Choosing your Battleground for the Hostile Transaction: Unsolicited Tender Offers or Proxy Battle

1
Choosing your Battleground for the Hostile
Transaction Unsolicited Tender Offers or Proxy
Battle?

• UBC Law School
• January 26, 2006
• (Presentation originally prepared for)

Stuart MorrowSecurities Corporate Finance
Calgary, AB December 5, 2005
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Overview

• Getting Organized
• Pre-Bid Weapons
• Legal Formalities
• Disarming of Defences
• Significance of Dissident Proxy Process
• What Provokes a Proxy Campaign
• Role of Institutional Investors

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Getting Organized

• If you dont know where youre going, youll be
  lost when you get there. (Yogi Berra)
• Know your objectives
• Which ones are vital? (Board seat? Control?
  Ownership 50? 67? 75? 90?)
• Which are dispensable? (red herrings, bargaining
  chips)
• Why choose hostile approach at all? (most fail)
• Where will support come from?
• Limited due diligence, no data room access

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• Have all other approaches been exhausted?
• Consider that gt90 required for post-takeover
  going private transaction. Much lower
  shareholder support required under Plan of
  Arrangement (75, 67 or less) (Molsons/Coors)

5

• Know your opponents
• Target management and Board
• Target shareholder makeup (institutional or
  retail? Passive or activist?)
• How committed to the stock? Management
  entrenched? Continuing role for management?
  Conflicts to exploit?
• Inability to displace controlling shareholder?
  (gt20)

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• Evaluate the likely competitive bidders/white
  knights
• Do you have the resources, resolve and patience
  to see it through? (HP/Compaq (25 billion proxy
  fight) Oracle/People Soft (9 16 billion
  takeover bid) or is it speculative/Quick Flip
  (i.e. greenmail))?
• Review particulars of Target defences already in
  place
• Allowable position before pill is tripped (15?
  20?)
• Is Plan subject to shareholder approval?
• Conditions for a qualified bid under the Plan?
• Is the Plan offside NP 62-202?
• Does Target have a staggered Board?
• How will you deal with the known defences?

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• Blueprint for, and execution of, campaign
• Assembly of campaign team (banking, financial and
  legal advisors, media and investor relations
  consultants)
• Business case for the bid and logic for the
  transaction structure proposed
• Decision tree (flow chart) map out all
  plausible scenarios and outcomes for the bid
  process

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• Prepare working group list, compliance checklist,
  confidentiality protocols, briefing notes for
  insiders and employees designation of bid
  spokesman
• Consider parallel proxy campaign to deal with any
  shareholder meeting issues (e.g. voting on poison
  pill/major transaction/elect independent
  directors/options/capital alteration/continuance,
  etc.)
• Management of the bid process keeping the
  pressure on to get the bid into shareholders
  hands
• Proceed by announcement of bid by news release,
  followed by mailing of the bid circular
• Make your bid as easy as possible to understand
  and accept i.e. Cash, clarity and simplicity

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• Anticipate counter-attacks
• Will the bid be seen as predatory or coercive?
• Will a non-cash bid be read as a sign of weakness
  in the bidder?
• Could profile of the bid put the bidder in play?
• Complex bid structure more difficult for market
  to understand and easier for Target to attack
  (Canfor/Slocan Forest Products)

10

• Risk of driving the Target into the arms of a
  competitor (Constellation failed bid for
  Vincor/Carl Icahn bid for Fairmont Hotels)
• Adverse media coverage (bias against hostile
  approach, tactics inconsistent with corporate
  governance best practices)
• Preferential treatment of controlling
  shareholders, at the expense of minority
  shareholders? Does tax structure favour Canadian
  shareholders over others? Consider equal
  treatment of securityholders policy (NP 62-201)
• Prepare FAQs for media and investors

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Pre-bid Weapons Available to Bidder

