Shareholder Activism in M&A: Anticipating and Responding...
Transcript of Shareholder Activism in M&A: Anticipating and Responding...
Shareholder Activism in M&A: Anticipating
and Responding to Shareholder Challenges Planning for Activist Objections to Board Representation,
Deal Price and Appraisal Rights When Negotiating Deals
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THURSDAY, OCTOBER 30, 2014
Presenting a live 90-minute webinar with interactive Q&A
Kai Haakon E. Liekefett, Esq., Vinson & Elkins, Houston
William P. Mills, Partner, Cadwalader Wickersham & Taft, New York
Gary Finger, Director, Houlihan Lokey, New York
Darren Novak, Senior Vice President, Houlihan Lokey, New York
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Shareholder Activism in M&A:
Anticipating and Responding to
Shareholder Challenges
Strafford Live Webinar October 30, 2014
Program Agenda
Shareholder Activism in M&A
I. Current Trends in Shareholder Activism in M&A (Houlihan Lokey)
II. Forms of Shareholder Activism in M&A
A. Proxy Fights and Vote No Campaigns (Vinson & Elkins)
B. Appraisal Rights (Cadwalader)
C. Hostile Takeover Bids and Activists (Vinson & Elkins)
III. Responding and Preparing for Shareholder Activism in M&A
A. Identifying Vulnerabilities in a Transaction (Vinson & Elkins)
B. Addressing Activism in Deal Preparation and Negotiation (Cadwalader)
C. Communicating with Shareholders (Houlihan Lokey)
Appendix: Presenter Bios
6
I.
Current Trends in Shareholder
Activism in M&A
Gary Finger
7 ©2014 Houlihan Lokey, Inc.
Activists an Ever-Increasing Threat for Public Companies
Increased Dry Powder and Influence
Over $100 billion in assets under management, not including campaign-specific “side cars”
Firepower enhanced through leverage, derivatives and special purpose vehicles
Pension funds and other institutional investors willing to “pile on”
Increasingly significant influence with ISS and Glass Lewis
ISS and Glass Lewis make recommendations in favor of activists over half the time
New activists continue to enter the market
New activists, often acting in “wolf packs,” focus on small- to mid-cap targets
Increasing Institutional Investor Interest
Activists waged 90 proxy fights in 2013, and many more campaigns launched by activists owning less than a 5% position
Accelerated investments into activist funds in first half of 2014
Activist funds now an “accepted asset class”
Returns strongly uncorrelated with market and generate “alpha,” with an average annualized return of approximately 24% since 2006 on “13D positions”
Despite being classified as long/short by equity managers, activists placed by institutional investors in long-only allocation where “alpha” scarce
Significant investments by high profile pension funds, including CalSTERS, Florida State, New York State Common Retirement Fund and the New Jersey Division of Investment
Activists’ success over the last decade has made activism an accepted asset class, providing activists with ever-increasing dry powder and ensuring that they remain an ever-increasing threat to public companies
Activism's Success Driving Increased Investment and
Influence
Trends in Shareholder Activism and M&A
8
0
20
40
60
80
100
120
140
A Look at Activist Activity Broadly
Trends in Shareholder Activism and M&A
Activist Campaigns1
Source: SharkRepellent Notes: 1. Defined as all US publicly disclosed activism excluding 13D filers with no publicly disclosed activism and targets with a market capitalization more than $500 million; Illustrative annual
rolling last twelve months 2. Yearly campaign totals reflect companies with market capitalization greater than $500 million
Number of Campaigns (Market Cap Greater than $500 million, July 2012 – July 2014
Selected Activist Activity2
Activists Target a Myriad of Companies Across All Industries
2009 2010 2011 2012 2013
87 Campaigns 112 Campaigns 129 Campaigns 148 Campaigns 180 Campaigns
9
U.S. Targets by Market Cap In 2014, half of all companies targeted by activist investors were mid-cap companies
The median market cap of targets in 1H 2014 grew to $260 million versus the median of $141 million for the same period in 2013
Source: Institutional Investor Services
33%
17%
50%
32%
50%
18%
0%
10%
20%
30%
40%
50%
60%
>$1 billion <$1 billion - $100 million <$100 million
2013 2014
Market Capitalization of Companies Targeted by Activists in 2013 and 2014
Trends in Shareholder Activism and M&A
10
Increased Level of Activism
Percentage of Proxy Fights by Campaign Type Success Rates (1)
Number of Proxy Fights Activism has been on the rise since 2004
Compromise and settlement frequently reached prior to launch of proxy contest or shareholder vote
Activists’ success rates have continued to trend upward and reached a record approximately 71% through 2014
The vast majority of proxy fights continue to be focused on board representation rather than board control
(1) Calculated as the number of outright victories, partial victories or settlements by the dissident as a percentage of all proxy fights where an outcome has been reached
Source: SharkRepellent (FactSet Research) as of August 30, 2014
42
56
100 109
126 133
100 93
77
90 95
0
20
40
60
80
100
120
140
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
69%
58% 57% 55%
18%
38% 39%
33%
13%
4% 4%
12%
0%
10%
20%
30%
40%
50%
60%
70%
80%
2011 2012 2013 2014
Board Representation Board Control Other
49% 51%
54% 55%
59%
52%
60%
71%
40%
45%
50%
55%
60%
65%
70%
75%
2007 2008 2009 2010 2011 2012 2013 2014
Trends in Shareholder Activism and M&A
11
2014 – M&A as a Weapon
Companies have used transformative transactions to attempt to thwart activist advances
Darden facing pressure from Barington Capital
Darden announces sale of Red Lobster
Starboard, unhappy with Red Lobster transaction currently
pursuing a campaign to replace the entire board
Strategic Hotels faces rumors of sale of the Company
Orange Capital announces campaign and calls upon the Board to sell the Company
Strategic Hotels sells Hotel del Coronado for $180 million
which was considered one of the company’s crown-jewel
assets
Men’s Wearhouse receives an unsolicited bid from Jos A.
Banks
Jos. A. Bank receives an unsolicited bid from Men’s
Wearhouse in revived pac-man defense
Jos A Bank announces defensive acquisition of Eddie Bauer but
eventually agreed to be acquired by Men’s Wearhouse, with
$100-150 million in projected annual synergies
Trends in Shareholder Activism and M&A
12
Muted return of corporate
confidence due to uncertain
macroeconomic and political
outlook
Improved liquidity, with “fits and
starts” in the capital markets
Substantial corporate cash
balances
Managements refocus on growth in
selected areas
Narrower valuation gap between
buyers and sellers; periodic
volatility in the equity markets
stems deal-making momentum
Increased activity by private equity
buyers, but strategics dominate
Renewed shareholder activism
Recent mega-deal activity suggests
a return of corporate confidence
and participation by strategic
buyers, but continued political and
economic stability will be required
for a sustained comeback
Managements also continue to
drive growth via smaller, tuck-in
acquisitions
Shareholder support for
transactions (particularly those with
demonstrable synergies) is
increasing
Substantial corporate cash
balances remain
Monetary policies, investor demand
and relatively low volatility continue
to support the capital markets
Availability of capital supports
leverage and higher valuations
Structural drivers such as low
defensive barriers, high support for
activists and tax considerations are
shaping activity levels
Economic crisis
Liquidity constraints and lack of
confidence
Corporate focus on retrenchment
rather than expansion
Sharp decline in global M&A
activity
Scarce financing for transactions
Wide valuation gap between
buyers and sellers
Legislative and regulatory
uncertainty
2008 & 2009
Market Overview – Evolution of Key Themes
2010 – 1H ‘13 2H ‘13 & 2014 Outlook
Trends in Shareholder Activism and M&A
13
M&A Market Overview
Historical Domestic M&A Activity
M&A activity has improved significantly over the past three years
Although 2011 M&A activity increased over 2010 levels, results in 2012 and much of 2013 reflected a “cooling-off” as
macroeconomic and political uncertainty dragged down confidence in the global economy
A more stable political and economic backdrop gave way to a pick-up in transactions announced in 2H ‘13, and deal
activity through Q2 ‘14 points to a continued rebound
Source: Thomson Reuters, as of 6/30/14.
