information should not be regarded as an indication that the Company or any of its affiliates, officers, employees, directors, advisors or other representatives or any other recipient of this information considered, or now considers, it to be necessarily predictive of actual future results or is indicative of guidance that the Company would provide should the merger not be consummated. No person has made or makes any representation to any shareholder or other person regarding the Company’s ultimate performance compared to the Company Projections or that forecasted results set forth in the Company Projections will be achieved. The Company has made no representation concerning the Company Projections or any financial forecast. Readers of this proxy statement are cautioned not to place undue reliance on the prospective financial information. See “Cautionary Note Regarding Forward-Looking Statements.”

 

The Company Projections were prepared for internal use and are subjective in many respects. Additionally, the Company Projections do not take into account any circumstances or events occurring after the date they were prepared. While presented with numeric specificity, the Company Projections reflect numerous estimates and assumptions of the Company’s management with respect to operating expense, capital expenditures, industry performance, general business, economic, regulatory, litigation, market and financial conditions and matters specific to the Company’s business, many of which are beyond the Company’s control. As a result, there can be no assurance that the financial results included in the Company Projections will be realized or that actual results will not be significantly higher or lower than estimated. Since the Company Projections cover multiple years, such information by its nature becomes less predictive with each successive year. A number of important factors with respect to the Company’s business and the industry in which it participates may affect actual results and result in the Company Projections not being achieved. Additionally, the Company Projections reflect assumptions regarding the continuing nature of ordinary course operations that may be subject to change. For a description of some of these factors, the Company’s shareholders are urged to review the Company’s most recent SEC filings as well as “Cautionary Note Regarding Forward-Looking Statements.” Economic and business environments can and do change quickly which adds a significant level of unpredictability and execution risk. These factors create significant uncertainty as to whether the results portrayed in the Company Projections will be achieved. The Company Projections were not prepared with a view toward complying with United States generally accepted accounting principles (“GAAP”), the published guidelines of the SEC regarding projections or the use of non-GAAP financial measures or the guidelines established by the American Institute of Certified Public Accountants for preparation and presentation of the Company Projections. Neither the Company’s independent registered public accounting firm, nor any other independent accountants, have compiled, examined, or performed any procedures with respect to the Company Projections, nor have they expressed any opinion or any other form of assurance on such information or its achievability. Furthermore, the Company Projections do not take into account any circumstances or events occurring after the date of their preparation and the Company does not intend to make publicly available any update or other revision to the Company Projections.

 

 

 

(1)4Q2020E

1Q2021E

2Q2021E

3Q2021E

4Q2021E

 

(in millions)

Income Statement

 

 

 

 

 

Revenue

$      5.4

$   5.6

$       6.5

$    6.3

$        6.3

Adjusted EBITDAX(2)

0.9

1.1

2.1

1.9

1.8

Balance Sheet

 

 

 

 

 

Cash

$      (0.4)

$      (3.7)

$      (1.8)

$      (0.2)

$      1.1

Total Assets

88.1

86.3

88.1

89.4

91.1

Total Debt

2.7

       -

       -

       -

       -

Net Debt

3.1

3.7

1.8

0.2

(1.1)

Preferred Equity

46.1

46.1

46.1

46.1

46.1

Cash Flow Statement

 

 

 

 

 

Cash Flow from Operations

$      (0.2)

$      0.0

$      2.1

$      1.6

$      1.5

Capital Expenditures (excluding dry hole costs)

0.5

0.7

0.2

       -

0.2

Cash Flow from Financing

    (4.0)

(2.7)

       -

       -

       -

Free Cash Flow (3)

(0.7)

(0.7)

2.0

1.6

1.3

Operating Profile

 

 

 

 

 

Net Oil production (Mbbl)

188

177

167

159

158

Net Gas Production (MMcf)

      3

3

13

52        

33

Total Production (Mboe)

189

178

169

167

164

Net Production per day (Mboe/d)

       2.1

2.0    

1.8

1.8        

1.8

43

 


Drilling and Completion Capital Expenditures

$      0.5

$      0.7

$      0.2

$             -

$      0.2

Facilities Capital Expenditures

       -

       -

       -

       -

       -

Total Capital Expenditures

0.5

0.7

0.2

       -

0.2

 

 

(1)2020E

2021E

2022E

2023E

2024E

2025E

 

(in millions)

 

Income Statement

 

 

 

 

 

 

Revenue

$      26.0

$   24.8

$       25.5

$    29.3

$        32.0

$        25.2

Adjusted EBITDAX(2)

10.4

6.9

9.0

12.2

14.8

11.8

Balance Sheet

 

 

 

 

 

 

Cash

$      (0.4)

$      1.1

$      7.6

$      9.4

$      (27.5)

$      (17.2)

Total Assets

88.1

91.1

97.9

110.7

73.6

82.4

Total Debt

       2.7

       -

       -

       -

       -

       -

Net Debt

3.1

(1.1)

(7.6)

(9.4)

27.5

17.2

Preferred Equity

46.1

46.1

46.1

46.1

       -

       -

Cash Flow Statement

 

 

 

 

 

 

Cash Flow from Operations

$      11.1

$      5.2

$      6.7

$      11.8

$      9.3

$      10.7

Capital Expenditures (excluding dry hole costs)

