Thursday, June 24, 2010
The May edition of The Business Lawyer just arrived in my inbox. This edition is the proceedings from a recent symposium on the constitutionality of state anti-takeover laws (DGCL 203) in spired by Guhan Subramanian et al's piece, Is Delaware's Antitakeover Statute Unconstitutional? Evidence from 1988-2008. The symposium includes contributions from Eileen Nugent (A Timely Look at DGCL Section 203), A. Gilchrist Sparks (After 22 Years, Section 203 of the DGCL Continues to Give Hostile Bidders a Meaningful Opportunity for Success), Stephen P. Lamb (A Practical Response to Hypothetical Analysis of Section 203's Constitutionality), and Larry Ribstein (Preemption as Micromanagement) among others.
Definitely summer beach reading. Too bad it's not available in a Kindle version!
Tuesday, May 4, 2010
Apparently, there are limits to the use of poison pills in Canada. As you likely know, Carl Icahn has a tender offer pending for all of the outstanding stock of Lions Gate. In response to Icahn appearing, Lions Gate amended its shareholder rights plan. Icahn then brought an action with the British Columbia Securities Commission seeking to have the plan nullified. Last week, the British Columbia Securities Commission ordered a halt to any trading of securities to be issued to be issued pursuant to Lions Gate's pill. Notwithstanding the order, Lions Gate management is still scheduled to submit the plan to LGF shareholders for approval on May 12, 2010. To that end, management is still recommending shareholders vote in favor.
A couple of things worth noting with respect to shareholder rights plans in Canada. In general, the provincial securities commissions have the right to review such plans. In reviewing such plans, the commissions will apply their own version of intermediate scrutiny. In re Royal Host provides the Canadian framework for thinking about whether or not a board must pull a pill. In re Royal Host entails and examination of relevant factors, including: 1) when the plan was adopted; 2) whether shareholders had approved the plan; 3) whether there is broad support for the continued operation of the plan. This standard has been widely adopted by Canadian regulators - the provincial securities commissions. In a subsequent case, Falconbridge, the Ontario Securities Commission applied the Royal Host approach in nullifying a shareholder rights plan. The BC Securities Commission has also previously applied the Royal Host approach.
Although the Commission did not make its reasons for nullifying the Lions Gate pill known, one can guess that the BCSC applied the Royal Host factors to the facts (pill adopted in response to Icahn appearing; shareholders have not yet approved the plan; and there appears to be shareholder support for the Icahn offer) and decided that on balance, the shareholders would be better off without the pill in place.
Thursday, April 15, 2010
Straska and Waller have a paper forthcoming in the Journal of Corporate Finance, Do Antitakeover Protections Harm Shareholders? They think not.
Abstract: We reexamine the negative relation between firm value and the number of antitakeover provisions a firm has in place. We document that firms with characteristics indicating low power to bargain for favorable terms in a takeover, but also indicating high potential agency costs, have more antitakeover provisions in place. We also find that for these firms, Tobin’s Q increases in the number of adopted provisions. These findings are robust to several methods that control for endogeneity. Our evidence suggests that adopting more antitakeover provisions is beneficial for certain firms and challenges the commonplace view that antitakeover provisions are universally harmful for shareholders.-bjmq
Wednesday, April 7, 2010
As predicted by our friend the Deal Professor, Apollo Management’s proposed $2.4 billion leveraged buyout of Cedar Fair, the amusement park operator, has died. This deal and its death are important for two reasons. One, it's yet another confirmation that the LBO market is going to continue to be slow at least in the next year. Second, the deal represents the dangers that boards face in moving forward with M&A transactions. The two sides terminated the deal, with Cedar Fair agreeing to pay Apollo $6.5 million for its expenses, in advance of a scheduled April 8th unitholders meeting since it was clear that the deal would be voted down by Cedar Fair’s unhappy investors. This is a big blow to the Cedar Fair board that just months ago unanimously approved the transaction and even got two fairness opinions (for which they paid $3 million in total) to support their recommendation. Knowing that the company is now in a vulnerable position, in connection with terminating the Apollo deal, the board also adopted a 3 year poison pill with a 20% trigger.
The next few months will likely not be FUN for the Cedar Fair board and management. The company has a heavy debt load which it will need to refinance. In addition, the company’s next scheduled unitholders meeting is on June 7th. The company’s investors, some of whom tried to hold a meeting on the street when the company postponed the initial meeting to vote on the Apollo deal, are really unhappy with the board and management. I expect that there will be a big push to replace at least some of these people. The Cedar Fair board and management should brace themselves for a wild ride in the next few months. I suspect that the Cedar Fair investors are not going to be distracted by all the fun they can have on the company’s two new roller coasters, the Intimidator305, a 305-foot-tall roller coaster at Kings Dominion, and Intimidator, a 232-foot-tall roller coaster at Carowinds.