Note: 2014 data shown on an annualized basis, based on data through 6/30/14.
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
0
200
400
600
800
1,000
1,200
1,400
1,600
1,800
1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Nu
mb
er
of
Deals
($ i
n b
illi
on
s)
Value of Deals Number of Deals
Trends in Shareholder Activism and M&A
14
M&A Market Overview: Average Domestic Transaction Size
Source: Thomson Reuters, as of 6/30/14.
Average Size of Announced Domestic M&A Transactions
Notes: 10-year median based on 2004 – 2013.
Includes transactions with estimated values.
Excludes terminated transactions. Future terminations of pending transactions will reduce totals shown.
Excludes minority stake acquisitions and most minority capital infusions into major financial institutions.
Average transaction values increased substantially in 1H ‘14 to $533 million, driven by several
announced mega-deals
$234
$310
$381$367
$290 $285 $291
$350
$268
$370
$533
10-year median: $301
$0
$100
$200
$300
$400
$500
$600
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1H '14
Trends in Shareholder Activism and M&A
15
M&A Market Overview: Acquisition Premiums
Source: Thomson Reuters, as of 6/30/14.
Source: Thomson Reuters, as of 6/30/14.
Notes: Premiums are relative to target share prices one day and four weeks prior to announcement for deals with U.S. targets valued over $100 million.
Excludes terminated transactions, ESOPs, self-tenders, spin-offs, share repurchases, minority interest transaction, exchange offers, recapitalizations, and restructurings.
Excludes negative premiums and premiums over 100%.
After decreasing in Q1 ‘14, average 1-day prior and 4-week prior acquisition premiums rebounded in Q2 ‘14
28% 27% 27% 25%27%
33%36% 37%
34% 33%31%
28%31%
0%
10%
20%
30%
40%
50%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Q1 '14 Q2 '14
Acq
uis
itio
n P
rem
ium
35%
29% 29% 30% 30%
37%
43%39%
36% 38%35%
30%34%
0%
10%
20%
30%
40%
50%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Q1 '14 Q2 '14
Acq
uis
itio
n P
rem
ium
Average 4-Week Prior Acquisition Premiums
Average 1-Day Prior Acquisition Premiums
Trends in Shareholder Activism and M&A
16
M&A Market Overview: Multiples by Transaction Size
Median EV/EBITDA Multiples
Source: Thomson Reuters, as of 9/30/14.
Note: Based on U.S. deals and excludes multiples below 0.0x and above 25.0x.
Although transactions in excess of $500 million have historically commanded higher multiples, a
different pattern was evident in 2013 and thus far in 2014
9.8x
9.0x
9.7x
10.9x
9.5x
7.5x
8.1x 8.3x
9.7x9.2x
15.0x 15.3x
11.4x11.2x
10.4x10.9x 10.7x
10.3x
7.4x
9.9x
8.8x
9.8x
10.9x
12.3x11.9x
9.0x
11.5x12.0x
11.3x
12.0x
10.5x
9.2x
9.8x 9.7x10.1x
9.4x
12.8x
11.9x
12.5x
0.0x
2.0x
4.0x
6.0x
8.0x
10.0x
12.0x
14.0x
16.0x
18.0x
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Q1 '14 Q2 '14 Q3 '14
Under $250 million $250 to $500 million Over $500 million
Trends in Shareholder Activism and M&A
17
M&A Market Overview: Unsolicited Bids
Value as a Percentage
of
Overall Domestic M&A
Activity
Sources: FactSet Mergerstat and Thomson Reuters, as of 6/30/14.
* 2008 includes InBev’s unsolicited bid for Anheuser-Busch and Microsoft’s unsolicited bid for Yahoo!.
** 2014 data has been annualized.
Notes: The above chart includes both unsolicited and hostile bids.
FactSet classifies unsolicited bids as offers in which there were no prior discussions between the target and the acquirer.
FactSet classifies hostile bids as unsolicited bids that were rejected by the board of directors of the target.
Domestic M&A includes minority equity deals, equity carve-outs, exchange offers, open market repurchases, and deals with undisclosed transaction values.
Hostile and unsolicited bids have been driven by continued shareholder activism, inflows into
activist funds and the importance of acquisitions to growth objectives
Unsolicited M&A bids in 2014 are on pace for a record year on an aggregate value basis, due to the $61.9 billion bid by
Charter Communications for Time Warner Cable and the $56.3 billion bid by Valeant Pharmaceuticals for Allergan
10.2% 10.4% 8.9% 6.6% 26.3% 5.3% 9.6% 9.8% 6.7% 9.5% 19.3%
$82.9
$120.2$134.0
$99.3
$243.1
$39.9
$78.7
$102.1
$54.6
$96.0
$280.6
26
51
71 71
94
56 57 57
3732 32
0
20
40
60
80
100
$0
$50
$100
$150
$200
$250
$300
$350
2004 2005 2006 2007 2008* 2009 2010 2011 2012 2013 2014**
Num
ber
of
Bid
s
Valu
e (
$ i
n b
illions)
Value
Count
Value and Number of Domestic Unsolicited M&A Bids
Trends in Shareholder Activism and M&A
18
20%
60% 58%
29%
0%
10%
20%
30%
40%
50%
60%
70%
2011 2012 2013 2014 (through July)
Success of Activist Attacks on Announced M&A Deals
Percentage of Activism Attacks That Have Been
Successful in Raising Deal Price or Stopping Deal
4/20
Successful includes:
Metro PCS
Plains Expl./Freeport-McMoran
Spring/Softbank/DISH
Clearwire/Sprint/DISH
Dell/Silver Lake
Outdoor
Channel/InterMedia/Kroenke
American Realty/Realty Income
EnergySolutions/Energy Capital
American Greetings/Weiss Family
Atlantic Coast Financial/Bond Street
Source: FactSet
2013 saw a significant increase in the success of activists attacking announced M&A transactions
6/10 11/19
2/7
Since 2011, ISS has recommended in favor of activists in the context of M&A transactions only 16.2% of the time
Trends in Shareholder Activism and M&A
19
II.
A. Proxy Fights and Vote No
Campaigns
Kai Haakon E. Liekefett
©2014 Vinson & Elkins LLP 20
• There has always been shareholder opposition to public M&A deals, but it used to
take a different form: shareholder litigation
– 94% of all public M&A deals in 2013 were subject to shareholder lawsuits, but most of them
were settled for de minimis concessions
• Opposition to M&A deals in the form of proxy fights or “vote no” campaigns
(“bumpitrage”) used to be rare events and rarely successful
• Recent years have seen an unprecedented number of highly successful
campaigns against M&A transactions. In the following high-profile transactions, the
parties were forced to postpone the shareholder vote and improve the deal terms:
– Sprint/Clearwire (Crest Financial Limited, Mount Kellett Capital Management)
– Freeport-McMoRan Copper & Gold/Plains Exploration & Production (Paulson & Co.)
– Energy Solutions/Energy Capital Partners (Carlson)
– T-Mobile/MetroPCS (P. Schoenfeld Asset Management, Paulson & Co.)
– Softbank/Sprint (Paulson & Co.)
