M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

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.



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.


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."


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.    


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

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. 



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.



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


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. 


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)

Sunday, February 27, 2011

Barry and Hatfield on takeover defenses

Before Airgas gets too far into your rearview mirror - Jordan Barry and John Hatfield have recently posted a paper, Pills and Partisans: Understanding Takeover Defenses.  Although Chancellor Chandler's opinion in Airgas may be the last word on the question for now, that doesn't mean we have to stop asking the questions! 

Abstract: Corporate takeover defenses have long been a focal point of academic and popular attention. However, no consensus exists on such fundamental questions as why different corporations adopt varying levels of defenses and whether defenses benefit or harm target corporations' shareholders or society generally. Much of the disagreement surrounding takeover defenses stems from the lack of a fully developed formal analytical framework for considering their effects. Our Article presents several formal models built upon a common core of assumptions that together create such a theoretical framework. These models incorporate the reality that target corporate insiders have superior information about the target but are imperfect agents of its shareholders. They suggest that modern defenses enable target shareholders to extract value from acquirers by empowering corporate insiders, but that takeover defenses do not benefit society as a whole. They also suggest why corporations with different characteristics may choose to adopt varying levels of takeover defenses. Our findings have implications for the longstanding debate about who is best served by state-level control of corporate law and the desirability of increased federal involvement in corporate law.


February 27, 2011 in Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Friday, February 18, 2011

Skadden on Airgas

Skadden's client memo on Airgas is here.

Gibson Dunn has their own long client memo on Airgas here.



February 18, 2011 in Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Tuesday, February 15, 2011

158 page Airgas opinion

Download it, get a cup of coffee, close the door, and start reading this primer on the pill, Unocal, and "just say no" defense.  Spoiler alert: Airgas wins and Air Products drops its bid and moves on.  So, looks like no appeal in the works.  

This opinion is a very thorough primer on the Unocal and takeover defenses. I expect it will quickly make its way into casebooks.  Chandler makes it clear early on that he doesn't believe inadequate price is a threat, but that the Supreme Court in its wisdom has decided that inadequate price is a legally cognizable threat, so there isn't much more he can do.  

There's a whole other post to be written on what Kraakman and Gilson really meant by "substantive coercion" in their paper on the Unocal intermediate standard and what half lessons the Delaware Supreme Court took from that paper, but I'll leave that for another day.  For the time being, substantive coercion - my stockholders are too stupid to know what's good for them - survives.  And Interco, well, Interco remains bypassed like an intellectually interesting sideshow.

Anyway, Chandler notes that "Just Say No" isn't "Just Say Never".  It's just "Just Say No" for a really long time.   I'll have to give this a longer more detailed read and will likely post more later.  In the meantime, download and enjoy!

Download Chandler_airgas_opinion.


February 15, 2011 in Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Wednesday, February 2, 2011

Airgas - a natural experiment

Lucien Bebchuk, Alma Cohen and Charles Wang have just posted a paper on SSRN, Staggered Boards and the Wealth of Shareholders: Evidence from a Natural Experiment.  In the paper they test the effect of the recent Airgas decisions - in the Chancery Court as well as in Supreme Court on company valuations.  They find that to the extent the Chancery Court weakened the power of staggered board by revealing a chink in the armor, it also increased valuations of firms with staggered boards.   On the other hand, when the Supreme Court reversed that decision, the reversal had the effect of reducing valuations.  In short, though the courts appear to disagree, the markets believe that staggered boards are value reducing.

While staggered boards are known to be negatively correlated with firm valuation, such association might be due to staggered boards either bringing about lower firm value or merely being the product of the tendency of low-value firms to have staggered boards. In this paper, we use a natural experiment setting to identify how market participants view the effect of staggered boards on firm value. In particular, we focus on two recent rulings, separated by several weeks, that had opposite effects on the antitakeover force of the staggered boards of affected companies: (i) an October 2010 ruling by the Delaware Chancery Court approving the legality of shareholder-adopted bylaws that weaken the antitakeover force of a staggered board by moving the company’s annual meeting up from later parts of the calendar year to January, and (ii) the subsequent decision by the Delaware Supreme Court to overturn the Chancery Court ruling and invalidate such bylaws.

