EVIO Inc (EVIO)

[Sunrae]

Following up on my previous post (#61943), I now believe a Steep Hill EVIO merger probably isn’t in the cards. My thoughts are as follows

1) Waldrop’s employment agreement (https://www.lawinsider.com/contracts/5AK40uG2A94Vxq80OQqeoN/evio-inc/employment-agreement/2018-01-04) had a change of control premium in it that stated

“Upon a Change of Control, then the Company shall use reasonable efforts to obtain employment for Executive with the surviving entity in the Change of Control, and to the extent such employment cannot be secured, the Company shall pay Executive the payments provided for in paragraph 7(a)(i) and severance in the amount of twenty-six (26) weeks of Executive’s then-current Base Salary pro-rated stock grant as as provided in Section 3 multiplied by (2) the number of full years that Executive has been employed by the Company as of the termination date, up to a maximum amount of two (2) years of Executive’s then-current Base Salary. The severance shall be paid in accordance with the Company’s normal payroll practices. Except for the benefits above, Executive’s employment and this Agreement in all other respects shall terminate upon the Termination Date, and the Company shall have no further obligation of any kind to Executive;”

This change of control clause would have provided Waldrop two years of severance if he stuck around through the transaction and wasn’t hired after the merger (based on the comments on this message board, who would hire him to run NewCo?). At his last reported salary of $180K per year, that was worth $360K just to hang on through a transaction with Steep Hill.

2) His employment agreement also had an auto-renew provision beyond the initial 3-year term – i.e. it automatically renewed unless he wanted to leave or EVIO indicated to him that they didn’t want him around anymore. Regardless of the reason, EVIO would have had to file a 8K (announcement of material event) when that decision (by either Waldrop or EVIO) was communicated and since that wasn't done 30 days ago (which was required by his agreement), it seems that his decision to leave was very recent. One would also believe that given EVIO's financial position, EVIO would have had to file Waldrop's consulting agreement as a "Material Contract" given its presumed financial cost. Since they haven't disclosed the magnitude of Waldrop's consulting contract, I don't give much merit to the statement by Glauser that he will continue to work through a transition.

3) There is also the issue of the Steep Hill lawsuits in California and Delaware. If you read through those lawsuits, the former CEO of Steep Hill alleges that a group of shareholders (led by Andrew Rosenstein and Merida Capital) voted by proxy to 1) convert their preferred shares to common shares 2) voted to change out the Board of Directors / Steep Hill management, and 3) ran Steep Hill into the ground through a series of missteps and general incompetence (one of the best stupid things they allegedly did was they didn’t even get Steep Hill’s company name correct on the proxy agreements).

The key claim by Steep Hill’s former CEO is that Rosenstein and Merida didn’t have a majority of votes to take over the Board and the management of the Company. If that claim is indeed true, all of the corporate actions taken by Steep Hill by the "takeover" Board and Management team is invalid – i.e. they didn’t have the proper corporate authority to make those decisions because the underlying proxy given them that authority didn’t represent a majority of shareholder votes.

What is interesting is that this would seem to be a simple claim for Steep Hill to prove was incorrect – i.e. all Steep Hill would have to do is show the court the shareholder records / investment docs / etc that validated they had a majority of the vote when they did their proxy fight. However, in all of the court filings, they never raised that defense – in fact, in the California case they indicated that some of the shareholders never signed their investment agreements and thus weren’t subject to jurisdiction in California and that the case should be heard in Delaware.

How this impacts EVIO is that Steep Hill would have to disclose these lawsuits to EVIO during any merger talks. The challenge for Waldrop / Glauser is they have a fiduciary duty to EVIO shareholders and as a result, they would need to be 100% certain that the two Steep Hill lawsuits had no merit. Or more specifically, if the proxy shareholders didn’t have a majority vote of shareholders to takeover Steep Hill originally, the "Takeover" Board couldn’t enter into an agreement with EVIO to merge because they weren't "real" and didn't have the authority to approve the transaction.

If Waldrop / Glauser didn’t perform the due diligence to ensure that Steep Hill had the proper corporate authority to merge the entities, Waldrop / Glauser would fail their duty to EVIO shareholders by ensuring that the transaction was fair.

And since the lawsuits are public, and it seems that validating a proxy vote would be a simple thing for Steep Hill to verify, the EVIO Board would have the responsibility to validate the shareholder documents of Steep Hill during their due diligence to ensure that the proper corporate authorities were in place at Steep Hill.

If Waldrop / Glauser didn't do that and simply moved forward with the transaction, they would not be protected by the Sound Business Judgement protections afforded to officers and board members (https://en.wikipedia.org/wiki/Business_judgment_rule) and they could be sued by us, the EVIO shareholders for breaching their fiduciary duty.

To conclude, if there was a deal brewing between Steep Hill & EVIO, I have to think that Waldrop would stick around to get his 2 year severance deal ($360K is $360K . . .) But if the deal can’t go through because the Steep Hill Board can’t prove they have the authority to do the deal, and EVIO is out of money and can't pay Waldrop to be CEO (again), he might as well jump now before the doors close and the guys in the blue wind breakers raid the place.

Any thoughts?