– Dell (Carl Icahn, Southeastern Asset Management)
Proxy Fights and Vote No Campaigns
Introduction
There is a New Sheriff in Town for M&A Transactions
21 ©2014 Vinson & Elkins LLP
• Proxy contest to solicit proxies
from the target’s shareholders to
vote against the transaction
• Vote no campaign to encourage
the target’s shareholders to vote
against the transaction
• Proxy contest to solicit proxies
from the target’s shareholders to
replace the target company’s
board of directors
Challenging the Transaction vs. Challenging the Board
Proxy Fights and Vote No Campaigns
Choosing a Strategy
Against the Transaction Against the Target Board
22 ©2014 Vinson & Elkins LLP
• Federal Securities Laws
– Regulation 13D: Reporting under the Securities Exchange Act of 1934
– Regulation 14A: Proxy rules under the Securities Exchange Act of 1934
• State Corporate Laws
– Determined by jurisdiction of incorporation of the company (e.g., Delaware)
• Governing Documents
– Charter and bylaws
– Board and committee policies (e.g., nominating committee guidelines)
• Other Documents
– Debt instruments (i.e., loan agreements and indentures)
– Other agreements with change-of-control provisions
Proxy Fights and Vote No Campaigns
Regulatory Framework
A Myriad of Rules Applies
23 ©2014 Vinson & Elkins LLP
File definitive proxy statement, issue press release with 1st fight letter
Mail 2nd fight letter, issue press release
Mail 5th fight letter, issue press release
35 to 45 Days
30 to 35 Days
Day 0
7 to 15 Days ISS and GL decisions; issue press releases in response
Proxy
Campaign
15 to 20 Days
Shareholder meeting
ISS meeting/GL outreach; mail 4th fight letter, issue press release
2 to 5 Days
25 to 30 Days Mail 3rd fight letter, issue press release
5 to 10 Days
Issue open shareholder letter as press release
45 to 60 Days File preliminary proxy statement (10 day SEC review period; multiple rounds possible)
45 to 75 Days Demand for shareholder list
Campaign
• Telephone campaign
• Final calls or visits with
major investors
• Meetings
with major
shareholders
• Media interviews
Days before Meeting
24
Proxy Fights and Vote No Campaigns
Proxy Fights: Sample Timeline
©2014 Vinson & Elkins LLP
• The initial step of an activist is typically to make a demand for the shareholder list
because an activist needs it to wage an effective proxy contest
• The proxy rules require that the proxy statement be mailed to all shareholders
– The shareholder list enables an activist to prepare a comprehensive shareholder profile
• Most activists make their demands for the shareholder list under state corporate law
because typically the target company is required to comply with a books and
records demand under state corporate law if the shareholder specifies a “proper
purpose“ (e.g., DGCL Section 220)
– Courts generally deem a proxy solicitation a “proper purpose” (unclear for vote no
campaigns)
– Most statutes give the company a certain time period (e.g., 5 business days) to comply and
the company is well advised to wait out the statutory response period
– Delaware courts have allowed companies to condition the access to the shareholder list on the
execution of a reasonable confidentiality agreement by the shareholder
• Occasionally activists make their demand pursuant to Rule 14a-7 of the proxy rules
– This rule gives the target company the choice to either provide the shareholder list or mail
the activist’s proxy materials itself
Proxy Fights and Vote No Campaigns
Demand for the Shareholder List
25 ©2014 Vinson & Elkins LLP
Proxy Fights and Vote No Campaigns
Proxy Rules: Overview
• The proxy rules govern all “solicitations” of votes or proxies
– The SEC and the courts have broadly interpreted “solicitation” to include any
communication that appears to be designed to influence shareholders’ voting decisions
– In practice, this means that almost all communications with shareholders (and employees)
during the proxy season will be deemed to be governed by the proxy rules
• The proxy rules require the filing of a preliminary proxy statement and form of
proxy card with the SEC
– The proxy rules contain detailed disclosure requirements for these documents
– The SEC reviews and provides comments on proxy materials within 10 calendar days
– Sometimes, multiple rounds are necessary to obtain SEC clearance
• All written soliciting materials (in particular all “fight letters” setting forth campaign
messages) must be filed by 5:30 pm ET on the first day of use with the SEC
– Unlike proxy statements, there is no SEC pre-clearance
– All soliciting materials need to include a legend advising investors to read the proxy statement
– The SEC has adopted a broad view of what constitutes “written” (may include even
informal email correspondence with a single shareholder)
26 ©2014 Vinson & Elkins LLP
Proxy Fights and Vote No Campaigns
Proxy Rules: Important Exemptions
• State Your Mind: The term “solicitation” does not include a “communication by a
security holder who does not otherwise engage in a solicitation ... stating how the
security holder intends to vote and the reasons therefor” (Rule 14a-1(l)(iv))
– Allows influential investors to publicly announce their voting intentions
– Not available to the company
• No Seeking of Proxy: Any solicitation by a person who does not seek power to act
as proxy and does not furnish or request a proxy is exempt (Rule 14a-2(b)(1))
– Used in “just vote no” campaigns against the election of incumbent directors
– Written materials must be filed with the SEC within three days after the date of first use
– Not available to the company and certain other persons, such as Schedule 13D filers who do
not disclaim control intent
• Rule of Ten: Any solicitation where the total number of persons solicited is not
more than ten is exempt from the proxy rules (Rule 14a-2(b)(2))
– At companies with extremely concentrated share ownership, it may be possible to obtain the
votes or consents needed to prevail in a contest without soliciting more than ten holders
– It is unclear whether “persons” is to be determined by record or beneficial ownership
– Unfortunately, the SEC has provided no guidance and there is a very limited case law
– Not available to the company
27 ©2014 Vinson & Elkins LLP
• Fight Letters – “Fight letters” are sent to shareholders multiple times, accompanied by proxy cards
– Commonly issued as press releases and included in SEC filings
– Sometimes sent only as private letters (but sent to reporters as well)
• Press Releases – Primary method to reach all audiences and directly communicate key messages
• Presentations – Used in meetings with investors and proxy advisory firms
– Help educate media and other key constituencies
• Standby Statements – Respond to attacks by stating company’s platform and correcting inaccuracies
• SEC Filings
– Proxy statement
– Fight letters, press releases and other written proxy materials to be filed with the SEC
• Other Communications – Company website
– Interviews with reporters (on-the-record vs. off-the-record)
Proxy Fights and Vote No Campaigns
Proxy Fights: Means of Communication
28 ©2014 Vinson & Elkins LLP
No Confidentiality
• Unless the shareholder signs a confidentiality agreement, there is no confidentiality obligation or
legal privilege protecting the company against disclosure by the shareholder
• Most shareholders will refuse to sign a confidentiality agreement with the company because it
implies the sharing of material non-public information, which would impede their ability to trade
Reg FD/Insider Trading
• Unless the shareholder signs a confidentiality agreement, the company must not disclose any
“material non-public information” because it is restricted by Reg FD and the insider trading rules
• Generally, any information about the activist is unlikely to constitute material non-public
information but there is a risk that a court could view the company’s proxy fight strategy as
material non-public information
Section 10b-5
• Section 10b-5 and Section 14a-9 of the proxy rules prohibit misleading, unsubstantiated and
inflammatory language
Proxy Rules
• A company should limit all communications with shareholders to telephone conversations and other
oral communications because under the proxy rules it is required to file all written proxy soliciting
material with the SEC on the same day (see “Proxy Rules: Overview”)
Proxy Fights and Vote No Campaigns
Legal Considerations for Shareholder Communications
29 ©2014 Vinson & Elkins LLP
Institutional Shareholder Services (ISS)
• ISS is the world’s largest proxy advisory firm and greatly influences voting
decisions of institutional investors (up to 20-30% of the vote)
• Meets with both sides in a proxy contest before releasing its recommendation
• ISS frequently supports dissidents
Glass Lewis
• Glass Lewis, while less influential than ISS, can still have a significant impact
on the outcome of an election contest
• It does not meet with parties but sometimes hosts a “Proxy Talk”
• Glass Lewis supports dissidents less frequently than ISS
Egan-Jones
• Egan-Jones does not wield much influence but receives media reaction
Proxy Fights and Vote No Campaigns
Role of Proxy Advisory Services
30 ©2014 Vinson & Elkins LLP
Case Study:
Crest Financial vs.
