Monday, September 28, 2009
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.
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.
Thursday, July 9, 2009
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.
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.
Update: Broadcom drops its bid and punks out completely.
Tuesday, July 7, 2009
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.
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.
Wednesday, October 31, 2007
Sunday, October 28, 2007
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.
Sunday, October 14, 2007
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.
Thursday, September 6, 2007
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.
Tuesday, August 28, 2007
A federal district court in Arizona has preliminarily enjoined the enforcement of the Arizona business combination statute and control share statute with respect to Roche Holding AG's hostile bid for Ventana Medical Systems Inc. (see the opinion here). This is the first court since the 1980s to hold a state anti-takeover statute invalid under commerce clause grounds (remember CTS and MITE from law school?).
In this case, Ventana was incorporated in Delaware but headquartered in Arizona and had substantial assets in that state. Arizona's third generation anti-takeover law, the Arizona Anti-Takeover Act, purports to cover Ventana since it has a substantial presence in the state. Roche sued in federal district court to have it declared unconstitutional and requested that enforcement of the statute be preliminarily enjoined. In granting this motion, the federal court found Roche to have a substantial likelihood of success on the merits because the statute applied to corporations organized under laws of states other than Arizona. Here the Court found that:
there is strong authority demonstrating that the Arizona statutes violate the Commerce Clause because the burden on interstate commerce “is clearly excessive in relation to the putative local benefits” to Arizona. In this case the burden on interstate commerce created by the broad application of Arizona statues includes the frustration and regulation generated by a tender offer made to a foreign corporation, such as Defendant. While Arizona clearly has an interest in protecting businesses that have significant contacts with Arizona, such as Defendant, Arizona clearly has “no interest in protecting nonresident shareholders of nonresident corporations.” In balancing such competing interests, the interference with interstate commerce created by the regulation of a foreign corporation controls. The instant case, based upon the Arizona statutes and their application to foreign corporations, is no different than the cases presented above as the Arizona statutes, while protecting businesses with significant contacts with Arizona, unreasonably interfere with interstate commerce based upon the regulation of businesses that are not incorporated in Arizona.
(citations omitted). The Court distinguished the Supreme Court's decision in CTS on the following grounds:
In CTS Corp., the Supreme Court upheld the constitutionality of Indiana’s Control Share Acquisition statute, which would impact the voting rights of an acquiring corporation in the event of a takeover of a target corporation, largely because the Indiana statute applied only to corporations organized under the laws of Indiana.
Thus, the difference for the Court here was the situs of incorporation for Ventana outsdie the state of Arizona. This opinion is therefore a strong statement in support of the internal affairs doctrine and should make life easier for M&A lawyers by more strictly confining the application of state takeover laws to companies organized in the state of their origin (although other federal cases from the '80s have held similarly - nice to know we are not going the other way though). And for those who engage in the race-to-the-bottom/race-to-the-top state corporate law debate, the case is a probably a good example of the need for a mediating and trumping federal presence in this debate. Here, I'll relate the historical tidbit that the Arizona Anti-takeover Law was initially proposed in 1987 by officials of Greyhound Corporation who claimed that they were the target of a hostile takeover.
Nonetheless, Ventana still can rely on its Delaware defenses including that state's business combination statute (DGCL 203) and the poison pill it has adopted. To be continued.
Thanks to Steven Haas for informing me of this decision.
Wednesday, August 15, 2007
Yesterday, AirTran reentered the bidding for Midwest Air Group. In a press release, AirTran announced an offer to acquire Midwest for $16.25 per share. The consideration under the new proposal would consist of $10 a share in cash and 0.6056 shares of AirTran common stock and values Midwest at $445 million in total value. As I write, AirTran's stock is trading at $10.49 valuing the offer at $16.35. The offer is slightly higher than the $16 a share offer from TPG Capital, L.P. the Midwest board announced on Monday that they were accepting.
My initial reaction is that AirTran management may want to read Bernard Black's classic Stanford law review article Bidder Overpayment in Takeovers. Professor Black ably analyzes the factors which go into the documented effect of bidder overpayment and the puzzling persistence of takeovers when studies have shown that they are at best wealth neutral for buyers. These include the classic winner's curse which is a product of information asymmetry and a bidder's consequent over-estimation of value (Think about competing with another bidder to buy a home). But it is also effected by other factors such as management optimism and uncertainty and simple agency costs (i.e., the risk of the acquisition is largely borne by AirTran's post-transaction shareholders). Some analysts have claimed that AirTran would be better positioned without Midwest, so perhaps these factors are in play here. Of course, we will only know the answer post-transaction if and when Midwest is acquired by AirTrans.