4.9

1.1

0.2

10.0

0.1

0.3

Cash Flow from Financing

    (17.4)

(2.7)

       -

       -

       (46.1)

       -

Free Cash Flow(3)

6.2

4.1

6.5

1.8

9.1

10.3

Operating Profile

 

 

 

 

 

 

Net Oil production (Mbbl)

802

661

611

679

693

548

Net Gas Production (MMcf)

      64

101

167

165

133

92

Total Production (Mboe)

813

678

639

707

715

563

Net Production per day (Mboe/d)

       2.2

1.9    

1.8        

1.9        

2.0        

1.5

Drilling and Completion Capital Expenditures

$      6.6

$      1.1

$      0.2

$      10.0

$      0.1

$      0.3

Facilities Capital Expenditures

       -

       -

       -

       -

       -

       -

Total Capital Expenditures

6.6

1.1

0.2

10.0

0.1

0.3

 

 

 

 

 

 

 

_________________

 

(1)

“E” denotes that these Company Projections are merely estimates of prospective financial information for the respective time period, which estimates are subject to the risks, uncertainties and other factors described above with respect to such Company Projections.

 

(2)

Adjusted EBITDAX is a non-GAAP financial measure that represents net loss plus interest and other income, net, income tax (benefit) expense, exploration, abandonment, and impairment, seismic and other exploration expense, foreign exchange loss, share-based compensation expense, (gain) loss on commodity derivative contracts, cash settlements on commodity derivative contracts, accretion of asset retirement obligation, depreciation, depletion, and amortization and loss on sale. The Company believes Adjusted EBITDAX assists management and investors in comparing the Company’s performance on a consistent basis without regard to depreciation, depletion, and amortization, impairment of oil and natural gas properties, exploration expenses, and foreign exchange gains and losses among other items, which can vary significantly from period to period. In addition, management uses Adjusted EBITDAX as a financial measure to evaluate the Company’s operating performance. Adjusted EBITDAX is not a measure of financial performance under GAAP. Accordingly, it should not be considered as a substitute for net income prepared in accordance with GAAP. Net income may vary materially from Adjusted EBITDAX.

 

(3)

Free Cash Flow is defined as cash flow from operations less capital expenditures. Free Cash Flow is a non-GAAP financial measure that excludes amounts included in cash flow from operations, the most directly comparable measure calculated in accordance with GAAP. This measure should not be considered as an alternative to cash flow from operations or other measures derived in accordance with GAAP.

 

Position of the Acquiring Group as to the Fairness of the Merger

Under a possible interpretation of the SEC rules governing “going-private” transactions, each member of the Acquiring Group may be deemed to be an affiliate of the Company and is therefore required to express its beliefs as to the substantive and procedural fairness of the merger to the unaffiliated common shareholders of the Company. The members of the Acquiring Group are making the statements included in this section solely for the purpose of complying with the requirements of Rule 13e-3 and the related rules under

44

 


the Exchange Act. The views of the Acquiring Group as to fairness of the proposed merger should not be construed as a recommendation to any of the Company’s shareholders as to how you should vote on the merger agreement proposal.

The Acquiring Group has interests in the merger that are different from, or in addition to, the interests of the Company’s unaffiliated shareholders, as further described under - “Interests of the Company’s Directors and Executive Officers in the Merger”.  In light of these different interests, and the fact that Mr. Mitchell is an officer of the Company and a member of the Board, Mr. Fite is a member of the Board and Mr. Rochman is a member of the Board, the Board established the Special Committee consisting solely of independent and disinterested directors who are not affiliated with the Acquiring Group (other than their interests described under “—Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 52) to negotiate with the Acquiring Group, with the assistance of independent legal and financial advisors. None of the Acquiring Group participated in the deliberations of the Special Committee or the Board regarding, or received advice from the Company’s legal advisors or financial advisors as to, the substantive or procedural fairness of the merger to the Company’s unaffiliated shareholders. For these reasons, the Acquiring Group does not believe that their interests in the merger influenced the decision of the Special Committee or the Board with respect to the merger agreement or the merger.

The unaffiliated common shareholders were represented by the Special Committee, which negotiated the terms and conditions of the merger agreement, with the assistance of the Special Committee’s legal and financial advisors. The Acquiring Group has not performed, nor engaged a financial advisor to perform, any valuation or other analysis for the purpose of assessing the fairness of the merger to the unaffiliated common shareholders of the Company.

 

The Acquiring Group did not receive a report, opinion or appraisal from an outside party with respect to the transactions contemplated by the merger agreement, the merger, the valuation of the Company or the tax benefits that would be available to the Acquiring Group as a result of the merger. Based on the Acquiring Group’s knowledge and analysis of available information regarding the Company, as well as discussions with members of the Company’s management regarding the Company and its business and the factors considered by, and the analysis and resulting conclusions of, the Board and the Special Committee described in the section entitled “Reasons for the Merger; Recommendation of the Special Committee; Recommendation of the Board; Fairness of the Merger” beginning on page 29 of this proxy statement, with which the Acquiring Group agrees and which the Acquiring Group has adopted, the Acquiring Group believes that the merger is substantively and procedurally fair to the unaffiliated common shareholders of the Company. Notwithstanding that the Acquiring Group may not rely upon the opinion provided by Seaport to the Board and the Special Committee, the Acquiring Group considered the fact that Seaport delivered a written opinion to the Board and the Special Committee on August 7, 2020 as to, as of such date, the fairness, from a financial point of view, to the holders of common shares as it relates to the merger consideration to be received by such shareholders.