Sprint–Clearwire
Proxy Fights and Vote No Campaigns
Case Study: Sprint-Clearwire
31 ©2014 Vinson & Elkins LLP
The Merger Parties:
• Clearwire Corporation was a public company listed on the NASDAQ
• Sprint Nextel owned a 48% stake in Clearwire (later increased to 50.2%)
Important Shareholders:
• Comcast, Intel and BHN Spectrum owned collectively 13% of Clearwire
and were parties to a shareholder agreement with Sprint
(the “Group of 13%”)
• Mount Kellett Capital, Glenview Capital, Chesapeake Partners and
Highside Capital owned collectively 9% of Clearwire
(the “Mount Kellett Group”)
• Crest Financial Limited was a long-term shareholder since 2009 and
owned approximately 4% of Clearwire
Proxy Fights and Vote No Campaigns
Case Study: Sprint-Clearwire
32 ©2014 Vinson & Elkins LLP
2012
OCTOBER – DECEMBER JUNE
Proxy Fights and Vote No Campaigns
Case Study: Sprint-Clearwire
33 ©2014 Vinson & Elkins LLP
January – March 2013
JANUARY – MARCH
Proxy Fights and Vote No Campaigns
Case Study: Sprint-Clearwire
34 ©2014 Vinson & Elkins LLP
April 2013
APRIL
Proxy Fights and Vote No Campaigns
Case Study: Sprint-Clearwire
35 ©2014 Vinson & Elkins LLP
May 2013
MAY
Proxy Fights and Vote No Campaigns
Case Study: Sprint-Clearwire
36 ©2014 Vinson & Elkins LLP
JUNE – JULY
June – July 2013
Proxy Fights and Vote No Campaigns
Case Study: Sprint-Clearwire
37 ©2014 Vinson & Elkins LLP
II.
B. Appraisal Rights
William P. Mills
38 ©2014 Cadwalader, Wickersham & Taft LLP
Appraisal Rights Generally
• Definition
o An appraisal right allows for a stockholder to elect not to accept consideration offered
in the transaction, and instead seek a fair value appraisal of its shares as determined
by a court
• Delaware Law
o Found in DGCL § 262
o Appraisal rights are available in all transactions in which the consideration to be
received is other than all stock
• According to various data sources, the number of transactions in which
appraisal proceedings have been filed or threatened has increased
significantly in recent years
39
Appraisal Rights
What Are Appraisal Rights?
©2014 Cadwalader, Wickersham & Taft LLP
Appraisal Rights Generally (Cont’d)
• Increased activity can be traced to “appraisal arbitrage”
• Stockholder activists and hedge funds focused on appraisal as an investment
or an activist tool
• Appraisal claims, or the threat of a claim, can be used to challenge a deal
and affect the certainty of closing and potentially the price of the transaction
40
Appraisal Rights
Appraisal Arbitrage
©2014 Cadwalader, Wickersham & Taft LLP
Appraisal Rights Generally (Cont’d)
• Creates potential for significant payments to dissenting stockholder post
closing
• Dissenters do not vote which could upset the required stockholder vote to
approve the deal
• Dissenters have the option to withdraw their claim post closing and not follow
through on a threat
41
Appraisal Rights
The Threat of Appraisal Creates Deal Uncertainty
©2014 Cadwalader, Wickersham & Taft LLP
Background
• In February 2013, Dell announced a going
private transaction with Silver Lake
Partners and Michael Dell for $13.65 per
share
• Because Michael Dell was part of the
buying group, the Dell board appointed an
independent committee to negotiate the
transaction terms
• The Dell Special Committee negotiated a
majority of the minority voting requirement
for the transaction
• An activist campaign against the
transaction was launched by Southeastern
Asset Management and Carl Icahn
• One of the tools that Icahn used in the
campaign was a call for investors to not
vote in favor of the transaction and exercise
Appraisal Rights Generally (Cont’d)
Result
• Initially, the transaction was not able to
obtain the majority of the minority vote
required to approve the transaction
• The parties agreed to raise the
transaction price to $13.75 per share in
exchange for a modification to the
majority of the minority requirement
Takeaway
• A no vote and appraisal rights campaign
contributed to the increased offer price.
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Appraisal Rights
Case Study: Dell & Carl Icahn
©2014 Cadwalader, Wickersham & Taft LLP
Factors that Influence the Increase in Appraisal Claims
Salomon Bros. v. Interstate Bakers Corp., 576 A.2d 650 (Del. Ch. 1989)
• As long as all other statutory requirements are met, if the shares are
purchased after the merger announcement date, they are not disqualified
from appraisal rights
Transkaryotic Therapies Inc., C.A. No. 1554-CC (Del. Ch. May 2, 2007)
• Appraisal rights attach on the date of the merger vote and not on the record
date
• In addition, shares held in street name should be treated as voted in the
aggregate without allocating the votes to each beneficial owner
• Beneficial holders of the shares held in street name are entitled to appraisal so
long as the total number of shares seeking appraisal does not exceed the
number of shares that voted against the transaction
• Stockholders therefore can delay, until the meeting date, a decision on
whether to buy target stock and pursue an appraisal
43
Appraisal Rights
Stockholders can Purchase Shares after the Record Date
©2014 Cadwalader, Wickersham & Taft LLP
Factors that Influence the Increase in Appraisal Claims (Cont’d)
• DGCL Section 262(e) allows stockholders to withdraw an appraisal demand
and accept merger consideration at any time within 60 days of the effective
date of the merger so long as the stockholder has not commenced appraisal
proceedings
• Provides investors with a timing advantage: The investor can weigh factors
that go to the valuation of the shares including trends in the company’s
business, and market and industry factors at a date closer to the closing date
44
Appraisal Rights
Stockholders Who Elect Appraisal have a 60 Day Option
©2014 Cadwalader, Wickersham & Taft LLP
Factors that Influence the Increase in Appraisal Claims (Cont’d)
• From 2010 until June 2014, only one appraisal case came out with a lower fair
value determination, and one case with equal consideration. All others had a
premium
• But the entire appraisal process can be lengthy; final rulings rarely occur
earlier than 2 years after the date of the appraisal petition and can occur
significantly later
• Appraisal proceedings can result in significant expenses
45
Appraisal Rights
Delaware Courts have Generally Awarded a Value That is a
Premium to the Transaction Value
©2014 Cadwalader, Wickersham & Taft LLP
Background • In October 2009, Dimensional Associates, a
controlling stockholder, offered outstanding
stockholders $1.68 per share
• Dimensional owned 42% of the outstanding
common stock and 99% of the Series A
preferred stock, with approximately 53% of the
total voting power
• A third party bidder, offered a price per share
significantly higher than Dimensional’s original
offer
• The transaction was approved by a special
committee and included a majority of the
minority voting provision
• In July 2010, Orchard Enterprises was
acquired by Dimensional Associates for $2.05
per share
• Minority investors brought an appraisal
proceeding
Factors that Influence the Increase in Appraisal Claims (Cont’d)
Result
• The minority investor shares were
appraised at $4.67 per share,
significantly higher than the original offer
price and the deal price
• The court took issue with Orchard’s use
of an inflated discount rate to calculate
the stock value
Takeaway
• Courts will apply their own valuation
analysis which can lead to significant
increase in share valuation
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Appraisal Rights
Case Study: Orchard Enterprises
©2014 Cadwalader, Wickersham & Taft LLP
Factors that Influence the Increase in Appraisal Claims (Cont’d)
The Interest Rate Advantage
• Compounded quarterly interest from the date of merger
• Set by statute in Delaware; DGCL § 262(h)
• Rate: federal reserve discount rate + 5%
Appraisal Settlements Are Less Attractive To Investors
• The value of pursuing the claim, as opposed to settling the claim, is more
attractive to investors because interest continues to accrue while the case is
pending
Many managed funds have become interested in taking advantage of this
arbitrage
• Hedge funds (e.g., Merion LP) have started to specialize in this investment
area and have raised funds in excess of $1 billion 47
Appraisal Rights
Stockholders are Entitled to a
Favorable Interest Rate on Their Shares
©2014 Cadwalader, Wickersham & Taft LLP
Factors that Influence the Increase in Appraisal Claims (Cont’d)
• Delaware courts have consistently held that the consideration negotiated in a
merger need not be given any presumptive weight in the determination of fair
value
• The court will determine the valuation methodology
• The Delaware courts have generally used the Discounted Cash Flow Method
(DCF) which often leads to a calculated value excess of the merger price
48
Appraisal Rights
Delaware Courts Use Discretion in
Determining Fair Value of the Shares
©2014 Cadwalader, Wickersham & Taft LLP
Factors that Influence the Increase in Appraisal Claims (Cont’d)
• Valuation is determined at the merger date and not announcement date
• Any increase in the underlying business performance occurring between the
