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Item
1.01
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Entry
into a Material Definitive Agreement
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Merger
Agreement and Tender Offer
On
November 25, 2017, MGC Diagnostics Corporation, a Minnesota corporation (the “Company”), entered into an Agreement
and Plan of Merger, dated as of November 25, 2017 (the “Merger Agreement”), by and among MGC Parent LLC, a Delaware
limited liability company (“Parent”), AC Breathe Merger Sub Inc., a Minnesota corporation and a wholly-owned subsidiary
of Parent (“Purchaser”), and the Company. Parent and Purchaser are affiliates of Altus Capital Partners, Inc. (“Altus”).
Altus is a private equity firm that makes control investments in middle market manufacturing businesses.
Pursuant
to the Merger Agreement, on November 29, 2017, Purchaser commenced a cash tender offer (the “Offer”) to purchase all
of the outstanding shares of common stock, par value $0.10 per share, of the Company (the “Shares”) at a price of
$11.03 per Share (“the Per Share Amount”).
The Merger Agreement provides that,
following the consummation of the Offer, the Purchaser will merge with and into the Company (the “Merger”), with
the Company surviving the Merger as a wholly-owned subsidiary of Parent. The Merger will be governed by Section 302A621 of the
Minnesota Business Corporation Act, with no shareholder vote required to consummate the Merger. In the Merger, each outstanding
share of Company common stock (other than shares of common stock or owned Parent or Purchaser or held by shareholders who are entitled
to demand, and who properly demand, dissenters’ rights under Minnesota law) will be converted into the right to receive cash
in an amount equal to the Per Share Amount, without interest.
The
Merger Agreement provides that each option to purchase common stock, each share of restricted stock, and each share issuable
under the Company’s Employee Stock Purchase Plan that is outstanding immediately prior to closing of the Merger will be
converted into the right to receive the Per Share Amount (less the exercise price in the case of options).
The
obligation of Purchaser to purchase Shares tendered in the Offer is subject to the satisfaction or waiver of a number of conditions
set forth in the Merger Agreement, including, there being validly tendered in the Offer and not validly withdrawn that number
of Shares that, together with the shares beneficially owned by Parent or Purchaser (if any), represents the greater of (i) a majority
of the Shares outstanding and (ii) one Share more than 90% of the total number of Shares outstanding immediately after the issuance
of the Top-Up Shares (as defined below), calculated on a fully diluted basis.
Under
the Merger Agreement, the Company has granted to Purchaser an option (the “Top-Up Option”) to purchase at a price
per share equal to the Per Share Amount that number of newly issued, fully paid and nonassessable Shares (the “Top-Up Shares”)
equal to the lowest number of Shares that, when added to the number of Shares owned by Parent and its subsidiaries (including
Purchaser) at the time of exercise of the Top-Up Option, will constitute one share more than 90% of the total number of Shares
outstanding immediately after the issuance of the Top-Up Shares, calculated on a fully diluted basis. The Company has no obligation
to issue Shares under the Top-Up Option unless a majority of the then-outstanding Shares have been tendered and not withdrawn
from the Offer. The Top-Up Option will be exercisable only once, in whole, but not in part, at any time following the Offer closing
and prior to the closing of the Merger.
The
Company, Parent and Purchaser have made customary representations, warranties and covenants in the Merger Agreement. The
Company has agreed to conduct its business in all material respects in the ordinary course of business until closing of the
Merger.
The
obligation of Purchaser to purchase Shares is also subject to a number of closing conditions, including (i) the Company not having
received demands from shareholders
exercising appraisal rights under Minnesota law with respect to Shares that represent 10% or
more of total outstanding Shares; (ii) neither Todd M. Austin nor Matthew S. Margolies having rescinded, revoked or terminated
his respective new employment agreement entered into in connection with the execution of the Merger Agreement; and (iii) there
not having occurred any changes, conditions, events, occurrences, facts or developments that would have, or be reasonably likely
to have, individually or in the aggregate, a Material Adverse Effect (as defined in the Merger Agreement) on the Company’s
business or operations.
The
Merger Agreement may be terminated under certain circumstances, including in specified circumstances in connection with a Takeover
Proposal (as defined in the Merger Agreement) that the Board determines constitutes a Superior Proposal (as defined in the Merger
Agreement). Under the Merger Agreement, the Company has agreed to not solicit or seek a Takeover Proposal. In addition, either
party may terminate the Merger Agreement, in certain circumstances, if the Offer has not closed by January 31, 2018.
Upon
the termination of the Merger Agreement, under specified circumstances, the Company would be required to pay to Parent a termination
fee of approximately $1.32 million. Upon the termination of the Merger Agreement, under specified circumstances, the Purchaser
would be required to pay to the Company a termination fee of $2.2 million.
The
Merger Agreement was unanimously approved by the Company’s Board of Directors
Tender
Support Agreements
Concurrent
with the execution and delivery of the Merger Agreement, on November 25, 2017, each Company director and executive officer entered
into a tender support agreement (the “Tender Support Agreements”) with Parent and Purchaser, under which each director
and executive officer agreed, among other things, to tender his or her Shares pursuant to the Offer. Shares held by these directors
and executive officers represent, in the aggregate, approximately 8.9% of the Shares outstanding on the date of the Merger Agreement.
The
foregoing description of the Merger Agreement and the Support Agreement are not complete and are qualified in their entirety
by reference to the Merger Agreement and the Tender Support Agreement, which are attached as Exhibit 2.1 and Exhibit 10.1,
respectively, to this Report on Form 8-K and incorporated herein by reference. The Merger Agreement and the foregoing
description of the Merger Agreement have been included to provide investors and shareholders with information regarding the
terms of the Merger Agreement. They are not intended to provide any other factual information about the Company. The
representations, warranties and covenants contained in the Merger Agreement were made only as of specified dates for the
purposes of that agreement, were solely for the benefit of the parties to the agreement, and may be subject to qualifications
and limitations agreed upon by the parties.
Forward-
Looking Statements
This
Current Report on Form 8-K contains forward-looking statements. These statements are based on current expectations and may rely
on some factors that are beyond the Company’s control. Among other things, these factors include the risk that the acquisition
will not be completed or is delayed because the tender offer did not proceed as anticipated, or that the tender
offer financing
becomes unavailable, or that closing conditions to the transaction are not satisfied. For a description of risks and uncertainties
associated with the Company, see its reports filed with the Securities and Exchange Commission, including the “Risk Factors”
section in its most recent Annual Report on Form 10-K.