We find evidence consistent with the hypothesis that the Chancery Court ruling increased the value of companies significantly affected by the rulings –namely, companies with a staggered board and an annual meeting in later parts of the calendar year –and that the Supreme Court ruling produced a reduction in the value of these companies that was of similar magnitude (but opposite sign) to the value increase generated by the Chancery Court ruling. The identified positive and negative effects were most pronounced for firms for which control contests are especially relevant due to low industry-adjusted Tobin’s Q, low industry-adjusted return on assets, or relatively small firm size. Our findings are consistent with market participants’ viewing staggered boards as bringing about a reduction in firm value. The findings are thus consistent with institutional investors’ standard policies of voting in favor of proposals to repeal classified boards, and with the view that the ongoing process of board declassification in public firms will enhance shareholder value.


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

Monday, January 24, 2011

Poison pill in Delaware court on Tuesday

So, tomorrow Chancellor Chandler will take up the question of whether to order the Airgas board to pull its pill.  Air Products, you'll remember, has been pursuing Airgas for many months now.   Airgas has steadfastly said "No."  In the fall Air Products elected three members to the board and got shareholders to vote to approve a new bylaw that would have moved up the next annual meeting to January - thereby cutting short the defense that time provides in the classified board.   The Chancery Court upheld the bylaw change.  But then, in a little bit of a stunner, the Delaware Supreme Court overruled the Chancery Court's opinion.  The Chancellor, I assuming confident that his opinion wouldn't be overruled, had put off the question of whether to order the rights plan pulled to a date just past the accelerated shareholder meeting date.   That was a nice way to avoid the question of the pulling the pill -- had the Chancery Court's opinion not been overruled, the shareholders would have met by now, and presumably, voted in a new majority for the board, thus making the question of the pill moot.  The Delaware Supreme Court decision ensured that this was not to be. 

So, Chancellor Chandler is put in the uncomfortable position of having to consider whether to order a board that has lost the first round in a proxy contest whether it must pull its rights plan.   Of course, Chancellor Chandler is not opposed to issuing such an order in the right circumstances.  In the Craigslist case he order the board to pull its pill.  Craigslist was a bit of a unique case.  How many closely-held firms have shareholder rights plans anyway?  Probably just Craigslist.  The Airgas case is more difficult.  Why?  Well because it's precisely the kind of case that the Chancery Court has studiously avoided hearing for year.  In his 2002 paper, which is a response to a paper from Profs. Bebchuk, Coates, and Subramanian, Vice Chancellor Strine described just this scenario as the "professorial bear hug" intended to forces judges to deal directly with the fiduciary duty issues related to the pill.

The question the authors ask us to decide affirmatively is fundamental: Can control of the corporation be sold over the objections of a disinterested board that believes in good faith that the sale is inadvisable? That is, at bottom, the authors want to force the hand of the Delaware courts to decide, once and for all, that impartial and well-intentioned directors do not have the fiduciary authority to "just say no" for an indefinite--even perpetual--period to a noncoercive tender offer made to their company's shareholders. ...

... When the stockholders of  a corporation with an ESB have  expressed their desire to receive  a fully funded, all-shares tender offer  in  a fair, noncoercive  board election  that was  preceded by an adequate opportunity for the incumbent board to develop  a better strategy and make  their  case to the target stockholders, does  a well-motivated  and well- informed majority of independent, incumbent directors who  believe  that the offer  is inadequate have  the power to block  that tender offer by continuing to deploy a poison pill?

And that, in essence, is what is at stake tomorrow in Chancellor Chandler's courtroom.  A couple of months ago, I predicted that we'd never get to see this day.  I also predicted that the Del. Supreme Court wouldn't overturn Chancellor Chandler's bylaw decision and that the Pats would beat the Jets (not cover the spread, just beat them).  Clearly, I'd be a mess if I had to make my living in Vegas, so I'm making no predictions.  Chancellor Chandler has shown himself to be sufficiently peeved at being overruled in his earlier decision that I think most bets are off.   I continue to be amazed that the Delaware Supreme Court wasn't able to look ahead to tomorrow and realize that by knocking down the bylaw they set up this Just-Say-No case to come before Chandler, and inevitably them.  Why is that a better outcome than letting the bylaw survive?  I don't know.  Anyway, tune in tomorrow for all the fun.



January 24, 2011 in Delaware, Hostiles, Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Friday, January 7, 2011

Has the market killed "Just Say No"?