Finally, the Midwest board still has leeway to prefer the TPG offer. The Midwest board is governed by Wisconsin law, not Delaware and therefore the typical Revlon duties do not apply. In fact, the duties of a board under Wisconsin law in these circumstances have never been fully elaborated. Moreover, Wisconsin has a constituency statute which permits a board considering a takeover to consider constituencies other than shareholders, such as employees. The Midwest board has before invoked this constituency statute to justify rejection of Airtran's bid. It may do so again. And even if Revlon duties did apply, the Midwest board could make the reasonable judgment that AirTran stock was likely to trade lower in the future, and therefore Airtran's offer was not a higher one than TPG's all-cash bid. Here, the strong shareholder support for Airtran's stock component will make such a board decision harder to support. But AirTran still has a ways to go before it actually reaches an agreement to acquire Midwest.
Tuesday, August 14, 2007
Midwest Air Group, owner of Midwest Airlines, yesterday announced that it had determined to pursue an all-cash offer from TPG Capital, L.P. to acquire all of the outstanding shares of Midwest for $16.00 per share in a transaction valued at about $424 million. Midwest and TPG expect to execute an agreement by tomorrow, August 15. Midwest did not disclose it at the time, but it subsequently was reported that Northwest Airlines would be an investor in this transaction with "no management role" in the operations of Midwest. Miudwest's announcement comes on the heels of AirTran Holdings Inc.'s weekend disclosure that it had allowed its own "hostile" cash and stock offer valued at $15.75 a share to expire.
The market is still uncertain about the prospects of a completed deal. On the announcement, Midwest's stock actually closed down 1.62% yesterday at $14 a share. To understand why, one need only read this excerpt from a letter delivered yesterday to the Midwest board from its largest shareholder (8.8%) Pequot Capital:
We have significant concerns with this Board’s decision to pursue an all-cash proposal from a private equity firm and its consortium. We are not convinced that this taxable, all-cash indication of interest is superior to the enhanced cash and stock offer that you indicated was made by Airtran this past weekend. In addition, we fail to see how TPG and Northwest will be able to match the job creation and growth opportunities promised by Airtran for the benefit of Midwest’s employees, suppliers, customers and communities.
Midwest's behavior throughout this transaction has been problematical. Their scorched earth policy has produced clear benefits -- Midwest's initial bid was $11.25, but their "just say no" policy to AirTran has highlighted the problems with anti-takeover devices and their potential use to favor suitors. Midwest management may have succeeded in preserving their jobs with this gambit, but it may be to the detriment of its shareholders.
It is also to the detriment of AirTran. AirTran has now incurred significant transaction costs, including lost management time expended on this transaction, and, assuming the bidding is done, now has nothing to show for it: TPG is a free-rider on AirTran's efforts. Here, I must admit I am a bit puzzled as to why AirTran did not establish a toe-hold; that is a pre-offer purchase of Midwest shares. If they had taken this route, AirTran would have paid for its expenses through its gain from this pre-announcement stock purchase. But instead, AirTran purchased only a few hundred shares for proxy purposes. This may have been due to regulatory reasons, but if not, it appears to be poor planning by AirTran. And AirTran is not alone. Toeholds are common in Europe (KKR recently used the strategy quite successfully in the Alliance Boots Plc transaction), but in the United States they are less utilized due to regulatory impediments such as HSR filings and waiting periods, Rule 14e-5 which prohibits purchases outside an offer post-announcement, and Schedule 13D ownership reporting requirements. Consequently, one study has found that at least forty-seven percent of initial bidders in the United States have a zero equity position upon entrance into a contest for corporate control. M&A lawyers may do well, though, to advise bidders to rethink this hesitancy. For more on this issue, see my post, The Obsolescence of Rule 14e-5.
