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

IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE MUDRICK CAPITAL MANAGEMENT ) L.P., et al., ) ) Plaintiffs, ) ) v. ) ) QUARTERNORTH ENERGY INC., ) ) Defendant. ) _____________________________________ ) C.A. No. 2024-0106-LWW ) QUARTERNORTH ENERGY INC., ) ) Counterclaim-Plaintiff, ) ) v. ) ) MUDRICK CAPITAL MANAGEMENT ) L.P., et al., ) ) Counterclaim-Defendants. ) MEMORANDUM OPINION Date Submitted: July 9, 2026 Date Decided: October 29, 2026 Bradley R. Aronstam, Roger S. Stronach, Benjamin M. Whitney, ROSS ARONSTAM & MORITZ LLP, Wilmington, Delaware; Jordan A. Goldstein, Florian Loibl, Matthew Nussbaum, SELENDY GAY PLLC, New York, New York; Counsel for Plaintiffs/Counterclaim-Defendants Blake Rohrbacher, PAUL, WEISS, RIFKIND, WHARTON & GARRISON LLP, Wilmington, Delaware; Kevin M. Gallagher, Matthew M. Murphy, John M. O’Toole, Elizabeth J. Freud, Clayton Faller, RICHARDS, LAYTON & FINGER, P.A., Wilmington, Delaware; Counsel for Defendant/Counterclaim-Plaintiff WILL, Vice Chancellor  Defendant QuarterNorth Energy Inc. emerged from bankruptcy in 2021 with a capital structure consisting of common stock and warrants. Its largest stockholders received the right to designate QuarterNorth’s board of directors. The warrant holders—including the plaintiffs here—bargained for anti-dilution protections to preserve the value of their warrants if the board returned significant cash to the common stockholders. Under the governing warrant agreements, if QuarterNorth paid an extraordinary cash dividend, the warrants’ share counts and exercise prices would be adjusted according to a formula. The principal disputed input in that formula is “M”—the fair market value of one share of QuarterNorth common stock on the business day before the ex-dividend date. Because QuarterNorth’s stock was not listed on an exchange, its board was required to determine “M” in good faith and in a commercially reasonable manner. In June 2023, QuarterNorth declared a cash dividend that triggered an anti- dilution adjustment. Relying on bids and valuations from a recent sale process, the board valued QuarterNorth’s aggregate equity before the dividend at $1.7 billion. QuarterNorth then divided that total by the undiluted number of outstanding common shares and participating units, setting “M” at $209.79 per share. The plaintiffs sued for breach of contract, alleging that “M” should have been based on lower over-the-counter broker quotes. QuarterNorth brought a counterclaim 1 asserting the breach of a drag-along provision in its stockholders agreement when the company was later acquired. After trial, I conclude that QuarterNorth breached the warrant agreements, though not to the extent the plaintiffs contend. The board acted in subjective good faith and reasonably rejected stale quotes from an illiquid, uninformed secondary market in favor of a $1.7 billion aggregate equity valuation. QuarterNorth failed, however, to act in a commercially reasonable manner when it divided that valuation by an undiluted share count that disregarded in-the-money warrants. Accounting for the dilutive effect of those warrants reduces “M” to $190.93 per share and entitles the plaintiffs to approximately $3 million in expectation damages plus interest. Finally, the counterclaim defendants breached the drag-along provision in the stockholders agreement, entitling QuarterNorth to nominal damages. 2 I. BACKGROUND The following facts were stipulated to by the parties or proven by a preponderance of the evidence at trial.1 A. QuarterNorth’s Formation and Capital Structure Defendant QuarterNorth Energy Inc. (the “Company”) is a privately held oil and gas company incorporated in Delaware and headquartered in Houston, Texas.2 It was formed on August 27, 2021, pursuant to a Chapter 11 reorganization of Fieldwood Energy Inc. and its debtor affiliates.3 Fieldwood was an oil and gas exploration and production company in the Gulf of Mexico before it filed for bankruptcy.4 After Fieldwood emerged from bankruptcy, its deepwater assets were spun off and allocated to the newly formed QuarterNorth.5 1 See Pre-Trial Stipulation and Order (Dkt. 179) (“PTO”). Trial occurred over four days, during which nine fact and two expert witnesses testified. The trial record contains 586 joint exhibits, including 20 deposition transcripts. Trial testimony is cited as “[Name] Tr.” See Trial Trs. (Dkts. 194-97). Exhibits are cited by the numbers provided on the parties’ joint exhibit list as “JX __,” unless otherwise defined, and pincites are to the joint exhibit pagination. See Updated Joint Ex. List (Dkt. 184). If joint exhibit pagination is unavailable, pincites are to the last four digits of Bates stamps (shown as ‘----). Deposition transcripts are cited as “[Name] Dep.” See Notice of Lodging of Dep. Trs. (Dkt. 182). 