In the meantime, I look forward to following the fallout from this deal. Busted deals may not be fun for the players, but they do provide some amusement for law profs.
Wednesday, March 31, 2010
A Reuters piece cites FactSet SharkRepellent data to note that the number of shareholder rights plans in effect is at the lowest since 1990.
of U.S. incorporated companies with a poison pill in effect hovered at 1,000 on
Tuesday, hitting the lowest level since 1990, according to FactSet
SharkRepellent. In comparison, the number of poison pills in force at the end
of 2001 totaled 2,218. ...
drop in poison pills has mirrored a drop in other takeover defenses, such as
having a board of directors with staggered election terms. At the end of 2009,
only 164 companies in the S&P 500 had a staggered board, down from 294 at
the end of 2001, according to FactSet SharkRepellent.
Interesting, but as Prof. Jack Coffee notes in the article, just because a board doesn't have a pill in place, doesn't mean it can't adopt one in about five minutes. The drop in staggered boards, I think, is more significant. Without the combination of the pill and the staggered board, the rights plan can delay, but not prevent, a hostile bid that is undertaken in conjunction with a proxy contest.
On that front SharkRepellent notes on its website that the number of proxy fights has soared recently.
The number of proxy fights against U.S. companies has soared from
42 in 2004 to last year's record total of 133.
Wednesday, March 24, 2010
Wednesday, March 3, 2010
Astellas Pharma launched a hostile offer for OSI Pharmaceuticals yesterday. In conjunction with the offer, Astellas filed suit in the Delaware Chancery Court seeking to have the board pull its pill. Astellas' central claim is that OSI brushed off its offer without considering it. From the complaint:
The Director Defendants failed to conduct a good faith and reasonable investigation of Astellas Pharma’s offer. Instead, the Director Defendants summarily refused to engage Astellas Pharma in a meaningful dialogue and failed to reasonably inform themselves about Astellas Pharma’s offer. The Director Defendants could not possibly be well informed concerning the offers that they have flatly rejected because they have declined to engage in any meaningful discussion or negotiation with Astellas Pharma, either directly or through their legal and financial advisors, to learn more about Astellas Pharma’s offer. This failure to conduct a good faith and reasonable investigation of Astellas Pharma’s offer is a violation of the Director Defendants’ fiduciary duties.
Presumably, sometime over the next 10 days the OSI board will meet to review the Schedule TO that's now on file with the SEC and inform themselves about the offer. Once they do that, it won't leave much for Astellas to complain about.
Tuesday, March 2, 2010
Vice Chancellor Noble issued his ruling in Selectica v. Versata (Richards, Layton & Finger posted the opinion) late last week. This case is worth noting for two reasons. First, it involves one of the very few cases of a shareholder rights plan being triggered. Second, Selectica's pill is not what you might consider to be a typical pill. As originally envisioned, the shareholder rights plan is intended to be a defensive measure to prevent a hostile takeover. The way it's worked in practice, with an effective pill in place and combined with a staggered board, potential hostile acquirers are forced to deal with the target board or accept the risks involved in a drawn out proxy fight.
Versata - a 5.1% shareholder and wholly-owned subsidiary of Trilogy, a Selectica competitor - decided to test pill and bought right through its limits. After Selectica attempted unsuccessfully to enter into a standstill agreement with Trilogy, allowed the pill to trigger - diluting Trilogy. The Selectica board then sought a declaratory judgment in Delaware in support of its actions.
Wednesday, February 24, 2010
While Delaware does not take a brightline rule approach to limiting the size of termination fees, other do. Last week, I referred to a paper from John Coates comparing Delaware's standards with respect to termination fees with the UK's rule-based approach. Well, last week, the Takeovers Panel in Australia, the Takeover Panel's cousin down under adopted new guidance on termination fees (break fees), limiting their size in most circumstances to no more than 1% of equity value of a transaction.
In its guidance on lock-up devices, the Panel also warned against the potentially anti-competitive effect of what they call no-due-diligence obligations, particularly those that provide initial bidders with information rights in the event a second bidder happens along. I blogged about the potentially anti-competitive effects of this kind of weak-form rights of first refusal before. Delaware, however, is clearly okay with them (see Toys R Us).