announcement date and closing date could increase the appraised value of the
shares
• The share value could also decrease between the offer date and the merger
date
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Appraisal Rights
Shares are Appraised as of the Merger Date
©2014 Cadwalader, Wickersham & Taft LLP
Factors that Influence the Increase in Appraisal Claims (Cont’d)
• While other stockholder challenges to a transaction such as a derivative claim
or class action require that a plaintiff prove wrongdoing by the board or the
company, wrongdoing or flawed sale process does not need to be proven in an
appraisal proceeding
50
Appraisal Rights
Investors Do Not Need To Prove Liability
©2014 Cadwalader, Wickersham & Taft LLP
Background
• In June 2013, Dole announced a
management buyout by its chief executive
David H. Murdock for $12 per share
• Mr. Murdock owned approximately 39% of
Dole. He had previously taken Dole private
in 2003 and then public again in 2009
• The price was raised to $13.50 per share
• The price was not considered to be fair in
the market
Current Issues
Result
• In August 2013, the transaction was
approved by the stockholders but only
by a very slim majority (50.9%)
• Approximately 25% of Dole stockholders
decided to exercise their appraisal rights
• Stockholders are seeking appraisal for
up to $190 million
Takeaway
• Even when a transaction is approved by
stockholders the threat of appraisal
proceeding can leave a company open
to significant additional financial liability
• Risk of large appraisal awards is
especially problematic if financing is not
sufficient
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Appraisal Rights
Case Study: Dole
©2014 Cadwalader, Wickersham & Taft LLP
Current Issues (Cont’d)
• Transkaryotic held that stockholders holding shares in street name are entitled
to seek appraisal
• Open issues from this holding:
o In the Ancestry.com transaction, a group of investors led by Pemira, paid $32
per share to buy Ancestry.com
Merion acquired its shares after the record date and was unsure of how the shares
were voted because they were held in street name
Ancestry is arguing that this disqualified Merion from seeking appraisal because
those shares must have not voted for the transaction
o In the Dole transaction, more shares are seeking appraisal than the number
of shares that voted against the merger
The Delaware court must determine how to award appraisal in such a situation,
when tracing share ownership is difficult
Appraisal Rights
The Transkaryotic Holding Has Left Open Some Issues
©2014 Cadwalader, Wickersham & Taft LLP 52
Current Issues (Cont’d)
• Reduce the statutory interest rate prescribed in Delaware for appraisal rights
• Limit the types of transactions where appraisal rights are available
• Restrict the timing that someone could file for appraisal rights
53
Appraisal Rights
The Delaware Legislature Could Reduce
the Advantage That Appraisal Rights Offers to Activists
©2014 Cadwalader, Wickersham & Taft LLP
II.
C. Hostile Takeover Bids and
Activists
Kai Haakon E. Liekefett
©2014 Vinson & Elkins LLP 54
• Historically, a hostile takeover was the greatest threat to the ability of the
board and management to set a company’s strategy
• In the last couple of years, the number of hostile takeovers has declined
significantly
• Today, the greatest threat to the control of a public company’s strategy is
from activists who acquire a small stake and threaten to launch a proxy
fight to push for change
• Recently, activists have become increasingly involved in hostile
takeover activity
Introduction
“Hostile” Activists
The new confluence of activism and hostile bids
may breathe new life into the hostile takeover
55
Hostile Takeover Bids and Activists
©2014 Vinson & Elkins LLP
The Hostile Takeover has been on the Wane…
13
22
46
66
57
72
39
43
47
42
34
29
10 9 8 18 15 18 18 15 15 12 5 7 0
10
20
30
40
50
60
70
80
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*
Unsolicited Takeover Bids
Hostile Takeover Bids
Source: FactSet Mergers (through October 20, 2014)
Unsolicited and Hostile Takeover Offers 2003 – 2014 YTD
56
Hostile Takeover Bids and Activists
©2014 Vinson & Elkins LLP
Activist Supports
Hostile Bid of Strategic
Acquiror
Activist Launches
Hostile Bid
Activist and Strategic
Acquiror are Co-Bidders
in a Hostile Bid
The New Page in the Activist’s Playbook
Hostile Takeover Bids and Activists
57
Forms of Activist Involvement in Hostile Takeovers
Carl Icahn Bill Ackman
(Pershing Square)
Ricky Sandler
(Eminence Capital)
©2014 Vinson & Elkins LLP
The Target: Allergan
• Large cap multi-specialty health care company with a $44.7 billion market cap when
the bid was announced, traded on the NYSE
• Allergan has 9 directors, all of whom are up for election at the 2014 annual meeting
• Chairman and CEO is David Pot (since 2001)
The Bidder: Valeant Pharmaceuticals International
• Large cap pharmaceutical and medical device company with a $44.5 billion market
cap, traded on the NYSE and TSX
• Manufactures and markets generic pharmaceuticals, over-the-counter products and
medical devices, in the eye health, dermatology, and neurology therapeutic classes
The Activist: Pershing Square Capital
• Led by Bill Ackman, Pershing Square is a hedge fund that manages approximately
$13 billion in capital and invests in North American equity securities
• Launched activist campaigns against McDonalds, Wendy’s, Target, JC Penney, Air
Products & Chemicals and Canadian Pacific Railway
• Shown a willingness to launch proxy fights and acquire the entire company at the
right price (i.e., Plains Resources)
The Parties
58
Hostile Takeover Bids and Activists
©2014 Vinson & Elkins LLP
PRIVATE
Timeline of Initial Events
February – May 2014
PUBLIC
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Hostile Takeover Bids and Activists
©2014 Vinson & Elkins LLP
The Terms of Valeant’s Takeover Bid
Valeant’s Offer
• Valeant issued its public “bear hug” letter the day after the filing of the
Schedule 13Ds and sent Allergan a draft merger agreement
• Initially, Valeant offered Allergan shareholders $48.30 in cash and 0.83
Valeant shares for each Allergan share, valuing the target at $152.89 a share
at the time of the offer (a 38% premium over Allergan’s unaffected stock price)
– Subsequently, Allergan increased its offer several times
– On October 27, it stated “Valeant is prepared to improve its offer and provide value
to your shareholders of at least $200 a share”
• Valeant offered to assume the entire antitrust risk (“hell or high water”)
• There is no financing contingency; Valeant has committed financing
• Valeant is “open to discussing and addressing social issues such as board
composition, senior management team composition and headquarters”
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©2014 Vinson & Elkins LLP
• Valeant and Pershing Square form a jointly owned entity (the “Co-Bidder
Entity”) as the exclusive entity for the stake accumulation in Allergan
• Valeant is not required to pursue a business combination with Allergan
and Pershing Square is not required to acquire Allergan equity
• Valeant contributes $75.9 million to the Co-Bidder Entity and Pershing
Square contributes additional amounts in its discretion
• Profits and losses of the Co-Bidder Entity on $75.9 million in value of
Allergan equity are allocated to Valeant and the remainder is allocated
to Pershing Square
o Exception: Valeant receives 15% of the net profits otherwise allocable to
Pershing Square in the event Allergan enters into a business combination
with a third party
The Relationship Agreement
Terms of the Pershing Square/Valeant Partnership
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Hostile Takeover Bids and Activists
©2014 Vinson & Elkins LLP
• Pershing Square directs the management of the Co-Bidder Entity
• The Co-Bidder Entity may not sell any Allergan equity after the filing of a
Schedule 13D by Pershing Square
o However, this covenant terminates under certain circumstances (described on
the next slide)
• Pershing Square will cause the Co-Bidder Entity to vote in favor of any
Valeant-Allergan business combination with Allergan and against any
other transactions or conflicting proposals
• Valeant will consult with Pershing Square before making any material
decisions relating to a business combination with Allergan and requires
Pershing Square’s consent for launching any tender offer
Terms of the Pershing Square/Valeant Partnership (Cont’d)
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Hostile Takeover Bids and Activists
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• If Valeant and Allergan consummate a business combination:
o Pershing Square will purchase Valeant common stock for $400 million at a
15% discount to the then current market price
o Pershing Square will cause the Co-Bidder Entity to elect to receive Valeant
common stock
o Pershing Square will hold at least $1.5 billion of Valeant common stock and
continue to hold at least $1.5 billion for at least one year
• The rights and obligations under the Relationship Agreement terminate if:
o Valeant informs Pershing Square that it is no longer interested in a business
combination with Allergan
