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Transcript of HE BOARD S ROLE IN DEFENDING AGAINST 2007 Foley & Lardner LLP THE BOARD’S ROLE IN DEFENDING...
©2007 Foley & Lardner LLP
THE BOARD’S ROLE IN DEFENDING AGAINST HOSTILE BIDS 1:15 PM
Bryan Armstrong, Ashton Partners
Justin Friesen, UBS Securities LLC
Richard Grubaugh, D. F. King & Co., Inc.
Charles J. Hansen, Saks, Inc.
Cary Kochman, UBS Securities LLC
Steve Vazquez, Foley & Lardner LLP
©2007 Foley & Lardner LLP
BRYAN ARMSTRONG PARTNER ASHTON PARTNERS
Bryan Armstrong has been with Ashton Partners, a strategic investor relations and crisis management firm, for over nine years currently serving as one of the firm’s three Partners. In addition to business development, client oversight and execution, Mr. Armstrong leads the Quantitative and Fundamental Research group and is part of the Crisis and Transaction group at Ashton.
Mr. Armstrong regularly provides commentary on topics such as shareholder activism and hedge funds to respected national financial media outlets including the Chicago Tribune, Seattle Times, First Business, Investment Dealers Digest, Financial Week and Investor Relations Business. In addition, Mr. Armstrong has published several articles in national publications and has presented at numerous conferences including the NASDAQ IR Seminar and the NIRI National conference.
Prior to joining Ashton Partners, Mr. Armstrong was an investment analyst at Merrill Lynch conducting security research and analysis, portfolio allocation schemes and retirement planning for high net worth clients and small businesses.
Mr. Armstrong received his BBA in Finance at the University of Wisconsin Madison, with a concentration in International Business. In addition, Mr. Armstrong holds the Chartered Financial Analyst (CFA) designation, is a member of the Investment Analysts Society of Chicago (IASC) and the CFA Institute.
©2007 Foley & Lardner LLP 2
JUSTIN FRIESEN EXECUTIVE DIRECTOR, MERGERS & ACQUISITIONS UBS SECURITIES LLC
Justin Webb Friesen is an Executive Director, Mergers & Acquisitions in the Investment Banking Department of UBS and is based in Chicago. Mr. Friesen has been involved in a wide variety of strategic and capital raising transactions in the diversified industrials, consumer / retail and business services sectors. Mr. Friesen’s transaction experience includes hostile M&A defense, corporate acquisitions, mergers and divestitures along with high-yield, equity and private placement capital raising for Fortune 500 and middle-market companies. His most recent transactions include ADESA’s leveraged buy-out sale to a private equity consortium led by Kelso, Banta’s white knight hostile defense and sale to R.R. Donnelley & Sons, JLG Industries’ sale to Oshkosh Truck, Pentair Inc.’s acquisition of APW Limited’s thermal enclosure assets and The Shaw Group’s acquisition of 20% of Westinghouse Electric.
Prior to joining UBS in May 2004, Mr. Friesen was a Vice President at Credit Suisse First Boston where he participated in significant M&A assignments including: Cooper Industries’ successful defense of Danaher Corporation’s hostile raid; S.C. Johnson’s acquisition of Bayer AG’s global household insecticide business; Pentair’s acquisition of Everpure from Veolia Environnement; sale of Collegis, Inc. to Sungard Data Systems and Whitman Corporation’s asset realignment with PepsiCo and subsequent acquisition of PepsiAmericas. Mr. Friesen began his investment banking career in 1994 as an analyst at Dean Witter Reynolds Inc.
Mr. Friesen received his M.B.A. from The Wharton School at the University of Pennsylvania where he graduated with highest honors and was recognized as a Palmer Scholar. He graduated with distinction from the Indiana University School of Business earning a B.S. in Accounting.
©2007 Foley & Lardner LLP 3
RICHARD GRUBAUGH SENIOR VICE-PRESIDENT D. F. KING & CO., INC.
Richard H. Grubaugh is a Senior Vice President of D.F. King & Co., Inc. and co-manager of the firm’s Extraordinary Events Group. Primarily advises corporations involved in complex shareholder transactions specializing in corporate control situations such as proxy contests, mergers and hostile tender offers. Formulates and recommends shareholder communications strategies for public companies in crisis situations. Prior speaking engagements include programs sponsored by the Practising Law Institute, the American Society of Corporate Secretaries and Governance Professionals and at Georgetown University on corporate governance issues.
