M & A Law Prof Blog

Airgas Appeal

The Airgas appeal before the Delaware Supreme Court gets underway in about 30 minutes (care of Courtroom View Network).  In the meantime, Lucien Bebchuk and his co-authors put a post on the Harvard Corporate Governance Network blog describing their work on staggered boards that figured so prominently in Ted Mirvis argument before the Chancery Court.  They highlight what they concluded, and, importantly, what they didn't conclude.  

Back in 30 minutes when the fun starts.

-bjmq

 

The Supremes...sitting en banc.

Ted Mirvis is now making the argument for Airgas

"For over 100 years everyone has believed that the terms of a staggered board are three years."

Ridgley:  Are you arguing that a year term must be exactly 365 days?

Mirvis:  No, not exactly 12 months, but if there are situations where it is inadvisable to have a meeting exactly 12 months apart that's okay, but not without limits.

Redgley:  But, what is the limit?

Mirvis:  Should be worked out on a case by case basis.

*** 

Berger:  Could directors move the annual meeting date by 6 months for business reasons?  

Mirvis:  If the directors wanted to do it, there would be no one to complain.  Stockholders can't do it if it deprives a director of his/her term because the term is a creature of statute.

***

Mirvis is arguing that this is a question of statutory interpretation and not necessarily one of interpretation of the charter.

Holland, helping out Mirvis with friendly questions:

 

Essential Enterprises makes another appearance.  You might as well read it.

Bebchuk et al's post gets a shout-out.  You should read that, too.

Mirvis is done.

Air Products' counsel making his case:

Per 211, the time and place of the annual meeting should be set per the manner established in the bylaws.  Now making a textual argument interpreting the charter in support of his position.  If Airgas is right, then none of the words in the charter (contract) don't matter.

Chief Justice Steele:

But only to the extent the charter is inconsistent with the statute, right?

Discussing the Seitz opinion in Essential Enterprises, again.

Berger asking questions that sound sympathetic to Airgas' position:

 Discussions of the meaning of the ABA form book for public company charter docs.

Through all the back and forth, it's not exactly clear where the Supremes are in their thinking - whether they have latched onto Airgas' "it's all about the statute and common understanding" or with Air Products' "we're only doing a plain reading of the charter" argument.  Then again ... they let Air Products' counsel make his argument almost unheeded for the last five minutes.  

Mirvis is back now for a minute making the same common understanding argument.  I think his argument that because Air Products has the same charter language as Airgas that it somehow disqualifies Air Products' interpretation of Airgas' charter isn't all that useful.  

... and that's it!  

Airgas and the Supremes

You'll remember that Airgas lost in the Chancery Court on the question whether or not the terms of its staggered board were for three calendar years or for that period of time required for three shareholder meetings to occur.  The two turn out to be different.  They've taken that issue to the Delaware Supreme Court where no doubt they will be making another version of the argument that the court should not interpret the plain language of the charter but rather a more ... common understanding.  As I noted before, that's not an argument that will likely carry the day.  Nevertheless, they are before the court this morning and, thanks to the crew over at Courtroom View Network, I'll be watching live. 

Given that the board of Airgas has already begun "discussions" of a sort with Air Products one wonders why they are pursuing this appeal.   I suppose if they win, they think they can just walk away from the talks about the talks. 

Anyway, oral argument is scheduled for 10:00am.

-bjmq

Update:  10:00am - tomorrow, Nov. 3!  That's what happens when you're on leave.  The calendar becomes a blur. 

Hostile Deals and Business Risks: More on BHP and Potash

BHP Billiton's hostile bid for Potash Corporation of Saskatchewan continues to provide interesting lessons for M&A buffs.  You can’t underestimate the power of a hostile deal, especially a cross-border one with regulatory uncertainty, to raise enormous amounts of risks for both sides.

For Potash Corp this week has brought both good and bad news.  The good news is, potash (the mineral) is in high demand, with Potash Corp reporting stellar quarterly profits. The bad news is that, in a weird twist not often seen in hostile deals, the stock of Potash Corp may not be trading as high as it should be (i.e. the fundamental value isn’t reflected in the current stock price) because of the uncertainty surrounding the BHP bid. In fact, Potash’s Q3 investor presentation spends much time driving home this point, providing a “hypothetical unaffected stock prince analysis” and honing in on the inadequacy of BHP’s offer.