o Valeant does not make a proposal for a business combination with Allergan
within 10 days after the filing of a Schedule 13D or withdraws such a proposal
o No definitive agreement has been reached with Allergan within 12 months
o Valeant does not make a superior proposal within a specified time period
following a third party proposal, agreement or tender offer for Allergan
Terms of the Pershing Square/Valeant Partnership (Cont’d)
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Hostile Takeover Bids and Activists
©2014 Vinson & Elkins LLP
• The Co-Bidder Entity will be dissolved upon:
o Mutual agreement of Pershing Square and Valeant
o Consummation of a business combination of Allergan with Valeant
o Consummation of a business combination of Allergan with a third party
(would not include a minority stake or other “white squire” investment)
o Sale of all Allergan equity by the Co-Bidder Entity
o Valeant informs Pershing Square that it is no longer interested in a business
combination with Allergan
o Valeant does not make a proposal for a business combination with Allergan
within 10 days after the filing of a Schedule 13D or withdraws such a proposal
o No definitive agreement has been reached with Allergan within 12 months
• Each party will bear its own costs and expenses
Terms of the Pershing Square/Valeant Partnership (Cont’d)
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Hostile Takeover Bids and Activists
©2014 Vinson & Elkins LLP
Note: Chart shows Allergan’s share price, volume, and the number of shares, options, and forwards purchased by Pershing Square
beginning February 25, 2014, the day Pershing Square began its purchases, through April 21, 2814. Data are from Capital IQ.
Pershing Square’s Stakebuilding
65
Source: Pershing Square, Definitive Additional Proxy Materials, filed with the SEC on April 22, 2014
Hostile Takeover Bids and Activists
©2014 Vinson & Elkins LLP
Schedule 13D Filing
Legal Issues of Pershing Square’s Stakebuilding
• Federal securities laws require the filing of a Schedule 13D within 10 days
of crossing 5% beneficial ownership in a public company
• Pershing Square used this 10-day window to increase its ownership stake
from 5% to 9.7%
• This 10-day window dates back to 1968 with the adoption of the Williams
Act and Congress has been urged to shorten the window for many years,
as almost every other developed market has a much shorter period
• The Dodd-Frank Act (adopted in 2010) authorized the SEC to close the
10-day window but the SEC has not yet exercised its authority
• Ongoing policy debate between corporate lobbyists and hedge fund
supporters
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Hart-Scott Rodino Act (HSR)
Legal Issues of Pershing Square’s Stakebuilding (Cont’d)
• The HSR Act requires the filing of a notification upon acquiring shares with
a market value exceeding $75.9 million
• Valeant avoided this requirement by limiting its investment in the Co-
Bidder Entity to exactly $75.9 million
• Pershing Square invested $3.2 billion in Allergan equity but the Co-Bidder
Entity primarily acquired options and forward purchase contracts, which do
not count towards the HSR threshold until exercised and settled
• Pershing Square filed its HSR notification after the filing of its Schedule 13D
and was granted early termination of the 30-day waiting period on May 1st
o This enabled Pershing Square to obtain actual voting power quickly
o By contrast, Valeant filed for HSR clearance on July 14th and received a second
request from the FTC on August 11th
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Insider Trading
Legal Issues of Pershing Square’s Stakebuilding (Cont’d)
• Many have wondered whether this stake accumulation constituted illegal
insider trading because Pershing Square possessed material non-public
information about Valeant’s interest in bidding for Allergan
• The U.S. Court of Appeals for the 2nd Circuit held in 1968 in SEC v. Texas Gulf
Sulphur Co. that “anyone in possession of material inside information must
either disclose it or … abstain from trading” (“possession theory”)
• However, the Supreme Court rejected this theory in 1980 in Chiarella v. United
States when it required a breach of a confidentiality obligation
• Pershing Square did not breach any confidentiality obligation to Allergan (not
the source of the information) or Valeant (consented to the stake accumulation)
• Also, a bidder’s own intention to pursue an acquisition does not constitute
“inside information” and Pershing Square was designated as “co-bidder”
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Tender Offer Rules
Legal Issues of Pershing Square’s Stakebuilding (Cont’d)
• There is a special SEC insider trading rule that deals with tender offers
• Rule 14e-3 provides that once a prospective bidder has “taken a substantial
step or steps to commence a tender offer,” then any person other than the
bidder who is in possession of material non-public information is prohibited
from acquiring shares in the target
• In the Relationship Agreement, Pershing Square and Valeant expressly state
that “no steps have been taken towards a tender for securities of Allergan
and the parties agree that the consent of both Pershing Square and
[Valeant] shall be required for launching such a tender offer”
• Furthermore, the Relationship Agreement provides that Pershing Square and
Valeant will be “co-bidders” in any tender offer and that Pershing Square
will be a significant shareholder (and even affiliate) of “New Valeant”
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The Structure Facilitates Hostile Takeovers …
Benefits of the Pershing Square/Valeant Partnership
• A hostile bidder usually takes a significant amount of risk, but the arrangement
with Pershing Square substantially lowers Valeant’s risk:
o In the event Allergan remains independent, Valeant takes little economic risk
because 98% of the funds for the Allergan stake came from Pershing Square
o In the event Allergan is rescued by a “white knight,” Pershing Square
compensates Valeant with a 15% break-up fee
o Valeant can utilize Pershing Square’s expertise and experience in secret stake
accumulations and proxy contests
o Allows a strategic bidder to quickly obtain HSR clearance for the toehold stake
• The structure also lowers Pershing Square’s risk because it received:
o Advance knowledge of Valeant’s hostile bid, which guaranteed Pershing Square a
significant lift in Allergan’s stock price
o 15% discount on $400 million of Valeant stock
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… But There are Also Risks
Risks of the Pershing Square/Valeant Partnership
• In the event Allergan remains independent, it is likely that its stock price will
drop back to pre-bid levels (and possibly lower), and Pershing Square stands
to incur significant losses
• Activists and corporations may team up on hostile takeovers, but companies
that join with activists may soon discover they are targets themselves
o If the hostile bid succeeds, Pershing Square will own approximately 6% of the
combined company
• There is a legal risk that a court will come to the conclusion that Pershing
Square’s stake accumulation violated the federal securities laws (in
particular Rule 14e-3)
• Lastly, there is a legislative risk: The high-profile hostile bid for Allergan may
put pressure on the SEC (and Congress) to close various legal loopholes
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Pershing Square and Valeant’s Choices
The Fight for Allergan
• Allergan’s poison pill effectively limits Valeant and Pershing Square to a
10% stake
• This forced Valeant and Pershing Square to either:
o abandon the pursuit of a transaction or
o try to negotiate a friendly transaction with Allergan’s board of
directors or
o run a proxy contest to replace the incumbent directors of Allergan in
the hope that a new board will redeem the poison pill
• An insurgent’s ability to replace the incumbent’s board through a proxy
contest depends on a target company’s structural defenses
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Strengths
• Poison pill in effect (1)
• No shareholder action by written consent (2)
• No proxy contest at 2014 annual meeting
possible under the advance notice provisions
for nominations and shareholder proposals (3)
• Board is authorized to change the size of the
Board without shareholder approval
• Board fills all director vacancies (including
due to removal) (4)
• No cumulative voting for election of directors
• Board may amend or repeal bylaws unilaterally
• Blank check preferred stock
• Board approval or affirmative vote of holders
of a majority of disinterested shares required
for transactions with 5% shareholders (5)
• Section 203 of the Delaware General
Corporation Law (DGCL)
• In contested elections, directors are elected by
plurality vote (6)
Weaknesses
• Annually elected directors
• Shareholders holding at least 25% of the
outstanding stock can call special meetings
• Low insider ownership (approx. 1.6%)
• Directors may be removed without cause by a
majority of the shares entitled to vote
• No supermajority vote requirement to approve
mergers or amend charter
