M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

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Thursday, February 27, 2014

Are Pills Preempted by the Williams Act?

Lucian Bebchuk and Robert Jackson think the answer there might be yes.  They have just posted their new paper, "Toward a Constitutional Review of the Poison Pill."

Abstract: In 1968, the Williams Act established a federal regime regulating attempts by outside buyers to acquire control of publicly traded companies through unsolicited tender offers. In the subsequent four decades, however, the states have developed a body of rules that impose additional impediments on such attempts. Recognizing the tension between the Williams Act and these state-law rules, between 1972 and 1985, the federal courts, including the Supreme Court, held some of these rules preempted by the Williams Act. To date, however, federal courts have not examined, and commentators have not analyzed, whether the state-law rules that authorize the use of the poison pill—the most powerful impediment to outside buyers of shares—are also preempted.

 In this Article, we examine this subject and conclude that there is a substantial basis for questioning the continued validity of current state-law rules that authorize broad use of the poison pill. Because these rules enable incumbents to block shareholder consideration of outside tender offers for lengthy periods of time, they may well impose tighter restrictions on unsolicited offers than the state antitakeover regulations that federal courts invalidated on grounds of preemption during the 1970s and 1980s. Indeed, we show that, upon a close examination of the state-law rules governing poison pills, the federal courts are likely to conclude that these rules are preempted.

 Finally, the Article provides a framework for lawmakers seeking to ensure that state-law poison-pill rules are not preempted. We explain that state-law rules that empower directors to block tender offers for long periods of time are least likely to withstand constitutional scrutiny. Thus, we argue, state corporate law that substantially limits the length of time during which a poison pill can be used to delay tender offers would be more likely to survive a preemption challenge. Whether preemption challenges lead to invalidation of existing state-law poison-pill rules or to their substantial modification, we show, these challenges could well have a major impact on the corporate-law landscape.

-bjmq

February 27, 2014 in Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Friday, December 20, 2013

Staggered Boards and Firm Value, Revisited

In Staggered Boards and Firm Value, Revisited, Cremers et al consider the effect of staggered boards 0n firm value.  The question of the staggered board has been central to many recent debates about the proper role of shareholders in corporate governance and takeovers.  The conventional academic wisdom has been that staggered boards lower firm value because the increase the likelihood of entrenchment of directors.  Now, Cremers and his co-authors are mixing it up a bit.  They look at the data and reach a different conclusion -- staggered boards are associated with an increase in firm value.  Here's the abstract:

This paper revisits the association between firm value (as proxied by Tobin’s Q) and whether the firm has a staggered board. As is well known, in the cross-section firms with a staggered board tend to have a lower value. Using a comprehensive sample for 1978-2011, we show an opposite result in the time series: firms that adopt a staggered board increase in firm value, while de-staggering is associated with a decrease in firm value. We further show that the decision to adopt a staggered board seems endogenous, and related to an ex ante lower firm value, which helps reconciling the existing cross-sectional results to our novel time series results. To explain our new results, we explore potential incentive problems in the shareholder-manager relationship. Short-term oriented shareholders may generate myopic incentives for the firm to underinvest in risky long-term projects. In this case, a staggered board may helpfully insulate the board from opportunistic shareholder pressure. Consistent with this, we find that the adoption of a staggered board has a stronger positive association with firm value for firms where such incentive problems are likely more severe: firms with more R&D, more intangible assets, more innovative and larger and thus likely more complex firms.

-bjmq

December 20, 2013 in Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Thursday, September 5, 2013

Cadbury Law has teeth

You'll remember that that in the UK they adopted the Cadbury Law in part as a backlash to the acquisition of  that august candy maker by US based Kraft in 2010.   Bloomberg has an excellent piece with an assessment of the law now that we've had some experience with it.   While there were a number of changes in the takeover regime that came with the Cadbury Law, the one that seems to have had the biggest (and most protective) bite is the addition of a hair-trigger to the "put up or shut up" rules:

The so-called Cadbury Law stipulates that any hint of a transaction involving a U.K.-listed target -- unusual stock movement, a news article based on anonymous sources, or even a tabloid market column that cites stock-trader chatter -- can force a company to issue a press release confirming or denying the existence of negotiations and identifying any potential bidder.