 

In connection with its determination, and in addition to the analysis and resulting conclusions of, the Board and the Special Committee described in the section entitled “Reasons for the Merger; Recommendation of the Special Committee; Recommendation of the Board; Fairness of the Merger” beginning on page 29 of this proxy statement, with which the Acquiring Group agrees and which the Acquiring Group has adopted, the Acquiring Group considered the following specific factors (not necessarily in order of relative importance):

 

 

each of Mr. Mitchell, Mr. Fite and Mr. Rochman, members of the Board, in order to avoid any potential conflicts of interest, abstained from all votes and recommendations with respect to the merger;

 

 

the merger consideration of $0.13 per share, to be paid solely in cash, provides immediate cash liquidity to the Company’s shareholders, thus eliminating any uncertainty in valuing the merger consideration;

 

 

the Company’s GAAP net book value was negative as to common shares;

 

the Company’s non-GAAP value, considering reserve value—which is derived from commodity price forecast and projected capital available for development of mineral resources—and non-reserve assets and liabilities, was negative as to common shares;

 

the liquidation value as to common shares was zero for purposes of determining fairness due to the fact that the Company’s assets are primarily mineral licenses in the country of Turkey, and the Acquiring Group considered such metrics to have little relevance because the mineral licenses cannot be transferred to a third party without prior approval of the Turkish government and the Acquiring Group considered it unlikely that any third party could obtain Turkish government approval to operate the mineral licenses prior to the Company becoming cash-flow insolvent;

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absent a transaction, the Company’s ability to continue operating as a going concern was in substantial doubt and the Company would likely need to consider seeking bankruptcy protection and the Acquiring Group considered the Company’s going-concern value to be less than the $0.13 per-share consideration proposed in the merger agreement;

 

 

even with the $8.0 million loan from Dalea Investment Group, LLC, an affiliate of Mr. Mitchell, and after considering cash on hand, projected future cash flow from operations, and the Company’s swap contract with DenizBank through February 2021, the Company’s current liquidity position is severely constrained and substantial doubt exists regarding the Company’s ability to continue as a going concern;

 

 

oil and gas production levels and projected future commodity prices do not provide adequate cash flow to fund additional development net of operating expenses, debt retirement, and cash dividends on the preferred shares;  

 

 

absent additional development, oil and gas production will continually decline;

 

 

common shareholders would continue to be diluted by dividends paid to preferred shareholders in the form of common shares if the Company does not have adequate cash to pay its dividends in cash;

 

 

the certificate of designation of the preferred shares mandates that the Company redeem the preferred shares at face value in 2024;

 

 

the transaction was structured to require informed consent and approval by 75% of the shareholders that vote (assuming the Company’s directors and executive officers and each member of the Acquiring Group each vote “FOR” the merger proposal and 100% of the outstanding common shares are cast on the merger proposal, then the merger proposal would be approved by the requisite vote if at least 16.4% of the outstanding common shares held by unaffiliated shareholders cast a vote “FOR” the merger proposal);

 

 

the Company’s shareholders who do not vote in favor of the merger agreement proposal and who comply with certain procedural requirements will be entitled, upon completion of the merger, to exercise statutory appraisal rights under Bermuda law, which allows shareholders to have the fair value of their shares determined and paid to them in cash;

 

 

the requirements or conditions to the merger are customary in the Acquiring Group’s opinion, and the merger is not conditioned on any financing being obtained by the Acquiring Group, thus increasing the likelihood that the merger will be consummated and the merger consideration will be paid to the shareholders;

 

 

the Board or Special Committee are permitted to withdraw or change its recommendation of the merger or merger agreement, and to terminate the merger agreement in certain circumstances;

 

 

there are no termination or break-up fees payable pursuant to the merger agreement;

 

 

the Board established a Special Committee, consisting of unaffiliated and independent directors, to review evaluate and negotiate the merger, as well as the lack of potential alternatives thereto, and make a recommendation to the Board with respect to the merger;

 

 

the Special Committee was deliberative in its process in analyzing, evaluating and negotiating the terms of the proposed merger agreement;

 

 

the Special Committee retained independent financial and legal advisors, each of which has extensive experience in the transactions similar to the proposed merger;

 

 

the merger consideration and other terms and conditions of the merger agreement resulted from extensive negotiations between the Special Committee (and its advisors) and the Acquiring Group (and its advisors);

 

 

the liquidity and cash flow constraints of the Company, and the adverse effect of such constraints on the common and preferred shareholders,

 

 

the Special Committee unanimously determined that the merger agreement and the merger are fair to, advisable and in the best interests of, the Company and its shareholders, including the Company’s unaffiliated shareholders;

 

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the Special Committee received an opinion from Seaport, to the effect that, as of the date of the opinion and based upon and subject to the assumptions, limitations and qualifications set forth in the opinion, the merger consideration to be received by the Company’s shareholders, including the Company’s unaffiliated shareholders, was fair, from a financial point of view, to such shareholders (see “Opinion of Seaport Gordian Energy LLC” beginning on page 35 of this proxy statement);

