Takeover Defense in Minnesota

TAKEOVER DEFENSE IN MINNESOTA

Steve QuinlivanApril 2014

TERMS AND STRUCTURES

• Tender offer-offer made directly to shareholder to acquire shares▫ Term not defined by SEC or MN statute▫ Unlikely 100% will ever be acquired

• Back-end merger: ▫ After control is acquired, call a shareholder meeting to

squeeze out remaining shares▫ Or short form merger if 90% acquired

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• Stages of a tender offer▫ Launch, publish offer, SEC filings▫ Wait for people to tender shares▫ Once conditions are satisfied, close and acquire shares▫ Subsequent offering period to acquire more shares▫ Back-end merger ▫ Takeover statutes generally do not prohibit launch or close▫ Takeover statutes will prohibit back-end merger

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• Negotiated acquisition▫ Statutory merger, approved by board and shareholders

where 100% is acquired▫ Friendly tender offer structure with agreed terms for back-

end merger• Proxy contest: Acquiror proposes its own slate of

directors for election• Activist investors

▫ Not interested in acquiring control▫ Force sale to third party▫ Replace management▫ Refocus strategy

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HISTORY

• Corporate raiders of the 1980s: Carl Icahn, Victor Posner, Nelson Peltz

• Michael Milken and Drexel• Coercive practices

▫ Raider controls the board after control acquired▫ Front-end loaded bids: Mesa bids $40 share cash for ½ of

Great American Oil. Upon gaining control, will issue equity or junk bonds with a value less than $40 per share

▫ Bust up company to extract value

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MINNESOTA HISTORY

• 1987 – Dart Group threatens hostile takeover of Dayton Hudson▫ Governor calls special session and adopts takeover

statutes• 1988 – Grand Metropolitan makes hostile bid for

Pillsbury which was headquartered in Minnesota▫ A Delaware corp. court orders redemption of pill (not the

case today)

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POLICY

• Coercive tender offer practices no longer prevalent• Who controls the final decision to accept a hostile

offer? ▫ Board? “Just say no”▫ Shareholders?

• Will uninformed shareholders accept an undervalued tender offer?

• What if there is sufficient information for the shareholders to make a fully-informed decision?

• What if significant shares are held by short term arbs?

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MN CONTROL SHARE ACQUISITION STATUTE

• MBCA 302A.671• Thresholds

▫ 20% < 33-1/3%▫ 33-1/3% < 50%▫ >50%

• No voting rights above range limits unless approved by shareholders

• Example: Unless approved by shareholders, a 21% owner could only vote 19.99% of shares

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• Process▫ Acquiror submits information statement▫ Can request shareholder meeting if acquiror pays

corporation expenses to determine voting rights▫ Determine at next annual or special meeting if no request

is made▫ Voting threshold Majority of all shares entitled to vote including all shares

of acquiror and Majority of all shares entitled vote excluding “interested

shares” (includes acquiror and corporate officers)

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• No conditions on financing permitted• Company can redeem shares in excess of thresholds if

▫ No information statement delivered to company within 10 days of CSA

▫ Shareholders do not approve voting rights• Some exceptions

▫ Acquired from company▫ All cash tender offers Approved by disinterested directors before

commencement or announcement Will acquire 50%+

▫ Negotiated mergers

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• Issuing public corporation▫ SEC reporting company with 50+ shareholders▫ Others with at least 100 shareholders

• Acquiring persons – picks up groups with “understandings”

• Beneficial ownership-broader than 13D rules, includes rights to acquire shares

• Aggregation of “affiliates” and “associates”▫ The SEC will not give guidance on “affiliate” status▫ “Control” presumed at 10% in MBCA

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MN CONTROL SHARE ACQUISITION ACT

• So no worries about a hostile deal? ▫ 19.9% is a formidable toe hold▫ Some may welcome the opportunity to take its case to

shareholders▫ Proposal just to put in play▫ Some don’t care and cross the line▫ Arbs may buy-in and approve▫ More of a concern with activist investors who don’t plan an

acquisition• For practical purposes, the business combinations statute

stops most accumulations at 9.9% ▫ Wage a proxy contest and obtain shareholder approval

under CSA

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MN BUSINESS COMBINATIONS STATUTE