At that point, an acquirer has 28 days to “put up or shut up” -- either making a firm, fully financed bid or walking away for six months, unless the target requests an extension. ...

Underscoring how practices have changed, earlier this month Vodafone twice issued press releases confirming media reports on its talks to sell its stake in Verizon Wireless -- even though bids for assets aren’t the focus of the new rules.

The regulations are meant to discourage so-called virtual bids that send stocks on a speculative tear, putting target companies in a defensive position and harming shareholders and employees if the bid never materializes, the Takeover Panel has said.

The effect of the hair-trigger is to force potential acquirers to disclose their interest well before a period where they might actually be comfortable to make a bid.  The consequence is that it puts the power to provide extensions of the 28 day tolling period into the hands of the target.  A hostile target board can use this power to put off a buyer.  

What's interesting about the Cadbury Law and its effects a year or so on is that we (academic types) used to be able to point to the UK as the natural experiment for what a shareholder friendly regime might look like - a regime where target boards had little power to stand between an offeror and shareholders.  Compare that regime to the US where states are extremely deferential to management in tender offer situations.  But now, that balance is shifting.  Boards in UK companies with the hair trigger rules now in effect have the ability through the use of leaks and forcing disclosure to wrest control of the process and insert themselves between offerors and shareholders. 

-bjmq

September 5, 2013 in Europe, Takeover Defenses, Tender Offer | Permalink | Comments (0) | TrackBack (0)

Monday, September 2, 2013

Dutch poison pill

Carlos Slim's America Movil has threatened to withdraw from its offer to purchase the 70% of the Dutch mobile carrier, Royal KPN NV, that it doesn't already own.  America Movil's change of heart came after Royal KPN deployed it's poison pill to defend against the unwanted offer.

Now, the poison pill deployed by Royal KPN is different from an American poison pill.  Remember, the power of the US-styled poison pill comes from the threat that it might be deployed and the difficulty presented in acquiring control once the pill is deployed.   The defensive power of the Dutch pill comes from an actual transfer of control from public stockholders to a controlled foundation.  The WSJ has a good description of how it works:

In the 1980s and 1990s, many Dutch firms set up defenses to protect themselves against hostile takeovers or activist investors. Although most barriers have been removed, many listed companies still have the possibility to block unsolicited takeover attempts through foundations they created.

Companies grant these foundations (in Dutch: Stichting) a call-option to buy preference shares which, if activated, allows them to take control of the company for a certain period of time.

The defense is barely used, however. Experts say it is a measure of last resort that deters investors in ordinary shares and only buys time to look for alternative strategic options.

In KPN’s case, the Foundation Preference Shares B KPN were set up in 1994 following the privatization of Koninklijke PTT Nederland NV, the former mother company of KPN. Its board comprises lawyers and former top executives at other Dutch companies, some of whom also sit on the boards of other foundations.

By deploying the pill, control is temporarily transferred from public stockholders to the foundation forcing a potential acquirer to negotiate with the foundation if the acquirer wants to gain control.  The effect is the same as with the US-styled pill - putting the board (in this case the foundation board) in between the tender offeror and the shareholders.   However, because the preference shares issued to the foundation are time limited, unlike the standard US poison pill, the Dutch pill is only a temporary defense.  It's not a 'just say never' defense, just a 'not right now' defense.

-bjmq

 

September 2, 2013 in Europe, Takeover Defenses, Tender Offer | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 7, 2013

Takeover defenses in IPO firms

Wilmer Hale has put out its annual M&A report.  There are a couple of interesting data points worth looking at.  In particular is the table below - Takeover Defenses in IPO Firms.   Notice that the basic tendancy to go public with lots of takeover defenses is consistent with findings from Daines and Klausner more than a decade ago (Do IPO Charters Maximize Firm Value?).  That much hasn't changed. Indeed, in recent years, there has been a noticeable uptick in tech firms going public with dual-class stock, entrenching entrepreneurs (7% in Wilmer's sample).  Also, adoption of exclusive forum provisions in certificates of incorporation appears to be reaching a critical mass - 27% of all IPOs and 44% of all PE backed IPOs.  Oh, and don't be fooled by the fact that only 2% of firms go public with poison pills in place.  People should stop counting that number.  Every board has an implicit pill in place.  