Friday, August 10, 2007
When we hadn't heard from you by Monday morning, we sent you a revised draft of the merger agreement we had been negotiating with you over the past several weeks. The only substantive changes from the version we had nearly fully negotiated with you related to the mechanics of the two-step transaction (first step tender offer and second step merger). We believe that all of the other substantive provisions had been negotiated with you and your colleagues, including the representations, covenants and termination provisions. . . . . We were disappointed to hear that as of Tuesday afternoon, Upper Deck had not yet even reviewed the draft.
At least as troubling, we were shocked to hear on our call with you Tuesday that Upper Deck is expressing an unwillingness to proceed with its tender offer. This is the very form of transaction for which Upper Deck sought and obtained judicial relief, so it is startling at this point in the process to be told that Upper Deck's new preference is to terminate its offer and proceed with a one-step merger, knowing full well that would require several months, expose our stockholders to transaction risk during that time and, giving effect to the time value of money, reduce the value of the consideration received by our stockholders.
We are eager to find out if we can execute a transaction with your client, and are hopeful that we can do so. However, as we have told you on several occasions, Upper Deck's behavior has raised an increasing amount of skepticism among our directors as to whether Upper Deck truly intends to acquire Topps, or whether it is simply taking steps to interfere with the current transaction with Tornante-MDP and otherwise harm Topps' business.
Upper Deck responded by disputing Topps' assertions, maintaining that it had committed financing and stating that the reason it was not able to comment on Topps's merger agreement on Tuesday was because "Ms. Willner, who is co-counsel . . . . was out of the office on Tuesday."
This last Upper Deck comment is sure to bring a laugh to any M&A lawyer. In this high pressure world, I've never heard of anyone using that excuse and actually meaning it. As an M&A lawyer you are always available. So, it's hard to know what is going on in Upper Deck's mind right now, but it appears to be stalling. But for what purpose is unknown. Perhaps it actually is unable to keep its financing in place or otherwise is pressing ahead to interfere with Topps' current bit to be acquired by the private equity firms The Tornante Company LLC and Madison Dearborn Partners, LLC. But the latter explanation seems a bit far-fetched -- Upper Deck has spent a lot of time and money simply to interfere with a competitor's deal.
Upper Deck's tender offer expires tonight at midnight. If you look in the amended tender offer statement, there are sufficient conditions in Upper Deck's offer that are unsatisfied that it will be able to let the offer simply expire and walk. If Upper Deck extends the offer, it will (to some extent) be an expression of its seriousness. Still, in its letter, Upper Deck again requested "due diligence materials (which have been repeatedly requested since at least April) so that Upper Deck may finalize its due diligence and analysis of Topps." If Upper Deck is indeed serious, this deal still has a bit more to go before an agreement can be reached. But Upper Deck only has so much time: the special meeting of Topps’ stockholders to consider and vote on the proposed merger agreement with the Tornante consortium is on August 30.
Final Note: Upper Deck may also be able to terminate its tender offer at any time. The key is whether the Williams Act tender offer rules prohibit this practice. The one court to consider this issue held that shareholders could not state a claim under the antifraud provisions of the Williams Act for a bidder's early, intentional termination of a tender offer because "[w]here, as here, the tender offer was not completed, plaintiffs have not alleged that the misrepresentations affected their decision to tender, they have not claimed reliance, [and] plaintiffs have failed to state a cause of action under § 14(e)." P. Schoenfeld Asset Management LLC v. Cendant Corp., 47 F.Supp.2d 546, 561 (D.N.J. 1999) vacated and remanded on other grounds Semerenko v. Cendant Corp., 223 F.3d 165 (3rd Cir. 2000). But, whether other courts would go so far in the face of an intentional withdrawal by a bidder is unclear. This is particualrly true if the bidder lacked an intent to complete the tender offer from the beginning.
Wednesday, August 8, 2007
The Wall Street Journal is reporting that the Japanese Supreme Court has upheld a landmark lower-court ruling affirming the use of a poison pill defense by Bull-Dog Sauce Co. The lower court had held that Bull Dog, a Japenese condiment maker, could employ the defense to fend off an unsolicited offer to be acquired from Steel Partners Japan Strategic Fund (Offshore) LP, a U.S. fund. Steel Partners is offering Yen 1,700 per share, a 25.8% premium to Bull Dogs's 12-month average closing share price. Steel Partners is one of the best-known takeover funds in Japan and is seen as a symbol of shareholder activism in that country.
