M&A Defense Checklist

Dennis McCarthy

(213) 222-8260

dennis@mbsecurities.com

Well, no sooner did I post “It’s Déjà Vu All Over Again” than I started getting requests for suggestions of what to include on a company’s M&A defense checklist.

You know, it’s simply good practice for a company to periodically review its M&A defenses.

But now, the task of reviewing a company’s M&A defenses takes on greater urgency.  The risk of a company getting an unsolicited offer is higher than usual now because many large companies are loaded with cash but short on revenue growth.

So what would I recommend for the checklist?

Please understand, I’m not necessarily recommending implementation of these provisions but rather suggest they be on your company’s M&A defense review list.

First on my list is a recent hot topic – proxy access rules and advance notice bylaw provisions.  Public companies should be aware of recent developments and consider updating to what’s known as “second generation” provisions.

Next on my list would be a couple charter provisions which slow aggressors.  These would be (i) restrictions on a shareholder’s ability to call a special meeting, and (ii) a prohibition on shareholder action by written consent.

Of course, we can’t forget the “poison pill” or shareholder rights plan.  While poison pills have declined in popularity over the last decade, we’ve seen several recent instances, Barnes & Noble, Airgas and Lions Gate, where a pill has played a key role in a company’s M&A defenses.

Even if you have a pill in place, there are a couple developments to note.  One development is the special purpose pill which, for example, may be used to dissuade a shareholder from triggering tax law change of ownership provisions which impairs use of a company’s net operating loss.  The second development involves expanding the definition of beneficial ownership to include sophisticated new forms of corporate ownership now available.

Another checklist item would be the classified or “staggered” board, where only a portion of the board members, typically a third, are up for shareholder vote each year.  This slows an aggressor’s efforts to change a board through a proxy battle.  A staggered board plus a pill is a powerful defensive combination.

Another defense provision is the supermajority vote which requires a high percentage of shareholders to approve an action, that is, once you’ve got your defense provisions in place.

In contrast, if your company permits cumulative voting, a small but organized minority shareholder group might be able to install a board member despite the group’s small ownership.

Certain states laws permit additional defenses or variations on these provisions.  For example, certain states permit what are known as constituency statutes which enable a board to consider the impact of an acquisition on constituencies including employees or the community, rather than just shareholders.  Depending upon your state, these extra features may be useful.

I would note here that some defense provisions can be implemented unilaterally by board action.  Others require shareholder approval which affects implementation feasibility.

In addition to these items, there are a number of tactical actions like stock buybacks and recapitalizations which can be used defensively in response to or to pre-empt hostile activity.

I recommend that a company set aside time at an upcoming board meeting for a review of its M&A defense provisions.  Company management, its attorneys, bankers and IR professionals can brief the board and make recommendations.

I can help your company to review its defenses in a timely and cost efficient manner. It’s better to be prepared.

It’s Deja Vu All Over Again

 

(213) 222-8260

dennismccarthy@ariesmgmt.com

Yogi Berra was right:  “It’s Déjà vu all over again.” 

Those of us who’ve been in the financial markets for a number of years have seen Wall Street prices rise and fall periodically.  I can’t predict exactly when they’ll rise or fall but I’m certain they will.

Therefore, when stock prices fall across the board, I don’t panic. I know it’s a cycle; prices will rise again eventually. 

Also, experience has taught me that when stock prices fall, public companies should once again pull out and dust off for consideration certain time tested corporate actions.

It’s kind of like pulling out the snow gear this time of year.  It’s a ritual.

What kind of corporate actions are appropriate to consider when stock prices drop?

First, I would say is stock buybacks. 

Yes, I know that my prior blog post cited a McKinsey Quarterly article reporting that companies don’t actually buy back stock when stock prices are low. 

My point is that public companies should consider a buyback program and, if appropriate, follow through.

Next, not to be paranoid, but public companies should review their takeover defenses.

Particularly now when big companies are awash in cash and their organic growth has slowed, big companies may see acquisitions as a smart means to get growth by putting their cash to work. Heaven knows, cash earns nothing sitting in the bank.

There’re a number of common takeover defenses, some which vary depending upon the company’s state of incorporation.  Common defenses include poison pills, staggered boards, shareholder vote submission and vote threshold provisions.

What I’m recommending here is that a company review with its Board, attorneys, investment bankers and IR professionals just what’s appropriate for the company given its circumstances.

Third, be proactive about M&A.

Rather than sit back and wait for a suitor to call, go ahead, evaluate your competition and all the adjacent players, those companies which are not direct competitors but are nearby.  Make sure your analysis includes all the global players too. It’s a very small world now.

For companies operating in several businesses, you really must evaluate each business independently.  Who knows, this might even lead to a split-off like that of ITT and Sara Lee.   

The goal of this analysis is to determine where there are good fits with your company, where one plus one equals three or more.  Even if you don’t immediately act on the analysis, you’re better off knowing the landscape if a suitor calls.

While you’re looking at alternatives, you should consider whether a “go private” or “go dark” transaction makes sense for your company.  Unfortunately, for many companies, the cost of being public outweighs the benefits.

I can help your company to consider all these actions in a timely and cost efficient manner .

Please contact me with questions or to discuss any of these projects.

Potential Trojan Horse?

Maybe because this M&A defense provision doesn’t enjoy a colorful name like a “poison pill”, the recent battle waged over proxy rules for selecting board members and determining many critical M&A corporate governance  provisions went largely unnoticed except by a small band of M&A specialists.

The side of this battle, described as defense, would likely claim victory because it succeeded in judicially thwarting a measure by the SEC to mandate a set of procedures to clarify and standardize the proxy proposal submission rules known as “advanced notice bylaw and proxy access rules”.

See what I mean about the catchy name?

What was left standing after the fierce battle were provisions which permit shareholders to submit proposed proxy provisions for a vote by shareholders.  Shareholders, therefore, can propose proxy proposal submission rules to address what was in the thwarted SEC mandate.

So the question is, in the next several years, will shareholders seize this opportunity to vote into place proxy proposal submission provisions which are more aggressor friendly than those in the thwarted SEC mandate?

Will slow to no growth in corporate performance trigger more shareholder impatience and activism and, guided by proxy advisory firms like ISS, translate into proxy proposal submission provisions which facilitate changes in underperforming companies’ boards?

Will we look back and see that “the defense” declared victory by defeating the SEC mandates and completely missed what turns out to be a more dangerous development?

The attached post from the law firm of Latham & Watkins provides an excellent discussion of the topic and suggests potential corporate responses.  Please click on the link below to download the pdf document.

http://www.lw.com/upload/pubContent/_pdf/pub4437_1.pdf

Many thanks to Latham & Watkins (www.lw.com) for this valuable article.