ANTI TAKEOVER DEFENSES: CLASS NOTES FOR DISCUSSION

PROF HARVEY PONIACHEK MERGERS & ACQUISITIONS FALL 2013

2 ANTI TAKEOVER DEFENSES

I. PREVENTIVE--REDUCE THE LIKELIHOOD OF A SUCCESSFUL HOSTILE BID II. REACTIVE--EMPLOYED AFTER A TAKEOVER BID WAS MADE III. STATE REGULATIONS

PREVENTIVE DEFENSES --THE POISON PILLS

GENERALLY, POISON PILLS MAY NOT PREVENT A HOSTILE TAKEOVER, BUT MAY SLOWDOWN THE PROCESS AND INDUCE MORE INTENSE NEGOTIATIONS AND HIGHER OFFERS POISON PILL DEFINITION: A SHAREHOLDERS RIGHTS PROGRAM WHICH ISSUES TO SHs OF RECORD ONE DIVIDEND PER COMMON SHARE UPON A TRIGGERING EVENT (SUCH AS A HOSTILE TENDER OFFER), WHERE THESE RIGHTS ARE EXERCISABLE BY A TRIGGERING EVENT (HOSTILE PARTY ACQUIRE X% OF THE TARGET OR ANNOUNCES A TENDER OFFER). THE RIGHTS COULD BE DEEMED AS CALL OPTIONS OR WARRANT. [NOTE THAT THERE ARE TWO TRIGGERING EVENTS1ST FOR ISSUING THE RIGHTS, 2ND FOR EXERCISING THEM] TYPES OF POISON PILLS: FLIP OVER--RIGHT TO PURCHASE HOSTILE SUITORS SECURITIES AT A LOW PRICE; FLIP IN--RIGHT TO PURCHASE TARGETS SECURITIES AT A LOW PRICE; POISON PUTS-- ARE RIGHTS TO SELL BONDS TO ISSUERS AT 100 TO 101% OF FACE VALUE IN THE EVENT OF A TAKEOVER WHO CREATES / REDEEMS POISON PILLS? A POISON PILL PROGRAM IS CREATED BY THE BOARD OF DIRECTORS (W/O SHs APPROVAL, BUT OFTEN SUBMITS ITS ADOPTION FOR SHs VOTE) AND THE BOARD HAS THE AUTHORITY TO REDEEM IT

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POISON PILLSFIRST GENERATION
BRIEF HISTORY: INVENTED BY MARTIN LIPTON, AN M&A ATTORNEY, IN 1982. FIRST USED IN THE FORM OF A PREFERRED STOCK PLAN, WHERE DIVIDEND OF PREFERRED SHARES RECEIVED BY SHs OF RECORD WERE CONVERTIBLE INTO THE ACQUIRERS SHARES IN THE EVENT OF A CHANGE OF CONTROL USED IN 1982 TO DEFEND EL PASO ELECTRIC AGAINST GENERAL AMERICAN OIL, AND IN 1993 TO DEFEND LENOX AGAINST AN UNSOLICITED TAKEOVER ATTEMPT BY BROWN FOREMAN MR LIPTON SUGGESTED THAT LENOX OFFER EACH COMMON SH A DIVIDEND OF PREFERRED THAT WOULD CONVERT INTO 40 COMMON SHARES OF BROWN FOREMAN IF THEY TAKEOVER LENOX THIS CONVERSION WOULD CONSTITUTE AN EFFECTIVE TAKEOVER DETERRENCE BECAUSE IT WOULD THREATEN A SERIOUS DILUTION OF THE BROWN FAMILYS OWNERSHIP POSITION THIS VERSION HAD SEVERAL DEFECTS, HOWEVERTHE ISSUE COULD BE REDEEMED IN EXCESS OF 10 YRS, PREFERRED SHARES WERE COUNTED TOWARD THE COMPANYS INDEBTEDNESS AND EXPANDED THE LEVERAGE