One supposes that the announcement of a brightline rule with respect to termination fees in Australia provides a nice opportunity for a natural experiment.
Thursday, February 18, 2010
Dear Mr. Burkle:
Wednesday, February 17, 2010
According to this client memo from K&E, recent takeover battles are bringing into question the continued vitality of the “just say no” defense, which allows the board of a target company to refuse to negotiate (and waive structural defenses) to frustrate advances from unwanted suitors.
According to the authors, "just say no" is more properly viewed as a tactic rather than an end, and when viewed this way,
it is apparent that the vitality of the “just say no” defense is not and will not be the subject of a simple “yes or no” answer from the Delaware courts. Instead, the specific facts and circumstances of each case will likely determine the extent to which (and for how long) a court will countenance a target’s board continuing refusal to negotiate with, or waive structural defenses for the benefit of, a hostile suitor.
Wednesday, February 10, 2010
Last week Air Products filed a suit in Delaware Chancery Court challenging Airgas' "Just Say No" defense. This has the makings of being an important case if it gets as far as a ruling.
Tuesday, February 2, 2010
You might remember that Barnes and Noble adopted a shareholder rights plan last November (here). Now, investor Ron Burkle (19% holder of BKS stock) has filed an amended Schedule 13D in which he questions the board's decision to adopt the shareholder rights plan and, in particular, its applicability to BKS' Chairman and largest shareholder, Leonard Riggio. In his letter to the board, Burkle writes:
We believe having over 37% of the Company shares in the hands of the Riggio family and other insiders, coupled with the 20% ownership limitation enforced on other shareholders under the poison pill, has a coercive effect on the Company’s other shareholders and gives the Riggio family a preclusive advantage in any proxy contest. This has the effect of placing de facto control of the Company in the Riggio’s hands, despite their owning much less than a majority of the Company’s shares.
Coercive? Preclusive? That's magic Unocal language! Now, Delaware is pretty clear. A shareholder rights plan, adopted under clear skies, is likely to survive a Unocal analysis. I think Burkle (or his lawyers) knows this. That's probably why he makes this request:
In addition, I hereby request the Board to (a) take such action as is necessary to allow me and my affiliated funds to collectively acquire up to 37% of the outstanding shares (including the shares we currently hold) without triggering the poison pill and (b) confirm that the members of the Riggio family cannot individually or collectively acquire any more Company stock without triggering the poison pill. This will allow us, through the purchase of additional shares, to be on an equal footing with the Riggio family at the Company’s annual shareholder meeting. Not to grant us such a waiver and interpreting the plan to allow the Riggio family to acquire additional shares would, in effect, create a near insurmountable barrier to us (or any other non-Riggio shareholder) in waging a successful proxy contest, because winning such a contest at the next annual meeting would be either mathematically impossible or realistically unattainable.
Mathematically impossible or realistically unattainable? That's Unitrin language applying the intermediate Unocal standard. What's Burkle up to? I don't pretend to know the big picture here, but at a tactical level it's clear that he is trying to push BKS' board into a fiduciary corner. If the BKS board says no to Burkle's request to increase his equity position or if the BKS board refuses to acknowledge that the Riggio family is prevented by the current shareholder rights plan, then they might as well hang a sign on the front door saying that they are entrenching management. Delaware courts are generally okay when informed boards rely on shareholder rights plans to defend the corporation "against danger to corporate policy and effectiveness." (Cheff v Mathes) But, when boards use the corporate machinery, including a pill, to entrench themselves with defensive measures that are coercive of shareholders or preclusive of shareholder action, then courts are less sanguine.
Monday, January 25, 2010
The Krispy Kreme board is doing a little revisiting of its pre-transaction planning. Last week it adopted a revised shareholder rights plan to replace the expiring plan that it had in place. The revised plan is similar to the first, with the notable exception that the revised plan expires in three years rather than ten. The term limitation on shareholder rights plans seems to be a growing trend amongst firms adopting such plans. On the other hand, KKD shareholders are not being asked to approve the new rights plan. From the board's announcement:
The new Rights Plan was adopted to deter abusive takeover tactics, but it was not adopted in response to any specific effort to acquire control of the Company. The Company's current market capitalization makes the Company and its shareholders especially vulnerable to a creeping acquisition of control whereby a person can acquire a substantial percentage of the Company's outstanding stock prior to making any public disclosure regarding its control intent and without paying a control premium.
