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Sunday, October 28, 2007

BEA Systems: Icahn Goes to Delaware

On Friday, Carl Icahn disclosed the following letter to the board of BEAS (NB.  Caps are his own just in case the Board was reading the letter too quickly and didn't get the point): 

October 26, 2007

BEA Systems, Inc.

To The Board Of Directors Of BEA:

I am the largest shareholder of BEA, holding over 58 million shares and equivalents. I am sure that the BEA Board would agree with me that it would be desirable not to have to put BEA through a disruptive proxy fight, a possible consent solicitation and a lawsuit. This can be very simply avoided if BEA will commit to the two following conditions:

BEA SHOULD ALLOW ITS SHAREHOLDERS TO DECIDE THE FATE OF BEA BY CONDUCTING AN AUCTION SALE PROCESS AND ALLOWING THE SHAREHOLDERS TO ACCEPT OR REJECT THE PROPOSAL MADE BY THE HIGHEST BIDDER. BEA should not allow the stalking horse bid from Oracle to disappear (failure to take the Oracle bid as a stalking horse would be a grave dereliction of your fiduciary duty in my view). If a topping bid arises, then all the better. But if no topping bid arises it should be up to the BEA shareholders to decide whether to take the Oracle bid or remain as an independent Company - - not THIS Board, members of which presided over the reprehensible "option" situation at BEA, a Board that has watched while, according to Oracle in its September 20, 2007 conference call, Oracle's Middleware business "grew 129% compared with the decline of 9% for BEA".

BEA SHOULD AGREE NOT TO TAKE ANY ACTION THAT WOULD DILUTE VOTING BY ISSUING STOCK, ENTRENCH MANAGEMENT OR DERAIL A POTENTIAL SALE OF BEA. We are today commencing a lawsuit in Delaware demanding the holding of the BEA annual shareholder meeting before any scorched earth transactions (such as stock issuances, asset sales, acquisitions or similar occurrences) take place at BEA, other than transactions that are approved by shareholders. AS WE STATED ABOVE, THIS LAWSUIT CAN EASILY BE AVOIDED.

Your recent press releases regarding Oracle's proposal to acquire BEA indicate to me that you intend to find ways to derail a sale and maintain your control of the company. In particular I view your public declaration of a $21 per share "take it or leave it" price as a management entrenchment tactic, not a negotiating technique. BEA is at a critical juncture and it finds itself with a "holdover Board". BEA has not held an annual meeting in over 15 months and has not filed a 10K or 10Q for an accounting period since the quarter ended April 30, 2006. Those failures have arisen out of a situation that occurred under the watch of many of the present Board members. You should have no doubt that I intend to hold each of you personally responsible to act on behalf of BEA's shareholders in full compliance with the high standards that your fiduciary duties require, especially in light of your past record. Responsibility means that SHAREHOLDERS SHOULD HAVE THE CHOICE whether or not to sell BEA. BEA belongs to its shareholders not to you. Very truly yours, /s/ Carl C. Icahn ----------------- Carl C. Icahn

I don't yet have a copy of the complaint.  But to the extent Icahn's suit is limited to the prompt holding of the annual meeting he has a very good claim.  As I noted in my defensive profile of BEAS, BEAS has not held its annual meeting since July 2006.  BEAS is in clear violation of DGCL 211 which requires that such a meeting be held within thirteen months of the past one.  Since Schnell v. Chris-Craft, 285 A.2d 437 (Del. 1971), Delaware courts have been vigilant in enforcing this requirement although they have left the door open for a delay in exigent circumstances.  See Tweedy, Browne and Knapp v. Cambridge Fund, Inc., 318 A.2d 635 (Del. 1974) (stating that not all delays in holding annual meeting are necessarily inexcusable, and, if there are mitigating circumstances explaining delay or failure to act, they can be considered in fixing time of meeting or by other appropriate order).  Here, I suspect BEAS will argue that it cannot hold its annual meeting due to its continuing options back-dating probe.  And I suspect the reason why is that BEAS simply cannot correctly fill out the compensation disclosure for their named executives because they just don't know how the options backdating effected it.  If the company‚Äôs proxy statement says that shares were priced at one level when the options were granted and it turns out that the price was different than disclosed in the proxy statement, the statement would be a material misstatement and create liability under the Exchange Act.  Hence the delay. 

There are ways around this -- one is to omit the disclosure and obtain SEC no-action relief on the point.  The Delaware court may go this route -- forcing BEAS to obtain such relief.  But of course, if the court simply orders a date and leaves BEAS to resolve this issue with the SEC, it creates uncertainty over whether the SEC will actually grant such relief (I can't see why they wouldn't, but expect BEAS to argue this).  Otherwise, perhaps the Chancery Court can use its nifty new certification option to the SEC to find the answer.   Ultimately, Delaware has always been rather strict in requiring the annual meeting to be held within the 13 month deadline -- I expect it to be the case here in some form.  Icahn is thus likely to soon get a quick win to gain momentum in this takeover fight.  Not to mention the ability to nominate a slate for 1/3 of BEAS's directors -- the maximum number he can do so due to BEAS's staggered board.      

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