 

 

the Special Committee had no obligation to recommend the adoption of the merger agreement proposal or any other transactions;

 

 

the absence of sophisticated shareholder and lender capital available to the Company due to concerns regarding political instability in Turkey, continuation and enforcement of Turkish laws permitted the development of government-owned minerals, and the relationship between the nations of Turkey and the United States;

 

the distortion of current and historical market prices of the Company’s common shares, including the fact that the Acquiring Group believes the closing price per common share of $0.34 to be overvalued (reflecting the price as of the last trading day prior to the announcement of entry into the merger agreement) and common share to have negative value in light of (i) the Company’s inability to continue as a going concern, (ii) anticipated future dividends on the preferred shares being paid in common shares, (iii) the upcoming November 2024 mandatory redemption of preferred shares for approximately $46 million, (iv) the upcoming June 2025 expiration of the Selmo production lease, (v) the Company’s inability to obtain alternate sources of financing to fund drilling, and (vi) declining cash flow;

 

any U.S. chapter 11 filing likely would be ineffective in solving the Company’s liquidity constraints because the Company’s assets and secured debt reside in Turkish subsidiaries and would require the Turkish government and Turkish creditors to comply with U.S bankruptcy laws, which the Acquiring Group considered unlikely;

 

any U.S. chapter 11 filing or other restructuring alternatives might result in the Turkish government revoking the Company’s mineral licenses and transferring such assets to the Turkish government’s oil and gas production company;

 

the range of trading prices of common shares since the date of execution of the merger agreement is attributable to unsophisticated shareholders analyzing the Company as though it owns U.S. assets with U.S. collateral, credit and restructuring options, while sophisticated shareholders and lenders have been unwilling to provide capital to the Company for the reasons stated above;

 

the Acquiring Group considered that the per-share merger consideration to be a fair price to avoid the administrative expense and reputational damage to the Company associated with seeking bankruptcy protection, including the Acquiring Group’s estimate that the professional fees and other administrative costs associated with a bankruptcy filing by the Company would be approximately equivalent to the total consideration to be paid to common shares not owned by members of the Acquiring Group;

 

the prior proposals for the Company’s assets received during the failed marketing process in 2018 offered less per-share consideration than the per-share consideration proposed in the merger agreement even though the Company’s current oil production is approximately 43% less than such production in 2018 and current commodity prices are approximately 40% lower compared to 2018;

 

the past efforts at seeking strategic alternatives for the Company, including a sale of assets, had proven unsuccessful; and

 

the absence of firm offers by unaffiliated persons during the preceding two years for (i) the merger or consolidation of the Company into or with such person or (ii) the purchase of a number of common shares that would enable the holder to exercise control of the Company.

 

The Acquiring Group believes that the foregoing factors support its determination with respect to the fairness of the merger to the unaffiliated common shareholders of the Company.

 

The Acquiring Group acknowledges that neither the merger agreement nor the Companies Act requires the approval of a majority of the Company’s unaffiliated shareholders. However, in addition to the procedural factors noted above, the Acquiring Group believes that the merger is procedurally fair to the Company’s unaffiliated shareholders based on the fact that the merger was approved by the Special Committee and a majority of the directors of the Company who are not employees of the Company. Additionally, the Special Committee engaged Seaport to deliver an opinion regarding the fairness of the merger consideration from a financial point of view.

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The Company did not retain an unaffiliated representative acting solely on behalf of the Company’s unaffiliated shareholders for the purpose of negotiating the terms of the merger or preparing a report covering the fairness of the merger. However, the Board formed the Special Committee, which is comprised entirely of independent and disinterested directors, to consider and negotiate the terms and conditions of the merger and to recommend to the Board whether to pursue the merger and, if so, on what terms and conditions. Additionally, the Board explicitly empowered the Special Committee to retain, at the Company's expense, independent legal counsel, financial advisors, and other professional advisors of the Special Committee’s choice. The Board directed the Company to pay all expenses incurred by the Special Committee and its members, including the fees and expenses of the independent professional advisors to the Special Committee. Although there was no third party that acted independently on behalf of the unaffiliated shareholders, the Acquiring Group believes that the Special Committee protected the interests of the unaffiliated shareholders by making a recommendation regarding the merger that they deemed fair to the unaffiliated shareholders. Therefore, the Acquiring Group believes that the Special Committee’s role in the negotiation of the merger was sufficient to protect the interests of unaffiliated shareholders.

 

The Acquiring Group’s view as to the fairness of the merger to unaffiliated common shareholders is not a recommendation as to how any such common shareholder should vote on the merger agreement. The foregoing discussion of the information and factors considered by the Acquiring Group is believed to include all material factors considered by the Acquiring Group. The Acquiring Group did not find it practicable, nor did it assign, relative weights to the individual factors considered in reaching its conclusion as to the fairness of the merger to such unaffiliated common shareholder. Rather, the Acquiring Group made the fairness determinations after consideration of all the foregoing factors as a whole.