Potash Corp investors that are hoping that as a result of the company's strong earnings BHP would raise its offer may not see that happening anytime soon. Recent reports indicate that, in addition to Saskatchewan, the Canadian federal and other provincial governments may get in the way of any possible takeover by a non-Canadian buyer.  Despite the fact that BHP’s offer is likely too low at the moment in light of the improving trends in fertilizer prices, based on statements (“I think we're going to get screwed” ) by a source allegedly close to BHP, it appears raising the offer is not likely at the top of their list given the tense negotiations with the Canadian government.  Of course, BHP issued a statement trying to distance itself from this comment, stating that "We have absolute confidence in the integrity of the Investment Canada process. We continue to have ongoing negotiations with the Investment Review Division, but we do not comment on these discussions in the media.”  We will see on November 3rd when the Canadian authorities complete their review of the bid.

BHP and its management are under a lot of presssure with this deal.  In addition to the problems they are encountering with the Canadan government, if they lose this deal, it will be the second big hostile deal that they have failed to complete in the last two years. Furthermore, losing out on the Potash deal will be painful and costly given the amount of resources they have devoted to it over the past several months.

In the meantime, Potash Corp’s CEO is also trying to calm things down, indicating that the company is looking for a white knight and has engaged in “very active conversations about alternatives to BHP’s hostile offer.”  Given the way the things are going in Canada with the BHP bid, it will be interesting to see whether these other options involve foreign buyers.

-AA

Nationalism and a Shakedown? More on BHP Billiton and Potash

As devoted readers know, we’ve spent a lot of time covering BHP Billiton’s hostile bid for Potash (see for example this, this, and this).  The deal is a classic example of cultural issues in cross-border transactions and the risks that arise in deals where government approval plays an important role.  Not only are the parties dropping cash on the people of Saskatchewan, but the provincial government, as Brian noted last week, is wading deeply into this deal.  In addition to last week’s shenanigans, the Saskatchewan Premier Brad Wall is playing the nationalist card in today’s press release urging the Canadian federal government to block the deal, stating that BHP’s former Chair views Canada as a “Branch Office” and that

"[I]t's up to our federal government to ensure we retain Canadian control of our natural resources and that we don't become a ‘branch office,' like BHP apparently sees us," Wall said. "Mr. Argus' words and BHP Billiton's apparent view of Canada should give the federal government plenty of pause as it considers its response to the largest foreign takeover in Canadian history. If Australian business leaders like Mr. Argus are concerned about ceding too much control of Australia's natural resources to foreign control, shouldn't our government feel that same concern about Canada's resources?"

Some conservatives in Canada are now accusing Saskatchewan of becoming the next Venezuela (going a bit overboard, no??) for allegedly asking BHP to pay a billion dollars of potential lost taxes up front…Let the fun continue.

-AA

Sask Premier on BHP Bid

"In the interests of Saskatchewan ... we must say no to this hostile takeover."

More cargo, please.

-bjmq

 

Statutory Fiduciary Duties, Unocal, and Revlon outside Delaware

I've written on this before (and also here, and here).  In the 1980s during the great takeover boom and hollowing out of the industrial heartland, many states adopted amendments to their corporate codes that codified directors' fiduciary duties, so-called "constituency statutes".  In general, these provisions made it clear that a director need not "maximize shareholder value."  Rather, in complying with their fiduciary obligations, directors may take all sorts of things into consideration - the impact of their decisions on various constituencies, including employees, the community, the environment, the color of the sky, whatever.  

When these statutes were first passed, they were heralded as way to protect jobs, etc.  Earlier this year, Michigan passed one hoping it would protect local jobs from corporate raiders.  Lots of other states have similar constituency statutes.  For example, Oregon has one (Sec. 60.357).  You can find them all over.  In general, these statutes reject Unocal and Revlon as binding on directors of corporations in those jurisdictions.  

My problem with these statutes is that they strike me as a bit of a head fake.  While they certainly give boards the power they need to protect local communities, etc should they so desire, they don't actually require directors to protect those constituencies.  In effect, such statutes, simply give directors another fiduciary lever to pull when negotiating with a potential acquirer.  