5 POISON PILLS--IMPROVEMENTS
THE 2ND GENERATION OF PILLS WAS IN THE FORM OF RIGHTS OFFERINGS THAT ALLOWED THEIR HOLDERS TO PURCHASE COMMON SHs IN THE ACQUIRING FIRM (THAT IS, FLIP OVER) AT A SUBSTANTIAL DISCOUNT FLIP OVER: IN THE TAKEOVER OF CROWN ZELLERBACH BY SIR JAMES GOLDSMITH IN 1985, THE FLIP-OVER PILL FAILED TO PROVIDE THE EXPECTED DEFENSE--BECAUSE THE ACQUIRER ASSUMED CONTROL OF THE TARGET (JUST OVER 50%, BUT NOT THE 100% TRIGGER OF THE PILL), CHANGED THE BOARD OF DIRECTORS (BOD) AND REDEEMED THE PILL THE 3RD GENERATION PILL IS THE FLIP IN VERSION, WHICH IS NOW IN EFFECT, TYPICALLY TRIGGERED WHEN THE ACQUIRER PURCHASED 20% OF THE TARGET SHARES OR MADE A TENDER OFFER FOR TARGET

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VARIANTS OF OF THE POISON PILLS
BACK END PLANS (OR NOTE PURCHASE RIGHTS PLANS)-- FIRST ISSUED IN 1984, PROVIDE SHs WITH A RIGHTS DIVIDEND A RIGHTS DIVIDEND ALLOWS TO EXCHANGE ONE RIGHT AND ONE COMMON SHARE FOR CASH OR SENIOR SECURITIES AT A SPECIFIC PRICE SET BY THE ISSUING BOARD OF DIRECTORS THE BACK END PRICE IS SET ABOVE MARKETSO THAT A MINIMUM PRICE IS ESTABLISHED FOR THE TARGET-- AND THE EXCHANGE IS TRIGGERED UPON A TAKEOVER OF THE TARGET FIRM USED TO LIMIT THE EFFECTIVENESS OF A TWO TIER TENDER OFFER, BY FORCING THE ACQUIRER TO COMPENSATE ALL SHs EQUALLY

7 DEAD HAND PROVISIONS & WHO COULD REDEEM THE PILL COURTS RULING
DEAD HAND PROVISION ALLOWS ONLY THE MEMBERS OF THE BOARD WHO INITIATED THE POISON PILL TO MODIFY OR REDEEM IT (THAT IS, DEACTIVATE IT), EVEN IF THEYRE OUSTED BY A TAKEOVER, THUS PREVENTING AN UNFRIENDLY ACQUIRER FROM SEIZING CONTROL OF THE BOARD AND DEACTIVATE THE PILL THIS PROVISION WAS INVALIDATED BY THE NEW YORK SUPREME COURT IN THE CASE OF THE BANK OF NY v. IRVING BANK THE DELAWARE COURT HAS RECENTLY DEEMED IT ILLEGAL IN THE CASE OF TOLL BROS THE COURT IN GEORGIA HELD THAT THE REDEEMING RIGHTS PROVISION EMBEDDED IN THE ISSUING BOARD WERE LEGAL BECAUSE THEY WERE INCORPORATED INTO THE CORPORATE CHARTER IN THE CASE OF INVACARE BID FOR HEALTH DYNE
TECHNOLOGIES

8 POISON PILLS LEGAL CHALLENGES

THE POISON PILL WAS CHALLENGED IN THE CONTEXT OF THE APPROPRIATENESS OF THE DEFENSE IN GENERAL, BUT NOT PER SE COURT CASES: IN THE BANK OF NEW YORK ACQUISITION OF IRVING BANK IN 1988, THE POISON PILL WAS HELD DISCRIMINATORY BY THE NEW YORK STATE SUPREME COURT. THE PILL RENDERED THE RIGHT TO TARGET SHs TO ACQUIRE $400 OF ITS STOCK FOR $200, EXCEPT BANK OF NY WHICH WAS SEEKING TO ACQUIRE IT IN 1985, THE DELAWARE COURT UPHELD A DISCRIMINATORY SELF TENDER OFFER THAT TRIGGERED A PILL EMPLOYED BY UNOCAL AGAINST MESA PETROLEUM IN 1985, IN THE CASE OF MORAN V. HOUSEHOLD INTL THE DELAWARE SUPREME COURT UPHELD THE LEGALITY OF THE POISON PILL, WHICH ESTABLISHED IT AS A POTENT DEFENSE MEASURE THE CASE OF MAXWELL V. MACMILLAN IN 1988, THE DELAWARE COURT HELD THAT MACMILLANS POISON PILLS UNFAIRLY DISCRIMINATED AGAINST MAXWELLS OFFER, AND THE PILL PREVENTED AN EFFECTIVE AUCTION OF THE FIRM

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CORPORATE CHARTER & BYLAWS A NOTE
A CORPORATE CHARTER CONSISTS OF ARTICLES OF INCORPORATION, WHICH ARE INITIALLY FILED WITH THE STATES SECRETARY OF STATE BY THE CORPORATIONS FOUNDERS THE STATE ISSUES A CERTIFICATE OF INCORPORATION UPON APPROVAL OF THE ARTICLES OF INCORPORATION THE CHARTER PROVIDES THE CORPORATION WITH POWER ACCORDING WITH THE STATES LAWS A CORPORATIONS BYLAWS SUPPLEMENT THE CHARTER WITH RULES THAT GOVERN THE INTERNAL MANAGEMENT OF THE COMPANY.

