Just a Small Leak

Dennis McCarthy – (213) 222-8260 – dennis@monarchbayassociates.com

In my post entitled, “Potential Trojan Horse?”, I described a battle being waged by a small band of M&A specialists over the “advance notice bylaw and proxy access rules”.

These corporate provisions specify how shareholders can influence their corporations on selecting board members and determining many critical M&A, corporate governance and management compensation decisions.

Proxy access rules may not have a catchy name like “poison pill”, but believe me, they’re important.

Here’s some background. In a battle waged last summer, the SEC’s proposed proxy access rules for shareholder participation were stopped in court.

What was left in place, maybe because its threat was underestimated, was the ability of shareholders to submit their own proxy access rules to a vote of shareholders.

I suggested that leaving in place this provision for shareholders to submit their own proxy access rule proposal was something of a Trojan horse that might surprise corporate boards with their vulnerability. 

So it caught my eye when I read that shareholders of Nabors Industries, a $6 billion New York Stock Exchange company, had approved a proxy access proposal on June 5th, the first instance of shareholders approving proxy access rules, to my knowledge.

The proposal was submitted by several large New York City pension funds and supported by pension funds from other states.

Interestingly, the proposal approved by Nabors’ shareholders contained several of the same elements that were in the SEC’s proposed proxy access rule struck down by the court last summer.

Now, the Nabors’ proposal was non-binding on the Nabors’ Board but it signals to me increasing shareholder activism and shareholders’ determination to have a voice in corporate decision-making.

What do you think?  Will this be an isolated case or does it signal a trend?

Please subscribe to my blog, capitalmarketalerts.com, to stay up to date on this and other critical capital markets issues.  Also, please contact me to help your company to raise equity or debt or to complete M&A deals.

M&A Defense – “Devil’s in the Details”

Dennis McCarthy – dennis@mbsecurities.com – (213) 222-8260

Roche’s hostile offer for Illumina is a great case study to follow up my post “M&A Defense Checklist” and to prove that old adage that “the devil’s in the details”.

The Roche hostile offer for Illumina highlights two of my points,

  1. Now there is higher risk of hostile activity for all companies.  Illumina, before the offer, was trading at 4x revenue and 14x EBITDA: not what you’d consider a low valuation target although its stock at $37.69 was below its 52 week high of $79.40.
  2. Companies should carefully review their M&A defenses to uncover and potentially fix any weaknesses before an aggressor uses them against the company.

As background on this case, after what appears to be a short courtship period, Roche launched a hostile tender offer to shareholders to buy Illumina at $44.50/share an 18% premium to Illumina’s closing price the day before the offer.  Roche also announced that it intends to wage a proxy battle which would result in its slate of nominees comprising a majority of the Illumina board.

In this post, I highlight key points from an impressive article entitled “The Chink in Illumina’s Defense” by Steven M. Davidoff, writing as The Deal Professor, a commentator for the New York Times’ “DealBook”.  The article speculates that Roche’s proxy battle strategy will likely include proposals to:

  1. Nominate board candidates for the 4 seats up for election this year;
  2. Propose a by-law amendment to expand the size of the board by two members to 11 and nominate those two board candidates; and
  3. Propose a shareholder vote to remove all of Illumina’s board without cause.

Illumina’s defenses include:

  1. Staggered board of nine members with only 4 up for election this year;
  2. Supermajority vote of 67% of all shares outstanding required to amend a by-law;
  3. Shareholders can’t call a special meeting;
  4. Shareholders can’t act by written consent; and
  5. Poison pill which had expired in 2011 but could be reinstated by board action alone.

Proving that time-tested maxim, “the devil’s in the details”, here’s what we might learn from issues with Illumina’s defenses that Roche may be exploiting according to “The Chink in Illumina’s Defense”.

  1. Certain key elements of Illumina’s defenses are contained in its by-laws, not as charter provisions.  A corporate provision contained in a company’s by-laws may be amended by shareholder action without board action.  In contrast, a provision in a company’s charter requires approval by both the board and shareholders.
  2. Illumina’s by-laws specify the size of the board which Roche is proposing to expand by two to eleven members of which Roche’s slate of 6 would constitute a majority. Shareholders can approve, albeit by 67%, this by-law amendments to expand the board without board approval.
  3. Illumina’s by-laws also permit removal of board members without cause upon approval by a simple majority of the votes cast at the meeting, a relatively low threshold.  Delaware law requires the provision for removal of board members without cause to be in a company’s charter so this provision will, no doubt, trigger litigation as to its validity and usefulness in Roche’s attack.
  4. Illumina’s advance notice provision for submission of proxy proposals to be included for consideration at its annual meeting requires only 90 days vs longer periods which are common.  As a result, Illumina has less time to respond before its annual shareholder meeting.

Subsequent to Roche’s offer, Illumina’s share price rose well above Roche’s offer price signaling that Wall Street thinks Illumina is worth more than Roche’s offer.  Also, Illumina reinstated its poison pill at a 15% threshold with updated definitions of beneficial ownership to include ownership through derivatives.

To read Roche’s offer letter to Illumina, click here or go to www.sec.gov for the recent documents filed under Illumina including its poison pill and various filings by both sides.

This is a valuable lesson for all of us, at Illumina’s expense.

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.