I've said this before, but you know a board might be very concerned about the impact of a potential acquisition on employees and the community when the bid is $69.  At $75, the board's concerns about the impact on the community might start to fall away. Why not move the HQ to Paris?  It's so much nicer there than Cambridge.   At $85?  Employees ... we have employees?!  

There's no requirement that a board share the incremental price increase with those stakeholders who will lose out when a transaction is ultimately done.  Does anyone really think that a board, having invoked this provision to say no, will then turnaround a cut a check to the local community the day after it accepts an offer to sell?  In the end, the price paid goes to shareholders, not to the employees or the community or the environment.  To the extent these statutes get sold to legislators as important tools to protect local companies (and jobs and communities) from outside raiders, they are, in that sense, a bit of a scam.  These statutes put all the cards into the hands of directors.  And that's fine, if that's what you want to do.  

Along those lines, I spent the afternoon in the MA Business Litigation Session yesterday with a couple of students.  We went to observe motions being argued in the consolidated case against Genzyme.  You'll remember that Genzyme and its directors were sued (8 lawsuits!) after they turned down a friendly merger proposal from French Sanofi (this is before Sanofi went hostile).  

In their complaints, the plaintiffs made a variety of allegations of the sort you might expect - by not accepting or negotiating the offer from Sanofi that the board violated is fiduciary duties to "maximize shareholder value" [Revlon], etc.  Here's the thing, though.  Massachusetts has a constituency statute (156D, Sec. 8.30).

Section 8.30. GENERAL STANDARDS FOR DIRECTORS

(a) A director shall discharge his duties as a director, including his duties as a member of a committee:

(1) in good faith;

(2) with the care that a person in a like position would reasonably believe appropriate under similar circumstances; and

(3) in a manner the director reasonably believes to be in the best interests of the corporation. In determining what the director reasonably believes to be in the best interests of the corporation, a director may consider the interests of the corporation’s employees, suppliers, creditors and customers, the economy of the state, the region and the nation, community and societal considerations, and the long-term and short-term interests of the corporation and its shareholders, including the possibility that these interests may be best served by the continued independence of the corporation.

So, here come the shareholders with the extremely premature claim that Genzyme's directors somehow violated their fiduciary duties to the corporation because they turned down an unsolicited offer from Sanofi.   But, Genzyme is a MA corporation and MA is not Delaware.  If the directors act in good faith, and then come to the determination that it's in the best interests of the corporation and the city of Cambridge for Genzyme to stay independent, no court in MA will disagree with them.  The plaintiff shareholders simply have no case because (so far) the constituency statute is working exactly as intended.  

I think this is interesting, because just as labor, community, etc. have no case to prevent a sale notwithstanding the presence of a constituency statute,  neither do shareholders have a voice to push one.  The directors call the shots.  I often wonder, other than directors, what constituency these constituency statutes serve.

-bjmq

Adventures in Shareholder Democracy

It's been an exciting couple of weeks on the proxy fight side.   Yesterday, Barnes & Noble announced the results of the proxy contest instigated by Ron Burkle of Yucaipa.  Management board members were returned and the dissidents lost (WSJ).  But here's the thing - management directors got 44% of the vote and Yucaipa's slate got only 39%.  OK, that's still a win for management under current voting rules for a company without a majority voting provision in its bylaws.  However, given that Riggio undoubtedly voted the 30% or so that he controls in his favor, the fact that management could only come back with 44% of the quorum (not the total shares outstanding) is pretty pathetic.   And Burkle doesn't off easy either - apparently Aletheia sat on the sidelines, not voting a large percentage of its stock (FT.com).   Turns out when Burkle's legal team was arguing at trial over the summer that they hadn't made an agreement - even a wink and a nod - with Aletheia that they were right! Sorry I ever doubted them.  But I bet you Burkle is wishing he might winked and nodded a bit more.

Over at Airgas, the parties are going to court next week to argue over the question of the validity of the bylaw amendment that calls for a shareholder meeting in January 2011.  Air Products won that vote.  Air Products was also successful in getting their slate of directors elected ousting three incumbent Airgas directors, including Peter McCausland, the CEO and Chairman.   Not but a couple of days later the Airgas rump board expanded its size by one and reappointed McCausland to the board.  Sure, I know, the board has the authority to  expand or decrease its size and that it's perfectly within its rights to reappoint McCausland.  But, c'mon. 

