Item 1.01. Entry Into a Material Definitive Agreement
Merger Agreement
On May 29, 2023, Ellington Financial Inc., a Delaware corporation (“EFC”), EF Merger Sub Inc., a Virginia corporation and wholly-owned subsidiary of EFC (“Merger Sub”), Arlington Asset Investment Corp., a Virginia corporation (“Arlington Asset”), and, solely for the limited purposes set forth in the Merger Agreement (as defined below), Ellington Financial Management LLC, a Delaware limited liability company (the “Advisor”), entered into an Agreement and Plan of Merger (the “Merger Agreement”), pursuant to which, subject to the terms and conditions therein, Arlington Asset will be merged with and into Merger Sub, with Merger Sub remaining as a wholly owned subsidiary of EFC (such surviving company, the “Surviving Company,” and such transaction, the “Merger”). Following the consummation of the Merger, the Surviving Company will be contributed to Ellington Financial Operating Partnership LLC, a Delaware limited liability company and EFC’s operating partnership subsidiary (the “OP”), in exchange for limited liability company interests in the OP. The board of directors of EFC has unanimously approved the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement.
Under the terms of the Merger Agreement, at the effective time of the Merger (the “Effective Time”), all of the property, assets, rights, privileges, immunities, purposes, powers and franchises of each of Arlington Asset and Merger Sub will vest in the Surviving Company without transfer, reversion or impairment, and all debts, obligations and liabilities of each of Arlington Asset and Merger Sub will become the debts, obligations and liabilities of the Surviving Company (including Arlington Asset’s outstanding trust preferred securities, 6.75% Senior Notes due 2025 and 6.000% Senior Notes due 2026). In addition, at the Effective Time, each share of Class A common stock, par value $0.01 per share, of Arlington Asset issued and outstanding immediately prior to the Effective Time (excluding any shares held by EFC or Merger Sub or by any wholly owned subsidiary of EFC, Merger Sub or Arlington Asset) (“Arlington Asset Common Stock”) will automatically be converted into the right to receive:
•from EFC, a number of shares of common stock, $0.001 par value per share, of EFC (“EFC Common Stock”) based on a fixed exchange ratio (the “Exchange Ratio”) of 0.3619; provided, however, that if a certain asset performance provision has not been met, the Exchange Ratio will be reduced to 0.3557 subject, in either case, to adjustment as provided in the Merger Agreement (the “Per Share Stock Consideration”); and
•from the Advisor, $0.09 in cash (the “Per Share Cash Consideration” and together with the Per Share Stock Consideration, the “Per Share Common Merger Consideration”).
Cash will be paid in lieu of any fractional shares of EFC Common Stock that would otherwise have been received as a result of the Merger.
In addition, each share of Arlington Asset’s 7.00% Series B Cumulative Perpetual Redeemable Preferred Stock, $0.01 par value per share (the “Arlington Asset Series B Preferred Stock”), issued and outstanding immediately prior to the Effective Time will be automatically converted into the right to receive one newly issued share of 7.00% Series D Cumulative Perpetual Redeemable Preferred Stock, $0.001 par value per share, of EFC (the “EFC Series D Preferred Stock”); and each share of Arlington Asset’s 8.250% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, $0.01 par value per share (the “Arlington Asset Series C Preferred Stock”), issued and outstanding immediately prior to the Effective Time will be automatically converted into the right to receive one newly issued share of 8.250% Series E Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock, $0.001 par value per share, of EFC (the “EFC Series E Preferred Stock”).
Each share of Arlington Asset Common Stock issued under the Arlington Asset Investment Corp. 2021 Long-Term Incentive Plan, the Arlington Asset Investment Corp. 2014 Long-Term Incentive Plan, the Arlington Asset Investment Corp. 2011 Long-Term Incentive Plan, and Arlington Asset’s Non-Employee Director Stock Compensation Plan (each, as amended from time to time, an “Arlington Asset Equity Plan”) that is unvested and/or subject to a repurchase option or obligation, risk of forfeiture or other restriction that is issued and outstanding as of immediately prior to the Effective Time, will, as of immediately prior to the Effective Time, become fully vested and any limitations or restrictions with respect thereto will lapse as of immediately prior to the Effective Time, and each share of restricted stock will, as of the Effective Time, be considered outstanding for all purposes of the Merger Agreement, including the right to receive the Per Share Common Merger Consideration.