• MBCA 302A.673• No business combinations of issuing public

corporations▫ with interested shareholders or affiliates and associates▫ for 4 years▫ unless approved by committee of disinterested directors▫ before becoming an interested shareholder

• Interested shareholder = ▫ Beneficial ownership of 10% or more▫ Present affiliates and associates of company who held 10%

or more in last 4 years

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• Disinterested committee must be formed promptly upon receipt of proposal

• If a good faith definitive proposal is made in writing the committee must respond within 30 days

• Business combinations▫ Mergers and exchange offers▫ 10% asset sales▫ 5% securities sales▫ Liquidation or dissolution▫ Reclassifications, reverse splits, etc.▫ Receipt by interested shareholder of loans, advances,

guarantees or other financial assistance

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• Exceptions▫ Not a public reporting company▫ Amend articles or by-laws to exclude application Majority of shares entitled to vote excluding interested

shareholders Not effective for 18 months after approval

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WAR STORY

• Phillip Goldstein and Andrew Dakos file 13D disclosing 11% ownership of Hector Communications, a MN corp.

• Letter to board offering to purchase for $30.25 per share

• Hector’s financial advisor asked Mr. Goldstein why he was not an “interested shareholder”

• Didn’t read statute?• Thought approval could be given after becoming

an interested shareholder?• Subsequently sold to third party for $36.40

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COMPARING MBCA 671 AND 673

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Control Share Business CombinationsThreshold Starts at 20% 10%Action Shareholders need to

approve voting rightsDisinterested directors need to approve combination beforebecoming an interest s/h

Applicability Includes corps > 100 shareholders

Must be public

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COMPARING MBCA 671 AND 673

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Control Share Business CombinationsLength of prohibition Forever if not

approved by shareholders

Four years

Back-end mergers Not likely without voting rights

Not for four years

Weakness Acquiror may welcome vote

9.9% holder pursues proxy contest

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MN FAIR PRICE STATUTE

• MBCA 302A.675• Applies to public reporting companies• If shares are acquired pursuant to

▫ a takeover offer▫ all further acquisitions are prohibited▫ for two years ▫ unless on substantially similar terms

• Takeover offer: tender offers where▫ offeror would own 10% of any class or series and▫ owned less than 10% of any class or series before the offer

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MN FAIR PRICE STATUTE

• Exception if approved by disinterested directors before any purchase of shares before a takeover offer

• A different definition of disinterested directors• When would this exception be utilized?

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REGISTRATION OF CORPORATE TAKEOVERS

• Minn. Stat. 80B.01 et seq.• Target companies

▫ Not limited to companies incorporated in MN▫ Must be public▫ Principal place of business in MN or $1,000,000 in assets▫ Share ownership 10% of security holders resident in MN 10% of securities owned by MN residents More than 1,000 beneficial or record holders resident in

state

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• Takeover offer: would own more than 10% or ownership would increase by 10% as a result of a tender offer

• File registration statement with Commissioner of Commerce

• Registration statement includes information about plans to change principal place of business, employment policies, etc.

• Information must be included in tender documents

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• Commissioner can suspend effectiveness of takeover offer upon finding that materials do not provide full disclosure

• Unlawful practices include:▫ Sale by controlling shareholders for a greater price▫ Offering different terms to MN residents▫ Williams Act would probably prohibit the above as well

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OTHER MN STATUTES

• 302A.553., subd. 3▫ No green mail▫ Prohibits purchases in excess of market value from 5%

shareholders, if shares have not been held for two years• 302A.255, subd. 3 – No granting parachutes or

increased compensation while a tender offer is in process

• 302A.441 – Written actions of shareholders must be unanimous if publicly held

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OTHER MN STATUTES

• MBCA 302A.223, subd. 3: Shareholders may remove directors by affirmative vote of a majority of shares entitled to vote▫ Can include supermajority provisions in articles or by-laws

