Wednesday, May 23, 2007
Alcan, Inc. yesterday filed with the SEC its response to Alcoa's $27 billion unsolicited offer to acquire the company. Alcan disclosed in the response that its board unanimously recommended its shareholders reject the Alcoa offer calling it "inadequate in multiple respects." The response document (called a Directors' Circular) is a fine piece of work and the financial sections a model for these things; these were presumably prepared by Alcan's investment bankers JPMorgan Securities Inc., Morgan Stanley, RBC Capital Markets Inc., and UBS Securities LLC. Two things caught my eye in this response:
1. Poison Pill. Alcan is taking the position that Alcoa's offer does not meet the definition of “Permitted Bid” under its shareholder rights plan (also known as a poison pill). To qualify as a “Permitted Bid” under the rights plan and avoiding triggering it, the Alcoa offer must contain an irrevocable and unqualified provision to the effect that no Alcan common shares may be taken up or paid for prior to the close of business on a day which is not less than 60 days following the date of the offer. Alcan is asserting that, "[t]he Alcoa Offer, while open for more than 60 days, does not contain an irrevocable and unqualified no take-up provision in respect of the first 60-day period. The Alcoa Offer is therefore not a 'Permitted Bid' under the Rights Plan." Alcoa's response is likely to amend its offer to respond to Alcan's assertion, so Alcan's position will only buy it a few weeks of time. [NB. The Alcan rights plan is different than U.S. ones in that it permits a bid to proceed without triggering the rights plan on the above basis; this is a requirement of Canadian securities regulators who permit a Canadian public company to employ a rights plan only to gain enough time for their shareholders to consider an offer, and after a period of 40-60 days force the company to redeem the rights or terminate the plan].
2. Inadequacy Opinion. Morgan Stanley has delivered an opinion to the Alcan board that the "the consideration to be received by holders of Alcan Common Shares pursuant to the Alcoa Offer is inadequate from a financial point of view to such holders." An inadequacy opinion is the opposite of a fairness opinion. It is often used outside the United States by targets fending off unsolicited bids. But you don't often see them here. One reason offered by practitioners for this is that by stating the price is inadequate, a board legally undermines a "Just Say No Defense." By rejecting an an offer based on price, a board implies that this was determinate in its decision and there is consequently a higher price at which it will agree to an acquisition. I'm not sure about the concerns, the Delaware courts last invalidated a "Just Say No Defense" in 1988 in Interco and that case has dubious validity at best in light of subsequent Delaware decisions (see City Capital Associates v. Interco Inc., 551 A.2d 787 (Del.Ch.1988)). Nonetheless, in Canada a "Just Say No" defense is not permitted, takeover defenses can only be used to provide a limited amount of additional time for shareholders to consider a bid. The Alcan board therefore did not face the same calculus a Delaware company does.
By the way, inadequacy opinions have the same problems as fairness opinions. Since financal valuation is a subjective exercise and there are no set agreed guidelines or practices for it, there is substantial leeway for investment banks to arrive at their clients desired conclusion. This is particularly true in light of the typical investment bank contingency-based fee arrangement. Here, the contingency component may not have been an issue as Morgan is aiding the defense of the company and not advising on its acquisition, but still Morgan did not disclose its fee structure in the Directors' Circular. (The SEC will oftentimes force a target to correct this omission).
Wednesday, May 16, 2007
The Financial Times is reporting that the Dutch Supreme Court is expediting its consideration of ABN Amro's appeal of a lower court decision halting the $21 billion sale of its subsidiary LaSalle Bank to Bank of America until an ABN Amro shareholder vote is held on the matter. According to the FT:
The court could complete its deliberations "by the end of June or early July", far quicker than expected, said a person familiar with the matter. The most optimistic estimates had suggested the process would take three or four months.
It is at these times that one must extol the virtues of the Delaware and other U.S. courts for their efficiency and responsiveness. If the matter arose in this country, any appeal would likely have been heard in weeks and certainly not months. In the interim, the competing bids for both ABN Amro and LaSalle are in limbo and the operations of ABN Amro, including LaSalle Bank will be run under the handicap of an uncertain future.
Tuesday, May 15, 2007
On Monday, an analyst at Prudential Equity Group, John Tumazos, sketched out the benefits of a reverse takeover by Alcan of Alcoa. Alcoa has commenced an unsolicited offer to acquire Alcan in a transaction valued at $33 billion. A reverse takeover, known as the pacman defense, whereby a target turns the tables on an acquirer and offers to acquire it instead, has not been used in the United States since the 1980s (most notably in the Bendix/Martin Marietta wars) [correction: a reader pointed out that in 2000 Chesapeake Corp. employed a successful pacman defense against Shorewood Corp.; details of that transaction are here). As reported by DealBook, the analyst highlighted the political benefits of a reverse-takeover; it will increase business by relocating the combined company outside the United States thereby stemming anti-American sentiment against Alcoa in other countries and be more politically palatable to the Quebec authorities where Alcan is headquartered and based. And so it goes . . . .
