Item 1.01.
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Entry into a Material Definitive Agreement.
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Merger Agreement
On June 29, 2017, D.R. Horton, Inc. (the Company) entered into an Agreement and Plan of Merger (the Merger
Agreement) with Forestar Group Inc., a Delaware corporation (Forestar), and Force Merger Sub, Inc., a Delaware corporation and wholly owned subsidiary of D.R. Horton (Merger Sub).
Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Merger Sub will merge with and into Forestar (the
Merger), with Forestar surviving the Merger (the Surviving Company).
Subject to the terms and conditions of the
Merger Agreement, at the effective time of the Merger (the Effective Time), each share of Forestars common stock, par value $1.00 per share (Forestar Common Stock) will be converted into the right to receive, either
(i) an amount in cash per share of Forestar Common Stock equal to $17.75 (the Cash Consideration); or
(ii) one share of common stock of the Surviving Company (the Surviving Company Common Stock),
in each case at the election of the holder of such share of Forestar Common Stock, subject to proration procedures applicable to
oversubscription and undersubscription for Cash Consideration by stockholders. The aggregate amount of Cash Consideration will equal $558,256,373.
Subject to the terms of the Merger Agreement, at the Effective Time, each award made or otherwise denominated in shares of Forestar Common
Stock (an Equity Award) that is outstanding immediately prior to the Effective Time under Forestars benefit plans shall be cancelled and of no further force or effect as of the Effective Time. In exchange for the cancellation of
such Equity Award, the holder of such Equity Award shall receive from the Surviving Company the Cash Consideration for each share of Forestar Common Stock underlying such Equity Award (plus payment of cash of all accrued dividend equivalents, if
any, with respect to such Equity Awards and, in the case of Equity Awards that are stock options or stock appreciation rights, less the aggregate exercise or strike price thereunder, but not less than $0), whether or not otherwise vested as of the
Effective Time. With respect to any Forestar market-leveraged stock units, the number of shares of Forestar Common Stock subject to such Equity Awards shall be determined pursuant to the terms set forth in the applicable award agreements and based
on a per share value equal to $17.75 plus reinvested dividends, if any.
Immediately following the Merger, subject to the terms of the
Merger Agreement, it is expected that the Company will hold shares of Surviving Company Common Stock representing approximately 75% of the outstanding shares of Surviving Company Common Stock and the former stockholders of Forestar will hold,
collectively, shares of Surviving Company Common Stock collectively representing approximately 25% of the outstanding shares of Surviving Company Common Stock.
Consummation of the Merger is subject to various closing conditions, including but not limited to (i) approval of the Merger Agreement by
holders of a majority of the outstanding shares of Forestar Common Stock entitled to vote on the Merger, (ii) the absence of any law or order prohibiting the Merger, (iii) the number of dissenting shares shall represent less than 20% of
the shares of Forestar Common Stock outstanding immediately prior to closing, (iv) the effectiveness of Forestars registration statement on Form
S-4
to register the shares of Surviving Company
Common Stock to be issued in the Merger and approval for listing on the New York Stock Exchange of the Surviving Company Common Stock to be issued in the Merger, and (v) the absence of a Company Material Adverse Effect, as defined in the Merger
Agreement.
The parties to the Merger Agreement have each made customary representations and warranties. Forestar has agreed to various
covenants and agreements, including, among others, (i) Forestars agreement to conduct its
business in the ordinary course consistent with past practice during the period between the execution of the Merger Agreement and the closing of the Merger, and (ii) Forestars
agreement to not solicit proposals relating to alternative transactions to the Merger or engage in discussions or negotiations with respect thereto, subject to certain exceptions. Each of the Company, Forestar and Merger Sub have agreed to various
mutual covenants and agreements, including, among others, (x) each partys agreement to use reasonable best efforts to take all actions necessary to consummate and make effective the Merger as promptly as practicable, and (y) each
partys agreement to give prompt notice to the other of the occurrence, or failure to occur, of any event, which occurrence or failure to occur is reasonably likely to cause failures of certain representations and warranties to be true and
correct or to cause material failure to satisfy a covenant, condition, or agreement to be complied with under the Merger Agreement.