• Building a position
• Acquiring a toehold of up to 19.9 in the
  Target
• Provides hedge against superior bid
• Lower cost base provides economic advantage over
  new bidders
• Makes you more difficult to displace as the
  logical suitor
• Insider and early warning reports reduce element
  of surprise
• Caveat on pre-bid acquisition rules (bid price
  and offer terms must match, or improve on, any
  non-market purchases in 90 days pre-bid)

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• Lock-up/Support agreements
• Contractual commitment to tender by major
  shareholders (Pacifica Papers BCCA
  repudiation of unenforceability comment in
  lower court (proxies always being revocable)
  Omnicare/NCS deal protection mechanisms went
  too far ? coercive and preclusive terms, no
  fiduciary out clause)
• Timing of bid
• When Target is undervalued
• Adverse events/publicity affecting the Target
• Bidders stock relatively attractive

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Legal Formalities, Snares and Pitfalls

• Insider filings and early warning reports
• Pre-bid integration rules will restrict your bid
  terms
• Conflicts of Interest disclosure in your circular
  (dont ever withhold material information it
  only provides other side with more ammunition
  with which to attack you (Pacifica Papers GEAC))
• Bill 198 (Ontario) director and officer
  liability for secondary market disclosure,
  effective December 31, 2005
• Strict compliance with corporate law requirements
  and securities disclosure rules (bid circular,
  dissident information circular, form of proxy,
  valuation, notices and exemption orders)

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• OSC Rule 61-501 (Insider Bids, Related Party
  Transactions) (US equivalent NASD Rule 2290)
• Competition (anti-trust) rules
• Foreign investment/export restrictions
• Tripping of poison pill (shareholder rights
  plan), change of control, benefits, bonuses,
  accelerated vesting of options, convertible or
  subordinated securities, coat-tail and
  drag-along rights

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Disarming of Defences

• Understanding and respecting fiduciary duties of
  the Targets Board
• Target directors primary duty is to protect the
  Target shareholders interests (Schneider case
  (Ont. C.A.) maximize shareholder value
  (Paramount/QVC), but not necessarily Revlon test
  (auction of the company)
• Impartially evaluate the bid, in good faith, free
  of conflicts
• Consider realistic, viable alternatives open to
  the Target (Failure of Iamgold merger ? Coeur
  DAlene/Wheaton River ? Goldcorp)
• Take steps to pursue maximization of shareholder
  value, however that may be legally achieved

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• It is counterproductive to attack bona fide,
  timely actions taken by the Targets Board in the
  fulfilment of their fiduciary duties
• Both sides invariably profess to be acting in the
  best interests of the Targets shareholders
  (Constellation/Vincor)
• Bases for successful challenge to strategic
  defences
• Unreasonable in the face of the risk intended to
  be guarded against (CW Shareholdings v. WIC)

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• Will result in undue delay in allowing
  shareholders to tender to the bid or vote on the
  transaction (Nations Energy vs. Tartan Energy
  (ASC August/05) last minute poison pill,
  without shareholder approval)
• Just say no (Paramount/Time/Warner, 1989)
  Does not apply in Canada where, sooner or later,
  the shareholders will decide
• Defensive measures coercive or preclusive, in
  that they effectively deny Target shareholders
  the ability to decide the issue themselves (see
  Omnicare v. NCS Healthcare not applied in Toys
  R Us June/05)

18

• Inappropriate or offensive under NP 62-202 seek
  Regulatory (Securities Commission) intervention
• Market pressure/moral suasion (Sovereign Bancorp
  and Relational Investors)
• Proxy campaign for issues at AGM or special
  shareholders meeting
• Court proceedings (Bidder to block
  inappropriate
• corporate obstruction of the bid)
• (Target Claim of oppression by
• bidder)

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• Business judgment rule
• Court will generally defer to a Board of
  Directors considered, good faith business
  judgment (see Peoples Department Stores, SCC,
  2004)
• Not an absolute rule, however two aspects
• 1. Procedural process rigorous, deliberative
• and transparent
• 2. Substantive assessment good faith and
• result within reasonable range of values.