• MBCA 302A.433, subd. 1▫ 10% of outstanding shares can call a special meeting▫ Need 25% for business combinations or to affect

composition of board• MBCA 302A.135/181

▫ 3% shareholders can propose amendments to articles and by-laws

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POISON PILLS

• Rights with 10-year term• Redeemable if Board supports offer• Flip in: if line crossed (10%-20%) can purchase shares with

a market value of 2X exercise price▫ But not acquiror

• Types of pills which violate law – no hand and dead hand

• Gelco decision upheld pill for a MN corp.• See MBCA 302A.409 which specifically contemplates pills• MBCA 302A.405 speaks to value at which

shares can be sold--“fair value” (Gelco said a pill was OK)

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POISON PILLS—FLIP-IN EXAMPLE

• 19,000,000 shares outstanding• Exercise price $130• Acquiror acquires 20% and trips pill• Would have to collect over $2 billion from

shareholders for dilution to occur

• Solution – exchange feature-issue one share to redeem rights held by non-acquiror

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POISON PILLS

• Flip over: if acquiror acquires more than 50% and engages in a merger, it becomes a right to buy acquiror stock having a value of twice the exercise price

• Operates where potential dilution has not stopped acquiror and not previously redeemed

• Under the MBCA shareholder approval is not necessary to adopt a poison pill

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POISON PILLS

• Who is ISS?• Pills expire after 10 years• Generally recommends withhold or votes against

directors for any company that adopts a poison pill without shareholder approval

• Will recommend a vote for a poison pill if▫ No lower than a 20% trigger ▫ A term of no more than three years▫ No feature that limits the ability of a future board to

redeem the pill▫ Shareholder redemption feature (qualifying

offer clause)

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POISON PILLS

• Qualifying offer: ▫ Cash, financed▫ Chewable pill: If the board refuses to redeem the pill 90

days after a qualifying offer is announced, 10 percent of the shares may call a special meeting or seek a written consent to vote on rescinding the pill

• Solution: Morning after pill▫ Draft pill▫ Educate directors▫ Adopt immediately after hostile bid is announced

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POISON PILL v. MINNESOTA STATUTES

• Business combination statute▫ Crossing 10% line in business combinations statute only

prevents business combination for four years▫ Could acquire control (subject to control share acquisition

statute) and wait out four-year period• Crossing flip-in line on a poison pill results in dilution• Board controls decision with classic poison pill• Shareholders control decision under Control Share

statute

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CLASSIFIED BOARDS

• Divide directors into three classes• Elect 1/3 of directors every year• Specifically permitted under MBCA 302A.213• Need shareholder approval to adopt (MBCA

302A.181)• Weaknesses:

▫ Failure to include supermajority votes to amend or remove directors

▫ Sloppy drafting-leave holes where shareholders can increase size of board

▫ Other games: Airgas court rejected attempt to speed up annual meetings

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CLASSIFIED BOARDS

• On the decline somewhat due to governance activists▫ Entrenched boards have less accountability▫ OR focus on long-term value creation▫ Bebchuck v. Wachtell

• 1/3 of S&P 500 companies have eliminated• 448 proxy proposals to destagger boards since 2005

▫ Average vote is 64% for destaggering

Source: Deal Professor

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ADVANCE NOTICE BY-LAWS

• Shareholder proposals must be received a set period of time (120 days) before meeting

• Certain information must be included• Avoid surprise at annual meeting• Shareholder approval not needed to adopt• Weaknesses:

▫ Contrary to MBCA 302A.135 & 181 which allows shareholders to propose article and by-law changes?