2 PTO ¶¶ 1, 33. 3 Id. ¶ 1. Fieldwood filed for bankruptcy in August 2020 amid the COVID-19 pandemic and a decline in oil prices. Mudrick Tr. 9; PTO ¶ 65. The operative plan of reorganization was dated June 25, 2021. JX 3 (describing the bankruptcy plan for Fieldwood Energy LLC and its affiliated debtors). 4 Mudrick Tr. 10; PTO ¶¶ 33, 65. 5 Mudrick Tr. 12-13. 3  As part of the reorganization, QuarterNorth issued various financial instruments to Fieldwood’s creditors on account of prepetition debts.6 First, QuarterNorth issued common stock and subscription rights to Fieldwood’s first-lien holders, including funds managed by Invesco Senior Secured Management, Inc., Nuveen Asset Management LLC, and Franklin Advisers, Inc.7 This package constituted “the lion’s share of [QuarterNorth’s] post-restructured equity.”8 Second, QuarterNorth issued “significant warrant packages” (the “Warrants”) to Fieldwood’s second-lien holders, including plaintiffs Mudrick Capital Management L.P. and Ellington Management Group.9 The Warrants were split into two tranches.10 The first tranche of Warrants (the “Tranche 1 Warrants”) consisted of 2,780,926 warrants with an exercise price of $166.09 per share.11 And the second tranche of Warrants (the “Tranche 2 Warrants”) consisted of 5,355,857 warrants 6 Id. at 11; Weiss Tr. 579. 7 PTO ¶ 2; Mudrick Tr. 12-17. 8 Mudrick Tr. 11. 9 Id.; Dane Tr. 166; PTO ¶ 2; see infra note 130 (listing the plaintiffs). Each individual warrant entitled its holder to receive one share of QuarterNorth common stock upon exercise and payment at a specified strike price. JX 4 § 3(a); JX 5 § 3(a). 10 PTO ¶ 2. 11 Id. (containing a typographical error listing 2,780,976 rather than 2,780,926 Tranche 1 Warrants). 4 with an exercise price of $189.42 per share.12 The Warrants were governed by two separate, substantially identical agreements, each dated August 27, 2021 (the “Warrant Agreements”).13 QuarterNorth also issued “New Money Warrants” to parties who provided debt financing to QuarterNorth at closing, and “GUC Warrants” to Fieldwood’s general unsecured creditors.14 B. The Warrant Agreements and Anti-Dilution Provisions Under the Warrant Agreements, the Warrants allocated both risk and upside to the second-lien creditors.15 If the business proved more valuable than the first-lien debt, the second-lien creditors would receive a “substantial recovery for a second lien position.”16 If not, the Warrants would “ultimately be worthless.”17 The second-lien creditors negotiated for protections against actions the Company’s stockholders could take to reduce QuarterNorth’s equity value at the 12 Id. 13 JX 4; JX 5 (with JX 4, “Warrant Agreements”); see PTO ¶ 2 (stipulating that the Warrant Agreements are identical in all material respects, except for the number of warrants and strike prices). 14 JX 3; PTO ¶¶ 2, 67. 15 Mudrick Tr. 14. 16 Id. 17 Id. 5 second-lien holders’ expense.18 Chief among those protections was a guarantee that the Warrant holders’ share counts and exercise prices would be adjusted to prevent dilution from the issuance of a large dividend to stockholders.19 These provisions were memorialized in Section 6(b) of the Warrant Agreements, within a section titled “Anti-Dilution Provisions.”20 The Anti-Dilution Provisions were triggered if the aggregate cash dividends paid by the Company during a fiscal year exceeded 30% of its annual free cash flow, requiring adjustments to the Warrants’ share counts and exercise prices (the “Warrant Adjustments”).21 They were drafted to protect the second-lien Warrant holders by returning them to the “economic position they were in prior to [any large] dividend.”22 Where assets were distributed out of the Company, the Warrants would be adjusted to reflect that the business was worth less.23 18 Id. at 20-22. 19 Id. 20 Warrant Agreements § 6(b). 21 Id.; see PTO ¶ 4. 22 Mudrick Tr. 23-24; see Dane Tr. 167-68; Mills Tr. 552-53. 23 Mudrick Tr. 23-24. 