 

Purposes and Reasons of Acquiring Group for the Merger

 

If the merger is completed, the Company will become a Texas limited liability company and wholly-owned subsidiary of Parent, and the Company’s common shares will cease to be publicly traded. For the Acquiring Group, the purpose of the merger is to enable Parent to acquire control of the Company, in a transaction in which all common shareholders of the Company (including the unaffiliated common shareholders of the Company) will be cashed out for $0.13 per share in cash, without interest, less any applicable withholding taxes. After the merger, the Company’s common shares will no longer be publicly traded and Parent will solely bear the risks, and be entitled to the benefits, of ownership of the Company. Upon consummation of the merger, all common shareholders  (including unaffiliated common shareholders) will immediately realize the value of their investment in the Company through their receipt of the merger consideration of $0.13 per share in cash, representing a discount of approximately 62% to the closing price per common share of $0.34 on August 6, 2020 on the NYSE American, the last trading day before the announcement that the Company, Parent and Merger Sub had entered into the merger agreement.

 

The members of the Acquiring Group believe that the Company’s liquidity crisis, as described in the Company’s annual report and most recent quarterly report (and which the Acquiring Group believes has been exacerbated by commodity prices) will materially adversely impact the Company and will result or has resulted in the Company’s inability (i) to continue as a going concern, (ii) to increase cash flow and prevent the continuation of diminishing income due to a lack of capital for new cash producing assets, (iii) to pay cash dividends on the preferred shares, who continue to receive quarterly dividend payments in kind, resulting in the continued dilution of common shareholders, and (iv) to borrow additional capital due to the lack of available assets to be used as collateral for debt. The members of the Acquiring Group believe that as a privately-owned company, the Company would have increased flexibility to make decisions that may negatively affect quarterly results but that may, over the long-term, increase the Company’s value, including, among other things, increasing the leverage at the Company and utilizing the infusion of capital from the merger to target increased cash flow. In contrast, as a publicly-traded company, the Company currently faces public shareholder pressure to make decisions that may produce better short-term results, but which may over the long-term lead to a reduction in the per share price of its publicly-traded equity securities.

 

Additionally, the Acquiring Group believes that the Company is no longer realizing the benefits of having access to capital markets associated with being a public company. The members of the Acquiring Group believe that raising any substantial equity capital through the issuance of additional common shares by the Company would be unlikely due to the recent market volatility in the energy section and the risk of the Company’s inability to continue as a going concern. Furthermore, the members of the Acquiring Group believe that raising capital through the public markets at this juncture would likely be cost-prohibitive and limited in scope due to the current capitalization priority issues regarding the preferred shares and common shares. Furthermore, as a privately-owned company, the Company would also be relieved of many of the other burdens and constraints imposed on public companies, including the obligations to file, and expenses associated with filing, annual and periodic reports with the SEC under the Exchange Act, and the Company’s management would not be required to devote time and attention to such obligations.

 

Further, the Acquiring Group believes that, due to the various concerns set forth herein, and absent the consummation of the merger, the Company will be unable to continue as a going concern and likely would need to consider seeking bankruptcy protection as early as the fourth quarter of 2020 or first quarter of 2021. The Acquiring Group estimates that the professional fees and other administrative costs associated with a bankruptcy filing by the Company would be approximately equivalent to the total consideration

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to be paid to common shares not owned by members of the Acquiring Group. Additionally, the Acquiring Group considered that the per-share merger consideration to be a fair price to avoid the administrative expense and reputational damage to the Company associated with seeking bankruptcy protection. Accordingly, and based on the Acquiring Group’s projection that the Company’s liquidity constraints are expected to become most severe toward the end of the fourth quarter 2020, the Acquiring Group (i) has agreed to provide a working capital loan or additional collateral support to the Company to sustain the Company through closing of the merger, and (ii) believes it is both appropriate and necessary to consummate the merger expeditiously.

 

Prior to submitting its transaction proposal to the Special Committee, the Acquiring Group reviewed and considered strategic alternatives, alternatives the Acquiring Group believed to be available to the Company, that could potentially improve the financial performance and shareholder value of the Company, but ultimately came to the decision that none of the other potential alternatives would likely alter the dynamics or the financial metrics of the Company enough to significantly increase the Company’s total returns to shareholders.  The Acquiring Group reviewed the following strategic alternatives to the proposed transaction: (A) continuing the status quo and operating as a public company, (B) seeking bankruptcy protection and (C) negotiating an exchange of the preferred shares for common shares. The members of the Acquiring Group believe that continuing the status quo of the Company was not a viable option because (i) it would not provide additional value to the Company’s shareholders, (ii) the Company is not performing up to the level of its publicly-traded peers and is not projected to do so in the foreseeable future, (iii) the requirements and costs of remaining a public company are continually increasing with minimal benefit to the Company and its shareholders in return, and (iv) it would not provide the Company the flexibility and necessary capital to solve its liquidity and cash-flow issues.  The Acquiring Group believes that seeking bankruptcy protection was not the best alternative for common shareholders due to the fact that the estimated costs associated with a bankruptcy filing were approximately equal to the total consideration to be paid to common shares not held by members of the Acquiring Group.  The Acquiring Group believes that an exchange of preferred shares for common shares would not be feasible, due to (1) the Acquiring Group’s view that the common shares do not have value based on (a) the Company’s inability to continue as a going concern, (b) anticipated future dividends on the preferred shares being paid in common shares, (c) the upcoming November 2024 mandatory redemption of preferred shares for approximately $46 million, (d) the upcoming June 2025 expiration of the Selmo production lease, (e) the Company’s inability to obtain alternate sources of financing to fund drilling, and (f) declining cash flow; and (2) the Acquiring Group’s belief that any such exchange transaction would also require the Acquiring Group to provide a working capital loan or additional collateral support which would need to convert to equity.  