So says Donald Drapkin.  Although the law hasn't moved this far, yet markets and investors just won't let it happen anymore.  Drapkin's observation highlights the sea-change that has occurred over the past three decades.  During the 1980s target boards sought to keep acquirors away - the hostile acquisition and entrenchment concerns guided the development of the corporate law.  Now, times have changed.  There are a few boards (Airgas, Genzyme, etc) who fight acquisition attempts.  Many more, however, can see the payday.   The real question these days is not of the entrenchment of the 1980s, but of management conflicts in the going private or cash out sale (e.g. J. Crew).  The law is still developing to deal with those conflicts.    


(h/t WSJ Deal Journal)




January 7, 2011 in Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Wednesday, December 29, 2010

Lipton on Shareholder Rights Plans

Marty Lipton is widely regarded as the creator of the poison pill.  He is interviewed by The Deal and walks through his motivations for developing the poison pill during the hostile takeover boom of the 1980s.  Notwithstanding criticism from the academics (especially law professors) his view with respect to the pill was accepted by the Delaware Supreme Court.


(h/t The Conglomerate)

December 29, 2010 in Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Tuesday, November 9, 2010

Genzyme & Sanofi: Penpals

Sanofi and Genzyme have been exchanging letters.  In the first one, Sanofi's CEO Christopher Viebacher sent a letter to Genzyme CEO Henri Termeer.  In the letter Viebacher makes the following points: 

First, you indicated that you believe that the Genzyme Board can, at any time, opt to immediately stagger the terms of its members, extending the terms of two‐thirds of Genzyme's current directors for an additional one to three years. ... 

Second, you stated that the Genzyme Board retains the ability to adopt a "poison pill". As you are well aware, if adopted, the poison pill would prevent Sanofi-Aventis from acquiring Genzyme, regardless of your shareholders' support for a transaction.

Third, you indicated that the Genzyme Board may wield the Massachusetts anti-takeover statutes in a manner that would, as a practical matter, prevent Sanofi‐Aventis from acquiring Genzyme without the cooperation of Genzyme's Board, notwithstanding your shareholders' support of a transaction.

Since the stockholders destaggered the Genzyme board in 2006, presumably Genzyme would stagger the board through a bylaw amendment adopted by the board.  In his letter, Viebacher suggests that taking these defensive actions would be inconsistent with "maximizing shareholder value."  I suppose he wants Termeer to get concerned that he might violate his fiduciary duties as a director of a MA company should he not immediately agree to a sale of Genzyme to Sanofi.  Well, Termeer has little to fear.  As I've written before, MA companies are very management friendly and have written out of the law any of the pesky obligations put on boards by Delaware decisions like Revlon and Unocal.  Just-say-no is alive and well in Massachusetts.  Clearly, the Genzyme board is engaged and informed.  That's basically going to be enough.  The brush off letter from Termeer back to Viebacher seems to indicate that Termeer knows this, too.


November 9, 2010 in Hostiles, Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Friday, October 8, 2010

Advantage: Air Products

OK, so I listened to the arguments regarding the Airgas bylaw, courtesy of our friends at Courtroom View Network.  While I'm terrible about predictions - especially about the future - I'll venture a guess that Air Products had the better of the arguments today.  I mean, if Ted Mirvis is relying on law professors to make his case, he must be leaning on a pretty thin reed.   

Really, the reason why I think Air Products got the best of the argument today is that in order for Chandler to rule in favor of Airgas' position, he will have to rule that when Airgas drafted its certificate of incorporation, it did not mean that directors should serve "a term expiring at the annual meeting of stockholders held in the third year following the year of their election" but that they meant 3 years.  


Air Products' counsel had the better argument here.  Summed up as: " 'Oh c'mon your Honor, you know what we meant' is not a recognized principle of contract or charter interpretation."  If Airgas wanted its directors to have a three year term, it would have, as other corporations have, written that explicitly into its charter.  But it didn't. 

Airgas would like board to read language below and come to the conclusion that X=Y.  I don't think the court will.  A"term of three years" is not the same as serving until "the annual meeting held in the third year following the year of the their election."  It's pretty plain.  One might not like it, and I'm sure that plenty of lawyers drafting proxy statements at 3am have happily conflated the two in order to get home before sunrise, but they are still not the same.