6  Section 6(b) set out two formulas to calculate the Warrant Adjustments:24 𝑀 𝑈𝑎 = 𝑈𝑏 × 𝑀−𝐷 𝑀−𝐷 𝑃𝑎 = 𝑃𝑏 × 𝑀 𝑈𝑏 is defined as the “Warrant Share Number” immediately before the adjustment, and 𝑈𝑎 is defined as the “Warrant Share Number” immediately after the adjustment.25 𝑃𝑏 is the “Exercise Price” immediately before the adjustment, and 𝑃𝑎 is the “Exercise Price” immediately after the adjustment.26 The present dispute centers on “M” and, to a lesser extent, “D.” Under Section 6(b), “M” is the “Fair Market Value of one Share as of the Trading Day immediately preceding the ex-date for [the] dividend or distribution” at issue.27 The operative definition of “Fair Market Value” provides that, “in the case of securities not” listed on a public exchange, Fair Market Value was to be “determined in good faith and in 24 PTO ¶ 5. The parties stipulated that Section 6(b) of the Warrant Agreements and the formulas it contains are clear and unambiguous. Id. ¶ 68. 25 PTO ¶ 6; Warrant Agreements § 1 (defining “Warrant Share Number” as the number of “Shares” into which the Warrants are exercisable, as adjusted pursuant to the Warrant Agreements); see infra note 29 and accompanying text (defining “Share”). 26 PTO ¶ 6; Warrant Agreements § 1 (defining “Exercise Price” as the price per Share for which a Warrant is exercisable—initially $166.09 for the Tranche 1 Warrants and $189.42 for the Tranche 2 Warrants—as adjusted pursuant to the Warrant Agreements). 27 PTO ¶ 6. 7 a commercially reasonable manner by the Board.”28 “Share” is defined as one share of QuarterNorth common stock.29 The relevant “Trading Day” is June 20, 2023.30 “D” is defined as the Fair Market Value of the excess portion of the cash dividend made per Share as of the record date.31 C. The Stockholders Agreement In connection with its emergence from Fieldwood’s Chapter 11 bankruptcy, QuarterNorth entered into a Stockholders Agreement with its post-reorganization securityholders, including the former first-lien creditors and second-lien creditors— principally funds managed by Invesco, Franklin, and Nuveen, as well as the plaintiffs.32 The Stockholders Agreement established QuarterNorth’s governance framework, granting rights to designate members of the Board of Directors (the “Board”) and setting forth the rights and obligations of QuarterNorth’s common stockholders and Warrant holders.33 28 Warrant Agreements § 1. The Warrant Agreements contain three definitions of Fair Market Value, but the parties stipulated that only the above-quoted definition is applicable. PTO ¶¶ 7, 69. 29 Warrant Agreements § 1. 30 PTO ¶ 7 (stating that June 20 was also the “Dividend Reference Date”). 31 Id. ¶ 6; Warrant Agreements § 6(b). 32 JX 6 (“Stockholders Agreement”). 33 Id. at arts. 2, 3, 4. 8  The Stockholders Agreement established a seven-member Board.34 Under Section 2.01(a), Invesco had the right to designate two directors, and Franklin and Nuveen could each designate one director.35 QuarterNorth’s Chief Executive Officer, Michael Dane, served as the fifth director.36 The sixth and seventh directors were designated collectively by the remaining stockholders.37 Invesco designated Peter Niehaus and Peter Wollman, Franklin designated Joseph Mills, and Nuveen designated John Simon.38 The remaining stockholders designated Jeffrey Soine and Scott Heck.39 The Board was populated by industry veterans who had served in both the C- suite and on other corporate boards.40 Each Board member contributed decades of experience in the oil and gas industry—spanning operations, engineering, 34 Id. § 2.01(a). 35 Id. § 2.01(a)(i)-(iii). 36 Id. § 2.01(a)(iv); PTO ¶ 34. 37 Stockholders Agreement § 2.01(a)(v). 38 Id. § 2.01(d). 39 Id. 40 See, e.g., Mills Tr. 445-49 (testifying that he was “working on [his] 44th year in the oil and gas business,” having served as the CEO of six companies (a mix of public and private companies) and a member of 17 boards); Soine Tr. 653-55 (testifying that he had “[a]bout 35” years in the oil and gas industry, serving first as an engineer before transitioning into officer positions and then starting his own oil and gas company); Heck Tr. 721-23 (testifying that he has “[a]pproximately 40” years of experience, with extensive experience at oil and gas “compan[ies] emerging from bankruptcy”); Simon Tr. 780-81 (testifying to “47, 48 years” in the industry). 