 

Each member of the Acquiring Group also believes that the merger will provide the Company with flexibility to pursue transactions with a risk profile that may be unacceptable to many public shareholders, and that these transactions can be more effectively executed as a private company. The Acquiring Group also believes that the merger will allow the Company’s common shareholders to realize immediate liquidity and pursue other investment opportunities. Although each member of the Acquiring Group believes that there will be significant opportunities associated with their investment in the Company, including, among other things, opportunities to further develop the Company’s existing oil and gas assets and explore for new assets, each member of the Acquiring Group also realizes that there are also substantial risks (including the risks and uncertainties relating to the prospects of the Company) and that such opportunities may not ever be fully realized.

 

If the merger is completed, the Company will become a wholly-owned subsidiary of Parent, and the shares of the Company’s common shares will cease to be publicly traded. The Acquiring Group believes that structuring the transaction in such manner is preferable to other alternative transaction structures because (i) it will enable Parent to directly acquire all of the outstanding shares of the Company’s common shares at the same time, (ii) it will allow the Company to cease to be a publicly registered and reporting company, and (iii) it represents an opportunity for the Company’s unaffiliated common shareholders to immediately realize the value of their investment in the Company. The Acquiring Group believes that the transaction structure will also provide a prompt and orderly transfer of ownership of the Company in a single step, without the necessity of financing separate purchases of the Company’s common shares in a tender offer and implementing a second-step merger to acquire any common shares not tendered in any such tender offer, and without incurring any additional transaction costs associated with such activities.

 

For these reasons, the Acquiring Group believes that private ownership is in the best interests of the Company and that the merger is in the best interests of the Company’s unaffiliated common shareholders.

 

Under the Exchange Act, the Acquiring Group is required to express its reasons for the merger to the public shareholders. The Acquiring Group is making the statements above solely for the purpose of complying with the requirements of Rule 13e-3 and related rules under the Exchange Act.

 

Voting by Members of the Acquiring Group

 

At the close of business on the record date for the special meeting, members of the Acquiring Group beneficially owned and had the right to vote 53,050,837 common shares in the aggregate, which represents approximately 69.5% of our common shares entitled to vote at the special meeting.

 

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The Preferred Shareholder Group entered into the voting agreement with Parent, pursuant to which, among other things, subject to the terms and conditions therein, the Preferred Shareholder Group agreed to vote, consent to or execute a written consent covering all of the preferred shares and all common shares, whether currently owned or subsequently acquired by them, approving the merger proposal and any other matters necessary for consummation of the merger and the other transactions contemplated by the merger agreement, and waiving any appraisal or rights to dissent in connection with the merger.

 

The members of the Acquiring Group have informed the Company that they currently intend to vote all common shares held by such members “FOR” the merger proposal and “FOR” the adjournment proposal.

 

The merger agreement and the Companies Act also require that the merger agreement and the statutory merger agreement be approved by the affirmative vote of 75% of the votes cast by holders of preferred shares, which was obtained on September 10, 2020 at a duly convened meeting of the Preferred Shareholder Group at which a quorum was present.

 

Plans for the Company After the Merger

 

After the effective time of the merger, Parent anticipates that Merger Sub, which will be the surviving company in the merger, will continue to conduct the operations and business substantially as they are currently being conducted by the Company, except that the Company will cease to be a public company and will instead be controlled by Parent, which will be owned by the Preferred Shareholder Group. If the merger is consummated, the Company’s common shares will no longer be quoted on the NYSE American and the Toronto Stock Exchange, the registration of the Company’s common shares under Section 12 of the Exchange Act will be terminated and the Company will no longer file reports with the SEC. If the merger is not consummated for any reason, the unaffiliated common shareholders will not receive any payment for their common shares, and the Company will remain a public company, with its common shares continuing to be quoted on the NYSE American and the Toronto Stock Exchange.

 

After the effective time of the merger, until successors are duly elected or appointed and qualified in accordance with applicable law or the applicable governing documents of the surviving company, the managers of Merger Sub at the effective time of the merger will be the managers of the surviving company, and the officers of Merger Sub at the effective time of the merger will be the officers of the surviving company.

 

Except as described above or elsewhere in this proxy statement, the Acquiring Group has advised the Company that they do not have any current intentions, plans or proposals to cause the Company to engage in any of the following:

 

 

an extraordinary corporate transaction following consummation of the merger involving the Company’s corporate structure, business or management, such as a merger, reorganization or liquidation;

 

 

the purchase, sale or transfer of a material amount of assets of the Company or any of its subsidiaries, other than the sale of its real properties in the ordinary course of business; or

 

 

any other material changes to the Company’s corporate structure or business.

