Wednesday, November 14, 2007
A stable product for M&A lawyers to shop to their clients in slowing times is the takeover defense review. Whether or not you agree with the legal regime we currently have in place which permits use of these defenses, the value of such a review is showing in two pending hostile deals: Roche's bid for Ventana and Sun Capital Partners rumored bid for Kellwood Co.
At first glance both companies would appear to have very strong takeover defenses. Both have a pre-offer poison in pill in place with a threshold of 20%. In addition, both have staggered boards. Kellwood's board, however, is only a two-class staggered board meaning half the directors are up for election at each annual meeting. Ventana has a three-class staggered board where roughly one-third of the directors is up for election at each annual meeting. The combination of the staggered board and the poison pill is a strong takeover deterrent. In the case of a recalcitrant target board it can force a potential acquirer to wage multiple proxy contests over several years to acquire a company; a lengthy and costly task.
However, Ventana has a hole in this defense that Kellwood does not. For each of these companies, their By-laws can be amended at a shareholder meeting to increase the number of directors on the board and fill these nominees with those elected by the bidder. This is a way to side-step the staggered board -- change the rules so you have more directors to nominate. In Ventana's case this can be done under their By-laws by a majority vote at the shareholder meeting. Kellwood on the other hand fills this hole in its By-laws by requiring a very hard to get approval of 75% of the outstanding shares to amend their By-laws.
So, should Roche continue its takeover bid into the new year, expect it to not only nominate directors for the open positions but to propose to amend Ventana's By-laws to expand the size of their board and fill it with the number of nominees sufficient to give Roche a majority. Per Ventana's proxy statement such proposals and nominations are due by December 7. Undoubtedly, this is a gap any M&A takeover lawyer would have pointed out prior to Roche's bid providing significantly more ability for Ventana to resist Roche's bid and implementing this change at a time when enhanced scrutiny under Blasius within Unocal would likely not be implicated.
NB. Thanks to M&A guru William Lawlor at Dechert who first highlighted Ventana's weakness to me in a recent Financial Times article. He also notes that Ventana's poison pill expires in March and Roche may file an for an injunction to prevent its extension. Under Delaware case-law, though, this is an action Roche is very unlikely to win.