All in all, it's been a couple of interesting weeks on the proxy contest front.  I suspect that neither the Barnes & Noble fight nor the Airgas/Air Products contest are near over.  

-bjmq

More on BHP/Potash deal

For readers who are following our posts (here and here) on BHP Billiton’s hostile bid for Potash, you should take a look at this post by the Deal Professor which considers the possible steps that Potash can take to deter BHP.  There is a lot of uncertainty in this transaction, including a host of regulatory and political issues.  For now, Potash’s sideshow litigation is moving along in U.S. federal court.  Potash has the opportunity to at least drag this out a bit with a ruling allowing the discovery process to proceed. 

-AA

More on the Potash Litigation

I'll just add this brief comment to Afra's good post on the state of the proposed Potash/BHP transaction. Potash has sued BHP in federal court over this BHP's hostile offer (Download Potash complaint). It's worth noting that since the complaint alleges various violations of the Williams Act, which you'll remember is the disclosure regime that governs tender offers, Potash is limited in the remedies that it can ask for.  The best remedy for inadequate or incorrect disclosure is .... well ... disclosure.  That's why the injunction that Potash is asking for is tied to slowing the offer down until the disclosure can be corrected.  In the real world of large NY law firms, that isn't a whole lot of time ... 24, 48 hours to kick out an amended Schedule TO?  

I have no doubt that if Potash could get an injunction preventing the offer from going forward, it would.  In fact, they hint at it in the complaint - suggesting the tender is coercive because BHP is only seeking 51% has not conditioned the offer on receiving more than 67% of the outstanding shares.  I think they're hoping that a judge will agree with them and enjoin the whole deal.  Well, that's not going to happen.  There's no obligation under the Williams Act that an offerer buy 100% of the outstanding shares, and buying less than all, without more, is just not coercive.   In any event, the courts have regularly ruled that the Williams Act is not intended to be a defensive weapon to protect management from unwanted bids.  A plaintiff is only going to get an injunction to block a bid if the preferred remedy - disclosure - isn't enough to avoid irreparable harm (see Rondeau v Mosinee Paper), and I don't see the irreparable harm here.

-bjmq

Hostile Cross-Border Deals: BHP's Pursuit of PotashCorp

A heated cross-border hostile takeover saga (with big US connections) has been occurring over potash (a key input for fertilizer and other agricultural products), and the moves by the various players should remind our readers of classic plays in the hostile takeover game.  In August of this year, British-Australian giant BHP Billiton (the jilted former suitor of Rio Tinto back in 2008) launched a $39 billion takeover bid for Canadian company Potash Corporation of Saskatchewan Inc. (“PotashCorp”).  PotashCorp’s board has been actively resisting BHP’s bid, putting forth the usual argument that BHP’s offer is opportunistic, inadequate and coercive, that Potash is better off alone rather than selling to BHP (without of course ruling out a potential sale at some point), and that “superior offers are expected to emerge.” PotashCorp’s management has not relied only on the standard letters, press releases and regulatory filings to resist BHP, as Brian noted earlier, PotashCorp’s CEO has also posted videos to communicate with the company’s shareholders.  Meanwhile BHP’s CEO is busy meeting with Canadian lawmakers and defending the Potash bid to his shareholders.  Now, there is also news that China’s Sinochem Corp. has allegedly hired expensive bankers (are there any other kind…) to explore a rival offer for PotashCorp. In light of potential competition from Sinochem, BHP’s CEO stated yesterday that BHP would be willing to walk away if the offer didn’t make sense for his shareholders.  Of course, this could also be because it is not clear that BHP’s shareholders buy the argument that the PotashCorp acquisition is the way to go (especially since there is a lot of evidence that big transactions like this rarely add value for the shareholders of the buyer).  Moreover, unlike these kinds of big deal involving US companies where shareholders of the acquirer often do not get voting rights, BHP may need shareholder approval for its offer under the UK Listing Rules which require approval from shareholders of the acquirer of larger (Class 1 transactions), meaning a transaction that amounts to 25 percent (or more) of any of the company‘s gross assets, profits, or gross capital, or in which the consideration is 25 percent (or more) of the market capitalization of the company‘s common stock. 