9 restructurings, and M&A. As the outside directors testified at trial, they viewed themselves as independent of the stockholders who appointed them.41 The Stockholders Agreement also contained drag-along provisions, which applied to holders of QuarterNorth’s common stock and Warrants.42 Under Section 3.03(a), where holders “owning 50% or more of the Aggregate Common Stock propose to Transfer shares of Common Stock . . . including through a sale of equity interests, merger or sale of all or substantially all assets of the Corporation (a ‘Drag- Along Sale’) . . . , [they] may at their option require” the other holders to “vote . . . all shares . . . in favor of, and adopt, such Drag-Along Sale.”43 In effect, this provision required QuarterNorth securityholders to support and vote their voting shares in favor of a merger if holders collectively owning 50% or more of the common stock opted to pursue such a sale.44 41 Mills Tr. 454-56 (disagreeing “vehemently” with any suggestion that he and his fellow board members were not independent); id. at 526 (Q: “Did you understand that one of the provisions in the [S]tockholders [A]greement allowed Franklin to remove you from the board of directors at any time it wanted?” A: “Sure. I mean, it was an appointment. So sure, they could pick whoever they wanted.” Q: “So hypothetically, if your views split at some point with Franklin, they could pick a new . . . director?” A: “And they were certainly entitled to do that. That doesn’t affect how I run my business.”); Simon Tr. 785-86 (Q: “Did you ever enter into any agreements with Nuveen, whether written or oral, as part of joining QuarterNorth’s board?” A: “The only oral agreement per se was I made it abundantly clear to them when they chose to appoint me to the board that I was going to be an independent director.”). 42 Stockholders Agreement § 3.03(a). 43 Id. § 3.03(a)(ii). 44 Id. § 3.03(a). 10  D. The Sale Process and Katmai Wells In late 2021, the Board began exploring a sale of QuarterNorth.45 In May 2022, it retained Barclays to serve as its financial advisor for the sale process.46 The Board chose Barclays for two main reasons. First, Barclays “had a history with QuarterNorth,” having gained a deep understanding of its business and principal assets while advising Fieldwood during its bankruptcy.47 Second, Barclays was the “preeminent” investment bank for Gulf of Mexico oil and gas asset sales and mergers.48 Once engaged, Barclays contacted approximately 50 potential counterparties.49 As the sale process unfolded, QuarterNorth made a discovery with profound implications for its value.50 At the time, QuarterNorth was successfully producing from an existing deepwater well in the Gulf of Mexico called Katmai East.51 Seeking to build on that success, it was simultaneously drilling a neighboring well called Katmai West that was “high risk” and “high potential.”52 Katmai West 45 PTO ¶ 70. 46 Id.; Mills Tr. 461-62. 47 Mills Tr. 462. 48 Id.; see also Simon Tr. 788-89. 49 JX 31 at 10; PTO ¶ 70; Soine Tr. 705-06. 50 Mills Tr. 459. 51 Id. at 523. 52 Id. at 467, 482-83. 11 was a “deep exploratory well” in 6,000 feet of water, drilled to a 32,000-foot depth, and carried a $200 million dry hole cost.53 Whether Katmai West would match Katmai East’s productivity—or perform at all—remained unknown until drilling was complete. Katmai West’s development lagged for several months during the sale process.54 The oil rig QuarterNorth planned to use was “tied up with another operator,” preventing QuarterNorth from accessing it until September 2022.55 QuarterNorth began actively drilling Katmai West in December 2022 and confirmed in January 2023 that oil was present.56 Still, it could not know the volume of the reservoir deep beneath the earth until drilling progressed in the spring.57 Potential bidders in the sale process were given direct—though preliminary— insight into Katmai West’s potential.58 They had access to a confidential data room with technical information on the prospects of the well, including a year-end reserve report.59 Although the Board and management closely tracked these developments, 53 Id. at 455. 54 Id. at 463. 55 Id. 56 Id. at 463-64. 57 Id. at 482-83. 58 Id. at 463-64. 59 Id. at 464-65, 467; JX 50; Sauvageau Dep. 173-77. 12 QuarterNorth deliberately withheld details of Katmai West’s progress from the market to prevent competitors from offsetting its leaseholds.60 E. The Offers The sale process resulted in five preliminary bids ranging in valuation from approximately $1.4 billion to $1.8 billion.61 On March 7, 2023, Barclays presented two acquisition proposals to the QuarterNorth Board.62 One was from Elliott Investment Management L.P., an investment management firm.63 The other was from Talos Energy Inc., a publicly traded oil and gas company.64 On February 21, Elliott had submitted a non-binding proposal to purchase QuarterNorth’s operating assets for approximately $1.35 billion in cash, implying a total equity value of $1.657 billion after adding QuarterNorth’s net cash and other adjustments.65 On February 24, Talos had submitted a non-binding offer to acquire 60 Mills Tr. 459. 