Choosing your Battleground for the Hostile Transaction: Unsolicited Tender Offers or Proxy Battle?
UBC Law School
January 26, 2006
(Presentation originally prepared for:) Stuart Morrow Securities & Corporate Finance
Calgary, AB – December 5, 2005
Overview
Getting Organized Pre-Bid Weapons Legal Formalities Disarming of Defences Significance of Dissident Proxy Process What Provokes a Proxy Campaign Role of Institutional Investors
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Getting Organized
“If you don‟t know where you‟re going, you‟ll be lost when you get there.” (Yogi Berra) Know your objectives Which ones are vital? (Board seat? Control? Ownership – 50+%? 67%? 75%? 90+%?) Which are dispensable? (red herrings, bargaining chips) Why choose hostile approach at all? (most fail) Where will support come from? Limited due diligence, no data room access
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Have all other approaches been exhausted? Consider that >90% required for post-takeover “going private transaction”. Much lower shareholder support required under Plan of Arrangement (75%, 67% or less) (Molson‟s/Coors)
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Know your opponents Target management and Board Target shareholder makeup (institutional or retail? Passive or activist?) How committed to the stock? Management entrenched? Continuing role for management? Conflicts to exploit? Inability to displace controlling shareholder? (>20%)
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Evaluate the likely competitive bidders/white knights Do you have the resources, resolve and patience to see it through? (HP/Compaq ($25 billion proxy fight); Oracle/People Soft ($9 – $16 billion takeover bid) or is it speculative/Quick Flip (i.e. “greenmail”))? Review particulars of Target defences already in place Allowable position before pill is tripped (15%? 20%?) Is Plan subject to shareholder approval? Conditions for a “qualified bid” under the Plan? Is the Plan offside NP 62-202? Does Target have a staggered Board? How will you deal with the known defences?
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Blueprint for, and execution of, campaign Assembly of campaign team (banking, financial and legal advisors, media and investor relations consultants) Business case for the bid and logic for the transaction structure proposed Decision tree (flow chart) – map out all plausible scenarios and outcomes for the bid process
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Prepare working group list, compliance checklist, confidentiality protocols, briefing notes for insiders and employees; designation of bid spokesman Consider parallel proxy campaign to deal with any shareholder meeting issues (e.g. voting on poison pill/major transaction/elect independent directors/options/capital alteration/continuance, etc.) Management of the bid process – keeping the pressure on to get the bid into shareholders‟ hands Proceed by announcement of bid by news release, followed by mailing of the bid circular Make your bid as easy as possible to understand and accept: i.e. Cash, clarity and simplicity
Anticipate counter-attacks Will the bid be seen as predatory or coercive? Will a non-cash bid be read as a sign of weakness in the bidder? Could profile of the bid put the bidder in play? Complex bid structure more difficult for market to understand and easier for Target to attack (Canfor/Slocan Forest Products)
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Risk of driving the Target into the arms of a competitor (Constellation – failed bid for Vincor/Carl Icahn – bid for Fairmont Hotels) Adverse media coverage (bias against hostile approach, tactics inconsistent with corporate governance best practices) Preferential treatment of controlling shareholders, at the expense of minority shareholders? Does tax structure favour Canadian shareholders over others? Consider equal treatment of securityholders policy (NP 62-201) Prepare FAQ‟s for media and investors
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Pre-bid Weapons Available to Bidder
Building a position Acquiring a “toehold” of up to 19.9% in the Target Provides hedge against superior bid Lower cost base provides economic advantage over new bidders Makes you more difficult to displace as the logical suitor Insider and early warning reports reduce element of surprise Caveat on pre-bid acquisition rules (bid price and offer terms must match, or improve on, any nonmarket purchases in 90 days pre-bid)
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Lock-up/Support agreements Contractual commitment to tender by major shareholders (Pacifica Papers – BCCA – repudiation of “unenforceability” comment in lower court (proxies always being revocable); Omnicare/NCS – deal protection mechanisms went too far → coercive and preclusive terms, no “fiduciary out” clause) Timing of bid When Target is undervalued Adverse events/publicity affecting the Target Bidder‟s stock relatively attractive
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Legal Formalities, Snares and Pitfalls
Insider filings and early warning reports Pre-bid integration rules will restrict your bid terms Conflicts of Interest disclosure in your circular (don‟t ever withhold material information – it only provides other side with more ammunition with which to attack you (Pacifica Papers; GEAC)) Bill 198 (Ontario) – director and officer liability for secondary market disclosure, effective December 31, 2005 Strict compliance with corporate law requirements and securities disclosure rules (bid circular, dissident information circular, form of proxy, valuation, notices and exemption orders)
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OSC Rule 61-501 (Insider Bids, Related Party Transactions) (US equivalent: NASD Rule 2290) Competition (anti-trust) rules Foreign investment/export restrictions Tripping of poison pill (shareholder rights plan), change of control, benefits, bonuses, accelerated vesting of options, convertible or subordinated securities, coat-tail and “drag-along” rights
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Disarming of Defences
Understanding and respecting fiduciary duties of the Target’s Board Target directors‟ primary duty is to protect the Target shareholders‟ interests (Schneider case (Ont. C.A.) – maximize shareholder value (Paramount/QVC), but not necessarily Revlon test (auction of the company) Impartially evaluate the bid, in good faith, free of conflicts Consider realistic, viable alternatives open to the Target (Failure of Iamgold merger → Coeur D‟Alene/Wheaton River → Goldcorp) Take steps to pursue maximization of shareholder value, however that may be legally achieved
