TAKEOVER DEFENSE IN MINNESOTA

Steve Quinlivan April 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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TERMS AND STRUCTURES

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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TERMS AND STRUCTURES

Negotiated acquisition Statutory merger, approved by board and shareholders

where 100% is acquired Friendly tender offer structure with agreed terms for backend 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 of
Bust up company to extract value

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

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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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MN CONTROL SHARE ACQUISITION STATUTE

Process Acquiror submits information statement Can request shareholder meeting if acquiror pays
corporation expenses to determine voting rights is made

Determine at next annual or special meeting if no request 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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MN CONTROL SHARE ACQUISITION STATUTE

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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MN CONTROL SHARE ACQUISITION STATUTE

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 dont care and cross the line Arbs may buy-in and approve More of a concern with activist investors who dont 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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MN BUSINESS COMBINATIONS STATUTE

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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MN BUSINESS COMBINATIONS STATUTE

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 Hectors financial advisor asked Mr. Goldstein why he was not an interested shareholder Didnt 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

Control Share Threshold Action Starts at 20% Shareholders need to approve voting rights

Business Combinations 10% Disinterested directors need to approve combination before becoming an interest s/h Must be public

Applicability

Includes corps > 100 shareholders

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COMPARING MBCA 671 AND 673

Control Share Length of prohibition Forever if not approved by shareholders Not likely without voting rights Acquiror may welcome vote

Business Combinations Four years

Back-end mergers Weakness

Not for four years 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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REGISTRATION OF CORPORATE TAKEOVERS

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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REGISTRATION OF CORPORATE TAKEOVERS

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 PILLSFLIP-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 statute) and wait out four-year period

Could acquire control (subject to control share acquisition

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 legallycognizable 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 PILLMORAN 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 boards

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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 its 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
Target Airgas Potash Caseys Yahoo Take-Two

(SOURCE DEAL PROFESSOR)

Offer Rejected $70

Price (April 2012) $91 70% above offer price

$38.50 $31 $26

$57 $15 $14.50

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Stephen Quinlivan

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612.335.7076

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stephen.quinlivan@stinsonleonard.com