61 JX 280. 62 JX 285. 63 Id. at 6-7. Elliott pursued the transaction in conjunction with Ridgewood Energy Corporation. PTO ¶ 70. 64 JX 285 at 6-7. 65 PTO ¶ 71; Kristiansen Tr. 359-60; Fischel Tr. 1024-25; see also Mills Tr. 466 (describing the Elliott bid); JX 291 at 13; JX 59. After transaction-related adjustments (resulting in an enterprise value of $1.382 billion) and the addition of QuarterNorth’s $275 million in net cash, Elliott’s $1.35 billion proposal implied an aggregate equity value of $1.657 billion. See JX 291 at 13, 18; JX 344 (Expert Report of D. Fischel) (“Fischel Report”) ¶ 9 n.11. 13 QuarterNorth at an implied equity valuation of $1.704 billion (inclusive of net cash), consisting of 35% cash and 65% Talos stock.66 Talos subsequently amended its offer to increase the cash consideration to 46%.67 Both proposals were based on QuarterNorth’s standalone asset value, as identified by the respective bidders, and neither priced in merger synergies.68 The Board determined that neither bid was sufficient. During the sale process, the Board worked with its advisors and reviewed internal reserve analyses, including data supporting a $1.822 billion net asset value of QuarterNorth’s oil and gas reserves, to conclude that QuarterNorth had an aggregate equity value of approximately $1.7 billion to $1.75 billion.69 This view was driven, in part, by the transformative breakthrough of Katmai West.70 As director Joseph Mills—who has decades of experience in the oil and gas exploration and production space—testified at trial, Katmai West was a “game 66 PTO ¶ 72; Kristiansen Tr. 359-60; Fischel Tr. 1025; see also Heck Tr. 732; Mills Tr. 465-67; JX 291 at 18; JX 61. Talos’s offer valued QuarterNorth’s operating assets at approximately $1.425 billion ($1.429 billion after adjustments), which implied an aggregate equity value of $1.704 billion after adding QuarterNorth’s $275 million in net cash. See JX 291 at 18; Fischel Report ¶ 9 n.11. 67 PTO ¶ 73; see also Mills Tr. 467 (describing the Talos bid). 68 See Dane Tr. 343; Sauvageau Dep. 210-11. 69 JX 291 at 19; Dane Tr. 181, 253; Soine Tr. 689-90 (explaining that $1.822 billion was the asset-level valuation before making balance sheet adjustments for net cash and debt). 70 Mills Tr. 481-82. 14 changer” that exceeded all expectations.71 Drilling and production into the spring months revealed “that the reservoir was even bigger” than QuarterNorth had hoped.72 This success shaped the Board’s belief that Elliott and Talos undervalued QuarterNorth.73 Elliott’s participation in the sale process ended on April 16, 2023.74 QuarterNorth submitted a counterproposal to Talos two days later, proposing an implied equity valuation of $1.739 billion and reducing the amount of Talos equity in the mix of consideration.75 Talos countered by lowering its bid after a decline in Talos’s stock price reduced the value of its stock component.76 The Board rejected Talos’s counteroffer and formally ended the sale process on May 30, 2023.77 71 Id. at 482. 72 Id. at 482-83, 523. 73 Heck Tr. 736 (describing the Katmai discovery as a “company-maker for QuarterNorth,” because it “changed the outlook from a production and value standpoint dramatically”); Soine Tr. 662; Mills Tr. 483. Katmai is now the “single most valuable asset on [the] balance sheet.” Id. at 467. 74 PTO ¶ 74; JX 291 at 16. 75 PTO ¶ 75; JX 88 at 3. 76 PTO ¶ 76; see Simon Tr. 790; see also Dane Tr. 292-94; Kristiansen Tr. 361-62. 77 Soine Tr. 683-84; PTO ¶¶ 76, 77. 15  F. The Dividend As the sale process wound down, the Board explored an alternative “return of capital business strategy.”78 It considered both a cash dividend and a stock repurchase program.79 The Board concluded that a stock buyback was “not an appropriate use of capital at [that] time” because material nonpublic information— including data on Katmai West—created a “value gap” between QuarterNorth and selling stockholders in the uninformed market.80 Instead, it opted to pursue a $200 million cash dividend, which it determined to be “in the best interest of the Company’s stockholders based on the cash needs of [the Company] through 2023.”81 On June 6, 2023, the Board declared a regular cash dividend of $200 million (the “Dividend”).82 The Dividend had a “Dividend Reference Date” of June 20, 2023, a record date of June 21, 2023, and a payment date of June 29, 2023.83 The Board knew that the Dividend could trigger a Warrant Adjustment under Section 78 JX 119 at 4; JX 127 at 2. 