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It is counterproductive to attack bona fide, timely actions taken by the Target‟s Board in the fulfilment of their fiduciary duties
Both sides invariably profess to be acting in the best interests of the Target‟s shareholders (Constellation/Vincor) Bases for successful challenge to strategic defences Unreasonable in the face of the risk intended to be guarded against (CW Shareholdings v. WIC)
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Will result in undue delay in allowing shareholders to tender to the bid or vote on the transaction (Nations Energy vs. Tartan Energy (ASC – August/05) – last minute poison pill, without shareholder approval) “Just say no” (Paramount/Time/Warner, 1989) – Does not apply in Canada where, sooner or later, the shareholders will decide Defensive measures coercive or preclusive, in that they effectively deny Target shareholders the ability to decide the issue themselves (see Omnicare v. NCS Healthcare; not applied in Toys ‟R Us – June/05)
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Inappropriate or offensive under NP 62-202 – seek Regulatory (Securities Commission) intervention Market pressure/moral suasion (Sovereign Bancorp and Relational Investors) Proxy campaign for issues at AGM or special shareholders meeting Court proceedings (Bidder: to block inappropriate corporate obstruction of the bid) (Target: Claim of oppression by bidder)
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Business judgment rule Court will generally defer to a Board of Directors‟ considered, good faith business judgment (see People‟s Department Stores, SCC, 2004) Not an absolute rule, however – two aspects: 1. Procedural process – rigorous, deliberative and transparent; 2. Substantive assessment – good faith and result within reasonable range of values.
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Defensive tactics raised in the face of a specific bid or other threat to control will be subject to review against the standards set out in NP 62-202 (Take-Over Bids – Defensive Tactics) Consider application of the Unocal test – that the onus is on the Target‟s Board to justify actions taken in response to an unsolicited bid
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Under Unocal test, once “enhanced scrutiny” applies (when defensive measures are invoked), Target Board must demonstrate: 1. they had reasonable grounds for believing that a danger to the Target‟s corporate policy and effectiveness was raised by the bid or proposal; and 2. the defensive measures taken were a reasonable response to the threat posed and such steps (i) were not coercive or preclusive (Omnicare/NCS Healthcare) (ii)the response falls within a range of reasonable responses to the perceived threat (Toys „R Us).
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Significance of the Dissident Proxy Solicitation Process
Right to solicit votes for use at shareholders‟ meeting Regulated by matrix of legislation (securities and corporate statutes), securities commission and stock exchange policies and contract (articles, bylaws, shareholder agreements) (collectively the “proxy rules”) Ability to “put your case” to shareholders in dissident proxy circular Prescribed disclosure in the dissident circular on the identity, interests and intentions of the dissidents (i.e. Who are they? What interests do they have in the company? What are they doing and why?)
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What Provokes A Proxy Campaign?
Poor corporate performance Need for new board leadership/independence from controlling shareholder Self-dealing, excessive compensation, conflicts of interest, related-party transactions by entrenched Board/Management (Enron / WorldCom /Tyco International /Adelphia Communications/ Royal Group Technologies, Hollinger Inc.) Slate voting for directors Commonly done in Canada Not binding on shareholders Free to “be selective” on substituted form of proxy
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Weak corporate governance (concern over entrenchment of Management, lack of Board independence, executive compensation not tied to performance, resistance to democratic reforms, adoption of defensive measures, such as shareholder rights plans, staggered boards, slate voting for directors and golden parachutes) Obscure, complex and limited financial disclosure (Fairfax Financial Holdings) Dual class share structure (multiple voting shares) (Magna, Molson‟s, Bombardier, Hollinger, Royal Group, Rogers, Shaw)
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Fraud (Bre-X Minerals) Insider Trading (Cartaway Resources/ ImClone and Martha Stewart Living Omnimedia) Bona Fide Clash of Corporate Visions (Pacifica PapersNorske Skog Plan of Arrangement (2002)/ Hewlett Packard-Compaq Merger (2003))
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Proxy as Alternative/Complementary Remedy to Other Options Open to Dissident/Insurgent Group:
Moral suasion (negotiation with Management and/or controlling shareholders) Shareholder proposals Take-over bid Precipitate regulatory intervention Derivative, Oppression and Class Actions
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Role of Institutional Investors
Not usually a factor among small cap, junior issuers that do not meet the investment eligibility criteria that pension fund and mutual fund managers require Preference to “work behind the scenes” (influence Management without confrontation or being seen to “rock the boat”) Pro-Management bias of institutions? (why are they in the stock to begin with?)
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Illiquidity of the Canadian “investment grade” securities market - relatively few issuers to choose between, large shareholdings and consequentially, an inability to “vote with their feet” (i.e. sell the stock) Fiduciary obligations to fund and trust beneficiaries motives and priorities may differ from those of ordinary, retail shareholders Reluctance to fund the campaign and inability to recover costs - will often seek a “free-ride” by letting others take the initiative.
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