The mechanics of the new Rights Plan are similar to the existing Rights Plan. In general terms, and as in the existing Rights Plan, the rights that will be issued under the new Rights Plan are not exercisable until such time as a person or group becomes the beneficial owner of 15 percent or more of the Company's common stock immediately following the expiration of the existing Rights Plan. The rights may cause substantial dilution to a person or group that acquires 15% or more of the Company's common stock unless the rights are first redeemed by the Board of Directors. Unlike the existing Rights Plan (which had a ten-year term), the new Rights Plan only has a three-year term.
You can find a copy of the revised rights plan here.
Monday, January 18, 2010
Abstract: This paper argues that in revising the Takeover Bid Directive, EU policymakers should adopt a neutral approach toward takeovers, i.e. enact rules that neither hamper nor promote them. The rationale behind this approach is that takeovers can be both value-creating and value-decreasing and there is no way to tell ex ante whether they are of the former or the latter kind. Unfortunately, takeover rules cannot be crafted so as to hinder all the bad takeovers while at the same time promoting the good ones. Further, contestability of control is not cost-free, because it has a negative impact on managers’ and block-holders’ incentives to make firm-specific investments of human capital, which in turn affects firm value. It is thus argued that individual companies should be able to decide how contestable their control should be. After showing that the current EC legal framework for takeovers overall hinders takeover activity in the EU, the paper identifies three rationales for a takeover-neutral intervention of the EC in the area of takeover regulation (preemption of “takeover-hostile,” protectionist national regulations, opt-out rules protecting shareholders vis-à-vis managers’ and dominant shareholders’ opportunism in takeover contexts, and menu rules helping individual companies define their degree of control contestability) and provides examples of rules that may respond to such rationales.
Tuesday, December 15, 2009
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.
Saturday, July 4, 2009
If the interlocking ownership structures that characterize the chaebol system didn’t already make it hard enough for the market for corporate control to operate in Korea, the Ministry of Justice is apparently moving quickly to legalize the use of shareholder rights plans as part of its fight against the economic downturn and provide yet more breathing space for management.
According to today’s Korean Herald:
The government will … introduce the "poison pill system," or the corporate protection measure to curb hostile takeover bids and allow companies to invest their reserve cash in investment activities.
The Korean Times quotes the Minister of Justice as saying:
"The business circle has strongly demanded introduction of measures for managerial rights protection, and the transition committee also demanded considering it. We will push for the introduction of devices that suit global standards after discussion with other ministries.”
Of course, while the domestic Korean business community is thrilled with the “poison pill system” a sample of Korean editorial opinion is less excited about the prospect of building yet more walls to entrench management of Korea’s Chaebol. The Hankyoreh suggests that the answer to Korea’s economic woes might lie in better managers and not more protection for failed managers. The Korea Times is skeptical that more protection of Chaebol control will result in more investment and employment.
To better put the proposed changes in context, it’s worth remembering the Asian Financial Crisis of 1997. Much of the Korean end of that crisis was blamed on poor corporate governance of the Chaebols. Since 1997, Korea has been struggling to find a way forward. Opening up its capital markets and freeing up the market for corporate control has been controversial and not popular locally. Kim’s paper on Corporate Governance in Korea provides a good overview of the issues that are in part motivating the introduction of the “poison pill system.”
Tuesday, June 23, 2009
In anticipation of a potential hostile approach by Microsoft last year, Yahoo adopted a "tin parachute" severance plan. The "tin parachute" is a company-wide severance plan that makes payments to employees who lose their job following a change in control. If part of the motivation for an acquisition is cost-reduction and if layoffs are part of the post-closing integration plan, then such a plan could be a deal-killer. The Deal Professor discussed Yahoo's tin parachute in a post at the time. In any event, the plan generated a lawsuit that, according to NY Times, was settled today. Here's a copy of the proposed settlement agreement and amended severance plan. The agreement modifies the plan to make it less onerous for a potential acquirer, but doesn't get rid of it altogether. This watered-down plan must stay in place for at least 18 months from the date the settlement plan is approved, thus making it hard for the Yahoo board to lean on it, should Microsoft come knocking again. A new Section 5.1 also permits the board to amend or terminate the plan at any time.
Tuesday, May 26, 2009
The credit crisis has brought the issue of the poison put to fore. A "poison put" is a change of control provision in an indenture that prevents a debtor from having its board replaced as a consequence of a hostile acquisition without triggering a default event. NRG has been waving the potential of such a default as a reason for its shareholders not to tender into Exelon's hostile bid for control of NRG ("NRG: Exelon's board proposal would accelerate $8B in debt").