The Company announced it has entered into a Stipulation of Settlement (the “Settlement Agreement”) to settle a securities class action pending in the United States District Court for the District of Delaware (the “District Court”). The lawsuit relates to matters alleged to have occurred in connection with the acquisition by Heckmann Corporation of China Water in 2008. The Company anticipates final court approval of the Stipulation of Settlement in the second half of 2014 (“Closure”), at which time all claims asserted against the Company and the individual defendants will be resolved.
Under the terms of the Settlement Agreement, which must be approved by the District Court, the Company has agreed to make at Closure a cash payment of $13.5 million (“Cash Portion”), as well as a grant of 847,990 shares of Nuverra common stock (“Equity Portion”), to the plaintiffs in the lawsuit.
Cash Portion. The Company currently has approximately $7 million of available coverage under the applicable insurance policy. The net cash cost to Nuverra would be $13.5 million less the amount of available coverage under the insurance policy at the time of Closure. The Company currently estimates the amount of available insurance at Closure will be in the range of $2 million to $4 million, which would equate to a cash payment by the Company at Closure of approximately $9.5 million to $11.5 million. The amount of available insurance at Closure could increase based on the outcome of disputed legal fees, which have been accrued but unpaid by the insurance policy and would reduce the required cash payment by the Company. Under the terms of the Settlement Agreement, the $13.5 million cash portion less available insurance coverage will be deposited into escrow at the time the District Court grants preliminary approval of the settlement, which is expected to occur in the first or second quarter of 2014. The escrow would then be released at Closure upon final District Court approval.
Equity Portion. The Company has agreed to provide a floor value of $13.5 million on the value at Closure of the Equity Portion of the Settlement Agreement. Therefore, to the extent that the 847,990 shares of Company common stock do not equate to $13.5 million in value at the time of Closure (an equivalent value of $15.92 per share), the Company would be required to contribute additional shares or cash, at the Company’s sole option, to make the value of the Equity Portion at Closure be no less than $13.5 million.
The Company established a $16.0 million accrual in the third quarter of 2013 related to the China Water matter, and as a result of this pending settlement, recorded an additional $7.0 million charge in the fourth quarter. If the value of the 847,990 shares at Closure exceeds $13.5 million, the Company would incur a non-cash charge at Closure for the excess of the market value of those shares at Closure above $13.5 million.
The Company and the individual defendants continue to deny all assertions of wrongdoing or liability and continue to believe the claims asserted in the litigation are without merit. The Company has concluded it is in the best interest of all stakeholders to settle this matter and move forward with its business and growth strategy.