79 JX 127 at 2; JX 108 at 3, 7 (recommending a “$200 [million] capital return program in the near and medium term” and a “warrant restructuring”). 80 JX 127 at 2; Soine Tr. 664-65; Simon Tr. 796. 81 JX 127 at 2; PTO ¶ 78. 82 PTO ¶ 80; JX 146 at 3 (stating an initial per-share amount of $24.79, or approximately $24.68 per security across 8,103,388 participating common shares, as-converted New Money Warrants, and vested restricted stock units). 83 PTO ¶¶ 7, 80. 16 6(b) of the Warrant Agreements.84 QuarterNorth management subsequently prepared slides with a pro forma calculation of the Warrant Adjustment reflecting an aggregate equity valuation of $1.75 billion.85 QuarterNorth announced the Dividend and the formal end of the sale process on June 8, explaining that “none of the bids received in the process represented the best opportunity to maximize value for the Company’s stockholders.”86 It also advised that the Board would calculate the Company’s free cash flow for 2023 in early 2024.87 Because the Section 6(b) formula depended on full-year free cash flow and the aggregate amount of dividends paid during the fiscal year, the Warrant Adjustment could not be finalized until QuarterNorth completed its year-end audited financial statements.88 G. The Talos Acquisition and Drag-Along Notice Negotiations with Talos resumed in September 2023.89 On September 15, Talos transmitted a new letter of intent that implied a pre-Dividend equity value of 84 JX 124 at 21; Soine Tr. 669. 85 JX 162 at 10; JX 124 at 22; Mills Tr. 481; Dane Tr. 181. 86 JX 161 at 3; see PTO ¶ 81. 87 JX 260 at 2; see PTO ¶ 81. 88 Soine Tr. 668-69 (explaining that it was not possible to calculate the Warrant Adjustment until QuarterNorth had its “year-end financials” because it “relied on . . . free cash flow for the year” and “the aggregate dividend amount,” which could both only be calculated at the close of the fiscal year); Simon Tr. 797-98. 89 JX 217 at 2. 17 $1.735 billion for QuarterNorth.90 In October 2023, another company—Harbour Energy plc—made an all-cash offer with an implied pre-Dividend equity value of $1.783 billion.91 Though Harbour Energy opted to pursue a different venture in Europe, negotiations with Talos continued.92 On January 12, 2024, the Board voted unanimously to approve a merger with Talos.93 Consideration for the transaction consisted of $965 million in cash and 24.8 million shares of Talos common stock.94 Post-Dividend, the aggregate equity merger consideration was roughly $1.603 billion.95 The merger consideration was based on QuarterNorth’s standalone asset value and did not include a control premium or synergies.96 The next day, QuarterNorth and Talos executed an Agreement and Plan of Merger (the “Merger Agreement”).97 Talos then filed a Form 8-K with the U.S. Securities and Exchange Commission announcing the execution of the Merger Agreement.98 90 Id. at 6; see infra note 219 and accompanying text (discussing post-Dividend offers). 91 JX 280 at 5. 92 JX 247 at 13; JX 223; Simon Tr. 802-03. 93 PTO ¶ 82; JX 247. 94 JX 254; PTO ¶ 83. 95 PTO ¶ 83; Dane Tr. 196-97; JX 308 at 17. 96 Dane Tr. 197-98; Sauvageau Dep. 211. 97 JX 275; JX 247; PTO ¶ 82. 98 JX 248. 18  On January 13, 2024, a group of QuarterNorth stockholders—including Franklin, Invesco, and Nuveen—delivered a Drag-Along Sale Notice to QuarterNorth securityholders.99 The notice stated that the stockholder group, which owned more than 50% of QuarterNorth’s common stock, was exercising its rights under Section 3.03(a) of the Stockholders Agreement to require the other securityholders to vote for the merger.100 The plaintiffs that held common stock (along with counterclaim-defendant Mudrick Cav Master, L.P.) did not vote on the merger.101 The Talos merger was subsequently approved on February 20, 2024, with holders of 93% of the participating voting securities voting in favor.102 The merger closed on March 4, 2024.103 99 JX 271 at 3-4; PTO ¶ 89. 100 JX 271 at 3-4; PTO ¶ 89; see also Stockholders Agreement § 3.03(a). 101 PTO ¶ 90. The non-voting securityholders included plaintiffs Mudrick Distressed Opportunity Fund Global, L.P., Blackwell Partners LLC – Series A, Boston Patriot BatteryMarch St LLC, Mudrick Distressed Opportunity Drawdown Fund II, L.P., Mudrick Distressed Opportunity Drawdown Fund II SC, L.P., CII Holdco Inc., EF Holdco Inc., ECO Holdco Inc., Ellington Private Opportunities Master Fund II (A) LP, and counterclaim-defendant Mudrick Cav Master, L.P. Id. ¶ 89; id. at 1-2. 