TakeoverDefensesinIPO

It's interesting.  Give it a look.

-bjmq

May 7, 2013 in Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Monday, March 18, 2013

Canadians reconsider the pill

There was news from up North late last week.  The Canadians are considering some adjustments in their current approach to the poison pill.  Presently, pills are permitted only as temporary devices that be held in place for only so long as to delay a hostile bid so that a target board can educate its shareholders and perhaps put together some sort of alternate strategy or transaction.   Let's call the Canadian approach to rights plans the Interco pill.  In general, Canadian approaches to takeover defenses are very much in line with Chancellor Allen approach in Interco. That is to say, in the face of an unwanted offer, the board should be motivated to either educate the shareholders of the correctness of the board's position or look to develop an acceptable alternative for shareholders.  To the extent boards deploy takeover defenses they should facilitate the ability of the board to engage in either education or in increasing value for shareholders. 

The draft amendments (here) to their rules on shareholder rights plans intend to make a number of subtle, but important changes in approach that nudge them closer to a US styled approach to poison pills. The amendment require approval of a majority of the disinterested shareholders withing 90 days of the pill being adopted.  Any material amendments to the rights plan will require an additional shareholder vote. Then, in order for a board to keep a pill in place, the board will have to go back to shareholders annually to seek approval.  Finally, a majority of disinterested shareholders could vote to terminate the rights plan at any time.

This new draft approach is a step back from the previous Canadian approach, which involved a regulator in the provincial securities regulator making a substantive determination about the reasonableness of director actions to keep a pill in place.  Guided by their Interco-like principles, the question for Canadian regulators was not if a pill should remain in place, but when it should be pulled.  Now, that may change.  Of course, this isn't necessarily a bad thing.  Nor should it necessarily be interpreted as moving towards an American (U.S.) styled approach to pills.  Up in Canada undere the proposed pill regime, disinterested shareholders will have plenty to say about whether or not a pill is permitted to remain in place.  Rather than make arguments to a regulator, boards will be required to make their case directly to the shareholders if they want to keep pills in place.  That's not a bad thing.

-bjmq

 

March 18, 2013 in Takeover Defenses, Takeovers | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 4, 2012

Gibson Dunn on "Don't Ask, Don't Waive" Standstill Provision

The typical M&A confidentiality agreement contains a standstill provision, which among other things, prohibits the potential bidder from publicly or privately requesting that the target company waive the terms of the standstill.  The provision is designed to reduce the possibility that the bidder will be able to put the target  "in play" and bypass the terms and spirit of the standstill agreement.

In this client alert, Gibson Dunn discusses a November 27, 2012 bench ruling issued by Vice Chancellor Travis Laster of the Delaware Chancery Court that enjoined the enforcement of a "Don't Ask, Don't Waive" provision in a standstill agreement, at least to the extent the clause prohibits private waiver requests.

As a result, Gibson advises that

until further guidance is given by the Delaware courts, targets entering into a merger agreement should consider the potential effects of any pre-existing Don't Ask, Don't Waive standstill agreements with other parties .  . .. We note in particular that the ruling does not appear to invalidate per se all Don't Ask, Don't Waive standstills, as the opinion only questions their enforceability where a sale agreement with another party has been announced and the target has an obligation to consider competing offers. In addition, the Court expressly acknowledged the permissibility of a provision restricting a bidder from making a public request of a standstill waiver. Therefore, we expect that target boards will continue to seek some variation of Don't Ask, Don't Waive standstills.

MAW

December 4, 2012 in Cases, Contracts, Deals, Leveraged Buy-Outs, Litigation, Lock-ups, Merger Agreements, Mergers, State Takeover Laws, Takeover Defenses, Takeovers, Transactions | Permalink | Comments (0) | TrackBack (0)

Thursday, October 11, 2012

Better bureaucrats, please ... and Benefit Corporations

Like many other states, Massachusetts has recently passed an amendment to its corporate law that permits the incorporation of "Benefit Corporations" (Chapter 238, Section 52).  I have opinions about whether this is anything more than just a marketing effort, but let me put those to the side for the time being.  Here, I'd like to focus on the fact that the Secretary of State of the Commonwealth of Massachusetts apparently has a tenuous grasp on what the corporate law of Massachusetts presently is.   In the Commonwealth's official notice and FAQ for Benefit Corporations, the Corporations Division describes the need for Benefit Corporations, thusly: 

What are benefit corporations?

