2012 Proxy Season – Initial Results

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

Webinar Linkhttp://www.equilar.com/webinar/2012-proxy-trends/archive.html

My recent post, entitled “Herding Cats” described proxy advisors as a powerful new voice for investors especially at proxy season.

Today’s post offers an initial recap of the 2012 proxy season:

what were the key issues on which proxy advisors played a role;

what were the companies’ responses; and  

what were the vote results?

Latham & Watkins, a law firm, and Equilar, executive compensation consultants, produced a valuable webinar covering these topics. The link is below.

The key issue this proxy season was “pay for performance”. 

Executive compensation, in general, is likely to be a hot button issue for several years so I recommend listening to the Latham and Equilar webinar.

Please subscribe to my blog to stay informed of these and other capital markets developments. 

Please call me to help your company to raise equity or debt or to complete M&A projects. Thank you. 

Shareholder Vote

Shareholder Vote

Proxy Advisory Firms – “Herding Cats”

dennismccarthy@ariesmgmt.com – (213) 222-8260

When someone describes a very difficult task, they often liken it to herding cats.

Each cat moves in its own direction, confident in its path and independent, maybe even suspicious, of others around it.  This is why herding cats in one direction is so difficult.

Another group that shares these characteristics are Wall Street investors.  It’s Wall Street investors’ independent perspectives on the stock market that makes the market.  At any moment, some are buyers and some sellers.

This is why it is so impressive that the firms, known as proxy advisory firms, have managed to gain such influence on Wall Street. These proxy advisory firms come close to herding cats.

So, what is a proxy advisory firm?

A proxy advisory firm will take a very visible position on corporate matters subject to shareholder vote.  Then the firm encourages Wall Street investors to vote as the proxy advisory firm recommends.

These proxy advisory firms have no control over Wall Street investors, only the power to sway investors by their argument supporting their recommended position.

No, shareholders don’t always vote as the proxy advisory firms recommend but often they do.

Over the years, a few proxy advisory firms have earned a powerful reputation for producing recommendations on shareholder vote issues which are supported by well-reasoned thinking and should result in outcomes which benefit shareholders and corporations.

Sure, there are times when corporations view the proxy advisory firms as adversarial.  The proxy advisory firms would likely respond that their positions on shareholder vote issues should improve corporate governance practices which are in the best longer-term interest of companies too.

Regardless of the motives, proxy advisory firms’ power is unmistakable.

These firms have changed the dynamics on Wall Street.  Under the guidance of proxy advisory firms, shareholders now act in more coordinated fashion on corporate policy issues including management compensation and M&A defense provisions. 

And, the proxy advisory firms’ influence is growing.  At some point, the balance of power may shift. 

Already, we see isolated incidents.  Over time, company after company may recognize the change.  Eventually, coordinated shareholder instruction to direct major corporate actions may come to be seen as the normal order.

I know it’s hard to imagine now. Time will tell.

Please contact me to discuss this topic or for assistance with any capital raising or M&A projects.

Herding Cats

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.

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.