• Board has proposed to allow shareholders to
act by written consent -------------------- (1) Poison pill was adopted April 22, 2014
(2) However, Allergen’s Board has proposed amending the Company’s certificate
at the 2014 annual meeting to allow shareholders to act by written consent
(3) Advance notice for director nominations and shareholder proposals for the
2014 annual meeting had to be given by April 6, 2014
(4) However, if all directors are removed, any officer or any shareholder may call a
special meeting or may apply to the Delaware Court of Chancery for a decree
summarily ordering an election (DGCL Section 223(a))
(5) Majority of disinterested shares are required to approve a business
combination with a 5% shareholder unless approved by majority of
independent directors
(6) In a contested election, shareholders are given the choice to cast “for” or
“withhold” votes for the election of directors; in a non-contested election,
shareholders have the choice to either cast votes “for” or “against” the election
of directors and directors are elected by majority vote standard
The Fight for Allergan: Allergan’s Structural Defense Profile
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Allergan has Certain Achilles’ Heels
The Fight for Allergan: Allergan’s Weaknesses
• Allergan had an annual meeting scheduled for May 6th and the deadline for
director nominations had already passed
• However, Allergan’s structural defense profile has significant weaknesses:
o Allergan allows shareholders holding 25% of the shares to call a special meeting
o Allergan’s Board submitted a proposal for the May 6th annual meeting to allow
25% of the shareholders to demand an action by written consent
o Directors may be removed without cause by a majority vote of the shareholders
• However, Allergan limits the shareholders’ ability to call special meetings (and
act by written consent) by barring a “Similar Item” from being presented to
shareholders within one year prior to the request
• Therefore, a key question was whether the removal and new election of
Allergan’s directors would be a “Similar Item” to the annual director election
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The Fight for Allergan: Allergan’s Weaknesses (Cont’d)
Allergan’s Own Interpretation Came to Haunt It
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Source: Allergan, Definitive Additional Proxy Materials, filed with the SEC on April 22, 2014
Hostile Takeover Bids and Activists
©2014 Vinson & Elkins LLP
Allergan was Not Always Vulnerable
The Fight for Allergan: History of Allergan’s Defenses
• Staggered Board
Allergan’s board of directors proposed to eliminate the staggered board at the
2011 annual meeting and Allergan’s shareholders voted to approved the
proposal
• Shareholder Power to Call Special Meetings
Allergan’s board of directors proposed to introduce shareholder power to call
special meetings at the 2013 annual meeting and Allergan’s shareholders voted
to approved the proposal
• Shareholder Action by Written Consent
Allergan’s board of directors has proposed to introduce shareholder action by
written consent at the 2014 annual meeting and Allergan’s shareholders voted
are expect to approve the proposal
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The Fight for Allergan: Timeline of Subsequent Events
May – June 2014
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MAY – JUNE
©2014 Vinson & Elkins LLP
The Fight for Allergan: Timeline of Subsequent Events (Cont’d)
August – September 2014
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Hostile Takeover Bids and Activists
AUGUST – SEPTEMBER
©2014 Vinson & Elkins LLP
The Fight for Allergan: Timeline of Subsequent Events (Cont’d)
October – December 2014
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OCTOBER DECEMBER
©2014 Vinson & Elkins LLP
III.
A. Identifying Vulnerabilities in a
Transaction
Kai Haakon E. Liekefett
©2014 Vinson & Elkins LLP 80
Identifying Vulnerabilities in a Transaction
Introduction
Activists are Looking at Every Deal
• Activists are looking at each and every announced deal:
o Looking to either get a “bump” or derail the deal
o Assessing vulnerabilities
• How activist investors become involved in an M&A transaction:
o As an existing shareholder that was urging a review of strategic alternatives or
sale process
o As a new shareholder that acquires a position post-announcement of the deal
81 ©2014 Vinson & Elkins LLP
Identifying Vulnerabilities in a Transaction
Deal Announcement
A. Investors are in favor of the deal, but they think the terms could be
sweetened
o Believe that maybe some value was left on the table
o Do not want to risk ‘deal in hand’
Initial Investor Reaction as Cue
82
B. Investors are not necessarily against the deal, but they think that the
proposed consideration undervalues the company on current terms
o Believe that amount or form of consideration is unacceptable
o Criticize lack of pre-signing market check or robust process
C. Investors oppose the deal for grossly undervaluing the company or lack of
strategic sense
o Believe that consideration is grossly inadequate
o Argue that more attractive strategic alternatives would have been available
©2014 Vinson & Elkins LLP
• Financial terms
• Shareholder vote
requirements
• Other closing
conditions
(including regulatory
and appraisal
conditions)
• Deal protection
provisions
The Activist’s Analysis
Identifying Vulnerabilities in a Transaction
Deal Terms
83
• Review
background to the
merger section
• Determine process
deficiencies or
conflicts of
interest
Deal Process
• Nomination deadline
for next annual
meeting
• Ability to remove
directors prior to
the next annual
meeting at a special
meeting or through
action by written
consent
Governance Profile
©2014 Vinson & Elkins LLP
III.
B. Addressing Activism in
Deal Preparation and Negotiation
William P. Mills
84 ©2014 Cadwalader, Wickersham & Taft LLP
Advanced Planning
• Analyze the potential vulnerabilities of the transaction
o Valuation: Fully vet management’s model and forecast, including underlying
assumptions
o Is there a controlling stockholder?
o Is there a conflict of Interest?
o Would a special committee be required?
o Is a shareholder vote required?
• Analyze stockholder base
o Are activists in the stock?
o What is the estimated cost basis for significant stockholders?
• Review company’s takeover defenses
o Can shareholder remove directors?
o When is the next annual meeting?
Addressing Activism in Deal Preparation and Negotiation
85 ©2014 Cadwalader, Wickersham & Taft LLP
Advanced Planning (Cont’d)
• Prepare investor relations communication plan
o “Black hat” review of transaction
• Put in stock monitoring
o To alert parties to large share purchases and turnover in stockholder base
• Retain qualified investors
• Consider pre-signing market check
Addressing Activism in Deal Preparation and Negotiation
86 ©2014 Cadwalader, Wickersham & Taft LLP
Negotiating the Transaction Terms
• Sellers should negotiate effectively and establish a record that they obtained
the best available transaction terms, including price
• Evaluate and consider pre- announcement market check, and limited auction to
qualified financial and strategic buyers
• Minority Protections o Special committee
o Majority of the minority vote
Pro: can provide business judgment protection for directors
Con: could encourage activists/arbs to seek to establish a blocking position
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Addressing Activism in Deal Preparation and Negotiation
©2014 Cadwalader, Wickersham & Taft LLP
Negotiating the Transaction Terms (Cont’d)
• Deal protection provisions
o Go shop
o Fiduciary out
o Termination fees
o Voting agreements with significant shareholders
o Appraisal rights condition Parties can include a condition that shares seeking appraisal do not exceed a
threshold (e.g. 5-10% of outstanding shares)
These conditions have become less common but may be considered in light of the
upward trend in appraisal proceedings
Protects seller against risk of significant appraisal cost; could be required for
financing
Shifts to buyer risk of appraisal proceeding
o Target’s adoption of a shareholder rights plan in conjunction with merger
agreement
A conflict free transaction with a market check, a strong record of negotiation and
reasonable deal protections is less likely to attract activist attention
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Addressing Activism in Deal Preparation and Negotiation
©2014 Cadwalader, Wickersham & Taft LLP
Respond to an Activist Approach or Public Campaign
• Assume private approach could lead to a public campaign
• Investor relations plan in place to communicate compelling rationale for
transaction
• Continue to focus on company performance
• Consider the activists position and recommendations and whether they are in
the best interest of all the stockholders
• Determine when to engage and negotiate with the activist
• Negotiation and compromise should be considered when optimal for
stockholders
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Addressing Activism in Deal Preparation and Negotiation
©2014 Cadwalader, Wickersham & Taft LLP
III.