PotashCorp isn’t waiting around to see if Sinochem comes forward with an offer, it has also filed a suit in US federal court  seeking to block the takeover and accusing “BHP of making false and misleading statements in regards to how it plans to run the combined company in the future.”  PotashCorp has also raised the BHP shareholder vote issue, stating in its complaint that “BHP failed to disclose to PCS shareholders that on the day it launched its hostile bid, and thereafter in light of the market reaction to the offer price, it was reasonably likely that a vote of BHP shareholders – required under U.K. law for any acquisition where the consideration equals 25% or more of the acquirer’s market capitalization – would be required. Indeed, even BHP’s lowball bid was equal to approximately 23% of BHP’s market capitalization at the time the tender offer was commenced. BHP’s misleading omission deprived PCS shareholders of critical information in at least two respects: that approval of the transaction was uncertain, and that the need for shareholder approval could constrain BHP’s ability to increase its bid to a level closer to fair value.”

For M&A buffs, it is worth keeping an eye on this deal, there are a lot of moving targets and I wouldn’t be surprised if more legal, strategic and regulatory issues arise.

-AA

14D-9's and the 21st Century

It used to be that a board in response to an unwanted offer a board would just send a press release to PR Newswire and then file a 14D-9.  My ... how times have changed.   Potash is presently fending off an unwanted bid from BHP and rather than simply issue a press release, they go to YouTube! (H/T WSJ Deal Journal)  Here's Potash CEO Bill Doyle explaining the board's reasons for rejecting the offer:

It's a simple, low budget production.  I wonder why they thought it would be more useful than a press release.  It's certainly not easier - it takes CEO time and still requires a filing with the SEC.  Since you can't file a video clip, yet, the whole thing has to be transcribed before its filed.  Here's the filing for the video.  It's also not the kind of thing that CNBC or some other business network is going to want to air.  I wonder what it's for.

Oh and here's Bill Doyle on those dastardly arbitrageurs ... you know who you are ...

To be honest, I  still think the guys over at Woot! know how to use video to communicate with their customers and shareholders.  Can you imagine the impact of a monkey puppet rejecting BHP's bid?! 

-bjmq

Michigan's New Anti-takeover Law

I thought we had moved beyond much of this silliness.  I guess I was wrong.  According to the Detroit News, the Michigan legislature is "rushing to pass a bill that would require two-thirds of a Michigan insurance company's shareholders to approve its hostile acquisition by another firm."  

 The bill (Senate Bill 1174) requires that any acquisition of a domestic (Michigan) insurer with less than 200 employees would require the "approval " of at least 66.67% of the shareholders if the proposed transaction is not approved by the board of directors.  Initial query - how is it that shareholders are supposed to "approve" an acquisition agreement that has not been approved by the board?  Unless the new law includes a requirement that board sign merger agreements that they don't approve of, the only way for shareholders to "approve" of a hostile transaction is by tendering their shares.  Oh ... and the bill purports to make it illegal for any person to make a tender offer for the shares of a domestic insurance company if such tender would result in a change of control!  Thanks always for the small things: the House version of this bill sunsets the legislation on May 1, 2012.

My problem with these kinds of efforts, other than them being vanity pieces, is that they are often touted as pro-employment/pro-community laws and supported by both labor and community leaders.  The truth is, though, they are not.  You know - the buyer will lay everyone off and give nothing back to the community - that kind of thing.  For example – here’s a letter to the editor of the Detroit News making just that argument with respect to this bill.  

But nothing in the law requires the board to do anything for labor or the community.  Indeed, I suspect that at the right price the board of a target Michigan firm subject to this law might be happy to do a deal.  But, there is no requirement in the law that the board in doing a transaction seek guarantees of employment for labor or seek commitments from the buyer that it remain in the community.  In effect, all these legislative efforts really do is give managers an additional lever to negotiate a better deal for shareholders.  

If legislators think they are passing these laws to protect local communities and jobs, they should guess again.  America’s Rust Belt is littered with efforts like these. 

 -bjmq

Poison Pill Use Declines

A Reuters piece cites FactSet SharkRepellent data to note that the number of shareholder rights plans in effect is at the lowest since 1990.

The number of U.S. incorporated companies with a poison pill in effect hovered at 1,000 on Tuesday, hitting the lowest level since 1990, according to FactSet SharkRepellent. In comparison, the number of poison pills in force at the end of 2001 totaled 2,218.  ...