Benefit corporations are corporations organized under Chapter 156A (the professional corporation statute) or Chapter 156D (the business corporations statute) that have elected to be a benefit corporation in their Articles.

Benefit corporations are similar to traditional for-profit corporations but they differ in one important respect. While directors and officers of traditional for-profit corporations must focus primarily on maximizing financial returns to investors, the directors and officers of benefit corporations are expressly permitted to consider and prioritize the social and environmental impacts of their corporate decision-making.

For example, the directors of a traditional for-profit corporation faced with financial difficulty may opt to build up cash reserves by laying off employees in order to fulfill their fiduciary duty to prioritize returns to investors. A benefit corporation's directors faced with similar economic circumstances could prioritize retaining the corporation's workforce through hard times, opting to dip into cash reserves to do so, in order to pursue the corporation's public benefit goals. 

Or ... the board of a for-profit corporation could simply decide to not lay-off employees and not face any repercussions from shareholders for a decision (not to lay-off workers when times are tough) that already is well within their rights.  

I've written on this before in the context of state anti-takeover laws.  Constituency statutes were adopted here in the Commonwealth during LBO boom to help give directors the power to resist unwanted offers.  Currently, the directors of a Massachusetts corporation can put "shareholder maximization" behind the interests of employees, suppliers, creditors, whatever.  Here's 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 ... a director of a MA for-profit corporation is presently under no legal obligation to put the maximization of short-term shareholder value/returns over interests towards constiuencies of the corporation, like employees.  It's true that constituency statutes were originally adopted as anti-takeover statutes and they still play that role.  But, for a publicly minded corporate board, the constituency statutes in place already provide plenty of legal cover to pursue public benefit in the corporate form.  

I'll have more to say on Benefit Corporations later.  For now, I am wondering whether Benefit Corporations might be a back door into supercharged state anti-takeover protections for firms that opt in?  I don't think it's necessary, but lawyers have been known for pursuing belt-and-suspender defenses. 

-bjmq

 

October 11, 2012 in State Takeover Laws, Takeover Defenses | Permalink | Comments (2) | TrackBack (0)

Friday, June 1, 2012

HGS pill suit fails to get TRO

Plaintiffs in the Maryland suit against the HGS board yesterday failed in their bid to get a order to force the board of HGS to pull the pill they put in place last month:

A Montgomery County Circuit Court judge shot down an HGS shareholder’s request for a temporary restraining order to invalidate the “poison pill” the Rockville biotech enacted last month to make it a less attractive acquisition target.

The biotech was sued by shareholder Duane Howell of Baltimore, who claims its management is cheating him, other stockholders and the company itself by rejecting GlaxoSmithKline’s $2.6 billion offer in April, and then instituting the shareholder rights plan, or poison pill. ...

Judge Michael D. Mason said Thursday that HGS had properly accounted for its actions with its shareholders when it issued the poison pill May 16.

No surprise here, I suppose.  The bigger surprise would have been if the Maryland judge had ignored both Delaware and Maryland law and order the pill pulled. Odd though, Bloomberg reports that the judge in this case qas concerned that only one shareholder, the litigant, was complaining:

After a hearing on Thursday, Montgomery County Circuit Court Judge Michael Mason denied Howell's request, saying only one shareholder had sued the company, according to a report by Bloomberg News.

"This is not a case where a number of disgruntled shareholders have come to court up in arms," the judge said in court, according to the report.

Even under Maryland law, the number of plaintiffs shouldn't matter to the result.  Hmm.