10 SUMMARY OF CORPORATE CHARTER AMENDMENTS

BOARD PROVISIONS: CLASSIFIED OR STAGGERED BOARD, FOR CAUSE DISMISSAL, MAX NUMBER OF MEMBERS, ELECT STANDBY DIRECTORS FAIR PRICE PROVISIONS SUPERMAJORITY VOTES:FOR ACQUISITIONS, TO CANCEL SUPERMAJORITY, TO AMEND CHARTER SUPER VOTING STOCK (DUAL CAPITALIZATION) ELIMINATE CUMULATIVE VOTING ANTI GREENMAIL AMENDMENT LIMIT SHAREHOLDERS ACTION: CURTAIL CONSENT SOLICITATION, ADVANCE NOTICE OF MEETING, ABILITY TO CALL SPECIAL MEETINGS, SCHEDULE SHAREHOLDER MEETINGS, SETTING AND CONTROLLING MEETING AGENDAS

11 VARIOUS BOD PROVISIONS: STAGGERED OR CLASSIFIED BOARD

STAGGERED OR CLASSIFIED BOARDDELAY EFFECTIVE TRANSFER OF CONTROL IN THE EVENT OF A MERGER-- BY PROVING FOR GRADUAL RETIREMENT OF BOARD MEMBERS EXAMPLE OF A STAGGERED BOARD: IN A BROAD OF 9 DIRECTORS, WITH MEMBERS ELECTED FOR A 3-YEAR TERM, A 1/3 OF THE MEMBERS WOULD END THEIR APPOINTMENT EVERY YEAR; HENCE, THE NEW MAJORITY SHs WOULD HAVE TO WAIT TWO YEARS BEFORE GAINING CONTROL OF THE BOARD

12 BOD PROVISIONSCONT.
ADDITIONAL ANTI CHARTER AMENDMENTS THAT AFFECT THE BOD INCLUDE: PROVISIONS PROHIBITING THE REMOVAL OF DIRECTORS, EXCEPT FOR CAUSE [WHAT MIGHT BE A JUSTIFIED CAUSE?] MAX NUMBER OF MEMBERS (TO DISALLOW NEW OWNERS TO INFLATE THE BOD AND EFFECTIVELY NULLIFY THE STAGGERED BOARD PROVISION), ELECT STANDBY DIRECTORS (IN CASE OF DEATH, THUS ASSURING A FAVORABLE APPOINTMENT)

13 FAIR PRICE AMENDMENTS

FAIR PRICE AMENDMENTS--DESIGN TO DEFEND AGAINST A TWO TIERED TENDER OFFER THAT COULD DISCRIMINATE AGAINST SHs, BY NOT OFFERING THEM THE HIGHEST PRICE A FAIR PRICE MAY BE ON THE BASIS OF A MULTIPLE OF EARNINGS OR BOOK VALUE OR OTHER METHODS THAT ARE EASILY APPLIED IN MOST CASES, THERE IS A BOARD-OUT CLAUSE WAIVING THE SUPERMAJORITY REQUIREMENTS IF A FAIR PRICE IS PAID FOR ALL PURCHASED SHARES BECAUSE A TWO TIER TENDER IS NOT NECESSARY FOR A SUCCESSFUL HOSTILE TAKEOVER, THIS AMENDMENT IS THE LEAST RESTRICTIVE IN THE CONTEXT OF THE CHARTER AMENDMENTS

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SUPERMAJORITY AMENDMENTS
SUPERMAJORITY AMENDMENTSOFTEN CALLED SHARK REPELLENTSARE ANTI TAKEOVER AMENDMENTS TO A COMPANYS CHARTER, AND MUST BE VOTED AND APPROVED BY SHs REQUIRE SHs APPROVAL BY AT LEAST 2/3 VOTE AND SOMETIMES 90% VOTE TO APPROVE A CHANGE OF CONTROL (VIA M&A). IN MOST CASES, THERE IS A BOARD-OUT CLAUSE THAT ALLOWS THE BOARD TO OVERRIDE THE SUPERMAJORITY REQUIREMENT IN SOME CASES, A SUPERMAJORITY SHs VOTE IS NEEDED TO CANCEL THE SUPERMAJORITY VOTE FOR AN ACQUISITION, AND TO AMEND THE CORPORATE CHARTER