102 PTO ¶ 91. 103 Id. 19  H. The Warrant Adjustments In January 2024, the Board met to determine the Warrant Adjustments.104 Relevant here, it set out to calculate the value of “M”—the Fair Market Value of one Share of QuarterNorth stock as of June 20, 2023 (the Trading Day immediately preceding the ex-date for the Dividend), as determined in good faith and in a commercially reasonable manner by the Board.105 At a January 22 meeting, the Board discussed a letter it had received from counsel for certain holders of Tranche 1 and Tranche 2 Warrants, which asked the Board to rely on “market-based evidence” of past trading prices to calculate the “proper” Warrant Adjustment.106 Though it was privately held, QuarterNorth’s equity was quoted on Markit, “[a]n independent third-party source owned by S&P Global” and “the leading provider/aggregator of broker-dealer quotes and transactions in nonexchange traded” markets.107 The Board concluded that prior trades were not a reliable indicator of value because QuarterNorth’s stock was “thinly traded” and no secondary trades had occurred for several months surrounding 104 Id. ¶¶ 84-85; JX 291. 105 See JX 905; PTO ¶ 7 (explaining that the parties’ “core dispute relates to the input ‘M’”); Mudrick Tr. 76-77, 157-60 (testifying that the other inputs were not meaningfully contested). 106 JX 281 at 2-3. 107 Mudrick Tr. 38. 20 the valuation date.108 Through counsel, the Board sent a response explaining that the warrant-adjustment process had not yet concluded and that it was “taking into consideration all relevant factors, including the relatively small and sporadic non- public trades.”109 The Board also reviewed a presentation prepared by Barclays during the sale process titled “Project Compass Warrant Adjustment Discussion.”110 The presentation identified three potential approaches to calculating “M.”111 The first approach would rely on “Offers Received,” using “buyer indications of value received during the [sale] process.”112 The second approach, titled “Barclays Valuation,” would evaluate “QuarterNorth databases . . . utilizing market prices and market views on risking factors and discount rates.”113 And the third approach— titled “Market Quotes”—would rely on secondary market data as a proxy for stock 108 Dane Tr. 235; Soine Tr. 684; JX 284 at 2 (“There was then a discussion on the thinly traded nature of the Company’s stock and that sporadic quotes do[] not constitute a true market.”). 109 JX 299 at 3. The letter, drafted by counsel for the QuarterNorth Board, also explained that case law cited in the Warrant holders’ letter was inapposite because it pertained to publicly traded companies. Id. at 3-4. 110 JX 280; JX 284. 111 JX 280 at 3. 112 Id. 113 Id. 21 price.114 Barclays cautioned against the third approach, explaining that prior quotes “[m]ay not accurately represent” fair market value due to the “illiquid” nature of the market and the fact that sporadic prior trades did “not reflect a sale of the entire company.”115 The Board did not make a final determination on the proper method for calculating “M” at the January 22 meeting. A second Board meeting to discuss the Warrant Adjustments was held two days later, on January 24.116 At the meeting, the Board addressed the Company’s annual free cash flow for fiscal year 2023 and the determination of “M.”117 The Board reviewed another presentation prepared by Barclays, which again outlined the possible approaches the Board could use to calculate “M.”118 The presentation included an illustrative table translating aggregate valuations into per- share prices by dividing the aggregate figures by 8,103,388 common shares—an undiluted share count that excluded the Tranche 1 and Tranche 2 Warrants (as well as the GUC Warrants).119 At a $1.7 billion valuation, the table reflected an 114 Id. 115 Id. 116 JX 291. 117 Id. at 2. 118 Id. at 6-22. 