-bjmq

June 1, 2012 in Hostiles, Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Monday, February 6, 2012

Marcus on Confis and Hostile Acquisitions

David Marcus at The Deal had an interesting piece over the weekend on the role of confidentiality agreements in the context of hostile acquisitions.  He focuses on confidentiality agreements in the Vulcan/Martin Marietta transaction and the Westlake/Georgia Gulf transaction.  It's a good read.  Marcus also offers up the following chart from Dealogic:

Hostiles
I'm curious as to how Dealogic defines "successful" - I suppose that a deal that starts hostile and then ends up with a negotiated transaction is considered successful.  That's one way to think about it.  But that does an injustice to the power of the poison pill. I doubt there are any deals on this list of US targets where a hostile bidder has been successful over the continued protests of the target board with a pill in place.

-bjmq

February 6, 2012 in Hostiles, Takeover Defenses | Permalink | Comments (1) | TrackBack (0)

Thursday, January 12, 2012

Davidoff on Airgas

Steven Davidoff has just posted a nice case study of the Airgas decision forthcoming in the Columbia Business Law Review.  Steven had a front-row view of the Airgas hostile offer and subsequent litigation. (Google Deal Prof and Airgas if you don't believe me.) In this paper, Steven revisits the class through the prism of Delaware's judges as strategic actors.  The role of Delaware's judiciary is fascinating and this paper - and the Airgas episode - is an important contribution to understanding how and why Delaware's courts decide as they do.  It's well worth a read.

Abstract: When is it appropriate for Delaware judges to act strategically? This case study documents and analyzes Air Products’ $5.8 billion unsuccessful, hostile offer for Airgas, reviewing the decisions made by the Delaware courts in adjudicating the most prominent takeover bid of 2010. The three court opinions in Air Products v. Airgas show how Delaware courts strategically decide cases and the effect of this decision-making on the course of Delaware corporate law and Delaware’s constituencies. The Airgas case ultimately provides a useful lesson for when, if ever, strategic considerations should influence the outcome of individual Delaware corporate law disputes.

-bjmq

January 12, 2012 in Delaware, Hostiles, Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Thursday, November 17, 2011

Steele on Pills and the Intermediate Standard

In early October, Chief Justice Myron Steele participated in a session in Canada about shareholder rights plans in the US and Canada.  The International Law Office has posted summaries of the panel discussion.  Steele's comments are interesting: 

The chief justice suggested that the view that Delaware law allows a board of directors to 'just say no' to a hostile offer has been overstated. In the context of appropriate findings of fact that a poison pill is no longer reasonable or that there is no sufficiently articulated long-term strategy that requires protection, he suggested that a case could be made for a mandatory injunction removing a poison pill under Delaware law. 

When Gilson and Kraakman wrote their paper, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, they recommended that the court adopt a stance that would inject substance into proportionality review by requiring boards who wished to adopt and maintain defensive measures against an unwanted, but otherwise noncoercive offer, to articulate a long term strategy that they would have to live with. Could it be that Steele is open to a Gilson/Kraakman like approach to proportionality review? That might breathe new life into Unocal. 

But those weren't the only comments made by Steele:

Steele noted that the analysis is determined primarily by the facts found in each decision. Findings of fact made by the Court of Chancery are accepted on review by the Delaware Supreme Court unless they are clearly erroneous. Steele suggested that, with appropriate findings of fact, a pill could be removed under Delaware law. ...

Steele noted that there was a tension between the view, on the one hand, that the board should have power to defeat an inadequate hostile offer and the view, on the other hand, that, once the board has discharged its duty to make clear to shareholders its view of the long-term value of the corporation and there is no likelihood that the poison pill could be used to generate an alternative offer, it should be the shareholders' responsibility to decide whether to accept the board's view of the corporation's value or accept the bidder's offer. Chandler's opinion appeared to show some sympathy for the latter position. However, he described his analysis as "constrained by Delaware Supreme Court precedent". 

Steele took issue with the view that the Chancery is constrained in its ability to remove a pill in the appropriate circumstances. He suggested that if the chancellor had found facts that were inconsistent with it being reasonable to keep the pill in place, an injunction against maintaining the pill could be issued under Delaware law. Where there is a battle of valuations, rather than the defence of a long-term strategy, a case can be made for removing the pill and letting the shareholders decide. 

OK, so if the question is one about the adequacy of a noncoercive offer, is Steele suggesting that a board could be ordered to pull its pill?  That an inadequate offer on its own is not a cognizable threat?  Personally, I tend to agree and would be happy with that result.  But, I'd be surprised if the Supreme Court was already there intellectually and simply waiting for the Chancery Court to hand up an opinion for appellate review.  Could it be that Chandler in Air Products just got it wrong?