Communicating with Shareholders
Gary W. Finger
90 ©2014 Houlihan Lokey, Inc.
Important Factors
Communicating with Shareholders
Create Deal Team Monitor Shareholder Base and Trading
Senior management, financial advisor, legal counsel and possibly other advisors, including proxy soliciting firm and public relations advisors
Maintain war list of updated contacts Prepare Board with periodic updates by advisors Prepare CEO Require coordinated and rapid response on all levels Momentum established in first hours following public announcement Delay may significantly lend air of credibility to activist campaign
Monitor changes in institutional and hedge fund holdings Trading activity, parallel trading and group activity (the activist “wolf
pack”) Proxy solicitation firms can analyze raw settlement data
from DTC Schedule 13D/13(f)/HSR filings Monitor peer groups, analysts, ISS, Glass Lewis, activist-like
institutions CalSTRS and TIAA-CREF, internet commentary and make reports that may attract attention
Retain stock watch service
Disclosure/Public Relations Communication of Transaction
Review investor presentations, analyst presentations and other financial public relations matters
Be consistent with the Company’s basic strategic message Proactively address reasons for any shortfall versus peer
company benchmarks Anticipate key questions and challenges from analysts and activists –
be prepared with answers Maintain regular close contact with major institutional investor – CEO
and CFO (and potentially lead independent director) participation very important – first meeting should not be after activist surfaces
Investor relations team should know names of likely activists and identify and log all incoming calls
Should meet with ISS often, as activists likely will and send ISS favorable research reports as it relates to public information (and not specify tailored presentations)
Create compelling investor presentation that provides rationale
Basis for all shareholder communications
Create plan to proactively communicate strategic plan (and proactively address activist concerns) with investment community
Communicate directly with analyst community
Maintain ongoing dialogue with investors, including portfolio managers and governance teams
Avoid being put in play – psychological and optical factors may be more important than financial factors in outcome of activist campaign against M&A transaction
Thank you
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Presenter Bios
93
William P. Mills
Bill Mills concentrates his practice in the area of corporate law, with emphasis on mergers and
acquisitions, securities law, corporate finance and corporate governance. Bill represents clients
in a wide range of complex transactions, including mergers, acquisitions, divestitures, public
and private securities offerings, proxy contests, spin-offs, restructurings, leveraged buyouts,
tender offers, exchange offers, and joint ventures.
He also represents investment banks as financial advisers on M&A and other transactions. Bill
advises listed public companies in the areas of corporate governance, activist defense, crisis
management, executive compensation, contractual negotiations, and general regulatory
compliance.
Select Representative Experience
• Forbes Media’s sale of a majority stake to a consortium of international investors
• Towers Watson's acquisitions of Extend Health and Liazon Corporation and sale of its
Reinsurance Brokerage Business
• AngioDynamics' acquisitions of Navilyst Medical, Microsulis Medical, Vortex Medical and
Clinical Data
• Elan Corporation's $3.25 billion sale of Tysabri rights to Biogen Idec
• Pfizer Inc.'s sale of its Capsugel business to KKR
• DPL Inc.'s merger with AES Corp.
• Pfizer Inc.'s $3.2 billion acquisition of King Pharmaceuticals
• Bear Stearns Companies Inc. acquisition by JPMorgan Chase
• Pfizer Inc.'s $68 billion acquisition of Wyeth
• Trian Fund Management in the $2.34 billion sale of Wendy's International to Triarc
Companies
• Pfizer Inc.'s $16 billion sale of its consumer health care division to Johnson & Johnson
• Xstrata Plc's sale of its Noranda aluminum division to Apollo Management
• Trian Partners’ successful proxy contest with H.J. Heinz Company
New York
212.504.6436
Presenter Bios
William P. Mills
94
Gary W. Finger
Mr. Finger is a Director and member of Houlihan Lokey’s M&A Group and the M&A Committee.
During an investment banking career spanning over three decades, he has been responsible
for a variety of public and private M&A assignments in a broad range of industries. He has
represented corporate clients and boards, hedge funds, and hostile raiders. Recent notable
transactions during Mr. Finger’s career include the campaign by PSAM to amend the terms of
the MetroPCS merger with T-Mobile, the going private transactions of Claxson Interactive and
Virbac; the merger of Salton and Applica; the merger of IASG and Protection One; and the sale
of Ameriserve to Wal-Mart. Mr. Finger is based in the firm’s New York office.
Before joining Houlihan Lokey, Mr. Finger was a Managing Director at Chemical Securities. His
experience includes positions as an Associate Director at Bear, Stearns & Co., and earlier stints
in M&A at E.F. Hutton and Morgan Stanley.
Mr. Finger received a B.S. and B.A., cum laude, from the University of Pennsylvania and an
MBA from Stanford Graduate School of Business. He is registered with FINRA as a General
Securities Principal (Series 24).
New York
212.497.4125
Presenter Bios
Gary W. Finger
95
Kai Haakon E. Liekefett
Since 2000, Kai has advised domestic and international companies, as well as financial
advisors, in connection with public and private M&A transactions, both hostile and friendly. Kai
has significant experience with shareholder activism, advising both target companies and
activists.
Prior to joining V&E, Kai was an associate at Cravath, Swaine & Moore in New York (2006 to
2011) and a legal trainee at Linklaters in Düsseldorf, London, Hong Kong and Tokyo (2000-
2004). Kai holds a Ph.D., magna cum laude, from Freiburg University; an Executive MBA,
summa cum laude (best of his class) from Münster Business School; an LL.M., James Kent
Scholar, from Columbia Law School; and a J.D., summa cum laude (best of his class), from
Osnabrück School of Law. He is admitted to practice in New York, Texas and Germany.
Select Representative Experience
• Conn’s in connection with activist activity by Luxor Capital and Greenlight Capital
• Endeavour International in its proxy contest defense against the Talisman Group
• Miller Energy in its proxy contest defense against Bristol Capital and Lone Star Value
• Gastar Exploration in connection with activist activity by Kleinheinz Capital Partners
• Crest Financial in its proxy contest against the $6 billion Clearwire-Sprint merger, resulting in
an increase of the merger consideration by approximately 70% from $2.97 to $5.00
• Oil States in connection with activist activity by JANA Partners
• Endeavor in connection with activist activity by Steelhead, O-Cap and Lone Star Value
• C&J Energy in its $2.86 billion merger with Nabors’ completion and production businesses
• Energy XXI in its $2.3 billion acquisition of EPL Oil & Gas
• Inergy in its $8 billion merger with Crestwood (2nd largest 2013 energy deal)
• Citigroup in LinnCo’s $4.9 billion acquisition of Berry Petroleum (5th largest 2013 energy deal)
• Evercore in Kinder Morgan’s $38.5 billion acquisition of El Paso (largest 2011 M&A deal)
• Westlake Chemical in its unsolicited $1.2 billion takeover offer for Georgia Gulf Corporation
Houston
713.758.3839
Presenter Bios
Kai Haakon E. Liekefett
96