The
Merger Agreement contains specified termination rights for the Company and Forestar, including a mutual termination right in the event that the Merger is not consummated by January 25, 2018. Forestar must pay the Company a $20,000,000
termination fee if the Company terminates the Merger Agreement following a change of recommendation, or failure to reaffirm the recommendation, of the Merger by Forestars board of directors (the Forestar Board), or if Forestar
terminates the Merger Agreement to enter into a definitive agreement with a third party with respect to a superior proposal, as set forth in, and subject to the conditions of, the Merger Agreement. Under certain additional circumstances described in
the Merger Agreement, Forestar must also pay the Company a $20,000,000 termination fee if the Merger Agreement is terminated in certain specified circumstances while an alternative acquisition proposal to the Merger has been publicly made or
communicated to the Forestar Board and not withdrawn and, within twelve months following such termination, Forestar enters into a definitive agreement with respect to a business combination transaction of the type described in the relevant
provisions of the Merger Agreement, or such a transaction is consummated. The Merger Agreement further provides that, upon termination of the Merger Agreement (i) in the event Forestars stockholders do not approve the Merger, or
(ii) by the Company in certain circumstances involving a material breach by Forestar of any of its representations, warranties or covenants under the Merger Agreement, Forestar will be required to pay to the Company up to $4,000,000 for
expenses incurred by the Company (with such payment credited to any termination fee subsequently paid by Forestar).
The foregoing
description of the Merger Agreement and the transactions contemplated thereby does not purport to be complete and is qualified in its entirety by reference to the Merger Agreement, a copy of which is attached hereto as Exhibit 2.1 and is
incorporated herein by reference. It is not intended to provide any factual information about the Company, Forestar or their respective subsidiaries and affiliates. The Merger Agreement contains representations and warranties by each of the parties
to the Merger Agreement, which were made only for purposes of that agreement and as of specified dates. The representations, warranties and covenants in the Merger Agreement were made solely for the benefit of the parties to the Merger Agreement;
are subject to limitations agreed upon by the contracting parties, including being qualified by confidential disclosure schedules; may have been made for the purposes of allocating contractual risk between the parties to the Merger Agreement instead
of establishing these matters as facts; and are subject to standards of materiality applicable to the contracting parties that may differ from those applicable to investors. Investors should not rely on the representations, warranties and covenants
or any descriptions thereof as characterizations of the actual state of facts or condition of the Company, Forestar or any of their respective subsidiaries or affiliates. Moreover, information concerning the subject matter of the representations,
warranties and covenants may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in the Companys public disclosures.
Stockholders Agreement
In connection with to the Merger Agreement, the Company and Forestar entered into a Stockholders Agreement, dated as of June 29,
2017 (the Stockholders Agreement), the terms of which shall become effective as of the Effective Time. Under the terms of the Stockholders Agreement, as of immediately following the Effective Time, and during the
Lock-Up
Period (as defined below), the Forestar Board shall have five directors, comprised of four individuals designated by the Company (which shall include the Executive Chairman
of Forestar and at least two independent directors) and one individual from the current Forestar Board designated by mutual agreement of the Company and Forestar prior to the Effective Time, with
the Companys agreement not to be unreasonably withheld (the Legacy Director) or his replacement. Thereafter, at all times when the Company and its affiliates beneficially own 20% or more of the voting securities of Forestar, the
Forestar Board shall have five directors unless otherwise agreed in writing between Forestar (as approved by a majority of the independent directors) and the Company, and the Company will have the right to designate a number of directors equal to
the percentage of the voting securities of Forestar beneficially owned by the Company and its affiliates multiplied by the total number of directors that Forestar would have if there were no vacancies, rounded up to the nearest whole number (and in
any event not less than one). The Company and Forestar have also each agreed to use their reasonable best efforts to cause at least three of the directors to be considered to be considered independent under the rules of the SEC and under
applicable listing standards.
In addition, at all times when the Company and its affiliates beneficially own 20% or more of the voting
securities of Forestar, no committee of the Forestar Board shall have more than three members unless otherwise agreed in writing between Forestar (as approved by a majority of the independent directors) and the Company, and each committee of the
Forestar Board shall include in its membership (i) a number of Company designees equal to the percentage of the voting securities of Forestar beneficially owned by the Company and its affiliates multiplied by the total number of members that
such committee would have if there were no vacancies on such committee, rounded up to the nearest whole number (and in any event not less than one) and (ii) at least one member not designated by the Company. In addition, at all times when the
Company and its affiliates beneficially own 20% or more of the voting securities of Forestar, the Forestar Board shall maintain a Nominating and Governance Committee, and the Legacy Director shall be a member of the Nominating and Governance
committee for so long as the Legacy Director serves on the Forestar Board. During the
Lock-Up
Period, the Nominating and Governance Committee shall have three members, including the Legacy Director (as long as
the Legacy Director is then on the Forestar Board) and at least one additional independent director.
Forestar has also agreed to
establish and maintain an investment committee (which will not be considered a committee of the Forestar Board) (the Investment Committee), the members of which shall be officers or employees of Forestar who are (A) experienced
professionals in the land acquisition and development business or (B) the chief executive officer, the chief financial officer, the general counsel or the president of community development (or any person serving in an equivalent role). The
Executive Chairman of Forestar shall be a member of the Investment Committee at all times. The other members of the Investment Committee will be appointed by the Nominating and Governance Committee. The Investment Committee will be vested with sole
responsibility over investment decisions of Forestar involving capital expenditures of $20,000,000 or less (each, an Investment Committee Approval Transaction). All decisions of the Investment Committee will require the approval of a
majority of the members of the Investment Committee. Any investment decision that does not involve an Investment Committee Approval Transaction will be subject to approval by the Forestar Board.