 

Notwithstanding the foregoing, following the merger, as part of the Acquiring Group’s long-term goal of increasing value, the Acquiring Group intends to conduct a detailed review of the Company and its assets, corporate structure, capitalization, operations, properties, policies, and management and consider and determine what, if any, changes may be desirable in light of the circumstances which then exist. In connection with this review, the Acquiring Group may consider a range of alternatives including acquisitions, mergers, business combinations, divestitures, liquidation, the incurrence of debt, and changes in, or new, business lines. Except as otherwise disclosed in this proxy statement (including in the Company’s filings with the SEC incorporated by reference into this proxy statement), as of the date hereof, no agreements, understandings or decisions have been reached and there is no assurance that the Acquiring Group will decide to undertake any such alternatives. Additionally, from time to time the Acquiring Group may decide to liquidate, merge or reorganize its subsidiaries (including Merger Sub) and other affiliated entities, for tax and/or corporate-related purposes.

 

Certain Effects of the Merger

 

If the merger agreement is adopted by the requisite company vote and the other conditions to the closing of the merger are either satisfied or waived, then the Company will be merged with and into Merger Sub, the separate corporate existence of the Company will cease, and Merger Sub will, as the surviving company in the merger, continue its existence and be governed by the TBOC, with the merger constituting a merger pursuant to the applicable provisions of the Companies Act and the TBOC.  At the effective time, (i) the merger of the Company with and into Merger Sub and the vesting of their undertaking, property and liabilities in the surviving company will become effective, (ii) the property of each of the Company and Merger Sub will become the property of the surviving company, (iii) the surviving company will continue to be liable for the obligations and liabilities of each of the Company and Merger

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Sub, (iv) any existing cause of action, claim or liability to prosecution shall be unaffected, (v) a civil, criminal or administrative action or proceeding pending by or against any of the Company or Merger Sub may continue to be prosecuted by or against the surviving company, and (vi) a conviction against, or ruling, order or judgment in favor of or against, the Company or Merger Sub may be enforced by or against the surviving company.

 

Upon consummation of the merger, each common share issued and outstanding immediately prior to the effective time of the merger (other than the excluded shares and dissenting shares) will immediately be converted into the right to receive the merger consideration, without interest and less applicable withholding taxes. Each outstanding RSU will fully vest and be canceled and will entitle the holder thereof to receive an amount in cash equal to the product of (i) the total number of common shares subject to such RSU immediately prior to the effective time of the merger times (ii) the merger consideration. The preferred shares will be canceled automatically and cease to exist, with no consideration paid for such shares.

 

Pursuant to the terms of the contribution agreement, the members of the Preferred Shareholder Group, which is part of the Acquiring Group, will receive equity of Parent in exchange for contributing their preferred shares and such member’s pro rata share of cash to be used by Parent to fund the merger consideration and pay other costs and expenses that may be payable in connection with the merger to Parent immediately prior to the effective time of the merger. As a result, if the merger is completed, Parent and the other members of the Acquiring Group will be the sole beneficiaries of the Company’s future earnings and growth, if any, and will own all of the shares entitled to vote on any matter submitted to the Company’s shareholders. Likewise, the Acquiring Group will also bear the risks of ongoing operations, including the risks of any decrease in the Company’s value after the merger. Specifically, as a result of the merger, the Parent will be owned (i) 7.27% by KMF Investments Partners LP (an affiliate of Mr. Fite, who is a member of our Board), (ii) 10.86% by West Investment Holdings, LLC (a former affiliate of Mr. Rochman, who is a member of our Board), (iii) 1.63% by Mr. Rochman and his wife, and (iv) 80.24% by Mr. Mitchell (the Chairman of the Board and Chief Executive Officer of the Company) and his family members. It is not anticipated that any other current executive officers of the Company or members of the Board will own any interest in in Parent or the surviving company following the consummation of the merger.

 

A primary benefit of the merger to the unaffiliated common shareholders is to realize immediate cash liquidity, without the brokerage and other costs typically associated with market sales, for the public shareholders. Additionally, such unaffiliated common shareholders will avoid the risk of any potential increase in the Company’s future net losses or any potential decrease in the Company’s future value as well as avoiding further dilution during the Company’s liquidity crisis due to the preferred shareholders receipt of quarterly dividend payments in kind.

 

The primary detriments of the merger to such common shareholders include the lack of interest of such shareholders in the Company’s potential future earnings, growth or value. Additionally, the receipt of cash in exchange for shares of our common shares pursuant to the merger will generally be a taxable sale transaction for U.S. federal income tax purposes to U.S. Holders (as defined in the section entitled “Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 53 of this proxy statement) who surrender our common shares in the merger, as described further under the section entitled “Material U.S. Federal Income Tax Consequences of the Merger” beginning on page 53 of this proxy statement.

 

In connection with the merger, the members of the Acquiring Group will receive benefits and be subject to obligations that are different from, or in addition to, the benefits received by the Company’s shareholders generally. The primary benefits of the merger to the members of the Acquiring Group, based on their direct or indirect ownership of all the equity interests in Parent following the merger, include their indirect interest in the Company’s potential future earnings and growth which, if they successfully execute their business strategies, could be substantial.  Furthermore, the Acquiring Group believes that following the merger, the corporate and organizational structure will be simplified allowing management to focus on the long term growth and value of the Company instead of the often disparate interests of the public shareholders who tend to be focused on short term quarterly results. In addition, following the merger, the Company will be a private company, and, therefore, the Company and its beneficial owners will be relieved of the applicable restrictions imposed on companies with publicly traded equity.