-bjmq

 

November 17, 2011 in Delaware, Takeover Defenses, Transaction Defenses | Permalink | Comments (0) | TrackBack (0)

Monday, September 19, 2011

Takeover Panel amendments go into effect

The Takeover Panel amendments that were the result of a review in the wake of Kraft's acquisition of cadbury go into effect today. You can find a summary of the changes and transitional arrangements at the Takeover Panel's site.  The most important include:

1. The offeree is required to disclose the identities of "any potential offeror with which the offeree company is in talks or from which an approach has been received."

2. After a potential offeror is identified, the offeror has 28 days to "put up or shut up."

3. General prohibition on transaction related inducement fees (termination fees).

4. Improved ability of employees representatives to make their views on the offer known.

The prohibition on termination fees is the most interesting change.  Most of the rationalization for termination fees in the US is that termination fees are required in order to assure potential acquirors to invest the resouces needed to put together a bid.  Without the termination fees, potential bidders will disappear - not content to invest resources in a bid that might eventually fail.  Here, the Takeover Panel is weighing benefits of the compensatory function of the termination fees against the social costs of reduced competition associated with the potentially deterrent effect of termination fees and is erring on the side of increased competition.  At some point in the next year, a finance graduate student somewhere should probably do an event study to check to see if elimination of termination fees ends the UK deal world as we know it.  My guess is that it will still be there.

-bjmq

 

September 19, 2011 in Europe, Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Tuesday, September 13, 2011

Craigslist and eBay ... again ...

This is a feud that never ends, I suppose.  Reuters is reporting that the US Attorney has "launched a criminal probe into whether eBay Inc employees misappropriated confidential information from classified ad service Craigslist."

You'll remember that Chancellor Chandler in the Delaware Chancery Court ruled that against Craigslist in a rare case ordering a board to remove a poison pill in 2009.

-bjmq

September 13, 2011 in Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Monday, September 12, 2011

Iowa's race to the bottom

Ted Allen at the ISS Corporate Governance Blog highlights a common trend in the corporate law -- the depressing race to the bottom that is characterized by state legislatures responding to management demands for protection from their own shareholders.  Iowa has now joined the list of states that now require classified boards of their public companies.  (h/t Broc Romanek)

Earlier this year, state lawmakers approved an amendment to the Iowa Business Corporations Act (IBCA) that requires public companies with more than 2,000 shareholders to maintain staggered board terms until Dec. 31, 2014. The law, which took effect March 23, provided a 40-day period during which a company's board could unilaterally vote to opt out of the classification mandate.

It appears that this legislation was passed to help Casey's General Stores, an Iowa-incorporated firm that faced an unsuccessful proxy fight in 2010. Casey's, an S&P 600 small-cap firm, did not opt out of the law and since has adopted a staggered board structure. The company has strong state legislative connections. One Casey board member, Jeffrey M. Lamberti, is an attorney who served in the Iowa Legislature from 1995 to 2006, which included three years as president of the Iowa Senate. His father is Donald Lamberti, the company's founder.

The classified board law was adopted despite the opposition of some Iowa corporate lawyers. In a Feb. 16 memo, the Iowa State Bar Association's Business Law Section Council observed that the legislation "will dramatically reduce the odds" that companies like Casey's would face proxy fights, but warned that it "would eliminate the voice of shareholders [from deciding whether to adopt staggered board terms] and leave that decision solely to management."

-bjmq

September 12, 2011 in Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Omnicare's litigation with Pharmerica

As part of its hostile effort to acquire Pharmerica, last week Omnicare filed suit against Pharmerica and its board.  Here's the Omnicare - Pharmerica complaint. Now, let me state right up front that I don't think this suit falls into the more general category of litigation flotsam that accompanies many merger announcements these days.  Although this is acquisition-related litigation, it involves a purported acquirer attempting to have the target's board withdraw its defenses against the offer.  This case is more along the lines of the Airgas scenario. In any event, given Airgas, one wonders whether Omnicare thinks it can pull an Omnicare-styled rabbit of the litigation hat.  And why not?  It happened famously for them once before.