The drop in poison pills has mirrored a drop in other takeover defenses, such as having a board of directors with staggered election terms. At the end of 2009, only 164 companies in the S&P 500 had a staggered board, down from 294 at the end of 2001, according to FactSet SharkRepellent.

Interesting, but as Prof. Jack Coffee notes in the article, just because a board doesn't have a pill in place, doesn't mean it can't adopt one in about five minutes.   The drop in staggered boards, I think, is more significant.  Without the combination of the pill and the staggered board, the rights plan can delay, but not prevent, a hostile bid that is undertaken in conjunction with a proxy contest.  

On that front SharkRepellent notes on its website that the number of proxy fights has soared recently.

The number of proxy fights against U.S. companies has soared from 42 in 2004 to last year's record total of 133. 

-bjmq

Astellas Launches Proxy Battle

You'll remember that Astellas made a hostile offer for OSI Pharmaceuticals earlier in the month.  Along with their offer, they sued in Delaware to get the OSI board to consider the offer.  Well, the board has considered the offer ($52/sh cash, a 40% premium) and has rejected it.  Here's part of their statement:

"After carefully analyzing and considering Astellas' offer, the Board has unanimously concluded that the offer does not fully reflect OSI's fundamental, intrinsic value. We believe that OSI is a unique asset - the only profitable, mid-cap biotech company with a growing, high quality and fully integrated oncology franchise and a strong diabetes and obesity franchise which also has a proven track-record of success. The OSI Board takes its fiduciary duties seriously and will continue to do what's right for OSI stockholders. In that regard, the Board of Directors has instructed OSI management, with the assistance of the Company's financial advisors, to contact appropriate third parties in order to explore the availability of a transaction that reflects the full intrinsic value of the Company.".

The full text of the OSI board's letter to shareholders can be found here.

None too happy with that response, Astellas has now launched a proxy battle at the next annual shareholders meeting of OSI - putting up a slate of 10 director nominees whose jobs it will be to deliver the company to Astellas.  OSI responded this morning by simply stating, "OSI believes the Astellas director nominees’ only mandate is to support Astellas in acquiring OSI at an inadequate price."  OK, so not a full-throated endorsement.

This is starting to have the feel of the 1980s again.  Who said the hostile acquisition was dead?!

-bjmq

CF - Terra - Agrium Saga Continues

The Deal Professor has been following what he aptly calls "The Forever War" more closely than I, but I thought the recent developments worth commenting on, if briefly.

CF Holdings filed a Schedule 13D yesterday announcing that is has acquired 7.0% of the outstanding shares of Terra Industries.  From September 10-25, CF Holdings spent $340 million accumulating this block of stock by making a large series of $35,000 purchases on the open market, resulting in a perceptable increase in market interest in the company's stock.  Here's the Google Finance page, take a look at the volumes in the 1 month back chart to see what I mean).

Now, Terra doesn't have a shareholder rights agreement on file with the SEC, so an accumulation of 7% doesn't trigger a dilution as it might were the board of Terra to have adopted one.  This, of course, raises the question why the board didn't adopt one?  It can be done easily enough and certainly the board must have been aware that someone (guess who) was actively building a bloc.   A pill would have permitted the board to to continue to stave off an unwanted CF Industries bid while conserving cash that it might use in its attempted acquisition of Agrium.  

Instead, it announced a $750 million cash dividend to shareholders.  The dividend will make the company less attractive to CF, but at the cost of sapping the strength that Terra might otherwise need to acquire Agrium.  Oh, and given that CF is now a 7% shareholder, the potential hostile buyer gets a nice dividend of about $7.50 per share for its troubles. 

-bjmq

Update: Sorry, I'm always getting the parties in this three-way confused.  Randy (see comments) is correct. Agrium is attempting to acquire CF Industries. So, for my benefit:  Agrium is trying to acquire CF Industries who is trying to acquire Terra.  

  

Broadcom-Emulex Litigation and a Collection of Strine Musings

In the Broadcom-Emulex battle that was before Vice Chancellor Strine earlier this week, Vice Chancellor Strine took Broadcom to task for “punking out” by walking away from the litigation and structuring its offer in a way that prevents the court from ruling on the just-say-no defense.  Rather than make their offer conditioned on the board pulling the poison pill, Broadcom conditioned its offer on the board accepting a friendly deal.  Those, as Strine noted in an office conference (transcript) among the parties are two different animals.  The former being an interesting and live, judiciable question and the latter looking akin to “a TW Services or SWT?  It’s always messed up, because one was the plaintiff.  Right?”