For so long as the Company and its affiliates beneficially own 35% or more of the voting securities of Forestar, Forestar and its subsidiaries
may not take any of the following actions without the prior written consent of the Company: (i) declare or make any extraordinary or
in-kind
dividend other than a dividend on a pro rata basis;
(ii) issue any new class of equity or voting securities; (iii) issue equity or equity-linked securities or voting securities (A) in the case of securities issued as employee compensation, constituting 1% or more of the then
outstanding shares of Forestar Common Stock in any calendar year or (B) in any case, constituting 10% or more of the then-outstanding number of shares of Forestar Common Stock; (iv) incur indebtedness above certain levels; (v) select,
terminate or remove certain key officers or change their compensation arrangements; (vi) make or approve any fundamental change in Forestars business of developing residential and
mixed-use
real
estate; (vii) acquire assets or enter into mergers or similar acquisitions involving capital expenditures in excess of $20,000,000; (viii) effect or approve any voluntary liquidation, dissolution or
winding-up
or certain events of bankruptcy or insolvency; (ix) enter into any strategic alliance or commercial agreement of a nature similar to the Master Supply Agreement (as defined below) with a person
other than the Company; or (x) effect any election of a settlement of Forestars 3.75% Convertible Senior Notes due 2020 in connection with an election to convert the notes by a holder thereof.
In addition, at all times when the Company and its affiliates beneficially own 35% or more of the
voting securities of Forestar, Forestar and its subsidiaries may not take any of the following actions without approval of a majority of the independent directors who are not also affiliated with the Company: (i) enter into, amend, modify,
terminate or approve any transaction between Forestar or any of its subsidiaries, on one hand, and the Company or any of its affiliates, on the other hand, or enter into any waiver, consent or election thereunder (other than an Investment Committee
Approval Transaction); (ii) amend, modify or terminate, or enter into any waiver, consent or election under, the Stockholders Agreement or enter into any merger or business combination with the Company or any of its affiliates;
(iii) enter into any merger, business combination or similar transaction in which the Company receives consideration for its Forestar Common Stock of greater value or in a different form than other Forestar stockholders; or (iv) settle any
claim between the Company and Forestar (other than an Investment Committee Approval Transaction).
For so long as the Company and its
affiliates beneficially own 20% or more of the voting securities of Forestar, Forestar may not amend its or its subsidiaries organizational documents in any manner that could adversely affect the rights of the Company under the
Stockholders Agreement. In addition, Forestar may not amend its or its subsidiaries organizational documents in any manner that could adversely affect the rights of the other Company stockholders under the Stockholders Agreement.
The Company has agreed to certain
lock-up
and standstill provisions for a period of 15 months
following the Effective Time (the
Lock-Up
Period). During the
Lock-Up
Period, the Company generally may not (subject to customary exceptions) transfer shares
of Forestar Common Stock, other than transfers of up to
one-third
of the aggregate amount of shares of Forestar Common Stock beneficially held by the Company and its subsidiaries as of immediately following
the Effective Time in an offering that is not registered under the Securities Act of 1933, as amended, to transferees agreeing to be bound by the
lock-up
provisions in the Stockholders Agreement. In
addition, during the
Lock-Up
Period, the Company and its affiliates generally may not (subject to customary exceptions) participate in any transactions that would result in the Company and its affiliates
beneficially owning more than 80% of the voting power of the Forestar Common Stock, provided that the Company is permitted, under certain conditions, to make private proposals to the non-Company affiliated directors on the Forestar Board. Any
proposal by the Company to acquire all of the shares of Forestar Common Stock must be (i) subject to review, evaluation and prior written approval of a majority of the independent directors, and (ii) submitted for approval to the Forestar
stockholders, with a nonwaivable condition that a majority of the voting power of the non-Company stockholders approve the transaction.
Except in certain cases, the Company has a
pre-emptive
right (but not the obligation) to participate
in any issuance of equity or other securities of Forestar by purchasing up to the Companys and its subsidiaries pro rata portion of such equity or securities at the price and otherwise upon the same terms and conditions as offered to
other investors.
