September 6, 2007
Leap's Defensive Weakness?
Earlier this week, MetroPCS Communications, Inc. announced that it had proposed a strategic stock-for-stock merger with Leap Wireless International. MetroPCS is proposing to offer 2.75 shares of MetroPCS common stock for each share of Leap valuing Leap's equity at approximately $5.5 billion. For those who collect bear-hug letters, you can access the fairly plain vanilla one here. (Aside, showing my M&A geekiness, I've been collecting these for years; my pride and joy is one one of the extra signed copies of Georgia-Pacific Corp.'s bear-hug for Great Northern Nekoosa Corp., one of the seminal '80s takeover battles).
As a preliminary matter, MetroPCS phrased the offer as a merger rather than an exchange offer or just plain offer in order to avoid triggering application of Rule 14e-8 of the Williams Act which would require it to commence its exchange offer within a reasonable amount of time. This is yet another bias in the tender offer rules towards mergers which doesn't make sense -- the SEC would do better to promulgate a safe-harbor for these types of proposals so an offeror has more public flexibility in proposing a transaction structure. Although, at this point, all of the actors here, except the public, know what MetroPCS means and why they are using this language.
I was also browsing through the Leap organizational and other documents this morning to see how takeover proof it is. Leap is a Delaware company and it has not opted out of Delaware's third generation business combination statute DGCL 203. But it has no staggered board or a poison pill (though as John Coates has academically observed it still can adopt one). While Leap's directors can be removed with or without cause, there is a prohibition on shareholders acting by written consent. This, together with a prohibition on shareholder ability to call special meetings, would mean that MetroPCS would have to wait until next year's annual meeting to replace Leap's directors. And Leap could force MetroPCS to do so by adopting a poison pill. So, Leap's ultimate near-term vulnerability boils down to whether its shareholders can call a special meeting. Here is what Leap's by-laws say about the shareholder ability to call special meetings:
Section 6. Special Meetings. Special meetings of the stockholders, for any purpose, or purposes, unless otherwise prescribed by statute or by the Certificate of Incorporation, may be called by the Chairman of the Board of Directors, the Chief Executive Officer or the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolution is presented to the Board of Directors for adoption). Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice of such meeting.
Does everyone see the problem here? It looks like a typo -- instead of "prescribed", the drafter here probably meant "proscribed". So, instead of limiting the calling of special meetings, by changing one letter the clause expands shareholder power provided the certificate or Delaware law permits Leap shareholders to call these meetings. Here, Article VIII of the certificate does not allow it. So we are down to Delaware. DGCL 211(d) is the relevant statute, and it states:
Special meetings of the stockholders may be called by the board of directors or by such person or persons as may be authorized by the certificate of incorporate or the by-laws.
A bit circular, but it can be safe to say that Leap probably dodged a bullet here: DGCL 211(d) does not appear to specifically authorize stockholders to call a special meeting. And, in any event, Leap's board has the power to amend its by-laws although doing so in the middle of a battle for corporate control has its own legal and political ramifications. Ultimately, though, the lesson here is how one (intentional or unintentional) letter can make a very big difference -- be careful out there.
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Ouch! Not to say this makes sense (at all), but they will probably argue that the phrase is intended to modify the permitted purposes of the meeting, not who could call it. They also would argue that, to the extent the bylaw is inconsistent with the charter, the charter trumps... so it doesn't matter what the bylaw says.
Take a look at Lion's Gate v. Image Entertainment for more transactional lawyer goofs that came to light during a contest for control.
Posted by: Steve H. | Sep 6, 2007 9:10:50 AM