 

The primary detriments of the merger to members of the Acquiring Group include the fact that all of the risk of any possible increase in the Company’s net losses or any potential decrease in the Company’s future value following the merger will be borne by the Acquiring Group, based on their direct or indirect ownership of all the equity interests in Parent following the merger. Additionally, the investment by members of the Acquiring Group in Parent and the surviving company will not be liquid, with no public trading market for such securities.

 

There are no change-in-control payments, transaction bonuses or other extraordinary bonuses payable to the Company’s management or employees as a result of the transactions contemplated by the merger agreement.  The Acquiring Group currently intends to retain existing executives and management as necessary for the administration of the Company as a private, non-reporting company, but all employees will be “at-will” employees.

 

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Our common shares are currently registered under the Exchange Act and are listed on the NYSE American under the symbol “TAT” and on the Toronto Stock Exchange under the symbol “TNP.” As a result of the merger, the surviving company will be privately held and there will be no public market for its equity. After the merger, our common shares, which will be canceled, will no longer be listed on any stock exchange and price quotations with respect to sales of the surviving company’s equity in the public market will no longer be available. In addition, registration of our common shares under the Exchange Act will be terminated.

 

At the effective time of the merger, the company agreement (as the equivalent corporate documents to the Company’s bye-laws) of Merger Sub as in effect immediately prior to the effective time will be the limited liability company agreement of the surviving company, until thereafter amended as provided therein or by applicable law.

 

Financing the Merger

 

Parent intends to fund the payment of the aggregate merger consideration with cash contributions from members of the Preferred Shareholder Group, which is part of the Acquiring Group, pursuant to the contribution agreement. The merger is not subject to a financing condition.

 

Interests of the Company’s Directors and Executive Officers in the Merger

 

Our directors and officers beneficially own and have the right to vote in the aggregate 44,463,613 of our common shares, which represents approximately 58.2% of our common shares. If the merger is consummated, these directors and executive officers will receive merger consideration in proportion to their ownership. For information regarding beneficial ownership (as defined by Rule 13d-3 under the Exchange Act), see the table set forth in “Security Ownership of Certain Beneficial Owners and Management” beginning on page 86 of this proxy statement.

In considering the recommendation of the Special Committee and the Board with respect to the merger proposal, you should be aware that certain of our directors and executive officers may be deemed to have interests in the transactions contemplated by the merger agreement that are different from, or in addition to, those of shareholders generally. For example, Longfellow and Dalea, which are members of the Acquiring Group, are affiliates of Mr. Mitchell, Chairman of the Board and Chief Executive Officer of the Company. KMF Investments Partners LP, also a member of the Acquiring Group, is an affiliate of Mr. Fite, a member of the Board. Also, Mr. Rochman, a member of the Board, and his wife Betsy Rochman, are part of the Acquiring Group. Each of these individuals will directly or indirectly own equity interests in Parent after the consummation of the merger. Additionally, the Company is a party to a service agreement with the Riata Entities, which includes Longfellow, Riata, an entity owned by Mr. Mitchell, and other entities controlled by Mr. Mitchell, pursuant to which we and the Riata Entities provide each other, among other services, certain management consulting services, oil and natural gas services, and general accounting services and we pay, or are paid, for the actual costs of such services rendered plus the actual cost of reasonable expenses on a reasonable basis. In accordance with this service agreement, a portion of the salary, cash bonus, and benefits earned by certain of the Company’s employees, including its named executive officers, is paid by the Company, and the applicable Riata Entities reimburse the Company for the actual cost of the services performed by such employees, including named executive officers, for any of the Riata Entities. In 2019, the Riata Entities reimbursed the Company $304,991 for a portion of the salary, cash bonus, and benefits provided to certain named executive officers. In addition, pursuant to the service agreement, a portion of the salary, cash bonus, and benefits earned by certain family members of Mr. Mitchell is paid by the Riata Entities, and the Company reimburses the Riata Entities for the costs of the services performed by certain family members for the Company. In 2019, the Company reimbursed the Riata Entities $114,870 for a portion of the salary, cash bonus, and benefits provided to Mr. Mitchell, his son, daughter, daughter-in-law, nephew, niece, sister-in-law, and brother-in-law. For the six months ended June 30, 2020, the Riata Entities reimbursed the Company $103,569 for a portion of the salary, cash bonus, and benefits provided to certain named executive officers. For the six months ended June 30, 2020, the Company reimbursed the Riata Entities $70,132 for a portion of the salary, cash bonus, and benefits provided to Mr. Mitchell, his son, daughter, daughter-in-law, nephew, niece, sister-in-law, and brother-in-law. Additionally, on September 22, 2020, the Company entered into the A&R loan agreement pursuant to which Dalea Investment Group, LLC (an affiliate of Mr. Mitchell) will provide a working capital loan to the Company of up to $8 million. These interests may create conflicts of interest. The Special Committee and the Board were aware of and considered these interests during their respective deliberations on the merits of the merger and in making their decisions to approve, respectively, the merger agreement, the related statutory merger agreement and the transactions contemplated thereby, including the merger and in recommending that the merger proposal be adopted by the Company’s shareholders. See “Background of the Merger” beginning on page 21 of this proxy statement and “Reasons for the Merger; Recommendation of the Special Committee; Recommendation of the Board; Fa