119 Id. at 14. The 8,103,388 share count consisted of 6,044,497 shares of initial common stock, 1,908,828 as-converted New Money Warrants, and 150,063 restricted stock units 22 illustrative price of $209.79 per share.120 The Board discussed the offers previously received from Elliott and Talos and concluded that the “Offers Received” approach was the most reliable method to determine the Fair Market Value of the Company.121 The final decision was put to a vote. Directors Niehaus and Wollman recused themselves from the vote because their employer, Invesco, owned both QuarterNorth common stock and Warrants.122 The remaining five directors unanimously approved resolutions determining: (1) that the Company’s annual free cash flow in fiscal year 2023 was $254.9 million, thus triggering the Warrant Adjustments; and (2) that the Fair Market Value of the Company as of June 20, 2023 was $1.7 billion.123 The voting directors further delegated authority to management to calculate the required Warrant Adjustments in accordance with the Warrant Agreements.124 On January 30, 2024, QuarterNorth provided a notice of the Warrant Adjustment and an accompanying presentation to holders of the Tranche 1 and under QuarterNorth’s equity incentive plan—the securities that participated in the June 2023 Dividend. See JX 304 at 3; see infra note 228 and accompanying text. 120 JX 291 at 14. 121 Id. at 2, 13. 122 Id. at 3; Dane Tr. 212 (“Peter Niehaus and Peter Wollman were both employees of Invesco. Invesco was a common equity holder, as well as a warrant holder. And so just given their ownership in these securities that were under discussion and likely to be impacted, they and the board felt that it was appropriate for them to recuse themselves.”). 123 JX 291 at 3; see Mills Tr. 507-08. 124 JX 291 at 3. 23 Tranche 2 Warrants.125 The notice identified “M” as $209.79 and “D” as $15.24.126 Management reached the $209.79 figure for “M” by applying “simple division,” dividing the Board’s $1.7 billion aggregate valuation of the Company by the 8,103,388 undiluted “common shares” outstanding, as shown in the January 24 presentation.127 Although the Tranche 1 and Tranche 2 Warrants (and GUC Warrants) were in the money at a $1.7 billion valuation, the denominator included none of those warrant shares.128 The resulting Warrant Adjustment provided a 7.8% increase in the Tranche 1 and Tranche 2 Warrant shares and a 7.3% reduction in the exercise price of both tranches.129 I. This Litigation On February 7, 2024, certain holders of the Tranche 1 and Tranche 2 Warrants filed this lawsuit against QuarterNorth, Franklin, Invesco, and Nuveen before the 125 PTO ¶ 85; JX 304. 126 JX 304 at 3; PTO ¶ 86. 127 Dane Tr. 225-26, 283; JX 291 at 14. 128 Dane Tr. 286-87 (confirming that the Warrants were in the money at a $1.7 billion valuation); Simon Tr. 831-33 (same); see also Fischel Tr. 968-70. 129 PTO ¶ 87 (containing a typographical error listing 2,988,810 rather than 2,998,810 Tranche 1 Warrants). The Tranche 1 Warrant shares increased from 2,780,926 to 2,998,810, and the Tranche 2 Warrant shares increased from 5,355,857 to 5,775,486. Id. Likewise, the exercise price for the Tranche 1 Warrants was reduced from $166.09 to $154.02, and the exercise price for the Tranche 2 Warrants was reduced from $189.42 to $175.66. Id. 24 Talos merger closed on March 4.130 They moved for a preliminary injunction to enjoin the defendants from imposing a “Drag-Along Sale” on the plaintiffs, which I denied.131 The plaintiffs filed an amended complaint on May 28.132 They brought claims for breach of contract and unjust enrichment, the latter of which I dismissed for failure to state a claim—leaving QuarterNorth as the sole defendant.133 QuarterNorth filed a counterclaim for breach of contract on December 27, alleging that the counterclaim defendants breached their obligations under Section 3.03(a) of the Stockholders Agreement by failing to vote for the Talos merger.134 130 Verified Compl. (Dkt. 1). The plaintiffs are: Mudrick Distressed Opportunity Fund Global, L.P., Blackwell Partners LLC – Series A, Boston Patriot BatteryMarch St LLC, Mudrick Distressed Opportunity Drawdown Fund II, L.P., Mudrick Distressed Opportunity Drawdown Fund II SC, L.P., CII Holdco Inc., EF Holdco Inc., ECO Holdco Inc., Ellington Private Opportunities Master Fund II (A) LP, Mudrick Distressed Opportunity SIF Master Fund, L.P., and Ellington Special Opportunities LLC. PTO at 1-2. 131 See Mem. Op. Regarding Mot. for a Prelim. Inj. (Dkt. 49). 132 Verified Am. Compl. (Dkt. 53). 133 Id. ¶¶ 68-93; Order Granting in Part Defs.’ Am. Mot. to Dismiss (Dkt. 70). As a result, the stockholder defendants—Franklin, Invesco, and Nuveen, and their corresponding entities—were dismissed. 134 Def.’s Answer and Verified Countercl. (Dkt. 75). 25  Trial took place from May 5 to 8, 2026.135 Post-trial briefing was complete as of July 2.136 Post-trial argument was held on July 9, and the mat