The analyst may have been a bit too hasty in his calculus as to the balance of local politics. Aloca is organized under the laws of the state of Pennsylvania. Pennsylvania has the strictest anti-takeover laws in the country, including a constituency statute, business combination statute, control share acquisition statute, fair price statute, and employee severance statute. For a good description of the Pennsylvania law and each of these provisions, see the article by William G. Lawlor, Peter D. Cripps and Ian A. Hartmann of Dechert LLP, Doing Public Deals in Pennsylvania: Minesweeper Required. Alcoa had the option to opt-out of these anti-takeover provisions when they were first enacted in 1990, but chose not to. The company also has in its Certificate of Incorporation an anti-greenmail provision. Although Alcoa doesn't currently have a poison pill, it could adopt one if Alcan made an offer. Pennsylvania courts, unlike courts in Delaware and New York, have allowed targets to utilize no-hand provision in these pills. The Pennsylvania courts also haven't yet considered the validity of a dead hand provision. Any pill adopted by Alcoa to fend off an Alcan bid would therefore also likely contain these powerful anti-takeover devices. Moreover, the Pennsylvania state legislature has been more than willing to change its laws to help a Pennsylvania organized company fight off an unwanted suitor when its current laws appeared insufficiently protective (most recently it acted to protect Sovereign Bancorp).
The effect of all of this would be to permit Alcoa to effectively undertake a "Just Say No" defense to any Alcan pacman bid. And while shareholder pressure may, if Alcan's bid goes high enough, force the Alcoa board to accept an offer this will likely take time and more consideration than Alcan, which is slightly smaller than Alcoa, can offer. And Alcoa, also has a staggered board making a proxy contest a multi-year affair (and still facing the problem of Pennsylvania's antitakeover laws making any proxy contest win moot). Compare this with Quebec law which permits Alcan to keep its poison pill for only a short period of time and has similar time limitations on other explicit anti-takeover maneuvers (see my previous blog post on this here). In light of the comparative advantage of Alcoa, a pacman would have a small chance of succeeding against any protracted resistance by Alcoa and before Alcoa could complete its offer for Alcan.
Addendum: Shares of Pennsylvania companies which have not opted out of the Pennsylvania anti-takeover statutes have been found to trade at a discount to their market comparables. For more on this point, see P.R. Chandy et al., The Shareholder Wealth Effects of the Pennsylvania Fourth Generation Anti-takeover Law, 32 Am. Bus. L. J. 399 (1995).
Monday, May 14, 2007
ABN Amro yesterday released a copy of the RBS consortium's inter-conditional offer to acquire ABN Amro for approximately $98 billion and ABN Amro's subsidiary, LaSalle Bank, for $24.5 billion. The disclosure was made at the prompting of the Autoriteit Financiële Markten, the Dutch regulator, and its inquiries into the propriety of ABN Amro's rejection of the RBS consortium's offer.
I link to a copy of the full RBS consortium offer as disclosed by ABN Amro here (RBS also released similar documents in response to a virtually identical request by the AMF). The first link also includes the subsequent correspondence between ABN Amro and the consortium, as well as the correspondence between their lawyers and bankers. It is fascinating reading. Notably, it includes ABN Amro's response to the RBS offer: a memo of 31 issues, questions and requests for additional information by ABN Amro which it requested be answered satisfactorily before it would even consider the bid. Reading the ABN Amro response, it is hard to make any other conclusion than that ABN Amro was framing the correspondence to justify rejection of the RBS offer. Although to be fair, RBS wasn't terribly cooperative in its subsequent response either stating that it had already supplied all needed information. Also notable is the clear lack of a financing condition in the RBS-group offers, a blow to ABN Amro's repeated attempts to justify its rejection on the lack of a clear financing commitment by the consortium. In other related news, the CEO of ABN Amro, Rijkman Groenink also yesterday withdrew his nomination for a board seat at Royal Dutch Shell in order to devote his full attentions to ABN Amro. Given what has occurred thus far, this may not be best news for ABN Amro shareholders.
Wednesday, April 25, 2007
ABN Amro yesterday filed with the SEC the agreement with respect to Bank of America's $21 billion dollar purchase of ABN Amro's U.S. subsidiary, LaSalle Bank.
Per the terms of the agreement (and Bank of America counsel Wachtell's fine negotiating skills), the LaSalle Bank contract contains a "calendar" 14 day "go shop" clause which continues until 11:59 PM New York time on May 6th, 2007. Under that clause an alternative bidder has 14 days to execute a definitive sales agreement on superior terms for cash and not subject to a financing condition. This is followed by a 5 business day right for Bank of America to match the new bidder's superior proposal. There is a $200 million termination fee to be paid by ABN Amro if Bank of America does not match.
This short time fuse almost certainly forestalls other bids for LaSalle Bank. And, as I speculated it would do on Monday, through an almost certain sale of LaSalle Bank ABN Amro has implemented a big roadblock to the $103.75 billion cash and RBS shares bid for ABN Amro announced today by the RBS consortium (Fortis, RBS and Santander). This competing bid is conditioned on ABN Amro having taken such steps as may be required to ensure that LaSalle Bank remains within the ABN Amro group. This is all just wrong. Nonetheless, under Netherlands law no ABN Amro shareholder vote here is required for the LaSalle Bank sale because it consitutes less than 30% of ABN Amro's assets, and Netherlands law does not otherwise prohibit a "crown-jewel" lock-up of this nature. For those who are wondering, it is questionable whether Delaware in a similar situation would permit these machinations.