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ADDITIONAL CHARTER AMENDMENTS
ADDITIONAL AMENDMENTS INCLUDE--ANTI GREENMAIL PROVISIONS, CHANGE STATE OF INCORPORATION) GOLDEN PARACHUTES (GENEROUS SEVERANCE AGREEMENTS OFFERED TO SNR MGT THAT MIGHT BE COSTLY TO ACQUIRING FIRMS, THUS CONSTITUTE A BARRIER TO ACQUIRE)

16 LIMITS ON SHs ACTION

THE BOD CONTROLS THE LOGISTIC RELATING TO SHs MEETING THE LOGISTIC AFFECTS THE RIGHT TO CALL A SPECIAL MEETING, SCHEDULE THE MEETING AND SET THE AGENDA--WHICH COULD PROVIDE AN UNFRIENDLY ACQUIRER AN IMPORTANT VENUE FOR SHs VOTE THESE LOGISTICS COULD BE USED TO IMPEDE AN UNWANTED ACQUIRERS ATTEMPT TO REST CONTROL

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LIMITS ON SHs ACTIONCONT.
IN SOME STATES, A CONSENT SOLICITATION COULD ADD SEATS TO THE BOARD, REMOVE BOD MEMBERS, OR ELECT NEW MEMBERS W/O A SPECIAL SHs MEETINGIF THE A CORPORATE CHARTER OR BYLAWS WERE NOT AMENDED TO LIMIT THIS PROCESS SOME CORPORATE BYLAWS REQUIRE AN ADVANCE NOTICE PROVISION WHICH MAY REQUIRE A 2 MONTHS NOTICE BEFORE A SPECIAL MEETING CAN BE HELD THE BOD HAS THE POWER TO CALL SPECIAL MEETINGS, TO SCHEDULE THE MEETINGS AND SET THE AGENDA

18 OTHER PREVENTIVE DEFENSES

OPERATIONAL & FINANCIAL METHODS

EFFICIENT AND PROFITABLE PERFORMANCE EFFICIENT WORKING CAPITAL MANAGEMENTAVOID EXCESSIVE CASH & SECURITIES DEFENSIVE FINANCIAL TECHNIQUES EXPAND YOUR INDEBTEDNESS

19 REACTIVE DEFENSES
I.
II.

III.

IV.

STANDSTILL AGREEMENTS, WHITE KNIGHT, WHITE SQUIRE, PAC MAN DEFENSE FINANCIAL RESTRUCTURING: CAPITAL STRUCTURE CHANGES TO WARD OFF A HOSTILE SUITOR (VIA RECAPITALIZATION BY EXPANDING INDEBTEDNESS, ISSUE MORE SHARES AND DILUTE OWNERSHIP, BUYBACK SHARES), EXCHANGE OFFER, LBO/MBO, LIQUIDATION OWNERSHIP REORGANIZATION THOUGHT RESTRUCTURING & REORGANIZATION, BY DIVESTING OF THE CROWN JEWEL, OR OTHER ASSETS, CREATING AN ESOP, ACQUIRING A COMPANY OR BUSINESS LITIGATION

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FINANCIAL RESTRUCTURING
DEFENSIVE MEASURES
UNDERTAKE MEASURES TO BECOME A LESS ATTRACTIVE TARGET BY--INCREASE INDEBTEDNESS, ISSUE DIVIDENDS TO REDUCE EXCESS CASH, LIQUIDATE SECURITIES PORTFOLIO REORGANIZATION OF FINANCIAL CLAIMS THROUGH DUAL CLASS RECAP, LEVERAGE RECAP, FINANCIAL REORG. DUAL CLASS RECAPITALIZATIONCORP RESTRUCTURING BY CREATING TWO CLASSES OF COMMON STOCK WITH SUPERIOR VOTING STOCK CONCENTRATED IN THE HAND OF MGT [IN JULY
1988 THE SEC ISSUED NEW REGULATIONS PROHIBITING PUBLIC COS FROM ISSUING NEW CLASSES OF STOCK THAT WOULD DIMINISH THE VOTING POWER OF EXISTING SHs]