Each award of performance restricted stock units (“Performance RSUs”), other than awards of certain Performance RSUs that vest based on achievement of certain stock price thresholds (“Stock Price Performance RSUs”), issued under an Arlington Asset Equity Plan that is outstanding as of immediately prior to the Effective Time, (i) will, as of immediately prior to the Effective Time, automatically become earned and fully vested with respect to (x) the number of shares of Arlington Asset Common Stock subject to such award of Performance RSUs immediately prior to the Effective Time that would vest as if the applicable performance goals set forth in the applicable award agreement were achieved at maximum performance levels, and
all restrictions, limitations and conditions with respect thereto will lapse as of immediately prior to the Effective Time, plus (y) the number of shares of Arlington Asset Common Stock attributable to any dividend equivalent rights that have been accrued with respect to such award of Performance RSUs but are unpaid as of immediately prior to the Effective Time and (ii) will, with respect to the number of shares of Arlington Asset Common Stock determined in accordance with the immediately preceding clause (i), as of the Effective Time, be treated as a share of Arlington Asset Common Stock for all purposes of the Merger Agreement, including the right to receive the Per Share Common Merger Consideration.
At the Effective Time, each Stock Price Performance RSU that is outstanding and unvested as of immediately prior to the Effective Time, (i) will, as of immediately prior to the Effective Time, become earned and fully vested with respect to (x) the number of shares of Arlington Asset Common Stock subject to such Stock Price Performance RSU award that would vest as if the performance goals set forth in the applicable award agreement were achieved at the actual level of performance, and all restrictions, limitations and conditions with respect thereto will lapse as of immediately prior to the Effective Time, plus (y) the number of shares of Arlington Asset Common Stock attributable to any dividend equivalent rights that have been accrued with respect to such award of Stock Price Performance RSUs but are unpaid as of immediately prior to the Effective Time and (ii) will, with respect to the number of shares of Arlington Asset Common Stock determined in accordance with the immediately preceding clause (i), as of the Effective Time, be treated as a share of Arlington Asset Common Stock for all purposes of the Merger Agreement, including the right to receive the Per Share Common Merger Consideration.
Each award of deferred stock units with respect to shares of Arlington Asset Common Stock granted under an Arlington Asset Equity Plan that is outstanding as of immediately prior to the Effective Time (i) will, as of immediately prior to the Effective Time, become fully vested and all restrictions, limitations and conditions with respect thereto will lapse as of immediately prior to the Effective Time and (ii) will, as of the Effective Time, be treated as a share of Arlington Asset Common Stock for all purposes of the Merger Agreement, including the right to receive the Per Share Common Merger Consideration.
The obligation of each party to consummate the Merger is subject to a number of conditions, including, among others, (a) the approval (the “Arlington Asset Shareholder Approval”) of the Merger Agreement, including the Plan of Merger (as defined in the Merger Agreement), and the transactions contemplated by the Merger Agreement, including the Merger, by the affirmative vote of a majority of the votes cast at the Arlington Asset Shareholders Meeting (as defined below) in accordance with the Virginia Stock Corporation Act and the Organizational Documents of Arlington Asset, (b) the effectiveness of a registration statement on Form S-4 to register the issuance of EFC Common Stock, EFC Series D Preferred Stock and EFC Series E Preferred Stock in connection with the Merger, (c) the approval for listing on the New York Stock Exchange as of, subject to official notice of issuance, or prior to immediately following the Effective Time of the shares of EFC Common Stock, EFC Series D Preferred Stock and EFC Series E Preferred Stock that will be issued in connection with the Merger, (d) the certificates of designations classifying the EFC Series D Preferred Stock and the EFC Series E Preferred Stock having been filed with and accepted for record by the Secretary of State of the State of Delaware, (e) the respective representations and warranties of the parties being true and correct, subject to the materiality standards and other qualifiers contained in the Merger Agreement, (f) each party’s compliance in all material respects with their respective covenants and agreements set forth in the Merger Agreement, (g) the absence of a material adverse effect with respect to either Arlington Asset or EFC, (h) the receipt by each party of (1) an opinion from the counterparty’s legal counsel that such counterparty has been organized and operated in conformity with the requirements for qualification and taxation as a real estate investment trust (“REIT”) under the Internal Revenue Code of 1986, as amended (the “Code”), commencing with the taxable year ended December 31, 2019, and (2) a tax opinion from such party’s own legal counsel that the Merger will qualify as a “reorganization” within the meaning of Section 368(a) of the Code, (i) the Director Designee (as defined below) having been appointed to the EFC board of directors effective as of the Effective Time and (j) the delivery of certain documents and certificates.