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• Defensive tactics raised in the face of a
  specific bid or other threat to control will be
  subject to review against the standards set out
  in NP 62-202 (Take-Over Bids Defensive Tactics)
• Consider application of the Unocal test that
  the onus is on the Targets Board to justify
  actions taken in response to an unsolicited bid

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• Under Unocal test, once enhanced scrutiny
  applies (when defensive measures are invoked),
  Target Board must demonstrate
• they had reasonable grounds for believing that a
  danger to the Targets corporate policy and
  effectiveness was raised by the bid or proposal
  and
• the defensive measures taken were a reasonable
  response to the threat posed and such steps
• (i) were not coercive or preclusive
  (Omnicare/NCS Healthcare)
• (ii) the response falls within a range of
  reasonable responses to the perceived threat
  (Toys R Us).

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Significance of the Dissident Proxy Solicitation
Process

• Ability to put your case to shareholders in
  dissident proxy circular
• Prescribed disclosure in the dissident circular
  on the identity, interests and intentions of the
  dissidents (i.e. Who are they? What interests do
  they have in the company? What are they doing and
  why?)

• Right to solicit votes for use at shareholders
  meeting
• Regulated by matrix of legislation (securities
  and corporate statutes), securities commission
  and stock exchange policies and contract
  (articles, bylaws, shareholder agreements)
  (collectively the proxy rules)

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What Provokes A Proxy Campaign?

• Poor corporate performance
• Need for new board leadership/independence from
  controlling shareholder
• Self-dealing, excessive compensation, conflicts
  of interest, related-party transactions by
  entrenched Board/Management (Enron / WorldCom
  /Tyco International /Adelphia Communications/
  Royal Group Technologies, Hollinger Inc.)
• Slate voting for directors
• Commonly done in Canada
• Not binding on shareholders
• Free to be selective on substituted form of
  proxy

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• Weak corporate governance (concern over
  entrenchment of Management, lack of Board
  independence, executive compensation not tied to
  performance, resistance to democratic reforms,
  adoption of defensive measures, such as
  shareholder rights plans, staggered boards, slate
  voting for directors and golden parachutes)
• Obscure, complex and limited financial disclosure
  (Fairfax Financial Holdings)
• Dual class share structure (multiple voting
  shares)
• (Magna, Molsons, Bombardier, Hollinger, Royal
  Group, Rogers, Shaw)

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• Fraud (Bre-X Minerals)
• Insider Trading (Cartaway Resources/ ImClone and
  Martha Stewart Living Omnimedia)
• Bona Fide Clash of Corporate Visions (Pacifica
  Papers-Norske Skog Plan of Arrangement
  (2002)/Hewlett Packard-Compaq Merger (2003))

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Proxy as Alternative/Complementary Remedy to
Other Options Open to Dissident/Insurgent Group

• Moral suasion (negotiation with Management and/or
  controlling shareholders)
• Shareholder proposals
• Take-over bid
• Precipitate regulatory intervention
• Derivative, Oppression and Class Actions

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Role of Institutional Investors

• Not usually a factor among small cap, junior
  issuers that do not meet the investment
  eligibility criteria that pension fund and mutual
  fund managers require
• Preference to work behind the scenes (influence
  Management without confrontation or being seen to
  rock the boat)
• Pro-Management bias of institutions? (why are
  they in the stock to begin with?)

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• Illiquidity of the Canadian investment grade
  securities market - relatively few issuers to
  choose between, large shareholdings and
  consequentially, an inability to vote with their
  feet (i.e. sell the stock)
• Fiduciary obligations to fund and trust
  beneficiaries - motives and priorities may differ
  from those of ordinary, retail shareholders
• Reluctance to fund the campaign and inability to
  recover costs - will often seek a free-ride by
  letting others take the initiative.