Steel Partners had sued Bull-Dog alleging that the poison pill was discriminatory and therefore in violation of Japanese law. On June 24, 2007, 80% of Bull Dog's shareholders had voted to approve the issuance of stock acquisition rights underlying the poison pill at its annual general meeting of shareholders. Both the lower court and the Supreme Court apparently relied heavily on this vote to find that the poison pill was not discriminatory because the company's shareholders had approved it. According to the Journal:
Bull-Dog's defensive scheme gives all shareholders three equity warrants for each Bull-Dog share they own. But the firm bars Steel Partners from exercising its warrants, instead granting it 396 yen ($3.33) for each warrant -- a 2.3 billion yen ($19.3 million) payout for Steel Partners -- but making it impossible for the U.S. fund to take control of the Japanese company.
A prior Journal report also calculated that the poison pill will dilute the fund's holdings to less than 3% from more than 10% if exercised. Bull-Dog is now scheduled to redeem the warrants on Aug. 9. This is a clear loss for Steel Partners. But, as I stated in an earlier post on the lower court ruling:
The decision is a bit of a surprise since in at least two other cases the Japanese courts had invalidated the use of a poison pill. But the big difference here appears to be the shareholder vote. Poison pills are often decried as denying shareholders the right to make their own decisions concerning a sale of their company. Yet in this instance there was a vote which overwhelmingly validated use of this mechanism. And Bull Dog's pill is a relatively mild one providing for limited dilutive effect. The case can therefore be distinguished on these grounds and likely confined to justifying the use of a pill to fend off unsolicited bids in Japan in those instances where shareholders overwhelmingly oppose the transaction.
For U.S. purposes, the decision also highlights a more democratic use of the pill. One where shareholders get a say on its use to deter unsolicited offers. This is a path which many activists in the United States have called for. And it is one which permits shareholders a say in the important takeover decision, one they are today often deprived of. For more, see Ronald J. Gilson, The Poison Pill in Japan: The Missing Infrastructure.
Tuesday, August 7, 2007
The Topps Company, Inc. announced yesterday that it has been advised by The Upper Deck Company that the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, with respect to Upper Deck's offer to acquire Topps had expired without a second request, an event which would have delayed Upper Deck's bid by several months. The antitrust condition to Upper Deck's offer is now satisfied and Upper Deck can now proceed with its $416 million bid. Upper Deck's offer of $10.75 a share is materially higher than the current agreement Topps has to be acquired by Michael Eisner's The Tornante Company LLC and Madison Dearborn Partners, LLC for $9.75 a share in cash, or about $385 million.
Topps stated in its press release that "it continues to negotiate with Upper Deck to see if a consensual transaction can be reached." As I stated before, "[i]f and when [Upper Deck clears its offer with the antitrust regulators], expect the bidding for Topps to continue." The next move is Tornante's and Madison's. If they walk, they will split a break fee of $12 million, higher than the $8 million fee payable during the go-shop period when Topps initially spurned Upper Deck's bid.
Wednesday, August 1, 2007
The Topps Company, Inc. announced yesterday that it had postponed the special meeting of Topps' stockholders to vote on the proposed merger agreement with Michael Eisner's The Tornante Company LLC and Madison Dearborn Partners, LLC to August 30, 2007. The record date is now August 10, 2007.
Upper Deck's competing, higher bid is still in the HSR Act waiting period being reviewed by the FTC or DOJ. The waiting period under the HSR Act for the Upper Deck bid will expire at 11:59 pm ET on August 3, 2007, unless this period is earlier terminated or extended. Given this, Topps had no choice but to postpone its own shareholder meeting. By the time the Topps shareholder meeting is held, the FTC or DOJ will have decided whether to initiate a second request concerning the Upper Deck acquisition proposal; if a second request is made it would postpone the Upper Deck bid by several months at best. In a few days Topps board and its shareholders will thus be in a better position to assess the Upper Deck bid and choose. But the choice will become much harder if a second request is made forcing Topps shareholders to decide between a lower, certain bid and Upper Deck's less sure and delayed higher one. For more see Upper Deck Tries to Buy Time, Topps and Upper Deck: The Antitrust Risk.