In any event, the first defense that Omnicare would like the court to order withdrawn is Pharmerica's pill.  It's hard, given Airgas, to come up with a reasonable justification for the court to order Pharmerica's board to pull its pill.  Maybe after a year or trying, but now?  Probably not.  Omnicare's argument that Pharmerica's board is violating its fiduciary duties by not negotiating with Omnicare is going to fall flat.  The requirement is that Pharmerica's board be informed.  There is no requirement that it negotiate to sell its company to an unwanted bidder.  Of course, this is complicated by the fact that early in the summer, Pharmerica's CEO approaced Omnicare's CEO to discuss a possible combination, but that's just a complication.  Omnicare doesn't present any evidence to seriously suggest that Pharmerica's board is uninformed about its decision not to engage with Omnicare.

Second, Omnicare would like the court order Pharmerica's board to adopt resolutions exempting Omnicare from the effects of DGCL 203.  Yikes.   Omnicare's argument is essentially that Pharmerica's board is violating its fiduciary duties to the corporation by not actively exempting an unwanted bidder from Delaware's antitakeover statute.  Absent egregious facts that aren't present in the complaint, I can't imagine a court taking that argument all that seriously.    

-bjmq 

September 12, 2011 in Litigation, State Takeover Laws, Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Monday, June 6, 2011

Microsoft's matching right for Nvidia

InformationWeek took a look at Nvidia's recent 10-Q and noticed something interesting.  Microsoft has hel a matching right Nvidia since 2000.  apparently has the ultimate takeover defense in place.  Here's the description of the right from Nvidia's recent 10-Q:

On March 5, 2000, we entered into an agreement with Microsoft in which we agreed to develop and sell graphics chips and to license certain technology to Microsoft and its licensees for use in the Xbox. Under the agreement, if an individual or corporation makes an offer to purchase shares equal to or greater than 30% of the outstanding shares of our common stock, Microsoft may have first and last rights of refusal to purchase the stock. The Microsoft provision and the other factors listed above could also delay or prevent a change in control of NVIDIA.

In fact, Nvidia has been making this same disclosure for more than a decade.  Here's the original disclosure from their first quarter 10-Q in 2000:

Microsoft Agreement

   On March 5, 2000, the Company entered into an agreement with Microsoft
pursuant to which the Company agreed to develop and sell graphics chips and to
license certain technology to Microsoft and its licensees for use in a product
under development by Microsoft. In April 2000, Microsoft paid the Company $200
million as an advance against graphics chip purchases. Microsoft may terminate
the agreement at any time. If termination occurs prior to offset in full of the
advance payments, the Company would be required to return to Microsoft up to
$100 million of the prepayment and to convert the remainder into preferred
stock of the Company at a 30% premium to the 30-day average trading price of
its common stock immediately preceding Microsoft's termination of the
agreement. In addition, in the event that an individual or corporation makes an
offer to purchase shares equal or greater than thirty percent (30%) of the
outstanding shares of the Company's common stock, Microsoft has first and last
rights of refusal to purchase the stock. The graphics chip contemplated by the
agreement is highly complex, and the development and release of the Microsoft
product and its commercial success are dependent upon a number of factors, many
of which the Company cannot control. The Company cannot guarantee that it will
be successful in developing the graphics chip for use by Microsoft or that the
product will be developed or released, or if released, will be commercially
successful.

I've checked the 10-Ks and 10-Qs back to 2000 and the Microsoft Agreement hasn't been filed as an exhibit anywhere.  I suspect that it's a material contract - Microsoft has a contractual right to basically block any sale of the company - that sounds material.  I'm sure a copy of the contract is buried in the filings somewhere. 

-bjmq

 

June 6, 2011 in Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Thursday, June 2, 2011

Poison Pill update

There's been a lot of clarification on the use of the shareholder rights plan over the past year - among others, see Chancellor Chandler's opinions in Air Products v. Airgas and eBay v Newmark, as well as the Surpeme Court's opinion in Versata v Selectica (all now available via the Google), .  Bab and Neenan at Debevoise & Plimpton have posted Poison Pills in 2011 to review the current state of pills:

Abstract:  Having been buffeted by sustained attacks from activists and proxy voting advisers in past years, the shareholder rights agreement is no longer as prevalent as it once was - a phenomenon that has been documented by many corporate governance observers like The Conference Board. However, the most recent case law confirms the validity of poison pills that are properly structured, adopted, and administered. This report discusses these new trends and provides guidance to boards considering whether to adopt a pill and how to formulate its terms.