The Stockholders Agreement provides for customary registration rights with respect to Forestar Common Stock held
by the Company, its affiliates and their permitted transferees. Pursuant to such registration rights, Forestar has agreed to file, prior to expiration of the
Lock-Up
Period, and to use its reasonable best
efforts to make and keep effective, a shelf registration statement permitting the resale of Forestar Common Stock by the Company, it affiliates and their permitted transferees. In addition, after expiration of the
Lock-Up
Period, the Company has the right, subject to certain limitations, to require Forestar to register the Companys Forestar Common Stock for resale. The Company also has piggyback registration
rights in connection with offerings of Forestar Common Stock by Forestar or other stockholders. The Stockholders Agreement also provides that the Company and its affiliates will not be prohibited from engaging in business opportunities
independently of Forestar unless the opportunity is offered to an individual who is both an affiliate of the Company and an officer or director of Forestar and the offer is made in writing to the individual in his or her capacity as an officer or
director of Forestar.
The Stockholders Agreement shall terminate upon termination of the Merger Agreement or on the first day that
the Company and its affiliates beneficially own less than 15% of the voting securities of Forestar,
provided that the provisions of the Stockholders Agreement relating to the Companys registration rights, the waiver of business opportunities and certain customary provisions will
survive the termination of the Stockholders Agreement after the Effective Time.
The foregoing summary of the Stockholders
Agreement and the transactions contemplated thereby does not purport to be complete and is subject to, and qualified in its entirety by, the full text of the Stockholders Agreement, which is filed as Exhibit 10.1 to this Form
8-K
and is incorporated herein by reference.
Master Supply Agreement
In connection with the Merger Agreement, the Company and Forestar entered into a Master Supply Agreement, dated as of June 29, 2017 (the
Master Supply Agreement). The terms of the Master Supply Agreement become effective as of the closing of the Merger, and unless earlier terminated, continue until the earlier of (a) the date that the Company and its affiliates
beneficially own less than 15% of the voting securities of Forestar and (b) June 29, 2037.
Under the Master Supply Agreement,
Forestar will present to the Company all lot development opportunities (subject to certain exceptions) that Forestar desires to acquire and develop that have been approved or conditionally approved by the Investment Committee (a Forestar
Sourced Opportunity); and the Company shall have the right, but not the obligation, to present Forestar with lot development opportunities that the Company desires to acquire for development (if presented to Forestar, a D.R. Horton
Sourced Opportunity).
The following opportunities are excluded from Forestar Sourced Opportunities: (a) any opportunities,
developments or ventures owned, under contract, the subject of a letter of intent or otherwise being pursued, by Forestar, as of the Effective Time, or (b) any opportunities presented to Forestar by a third-party builder.
The Company and Forestar will collaborate regarding all Forestar Sourced Opportunities and all D.R. Horton Sourced Opportunities, after
considering current and future market conditions and dynamics. If the parties agree to pursue a Forestar Sourced Opportunity or a D.R. Horton Sourced Opportunity, such agreement will be evidenced by a mutually agreed upon written development plan
prepared at the direction of the Investment Committee (a Development Plan), addressing, among other things, the number, size, layout and projected price of lots, phasing, timing, amenities and entitlements, and are referred to as either
a Forestar Sourced Development or a D.R. Horton Sourced Development, as the case may be.
The Company or its
affiliates will have (a) a right of first offer (ROFO) to buy up to 50% of the lots in the first phase (and in any subsequent phase in which the Company purchased at least 25% of the lots in the previous phase) in each Forestar
Sourced Development; and (b) the right to purchase up to 100% of the lots in each D.R. Horton Sourced Development, at the then current fair market price and terms per lot, as mutually agreed to by the Company and Forestar. All lots in a
Forestar Sourced Development in which a Company affiliate participates as a buyer will be equitably allocated among the Company and any other builders in each phase taking into consideration the location, size and other attributes associated with
the lots. The agreement evidencing the ROFO for the lots in the Forestar Sourced Development (the ROFO Agreement), and the purchase and sale agreement for the lots in the D.R. Horton Sourced Development (the PSA), will be
negotiated, finalized and executed as a part of the Development Plan, and in all events the Development Plan will be finalized, and the ROFO Agreement will be negotiated, finalized and executed, prior to the expiration of the feasibility period in
any contract to acquire a Forestar Sourced Development. The Company will assign to Forestar on an
as-is,
where-is
basis the contract to acquire a
D.R. Horton Sourced Development after the finalization of the Development Plan and PSA for such D.R. Horton Sourced Development.
Forestar, at its sole cost and expense, will perform and direct, through its employees, agents and contractors, all functions relative to
diligence, entitlement, financing, planning, design and construction of all
on-site
and
off-site
improvements required for any development.
In addition to termination for breach or mutual agreement of the parties, Forestar may terminate
the Master Supply Agreement at any time that the Company and its affiliates beneficially own less than 25% of the voting securities of Forestar.
The foregoing summary of the Master Supply Agreement and the transactions contemplated thereby does not purport to be complete and is subject
to, and qualified in its entirety by, the full text of the Master Supply Agreement, which is filed as Exhibit 10.2 to this Form
8-K
and is incorporated herein by reference.