Tuesday, July 31, 2007
Midwest Air Group, Inc., parent of Midwest Airlines, announced today that it has formed a special committee to explore strategic and financial alternatives for the company. According to the announcement:
While the board of directors has not changed its recommendation regarding the unsolicited exchange offer by AirTran Holdings, Inc., the committee intends to commence discussions with AirTran regarding its proposal to acquire all outstanding shares of Midwest. Additionally, the committee intends to hold discussions with other strategic and financial parties that have recently expressed interest in pursuing a transaction with Midwest.
Airtran's battle for Midwest has been one of the most vigorously fought takeover battles of this decade. The formation of a special committee by Midwest is likely driven by increasing shareholder protest at their board's scorched earth resistance to Airtran's "hostile" bid. Last week, hedge fund Octavian Management LLC, Midwest's largest shareholder with a 7.5% stake, called the Airtran bid "extremely compelling" and stated that it was "irresponsible and wrong for the company not to abide by its fiduciary responsibility to engage with AirTran" in negotiation. The Midwest committee will therefore serve to cover the board's liability exposure, but it is also likely to lead to a serious exploration of the AirTrans offer. If Airtran succeeds in acquiring Midwest it will be a powerful statement about the ability of any public company to "just say no" and resist a transaction, but it will also serve as a reminder of the immense transaction costs our current takeover system imposes by permitting the use of anti-takeover devices.
The Board of Directors of Bausch & Lomb Inc. yesterday responded in a letter to Advanced Medical Optics' proposal to acquire B&L for $75 per share in cash and AMO stock. B&L currently has an agreement to be acquired by affiliates of Warburg Pincus for $65 per share in cash.
In their letter, the B&L board and special committee expressed uncertainty as to the ability of AMO to complete an acquisition of B&L. ValueAct Capital, the owner of 8.8 million shares of AMO common stock, representing 14.7% of the outstanding AMO shares, has publicly stated it will vote against the acquisition. AMO is required to have its own shareholder vote on the proposal in order to approve the share component of the offered consideration. Given this completion risk, the B&L board stated that the $50 million reverse termination fee proposed by AMO was too low.
AMO had previously been designated by B&L as a party who B&L could continue to negotiate with despite the end of the "go shop" period in the Warburg Pincus merger agreement. However, in yesterday's letter the B&L board threatened to withdraw this status if AMO was not more cooperative. The effect of such a redesignation would be to require B&L, if it ultimately accepts the AMO bid, to pay Warburg a $120 million termination fee rather than the lower $40 million required if a bid was received during the "go shop" period.
B&L's actions appear to be appropriate considering the uncertainty surrounding the AMO proposal. However, the threat of a redesignation of AMO seems a bit odd -- such a move would only hurt B&L shareholders and make it harder for AMO to pay the consideration offered. It therefore seems motivated to assuage likely complaints of Warburg more than anything else. B&L is currently in discussions with AMO's shareholders concerning their intentions with respect to any AMO vote, and apparently is in a dispute with AMO concerning the provision of information to these shareholders. the actions of AMO's large shareholder have clearly thrown a monkey-wrench into AMO's bid and put them in the role of "decider" for this acquisition contest. Another victory for institutional shareholder activists.
Monday, July 30, 2007
The Managing and Supervisory Boards of ABN AMRO today announced that they would no longer recommend the Barclays offer to combine with ABN AMRO. Instead, the boards announced that they were not "currently in a position to recommend either" the Barclays offer or the Royal Bank of Scotland consortium "[o]ffers for acceptance to ABN AMRO shareholders". As at the market close on 27 July 2007, the Barclays offer was at a 1.0% discount to the ABN AMRO share price and the RBS consortium offer was at a premium of 8.5% to the ABN AMRO share price; 9.6% higher than the Barclays offer.
This essentially leaves the battle for ABN AMRO in the hands of its shareholders. Nonetheless, there are structural differences which may influence the contest. The RBS consortium is proceeding through an exchange offer structure (see the Form F-4 here, it is a nice precedent for a U.S./Dutch cross-border exchange offer). The Barclays offer is pursuant to a Dutch merger protocol. RBS has launched its offer and Barclays today stated that it intended to make its offer documentation available on August 6. Given the need for all of the parties to obtain regulatory and other approvals, it is likely that they will remain on the same timing track. Thus, ultimately, the contest now largely depends on the share price of Barclays increasing during this time period sufficiently to justify its acquisition proposal: an uncertain prospect in today's volatile markets.
