October 14, 2007
BEA: The Defensive Analysis
On Friday, Oracle delivered a bear hug letter to BEA Systems, Inc. (BEAS) offering to purchase the company for $17 per share in cash. For those who collect bear hug letters, Oracle wasn't kind enough to release the letter itself instead releasing a press release announcing its delivery. BEAS followed up with two letters later in the day accessible here and here. BEAS's response was standard operating procedure -- "just say no", hire Wachtell and buy time to develop a strategy or continue to say no. Then came Carl Icahn, owner of 13.22 percent of BEAS disclosed his own letter rejecting the Oracle offer and requesting that BEAS put itself for auction or accept a preemptive bid at a compelling valuation (i.e., higher than Oracle's offer). Interestingly, Ichan filed the letter on Form DFAN14A meaning he is preserving his right to conduct his own proxy solicitation to in his own words "seek to nominate individuals for election as directors of the Issuer".
So, the question now is what are BEAS's defenses? First, the really interesting point. BEAS, a Delaware company has not had an annual meeting since July 2006. BEAS is in clear violation of DGCL 211. DGCL requires that:
If there be a failure to hold the annual meeting or to take action by written consent to elect directors in lieu of an annual meeting for a period of 30 days after the date designated for the annual meeting, or if no date has been designated, for a period of 13 months after the latest to occur of the organization of the corporation, its last annual meeting or the last action by written consent to elect directors in lieu of an annual meeting, the Court of Chancery may summarily order a meeting to be held upon the application of any stockholder or director.
This gives Oracle the ability to go to Delaware Chancery Court to force BEAS to hold a shareholder meeting for the election of directors. This is a hole in BEAS's defensive shield, but to make a full assessment let's look at the rest of its defenses:
BEAS has a shareholder rights plan (aka "poison pill") with a 15 percent threshold. It is both a flip-in and flip-over plan and is triggered If a person or group acquires, or announces a tender or exchange offer that would result in the acquisition of, 15 percent or more of BEAS's common stock. This is a standard form of the pill and nothing particularly unusual. For definitions of these terms see here.
The BEAS board is divided into three classes. Each class serves three years, with the terms of office of the respective classes expiring in successive years. The staggered board is a powerful anti-takeover device as it requires successive proxy contests over two years (for more on this generally see Lucian Bebchuk, et al., The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence and Policy)
Action by Written Consent:
Permitted. However, under Delaware law (DGCL 141(k)) the BEAS directors can only be removed for cause since BEAS has a staggered board. So, Oracle can't act by written consent to remove the board. Oracle will have to wait for two annual meetings in a row to gain a majority board. This is likely about sixteen months from now give or take.
Notice of Director Nominations
Notice of the nomination must be delivered not earlier than the close of business on the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting or the 10th day following the day on which public announcement of the date of such meeting is first made by the corporation. Oracle will thus have 10 days after the meeting is called to make its nominations.
DGCL Section 203
Applicable as BEAS has not opted out of it. This is the Delaware business combination statute, and given the presence of a poison pill here, it is not particularly relevant. This is because Oracle cannot acquire BEAS without gaining board approval and the board's accompanying redemption of the poison pill. Any board that would do this would also exempt out Oracle from this statute by approving their acquisition.
The bottom line is that BEAS has strong takeover defenses in the form of a staggered board in particular. But, Oracle can force BEAS to call a meeting rather quickly and under the nomination provisions above force an election to replace 1/3rd of the board. This would be a quick publicity gain for Oracle and provide it valuable momentum. If BEAS continues to adopt a scorched earth strategy and just say no to a deal (a route permitted under Delaware law), Oracle would then have to wait another year to elect a majority on the board to redeem the poison pill and agree for Oracle to acquire the company. Few companies have this staying power but Oracle did just such thing successfully in the PeopleSoft transaction. For those reading tea leaves, there Oracle revised its initial unsolicited bid for PeopleSoft (including one reduction) five times over eighteen months before finally acquiring it in late 2004. Oracle began at $16/share and ended at $26.50/share in the interim fighting off a DOJ suit to prevent the deal in 2004. And if Oracle wants to be particularly aggressive and risky, it can attempt to chew through BEAS's pill, a strategy which academic Guhan Subramanian thought viable and which he detailed in Bargaining in the Shadow of PeopleSoft's (Defective) Poison Pill. Perhaps BEAS's pill has the same defects (OK -- I'm kidding here, no lawyer would ever recommend this strategy -- way to risky).
For its part, BEAS will take particular pains (as it did in two press release on Friday) to avoid saying that it is up for sale. That is because, once the BEAS board decides to initiate a sale process, Revlon duties under Delaware law apply and the board is required to obtain the highest price reasonably available. By refusing to initiate a sale process, the board adopts a legitimate "just say no" defense. One which Delaware law permits, including the use of a poison pill to avoid a deal. Although, hope springs eternal and perhaps a case is on the horizon where Delaware where readopt Chancello Allen's opinion in Interco and reestablish supervision and court-mandated redemption of poison pills when sufficient time has passed and they are being used solely as a shield. But don't hold your breath.
Ultimately, I predict Oracle will attempt to put pressure on the BEAS board by initiating litigation in Delaware to hold a BEAS annual meeting and running a proxy contest coupled with a tender offer to replace the 1/3rd of the board up for election then. If Oracle wins it will likely put enough pressure on BEAS to reach a deal. Particualrly with Icahn chomping at the bit. Expect BEAS to resist until then knowing that Oracle has, in the past, met such resistance with increased consideration
Technical Tidbit: Any agreed acquisition will likely have to be pursuant to a tender offer rather than a merger. This is because a company that is not current in its financial reporting (i.e., BEAS) can be the subject of a tender offer but, because of an SEC staff interpretation of the proxy rules, that company may not be able to file and mail a merger proxy and thus cannot hold a shareholder vote on the merger.
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Professor Davidoff, A question for you on DGCL 211: When does it become ripe to sue to force an annual shareholder meeting under DGCL 211? And, what does the shareholder need to demonstrate/argue to win a court order for a meeting?
Posted by: David Connor | Apr 9, 2008 9:37:41 AM