I think coming to grips with the implications of this was behind some of Chandler's early discomfort with Air Products' argument.  I can imagine that he was going over in his head what the result would be of his ruling in favor of Air Products -- a full employment ruling for corporate law departments around the country as they scurry to tighten the language in the provisions in their charters. 

On the other hand, if Chandler were to go with the "typical understanding" of the length of the term of a staggered board rather than a reading of the plain text, then he would do something that he would never do in the context of, for example, interpretation of a merger agreement.  I tell my M&A class that Delaware adheres to a "big boy" rule - courts assume counsel is smart enough to bargain for the provisions that they want and courts will not interpret beyond what is in the plain language -- think Alliance Data Systems v Blackstone.  

If Chandler were to side with Airgas in their argument that would require him to assume that Airgas did not mean what it wrote in its charter.  That's a hard sell and, I suspect, would result in an immediate appeal to the Supreme Court. 

Beyond that, the old bylaw provisions permitted Airgas to advance its meeting date so that meetings could be separated by a window as little as seven months showed that, until the litigation, Airgas itself didn't interpret its charter to require an annual meeting occur at least 12 months after the previous meeting. Their current interpretation seems to be one that is convenient given the current litigation.  

Anyway, it's going to be tough for Chancellor Chandler.  I think he's going to have to rule for Air Products - he may try to hedge a bit, but I don't think he really has any choice.  

And, I think that the result will be  howls of pain from attorneys all over the place - people will be quoted saying things like "worst since Van Gorkom or Omnicare" but they will be wrong.  In the end, though, we'll all survive.  Lawyers will be more attentive to their drafting and will specify in their charters that the term for a director on a staggered board is 3 years and not some other term.

But, maybe they should have gone through that exercise the first time around.  

Anyway, I guess all this puts me at odds with the conventional wisdom - Airgas' price is down $1 today (I won't get into Fischel's expert opinion this afternoon and the EMH) and Bloomberg seems to suggest it will go the other way.    


October 8, 2010 in Cases, Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Why does anyone still have a poison pill?

I occasionally give some thought to the question why any board bothers to adopt a poison pill absent an obvious threat of takeover.  I mean, why bother?  A well-informed board can adopt a shareholder rights plan in, let's be honest, about five minutes.  These plans are by now pretty standardized and if your outside counsel bills you more than a few hours to put one together for your company, you probably should look at your bills a little closer.  At the same time, if you carry a pill in the absence of a takeover threat - just in case - you'll get dinged by Riskmetrics and they'll recommend voting against your board.   Who wants that?  

Hypercom has it about right.   They had no pill in place and then when Verifone started sniffing around, the board met, considered and then issued a press release that read:


Hypercom’s Board thoroughly reviewed VeriFone’s unsolicited proposal with the assistance of its independent financial and legal advisors and concluded that the proposal significantly undervalues the Company and its future prospects and is not in the best interests of stockholders. Hypercom believes that VeriFone’s proposal is opportunistic and intended to disrupt its business, which has successfully taken market share from VeriFone in several markets.
“Our Board firmly believes that Hypercom has proven its ability to grow profitably, has strong near- and long-term value creation potential and is well-positioned to increase profits and market share,” said Norman Stout, Chairman of the Hypercom Board of Directors. “We are committed to representing the best interests of our stockholders and consistently have been open to exploring ways of enhancing value. However, we believe that VeriFone is not offering appropriate value to Hypercom stockholders, given our evident momentum in the marketplace and our excellent future prospects.”


With that, Hypercom adopted a pill.  Now, should a court review the board's decision to adopt the pill, we know that the court will subject it to Unocal intermediate scrutiny.  But guess, what?  We also know that under Moran, if a board had adopted a pill "under a blue sky", the subsequent decision not to pull the pill in the face of an offer would also be subject to intermediate scrutiny.  So ... since everybody knows that anybody can quickly adopt a pill and since Riskmetrics, etc hate the pill for governance reasons, I think everybody should just get rid of them ... until you need them, that is. 

OK, it's Friday.  Off my soapbox.  I'll take up Hypercom's suit against Verifone another day.


October 8, 2010 in Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Wednesday, October 6, 2010

Statutory Fiduciary Duties, Unocal, and Revlon outside Delaware

I've written on this before (and also here, and here).  In the 1980s during the great takeover boom and hollowing out of the industrial heartland, many states adopted amendments to their corporate codes that codified directors' fiduciary duties, so-called "constituency statutes".  In general, these provisions made it clear that a director need not "maximize shareholder value."  Rather, in complying with their fiduciary obligations, directors may take all sorts of things into consideration - the impact of their decisions on various constituencies, including employees, the community, the environment, the color of the sky, whatever.  