▫ Too long of a period▫ Sloppy drafting-unclear as to what the by-laws apply to

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PUTTING IT ALL TOGETHER

• Hostile acquiror wants board to redeem the pill and accept tender offer

• Wages simultaneous proxy fight to elect directors▫ In MN would need approval under the Control Share

statute as well if tender offer has been commenced• Hence tender offer must be announced and

shareholder nominees proposed in accordance with advance notice by-laws

• If Board is classified, it takes two years to gain control

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1985

• Smith v. Van Gorkum: Board must consider intrinsic value of company and not just market price

• Moran-validity of pills• Unocal-defensive measures• Revlon

▫ Obtain best price for shareholders▫ The reason hostile bids fail is the acquiror “must be

prepared to pay more than anyone else on the planet”

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DEFENSIVE MEASURES -- UNOCAL

• “Omnipresent specter” of entrenchment in takeover situations

• Intermediate scrutiny▫ Reasonable grounds for believing danger to corporate

policy and effectiveness existed Reasonableness of process, investigation and results

▫ Any board action taken in response to threat is reasonable in relation to threat posed Not if preclusive or coercive

• Gelco case – similar in MN

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MORAN – VALIDITY OF PILLS

• Coercive acquisition techniques a legally-cognizable threat

• Adoption of pill a reasonable defensive measure taken in response to threat

• When faced with a tender offer and a request to redeem rights, the Board will not be able to arbitrarily reject offer

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AIRGAS-REDEMPTION OF A PILL—MORAN AND UNOCAL APPLIED

• Corporate threat exists▫ Board analysis supports undervalued offer (after extensive

analysis) and shareholders may accept• A staggered board in conjunction with a pill is not

preclusive or coercive▫ Delays but does not prevent a takeover▫ It may take two years but that is a business decision

• A Delaware court will not substitute its business judgment for the board’s

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REVLON

• Once a Board has determined to sell a corporation for cash, Delaware courts have imposed a supplemental duty (frequently called the Revlon duty) to act reasonably to attempt to obtain best terms reasonably obtainable for shareholders

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REVLON

• No blueprint for how Board should attempt to maximize terms

• Only price is relevant under Revlon• There is no long-term under Revlon• Does Revlon exist in Minnesota?

▫ No cases▫ 302A.251, subd. 5: Can consider things other than price Employees Customers Suppliers Long-term and short-term interests and the

possibility these interests may be best served by continued independence

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TAKEOVER PREPAREDNESS

• Educate board annually▫ Management plan and strategy▫ Intrinsic value of the company▫ Statutory protections▫ Structural protections▫ Fiduciary duties

• Educate CEO▫ If anyone calls, “The Company is not for sale”▫ Do not unilaterally reject an offer

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HOW IT STARTS

• Tender offer launched with no warning• Public bear hug• Private bear hug• Phone call to CEO

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FIRST STEPS

• Board has a duty to evaluate credible offers• Form special committee under business combinations

statute• General business judgment standard-- MBCA 302A.251• No court has ever imposed liability for rejecting an offer

(so far)• Hire bankers• Evaluate offer

▫ Premium to market price▫ Trading multiples of similar companies▫ Comparable transactions analysis▫ Discounted cash flows

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FIRST STEPS

• Reject offer as inadequate?• If it’s in the “zip code”

▫ Reject offer as inadequate but request “best and final offer”

▫ Market check to satisfy Revlon duties? Run auction and contact numerous parties (greater than

25) Contact more limited set of likely acquirors No “pre-signing market check” and rely on “post signing

market check” through fiduciary out in merger agreement

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AIRGAS CASE STUDY

• Initial tender offer bid of $60• Classified board• Poison pill• Acquiror elects three independent members to

board• Best and final offer of $70• Board unanimously believes value is at least $78• Even the acquiror nominated directors vote to

reject offer• Delaware does not require board to redeem pill• Acquiror folds

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FUN FACTS (SOURCE DEAL PROFESSOR)

Target Offer Rejected Price (April 2012)

Airgas $70 $91

Potash 70% above offer price

Casey’s $38.50 $57

Yahoo $31 $15

Take-Two $26 $14.50

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Stephen Quinlivan \\ 612.335.7076 \\ [email protected]

Documents

Takeover Defense in Minnesota