M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

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Monday, January 25, 2010

Krispy Kreme's Poison Pill

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.

-bjmq

January 25, 2010 in Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Monday, January 18, 2010

A Netutral Approach to Takeover Law

Enriques has a new paper, European Takeover Law: The Case for a Neutral Approach, arguing that the EU should adopt a neutral position towards takeovers (along the lines of the UK's takeover panel) in its current reappraisal of the directive.  A copy of the original EU takeover bid directive from 2004 can be found here.

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.

-bjmq


January 18, 2010 in Europe, Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Tuesday, December 15, 2009

Coast is Clear: Saks Pulls Its Pill

Last year Carlos Slim, Mexcian magnate and occasionally the richest man in the world, began accumulating an 18% position in Saks Fifth Avenue, which at that point was trading at al all time low (around $2.50/sh).  Almost immediately, the Saks board adopted a poison pill.  Now that Slim has moved on, the Saks board has filed an 8-K announcing that it has amended its poison pill (rights plan) to allow the rights to expire on Dec 14, 2009 rather than 2018 as the plan had originally envisioned.  

If you had invested in Saks two years ago, your investment would have lost approximately 60% in value -- even after the mini-run-up since this past summer.  Congratulations.  

- bjmq

December 15, 2009 in Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Thursday, July 9, 2009

Broadcom-Emulex Litigation and a Collection of Strine Musings

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

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

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


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

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

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

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

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

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

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

 -bjmq


Update:  Broadcom drops its bid and punks out completely.


July 9, 2009 in Delaware, Hostiles, Litigation, Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Saturday, July 4, 2009

Korea Introducing the “Poison Pill System”

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.”

 -bjmq

 

 

July 4, 2009 in Asia, Takeover Defenses | Permalink | Comments (1) | TrackBack (0)

Tuesday, June 23, 2009

Yahoo Shareholder Litigation Settled

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.

-bjmq



June 23, 2009 in Litigation, Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 26, 2009

Delaware Weighs in on Poison Puts

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").  


In April, the WSJ ran an article on the role of poison puts in slowing down the market for corporate control during the credit crisis.  Whereas in better times, potential sellers with restrictive debt covenants. ("Poison puts undercut mergers").  Below is a discussion from the WSJ on the effect of "poison puts" on the M&A market.  


  


The Delaware courts recently had a chance to weigh in on the validity of poison puts in the Amylin case.  The opinion is here: Download Amylin-Poison Put. The core issue in the Amylin case was whether a board can, in effect, tie their own hands, as well as the hands of shareholders by leaving it to third party creditors to decide whether or not a hostile bidder is acceptable.  If you'r familiar with the deadhand/slowhand poison pill cases, then it's hard to imagine a Delaware court deciding that a board may, consistent with its fiduciary duties, agree to poison put that effectively neuters shareholders' voting rights.

In the Anylin case, creditors sued to enforce the covenant and prevent a new board that won a proxy contest from taking their seats on the board.  Shareholders and the board opposed.  The court ruled with the board. The effect of which is that poison puts must be read more generously and in a manner that does not have the effect of entrenching management and disenfranchising shareholders.   There is a nice post on this decision on the Harvard Corporate Governance Blog (here). 

- bjmq

May 26, 2009 in Cases, Takeover Defenses, Transaction Defenses | Permalink | Comments (0) | TrackBack (0)

Wednesday, August 8, 2007

The Japanese Poison Pill (Redux)

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

August 8, 2007 in Asia, Hostiles, Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Friday, June 29, 2007

The Japanese Poison Pill

The Wall Street Journal is reporting that yesterday a Tokyo court issued a landmark ruling upholding the use of a poison pill defense by Bull-Dog Sauce Co.   The court held that Bull Dog, a 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.  Last Sunday, 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.  The Tokyo District Court 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, the poison pill will dilute the fund's holdings to less than 3% from more than 10% if triggered. 

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 here there was a shareholder 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

June 29, 2007 in Asia, Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Friday, May 18, 2007

More on Alcan and the Problem of a Pacman Defense

The Wall Street Journal Breakingviews column has a piece today on the problems Alcan would face under Pennsylvania law if it initiated a Pacman defense against Alcoa.  For those who want more of a legal analysis, I refer you to my Wednesday blog post on this subject.

May 18, 2007 in Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Tuesday, May 15, 2007

Alcan, Alcoa and the Pacman Defense

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).

May 15, 2007 in Hostiles, Takeover Defenses, Tender Offer | Permalink | Comments (2) | TrackBack (0)