Of course, there were more “Strine-isms” from the office conference.  By this time, it’s clear that Broadcom got the Vice Chancellor’s nose out of joint for wasting the court’s time.  The court is offering to allow defendants to continue their discovery even though Broadcom dropped out of the litigation after it completed its discovery.

Strine:  Get me your subpoena.  You guys come back to me if Broadcom changes its approach.  We will take stock at the end of next week.  I expect you all to speak with each other before you come back to me within the plaintiff camp.  You know, talk seriously.  Like I said, I am sensitive to the amount of time and effort on both sides that – of all the lawyers in the room, and the lost time with family, and lost sleep, and time spent in going through airport security, which is a brilliant thing.  When are they going to end the liquid ban?  I swear, I think you could get – if you could find a – somebody should run for president.  The idea is like any person – any employee of the airlines can shoot somebody if they have more than four liquid containers on their tray and  -- you could get elected on that.  At least you would have a very high percentage vote among air travelers.

The Vice Chancellor offering his opinion on the incentives facing the named plaintiff in the case who owns exactly one share of Emulex stock:

Strine: … And that’s why I’m telling you all I’m more interested, terms of expedition, if we get past this, in the supermajority bylaw.  But you want to be serious with yourselves and the clients.  I’m not talking about Mr. Middleton.  I’m not saying he doesn’t have, technically, standing, but in the room we – I could make him happy, you know, even with – I could take it.

Mr. Smith:  A Happy Meal would make him happy.

Strine:  I could – I could double the 11-dollar offer and make Mr. Middleton happy.  And he would be – the Middleton Fund would have a great return for the year.  And I mean – he could go to – I could recommend if he came here, he could go to Libby’s three days in a row, and he could eat well.  But after that, he would be out of skin in the game.

This transaction has been a battle from the very beginning.  Emulex has characterized the Broadcom in a negative light, even filing suit in a California court -- referring back to its unpleasantness with a previous CEO.  And now, Broadcom has walked away from its opportunity to force the Emulex board to pull its pill by dropping out of the litigation and forming its offer in a way that its lawyers should know does provide the court an opportunity to rule in favor of the plaintiffs left behind. 

For the record, given that Emulex adopted its pill and other defensive measures in response to early offers from Broadcom and not on a clear day, it’s possible that the Vice Chancellor could have ordered Emulex to pull its pill.  But now we’ll never know.

The Deal Professor has a good run down of the legal issues in this case.

 -bjmq

Update:  Broadcom drops its bid and punks out completely.

A Hostile "Mini-Wave"?

Steven Davidoff over at the Deal Professor has been doing a great job following the in's and out's of the legal issues related to the ongoing NRG/Exelon battle so I haven't spent much time on this trasnaction (here, here, here, and here).  Fortune magazine is pitching in with a a nice "inside the boardroom" view of the transaction as well.  One thing appears clear from the Fortune piece is that both parties knew from the get go that the $8.5 billion poison put would be a factor from the very beginning.   Nothwitstanding that potential roadblock, Exelon has pursued NRG relentlessly since last October.  Now it is all coming to a head in a familiar dance.  Exelon is purusing a proxy fight  and seeking to oust the NRG board.  NRG's board has been urging shareholders to resist Exelon's "inadequate" offer. 

All of this has started me thinking about the hostile takeover.  Just a year or two ago, people thought that the combination of staggered boards and the poison pill meant the end of the hostile takeover.  However, now that market capitilizations have fallen 60% of the all-time highs, there is some life in the hostile acquisition model.  The EMC/NetApp/Data Domain contest is an example as is the CF Industries/Agrium transaction.   This new "mini-wave" of hostile acquisitions differs from the hostile activity of the 1980s, though.  This time around the acquirers are strategic buyers with cash and not LBO funds.  For the time being leverage appears to be dead.  One wonders whether the nature of the buyers will affect the way these hostile transactions are received in the marketplace and by the courts.

-bjmq

It Only Takes One Flaw: Ventana and Kellwood

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.   

Icahn's Complaint: The Copy

You can download a copy of his complaint here.  My post analyzing it can be accessed here (or just scroll down). 

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’s 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.