When these statutes were first passed, they were heralded as way to protect jobs, etc.  Earlier this year, Michigan passed one hoping it would protect local jobs from corporate raiders.  Lots of other states have similar constituency statutes.  For example, Oregon has one (Sec. 60.357).  You can find them all over.  In general, these statutes reject Unocal and Revlon as binding on directors of corporations in those jurisdictions.  

My problem with these statutes is that they strike me as a bit of a head fake.  While they certainly give boards the power they need to protect local communities, etc should they so desire, they don't actually require directors to protect those constituencies.  In effect, such statutes, simply give directors another fiduciary lever to pull when negotiating with a potential acquirer.  

I've said this before, but you know a board might be very concerned about the impact of a potential acquisition on employees and the community when the bid is $69.  At $75, the board's concerns about the impact on the community might start to fall away. Why not move the HQ to Paris?  It's so much nicer there than Cambridge.   At $85?  Employees ... we have employees?!  

There's no requirement that a board share the incremental price increase with those stakeholders who will lose out when a transaction is ultimately done.  Does anyone really think that a board, having invoked this provision to say no, will then turnaround a cut a check to the local community the day after it accepts an offer to sell?  In the end, the price paid goes to shareholders, not to the employees or the community or the environment.  To the extent these statutes get sold to legislators as important tools to protect local companies (and jobs and communities) from outside raiders, they are, in that sense, a bit of a scam.  These statutes put all the cards into the hands of directors.  And that's fine, if that's what you want to do.  

Along those lines, I spent the afternoon in the MA Business Litigation Session yesterday with a couple of students.  We went to observe motions being argued in the consolidated case against Genzyme.  You'll remember that Genzyme and its directors were sued (8 lawsuits!) after they turned down a friendly merger proposal from French Sanofi (this is before Sanofi went hostile).  

In their complaints, the plaintiffs made a variety of allegations of the sort you might expect - by not accepting or negotiating the offer from Sanofi that the board violated is fiduciary duties to "maximize shareholder value" [Revlon], etc.  Here's the thing, though.  Massachusetts has a constituency statute (156D, Sec. 8.30).


(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, here come the shareholders with the extremely premature claim that Genzyme's directors somehow violated their fiduciary duties to the corporation because they turned down an unsolicited offer from Sanofi.   But, Genzyme is a MA corporation and MA is not Delaware.  If the directors act in good faith, and then come to the determination that it's in the best interests of the corporation and the city of Cambridge for Genzyme to stay independent, no court in MA will disagree with them.  The plaintiff shareholders simply have no case because (so far) the constituency statute is working exactly as intended.  

I think this is interesting, because just as labor, community, etc. have no case to prevent a sale notwithstanding the presence of a constituency statute,  neither do shareholders have a voice to push one.  The directors call the shots.  I often wonder, other than directors, what constituency these constituency statutes serve.


October 6, 2010 in Hostiles, State Takeover Laws, Takeover Defenses | Permalink | Comments (0) | TrackBack (0)

Tuesday, October 5, 2010

Selectica NOL Pill Okay'd

The Delaware Supreme court handed down its opinion in Versata v Selectica.  You'll remember that Selectica amended its rights plan to protect its NOLs with a 4.99% trigger.  The pill was then triggered when Trilogy aggressively bought through the 4.99% limit knowing that it might trigger the pill.   Trilogy was looking to get into the courtroom apparently. The court upheld the board's adoption of the shareholder right plan with a 4.99% trigger, and the special committee's subsequent decision to deploy the pill to dilute Versata.

You can read the opinion here.  If you're looking for an overview of the issues at stake, Robert Miller at Villanova Law published a nice little piece a couple of months ago (NOL Pill Reloaded) that's worth reading.

Generally speaking, the court upheld the Chancery Court opinion. Consistent with past practice, the court held that the proper standard of review for challenged board actions taken to defend the corporation or a corporate policy is Unocal.  Applying Unocal, the court then largely concurred with Chancery's analysis.  Moving on ...


October 5, 2010 in Takeover Defenses | Permalink | Comments (0) | TrackBack (0)