Thursday, July 19, 2007
On Tuesday, The Upper Deck Company announced that had withdrawn its Hart-Scott-Rodino Antitrust Improvements Act notification filing related to its proposed acquisition of The Topps Company, Inc. Upper Deck stated at that time that it plans to re-file its notification today, July 19, 2007. Upper Deck had originally filed its HSR notification on July 2, 2007. By re- filing its notification with the FTC, Upper Deck now has another full 15 day period to discuss the transaction, and answer any questions raised by the FTC, the agency reviewing the HSR filing. Assuming Upper Deck does file today, the waiting period under the HSR Act will expire at 11:59 pm ET on August 3, 2007, unless this period is earlier terminated or extended.
Upper Deck stated that "its decision to withdraw and re-file its notification was prompted in part by the July 4th holiday and by additional factors outside of its control." Sometimes, companies withdraw and refile HSR notifications to correct or update information. But refilings also sometimes occur when companies want to give the FTC or DOJ more time to review the transaction in the hopes of avoiding a second request which would delay Upper Deck's bid by several months. This was likely the circumstances here. Upper Deck is desperate to avoid a second request so as to make its $416 million bid more compelling than the current agreement Topps has to be acquired by a The Tornante Company LLC and Madison Dearborn Partners, LLC for $9.75 a share in cash, or about $385 million. A refiling buys more time to convince the FTC that there is no antitrust problem with its transaction. And as I stated before in a prior post:
And the antitrust risk is clearly in both parties minds, as Topps 14D/9 filed today details that the substance of the parties' negotiations have concerned antitrust issues. Topps is requesting that Upper Deck agree to a $56.5 million reverse termination fee and a modified hell or high water provision (a provision in which Upper Deck would agree to sell or hold separate assets to satisfy governmental antitrust concerns). Upper Deck has resisted these provision, and the parties have agreed to suspend negotiations on the matter until the antitrust risk is clarified through the HSR process.
Topps was scheduled to hold a shareholders meeting to vote on the Tornante acquisition on June 28. But, the Delaware Court of Chancery enjoined the holding of the meeting to permit Upper Deck to commence its tender offer. Topps has yet to announce the new date for the meeting but has set the record date for the close of business on July 3.
For the time being, the deal is in the hands of the antitrust authorities. If and when they clear the transaction, expect the bidding for Topps to continue. In the case of a second request, Topps may try and push forward with the Tornante bid, perhaps with a sweetener from that consortium to hasten the process.
With its HSR refiling Upper Deck is signalling that a second request is still a very real possibility.
Monday, July 16, 2007
Fortis, RBS and Santander announced today that they intend to proceed with their proposed offer for ABN AMRO. The consortium left the consideration per ABN AMRO share being offered unchanged at €38.40 but raised the cash component to approximately 93% (€35.60 in cash plus 0.296 New RBS Shares for each ABN AMRO share). The offer values the equity of ABN AMRO at €71.1 billion or $98.03 billion.
The prior bid has been 79% cash. It was also conditioned upon a shareholder vote with respect to the LaSalle Bank sale and withheld €1 a share to cover costs for litigation over ABN's LaSalle bank unit. This condition and the withholding have been dropped in this bid in the wake of the Dutch court ruling upholding the sale of LaSalle Bank to Bank of America. Instead, RBS issued a press release today stating that the net cash received from the LaSalle sale will go to RBS. The new RBS consortium offer puts significant pressure on Barclays to raise its competing all-share bid which currently values ABN AMRO at about €65 billion.
ABN AMRO's securities are registered with the SEC and it has greater than 10% of its shareholders resident in the United States disqualifying the RBS-led group from using the SEC's cross-border exemptions. Accordingly, there will be two offers made by the RBS consortium: one to U.S. shareholders and ADS holders wherever located governed by U.S. rules and one to all other shareholders governed by Dutch rules. In connection with the U.S. bid, RBS will need to prepare and file with the SEC a registration statement on Form F-4. However, unless ABN AMRO cooperates, the RBS consortium will not need to include in the F-4 the usually required U.S. GAAP pro forma financial information for the combination. This omission is permitted by Rule 409 of the Securities Act since the information is reasonably unavailable (usually required ABN AMRO auditor consents can also be omitted under Rule 437). And it is a way for hostile bidders in cross-border transactions to gain timing parity by having to avoiding the time-consuming process of preparing this financial information.