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Frontier Oil Corp. v. Holly Corp.4/29/2005
Date Submitted: May 4, 2004
Plaintiff and Counterclaim Defendant Frontier Oil Corporation ("Frontier") and Defendant and Counterclaim Plaintiff Holly Corporation ("Holly") on March 30, 2003, agreed to merge. On August 19, 2003, Frontier concluded that Holly had repudiated the Merger Agreement and brought this action the next day. In this post-trial memorandum opinion, the Court explores how and why the transaction fell apart and determines the consequences of the parties' conduct.
I. FINDINGS OF FACT
A. The Parties
Frontier, a Wyoming corporation, and Holly, a Delaware corporation, are both mid-sized petroleum refiners. Frontier, headquartered in Houston, Texas, operates in a market that lies primarily on the eastern slope of the Rocky Mountains; Holly, with its headquarters in Dallas, Texas, focuses on the western slope of the Rockies. In addition, Holly owned and operated approximately 1,600 miles of pipeline with support facilities to transport crude oil and refined products.
B. Merger Negotiations Begin
For several years, Frontier had recognized the benefits of a combination with Holly. James R. Gibbs, Frontier's chief executive officer, predicted that Frontier and Holly together would be "one incredible company" which would be "either the largest or second largest refiner" in the Rocky Mountain region. C. Lamar Norsworthy, IIII, Holly's chief executive officer, also saw the advantages that could result from joining with Frontier.
Serious efforts to bring Frontier and Holly together were frustrated for several years because of Holly's role as a defendant in a lawsuit brought in a Texas court by an entity controlled by major national petroleum companies.
Holly was accused of having engaged in anticompetitive conduct by opposing (and surreptitiously supporting the opposition to) the Longhorn pipeline, proposed by the plaintiff in that action. The Longhorn pipeline would have been competitive with Holly's pipeline facilities. Although Holly considered the Longhorn Litigation to be without merit, the plaintiff claimed damages in excess of $1 billion. W. John Glancy, Holly's general counsel, said that the litigation made him feel as if "he was in jail." More specifically, Glancy understood that the Longhorn Litigation severely impaired Holly's ability to borrow, tied up management time and energy, and "walled off [Holly] from the whole M&A field." For Gibbs, the "uncertainty" and "risk" associated with the litigation deterred him from pursuing Holly. Eventually, Holly was able to negotiate a settlement under which it agreed to provide approximately $25 million worth of refined petroleum product transportation services.
The settlement was announced on November 15, 2002. A few days later, Gibbs called Norsworthy to propose negotiations that would lead to a merger between Holly and Frontier. Merger negotiations commenced in late November, but, by the end of January 2003, the parties had reached an impasse. Holly then turned its attention to enhancing shareholder value through creating (and sale to the public of a portion of) a master limited partnership ("MLP") into which it would contribute its pipeline assets.
Holly retained Lehman Brothers to assist in the MLP effort.
C. The Merger Agreement is Negotiated
In February 2003, merger negotiations resumed. By March 3, 2003, the parties had agreed upon the basic terms of a merger. For each share of Holly common stock, its shareholders would receive one share of Frontier and $11.11 in cash. No protection, such as ceilings, floors, or collars, was afforded the shareholders to guard against fluctua
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