Each of the parties to the Merger Agreement has made certain customary representations, warranties and covenants. Among other things the Merger Agreement provides that each of Arlington Asset and EFC will, until the Effective Time and subject to certain agreed-upon exceptions, maintain its status as a REIT and use commercially reasonable efforts to operate their respective businesses in all material respects in the ordinary course, preserve substantially intact its current business organization and preserve key business relationships. Each of Arlington Asset and EFC is subject to restrictions as specified in the Merger Agreement on certain actions each company may take prior to the Effective Time, including, among other things, actions related to amending organizational documents, declaring dividends, issuing or repurchasing capital stock, engaging in certain business transactions and incurring certain indebtedness. In addition, Arlington Asset has agreed to, and agreed to cause the board of directors of Arlington Asset to, take all actions necessary prior to the Effective Time to terminate the Arlington Asset Shareholder Rights Agreement, dated July 5, 2009, as amended, and any Rights (as defined therein) and any other rights outstanding thereunder.
The Merger Agreement contains a “no-shop” provision, which prohibits Arlington Asset and its subsidiaries from, among other things, (a) initiating, soliciting or knowingly encouraging or facilitating the making of a competing proposal; (b) engaging in any discussions or negotiations with any person with respect to a competing proposal; (c) furnishing any non-public
information regarding it or any of its subsidiaries, or access to its properties, assets or employees in connection with a competing proposal; (d) entering into a binding or non-binding letter of intent, agreement in principle or other agreement providing for a competing proposal; or (e) effecting a change of recommendation to Arlington Asset’s shareholders regarding the Merger or publicly recommending the approval of a competing proposal. The no-shop provisions are subject to certain exceptions as more fully described in the Merger Agreement, including the ability of Arlington Asset to engage in the foregoing activities under certain circumstances in the event that it receives a bona fide, unsolicited competing proposal.
At any time prior to obtaining the Arlington Asset Shareholder Approval, under certain specified circumstances, the board of directors of Arlington Asset may change its recommendation to Arlington Asset’s shareholders regarding the Merger if the Arlington Asset board of directors determines in good faith after consulting with its legal and financial advisors that the failure to do so would be inconsistent with its legal duties under applicable law, provided that Arlington Asset complies with the procedures set forth in the Merger Agreement. If such change of recommendation is made in response to a proposal that the board of directors of Arlington Asset has determined in good faith (after consultation with its legal counsel and financial advisors) is a “superior proposal”, after taking into account any adjustment to the terms and conditions of the Merger Agreement proposed by EFC in accordance with the Merger Agreement, Arlington Asset may terminate the Merger Agreement to accept such superior proposal upon payment of the termination fee described below.
The Merger Agreement contains certain termination rights for both Arlington Asset and EFC, including if the Merger is not completed on or before December 29, 2023, the failure to obtain the Arlington Asset Shareholder Approval, a change of recommendation of Arlington Asset’s board of directors regarding the Merger, and breaches by the other party of certain covenants. In the event of a termination of the Merger Agreement under certain circumstances, including a change of recommendation by the Arlington Asset board of directors regarding the Merger or Arlington Asset’s acceptance of a superior proposal, Arlington Asset would be required to pay EFC a termination fee of $5,015,050.
In accordance with the Merger Agreement, EFC will prepare and file with the U.S. Securities and Exchange Commission (the “SEC”) a Form S-4 registering the shares of EFC Common Stock, EFC Series D Preferred Stock and EFC Series E Preferred Stock issuable in the Merger, and Arlington Asset will prepare a mutually acceptable proxy statement with respect to the special meeting of Arlington Asset’s common shareholders to be convened for purposes of approving the Merger Agreement, the Merger and the other transactions contemplated by the Merger Agreement (the “Arlington Asset Shareholders Meeting”). The proxy statement will be included in the Form S-4 and will contain, subject to certain exceptions, the recommendation of the Arlington Asset board of directors that Arlington Asset shareholders vote in favor of approval of the Merger Agreement, including the Plan of Merger, and the transactions contemplated by the Merger Agreement, including the Merger.
In the Merger Agreement, EFC has agreed to take all necessary corporate action so that upon and after the Effective Time, the size of the board of directors of EFC will be increased by one member, and Arlington Asset will designate one of its pre-Merger directors (the “Director Designee”) to serve on the board of directors of EFC until the 2024 annual stockholders meeting of EFC, at which point EFC has agreed to re-nominate the Director Designee to stand for election for a subsequent term.
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 full text of the Merger Agreement, which is filed as Exhibit 2.1 to this Current Report on Form 8-K and is incorporated herein by reference.
The representations and warranties of each of the parties set forth in the Merger Agreement have been made solely for the benefit of the other parties to the Merger Agreement and such representations and warranties should not be relied on by any other person. In addition, such representations and warranties, covenants and other agreements (a) have been qualified by disclosures made to the other parties in connection with the Merger Agreement, (b) are subject to the materiality standards contained in the Merger Agreement that may differ from what may be viewed as material by investors and (c) made only as of the date of the Merger Agreement or such other date as is specified in the Merger Agreement.