Presenting a live 90 ‐ minute webinar with interactive Q&A Hostile Takeover Defenses: Recent Decisions Evaluating and Structuring Anti ‐ Takeover Strategies THURS DAY, JUNE 23, 2011 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific T d Today’s faculty features: ’ f l f Joseph J. Basile, Partner, Weil Gotshal & Manges , Boston Adam H. Offenhartz, Partner, Gibson Dunn & Crutcher , New Y ork Eduardo Gallardo, Partner, Gibson Dunn & Crutcher , New Y ork The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Hostile Takeover Defenses Hostile Takeover Defenses Joseph J. Basile Adam H. Offenhartz Eduardo Gallardo 5
Overview Overview I I. Introduction Introduction II. Takeover Defenses III. What We Can Learn From Recent III Wh t W C L F R t Takeover Decisions and State Statutory F Frameworks k IV. Best Practice Strategies 6
I. Introduction Introduction 7 I
Overview of U.S. M&A Environment Environment • 2010 public large-cap (>$1 billion) M&A activity increased following the end of the economic downturn • In 2011, upward trend has continued Source: Thompson Financial; Year- to-Date Numbers as of June 14, 2011 8 8
Overview of U.S. M&A Environment (cont ) Environment (cont.) • Large cap hostile and unsolicited takeover attempts on the rise Source: Thompson Financial; Year-to- Date Numbers as of June 14, 2011 9 9
II. Takeover Defenses Takeover Defenses 10 II
Stockholder Rights Plans • Mechanics – Issuance to existing stockholders of rights to acquire common g g q stock at a 50% discount in the event a potential acquiror accumulates a specified percentage of voting shares (typically 10%-20%) – Hostile acquiror that triggers the rights plan is not permitted to H til i th t t i th i ht l i t itt d t exercise the rights, resulting in significant dilution • Benefits of a Rights Plan – Provides Boards with adequate time to consider and respond to unsolicited takeover proposals – Prevents the acquisition of a controlling interest that would preempt Board consideration of alternatives preempt Board consideration of alternatives – Limits the use of abusive takeover tactics 11
Stockholder Rights Plans (cont’d) • Opposed by many institutional investors, stockholder activists and proxy advisor firms • Increased pressure for companies to terminate their rights plans I d f i t t i t th i i ht l • Implementation of rights plan with a term of more than 12 months may lead to “withhold vote” recommendation by ISS Stockholder Rights Plans – Changes from 2002-2011 70.00% 60.00% 50.00% 40.00% 30.00% 20.00% 10.00% 0.00% 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Percentage of S&P 500 *Source: 2002-2011 SharkRepellent.net 12
Stockholder Rights Plans (cont’d) • Recent Developments – Many companies have decided to follow an on-the-shelf strategy Many companies have decided to follow an “on the shelf” strategy • Rights plan is kept ready for implementations at such time as the Company faces the actual threat of a hostile bid – Definition of “Beneficial Ownership” expanded in some rights plans to include derivatives (e.g. cash-settled equity swaps) swaps) – Use against controlling stockholder (e.g. iBasis/KPN) 13
Rights Plan and Takeover Strategy • Since rights plans make it economically impracticable for a hostile bidder to close on an unsolicited tender offer, the end game in most hostile takeovers is to take control of the target board h til t k i t t k t l f th t t b d – If hostile bidder’s nominees take control of the board new directors could deactivate pill and permit bidder to complete tender offer tender offer • A target’s ultimate vulnerability will depend on a hostile bidder’s ability to take control of the board within a reasonable timeframe • This highlights the importance of classified boards 14
Classified Boards • A classified board is one in which directors are divided into separate classes – Usually three classes, with directors in each class serving three-year terms and only one class elected annually • Staggering directors’ terms makes it more difficult for raiders Staggering directors terms makes it more difficult for raiders or dissidents to use proxy contest to take control of target immediately • • Under Delaware law if you have a classified board your Under Delaware law, if you have a classified board, your directors can be removed only for cause • The use of classified boards have come under pressure from corporate governance groups and activist stockholders corporate governance groups and activist stockholders. 15
Action by Written Consent and Special Meetings Meetings • What is “action by written consent”? – Stockholders can take corporate action in writing, as opposed to at annual or special meeting special meeting – Provision denying stockholders ability to act by written consent must be in Charter in Delaware • Provisions regarding calling special meetings also may vary – Some permit stockholders owning over a specified percentage to call a special meeting – Some permit only management and/or board to call special meetings • Stockholders’ ability to act by written consent and/or call a special Stockholders ability to act by written consent and/or call a special meeting can significantly impact the vulnerability of a company with a declassified board – Window to react to a hostile bidder is reduced from up to 13 months to 2-3 months th • Corporate governance groups and activist investors have increased pressure on public companies to allow for action by written consent and give stockholders ability to call special meetings. and give stockholders ability to call special meetings. 16
State Takeover Statutes • Come in many varieties – Control Share Acquisition Statutes – Business Combination Statutes (e.g. Delaware 203) C S ( ) – Business Combination with Fair Price Provisions • Most of these statutes will play a secondary role in the takeover context, as rights plan will typically be the main deterrent that a hostile bidder will face • However, parties to a hostile bid must play close attention to these o e e , pa t es to a ost e b d ust p ay c ose atte t o to t ese provisions, as they can be a trap for the unwary (e.g. inadvertent triggering of “beneficial ownership” definition under state statutes) 17
III. What We Can Learn From R Recent Takeover Decisions t T k D i i and State Statutory and State Statutory Frameworks 18
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