Wednesday, May 23, 2007
Alcan, Inc. yesterday filed with the SEC its response to Alcoa's $27 billion unsolicited offer to acquire the company. Alcan disclosed in the response that its board unanimously recommended its shareholders reject the Alcoa offer calling it "inadequate in multiple respects." The response document (called a Directors' Circular) is a fine piece of work and the financial sections a model for these things; these were presumably prepared by Alcan's investment bankers JPMorgan Securities Inc., Morgan Stanley, RBC Capital Markets Inc., and UBS Securities LLC. Two things caught my eye in this response:
1. Poison Pill. Alcan is taking the position that Alcoa's offer does not meet the definition of “Permitted Bid” under its shareholder rights plan (also known as a poison pill). To qualify as a “Permitted Bid” under the rights plan and avoiding triggering it, the Alcoa offer must contain an irrevocable and unqualified provision to the effect that no Alcan common shares may be taken up or paid for prior to the close of business on a day which is not less than 60 days following the date of the offer. Alcan is asserting that, "[t]he Alcoa Offer, while open for more than 60 days, does not contain an irrevocable and unqualified no take-up provision in respect of the first 60-day period. The Alcoa Offer is therefore not a 'Permitted Bid' under the Rights Plan." Alcoa's response is likely to amend its offer to respond to Alcan's assertion, so Alcan's position will only buy it a few weeks of time. [NB. The Alcan rights plan is different than U.S. ones in that it permits a bid to proceed without triggering the rights plan on the above basis; this is a requirement of Canadian securities regulators who permit a Canadian public company to employ a rights plan only to gain enough time for their shareholders to consider an offer, and after a period of 40-60 days force the company to redeem the rights or terminate the plan].
2. Inadequacy Opinion. Morgan Stanley has delivered an opinion to the Alcan board that the "the consideration to be received by holders of Alcan Common Shares pursuant to the Alcoa Offer is inadequate from a financial point of view to such holders." An inadequacy opinion is the opposite of a fairness opinion. It is often used outside the United States by targets fending off unsolicited bids. But you don't often see them here. One reason offered by practitioners for this is that by stating the price is inadequate, a board legally undermines a "Just Say No Defense." By rejecting an an offer based on price, a board implies that this was determinate in its decision and there is consequently a higher price at which it will agree to an acquisition. I'm not sure about the concerns, the Delaware courts last invalidated a "Just Say No Defense" in 1988 in Interco and that case has dubious validity at best in light of subsequent Delaware decisions (see City Capital Associates v. Interco Inc., 551 A.2d 787 (Del.Ch.1988)). Nonetheless, in Canada a "Just Say No" defense is not permitted, takeover defenses can only be used to provide a limited amount of additional time for shareholders to consider a bid. The Alcan board therefore did not face the same calculus a Delaware company does.
By the way, inadequacy opinions have the same problems as fairness opinions. Since financal valuation is a subjective exercise and there are no set agreed guidelines or practices for it, there is substantial leeway for investment banks to arrive at their clients desired conclusion. This is particularly true in light of the typical investment bank contingency-based fee arrangement. Here, the contingency component may not have been an issue as Morgan is aiding the defense of the company and not advising on its acquisition, but still Morgan did not disclose its fee structure in the Directors' Circular. (The SEC will oftentimes force a target to correct this omission).