LEVERAGED RECAPITALIZATIONA REORGANIZATION OF THE CAPITAL STRUCTURE, WHEREBY OUTSIDE SHs RECEIVE A LARGE ONE TIME CASH DIVIDEND AND MGT (THAT IS, INSIDE SHs) RECEIVE NEW COMMON SHARES. THE CASH DIVIDENDS IS PREDOMINANTLY FUNDED THROUGH NEW DEBT, WHICH RESULTS IN A HIGHLY LEVERAGED FIRM WITH A LARGER OWNERSHIP HELD BY MGT

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OWNERSHIP REORGANIZATION
REORGANIZATION OF ASSETS (M&AsACQUIRE OTHERS, DIVESTITURES OF DIVISIONS / SUBS) CHANGE OWNERSHIP (SPIN OFFS, SPLIT OFF, SPLIT UPS, EQUITY CARVE OUTS) ALTERNATIVE POLICIES (JVs, ESOPs, GOING PRIVATE (LBOs), SHARE REPURCHASE)

22 STATES ANTI TAKEOVER REGULATIONS

THE INDIANA ACTWAS DEEMED CONSTITUTIONAL BY THE SUPREME COURT IN 1987STIPULATES THAT THE TRANSFER OF VOTING RIGHTS TO A BIDDER IN A TENDER OFFER IS SUBJECT TO APPROVAL BY A MAJORITY SHs, EXCLUDING THE BIDDER AND INSIDER DIRECTORS AND MANAGEMENT NEW YORK AND NEW JERSEY LAWS PROVED A FIVE-YEAR MORATORIUM PREVENTING HOSTILE BIDDERS FROM DOING A SECOND STEP TRANSACTION

23 STATES ANTI TAKEOVERCONT.

THE WISCONSIN ANTI TAKEOVER LAW-REQUIRES THE BIDDER WITH 10% OR MORE OF THE TARGET SHARES TO OBTAIN APPROVAL FROM OTHER SHAREHOLDERS TO PROCEED WITH THE MERGER, OR WAIT 3 YEARS TO COMPLETE THE TRANSACTION PENNSYLVANIA HAS THE STRONGEST ANTI TAKEOVER LAW IN THE U.S. THAT WAS PASSED IN 1990. IT RESTRICTS THE VOTING RIGHTS OF ANY GROUP OR INVESTOR THAT PURCHASE 20% OR MORE OF A TARGETS SHARES

24 STATES ANTI TAKEOVERCONT.

DELAWARE IS HOME TO 56% OF FORTUNE 500, 180,000 COS, AND 20% OF STATE BUDGET IS DERIVED FROM REGISTRATION FEES. THEREFORE, THE STATE DEVELOPED EXPERTISE TO SERVICE THESE FIRMS AND ITS CORPORATION LAWS HAVE BECOME THE BENCHMARK FOR OTHERS THE DELAWARE ANTI TAKEOVER LAW--UNWANTED BIDDER (HOSTILE BIDDER) WHO ACQUIRES MORE THAN 15% OF THE TARGET MAY HAVE TO WAIT 3 YEARS, UNLESS SEVERAL OTHER CONDITIONS ARE SATISFIED (ACQUIRES 85% OUTSTANDING SHARES, 66% OF SHAREHOLDERS APPROVE THE ACQUISITION, THE BOARD AND SHAREHOLDERS WAVE THE ANTI TAKEOVER LAW)

25 THE IMPLICATIONS OF ANTI TAKEOVER POLICIES

EFFECT ON SHs VALUE CUMULATIVE ABNORMAL RETURN (CAR) SUCCESS IN KEEPING THE TARGET INDEPENDENT

26 REFERENCES
PATRICK A. GAUGHAN, MERGERS, ACQUISITIONS AND CORPORATE RESTRUCTURING, 3RD ED., WILEY 2002, CH 5 J. FRED WESTON ET AL, TAKEOVERS, RESTRUCTURING AND CORPORATE GOVERNANCE, 3RD ED, PRENTICE HALL, 2001, CH 19 J. FRED WESTON, SAMUEL C. WEAVER, MERGERS AND ACQUISITIONS, THE McGRAW-HILL EXECUTIVE MBA SERIES, McGRAW-HILL, NEW YORK, 2001, CH. 10 BRUCE WASSERSTEIN, BIG DEAL: 2000 AND BEYOND, WARNER BROS., 2000