Bab and Neenan focus, correctly, on the importance of the effective staggered board/shareholder rights plan combination.  In the chart below they show that the recent trend of destaggering boards and dropping pills has continued.  However, it's worth remembering that the ability of boards to adopt a pill very quickly at almost any point makes counting the number of firms with pills currently in place something less than a useful exercise.   Best to simply assume that every company has a pill or could have one easily.  The focal point for the effective defense is the staggered board.  That's harder to implement.

PillsSP500

-bjmq

June 2, 2011 in Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Thursday, March 10, 2011

AIG adopts an NOL pill

AIG annoucend yesterday that it had adopted what it calls a "Tax Asset Protection Plan".  To the rest of us, that's an NOL pill.   The Delaware Supreme Court ruled in the Versata v Selectica case last fall that boards can reasonably adopt these NOL pills to protect corporate assets, like net operating losses.  The issue with them at the time was two-fold.  First, they are ostensibly not takeover defenses, but intended to protect a corporation ability to access its net operating losses.  Second, their trigger is usually set at 5% - above that point and the firm loses its NOLs.  The court looked at them in Versata and decided they were a reasonable response to the threat of losing a valuable corporate asset.  

NOLs allow companies to reduce their tax liabilities.  Under the tax laws, a company may lose access to its NOLs in the event a single shareholder acquires more than 5% of the stock of the corporation. The pill prevents shareholders from accumulating a large enough block to trigger the loss of the NOLs.  I suppose the only reason that AIG has any NOLs left on its books is because the largest single stockholder, the US government (92%) doesn't file a tax return... 

For your file, here's a copy of AIG's shareholder rights plan Tax Asset Protection Plan

-bjmq

Update:  I've been working my way through Samuel Thompson's 4 volume, Mergers, Acquisitions, and Tender Offers recently.  He's got a very nice summary of NOL pills and the state of the law governing their use.  If you have a library, they should have this treatise on their shelves.  It's timely and have got great coverage.

March 10, 2011 in Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Thursday, March 3, 2011

Dollar's toothless defense

The ink on the Airgas opinion has barely dried and Family Dollar looks like it's trying to use the Just Say No defense to stave off an offer by Nelson Peltz.  Peltz announced his offer to the world in a recent 13d filing:

On February 15, 2011, the Trian Group contacted Howard Levine, Chairman of the Board and Chief Executive Officer of the Issuer, and advised him that it beneficially owned approximately 8% of the outstanding Shares and believed that it was the largest beneficial owner of Shares. The Trian Group also advised Mr. Levine that it proposed that the Trian Group or one of its affiliates acquire the Issuer at a price in the range of $55 to $60 per Share in cash.

The Family Dollar board considered the offer and responded (Form 8-K): 

by a unanimous vote of those present, determined that continued implementation of the Company’s strategic plan remains the best way to deliver value to all Family Dollar shareholders. The Board also determined that the unsolicited, conditional proposal from Trian Group to acquire Family Dollar substantially undervalues the Company and that pursuit of a sale of the Company is not in the best interest of shareholders.

The Family Dollar board also adopted a shareholder rights plan.  It's an imperfect defense, though.  Family Dollar's board is elected annually.  It does have a 90 day advance notice provision in its bylaws for nominations, but no classified board.  The effectiveness of the rights plan as a defensive measure comes from the combination of the pill and the classified board.  Family Dollar is going with just the pill and not the staggered board.  I guess we'll soon see how that works for them. 

-bjmq

Update:  The Deal Professor tweets (Steven Davidoff has a Twitter account - @StevenDavidoff) that the 10% threshold on Family Dollar's pill might be more about keeping away hedge funds than Peltz.  He's probably right because without a staggered board the pill isn't doing much else. 

March 3, 2011 in Takeover Defenses | Permalink | Comments (0) | TrackBack (0)