©2007 Foley & Lardner LLP 4
CHARLES HANSEN EXECUTIVE VICE-PRESIDENT &
GENERAL COUNSEL SAKS INCORPORATED
Charles J. Hansen is the Executive Vice President and General Counsel of Saks Incorporated. Saks Incorporated, listed on the New York Stock Exchange under the ticker symbol “SKS,” owns and operates 62 Saks Fifth Avenue stores; 54 Saks Off 5th stores; and 24 Club Libby Lu specialty stores. Mr. Hansen is a graduate of the University of Kansas and has a J. D. degree from Boston College, where he was an editor of the Boston College Law Review. He was an associate at Shearman & Sterling, New York, New York, and served as General Counsel for Carson Pirie Scott & Co. prior to its acquisition by Saks Incorporated. He is a member of the bars of the States of Illinois, New York, and Wisconsin.
©2007 Foley & Lardner LLP 5
CARY A. KOCHMAN MANAGING DIRECTOR UBS INVESTMENT BANK
Cary Allan Kochman is a Managing Director, Co-Head of Americas Mergers & Acquisitions, and serves as Co-Head of the Investment Banking Department’s (IBD’s) Chicago office and Midwest Region. He is a member of the Americas IBD Executive Committee. Mr. Kochman is also a member of the Business Review Group.
Mr. Kochman advised on numerous recent transactions including ISCAR’s $5 billion sale to Berkshire Hathaway, ADESA’s pending $3.7 billion LBO transaction, JLG’s $3.1 billion sale to Oshkosh Truck, Zimmer Holdings’ unsolicited, cross-border $3.7 billion takeover of Centerpulse AG, the successful defense of Cooper Industries, Banta Corporation’s White Knight sale to R.R. Donnelley & Sons, the merger of Case Equipment Company with New Holland N.V., Flowserve’s acquisition of IDP, Hussmann’s corporate sale to Ingersoll-Rand, Terex’s cross-border acquisition of Powerscreen Plc, S.C. Johnson’s acquisitions of DowBrands and Drackett, Giddings & Lewis’ cross-border white knight sale to Thyssen AG, Whitman’s realignment with PepsiCo and subsequent acquisition of Pepsi Americas, Goodyear’s acquisition of Debica, the LBO of Jostens by Investcorp, the defense of Clark Equipment, as well as the sale of Specialty Equipment to United Technologies.
Before joining UBS, Mr. Kochman worked at Credit Suisse for 14 years where he was head of the U.S. M&A Department for his last 2 years. He holds both his J.D. and M.B.A. from the University of Chicago. He also has a B.S. in Accounting from the University of Illinois at Chicago. Mr. Kochman is a member of the Illinois Bar and is both a C.P.A. and C.M.A. Mr. Kochman is a Trustee of the Shedd Aquarium. He serves as a member of the Visiting Committee of The Law School of the University of Chicago. He is a member of the Business Advisory Council to the University of Illinois at Chicago College of Business. Mr. Kochman is also a member of The Economic Club of Chicago, The Executive’s Club of Chicago and The Commercial Club of Chicago. He is also a frequent lecturer at Northwestern University’s MergerWeek.
©2007 Foley & Lardner LLP 6
STEVEN W. VAZQUEZ PARTNER FOLEY & LARDNER LLP
Steven Vazquez is a partner with Foley & Lardner LLP, where he is a member of its Transactional & Securities and Private Equity & Venture Capital Practices, as well as its Emerging Technologies, Life Sciences and Nanotechnology Industry Teams. He practices in the areas of securities law and mergers and acquisitions, concentrating on debt and equity securities offerings, public and private mergers and acquisitions, and venture capital financings.
Mr. Vazquez has represented issuers in numerous initial and secondary public offerings and regularly counsels public companies and special committees of public companies.
Mr. Vazquez’s mergers and acquisitions expertise includes public and private company transactions in a variety of industries. He has specific experience in mergers and acquisitions involving health care, real estate, and technology companies.
Mr. Vazquez’s venture capital expertise includes representing emerging growth companies in the technology and telecommunications industries. Since 2000, Mr. Vazquez has represented investors and companies in more than 25 venture capital transactions raising an aggregate of more than $300 million.
Mr. Vazquez graduated, with honors, from the University of Florida College of Law in 1993, where he was elected to Order of the Coif and was an editor of the Florida Law Review and the Florida Tax Review. He received his bachelor's degree in finance from Florida State University in 1990.
Mr. Vazquez is named in The Best Lawyers in America®. In 2005, he was recognized as one of Florida’s Legal Elite™ by Florida Trend magazine.
2007 National Directors Institute
March 2007
Hostile Takeover Discussion Materials
STRICTLY CONFIDENTIAL
1
Table of Contents
SECTION 1 M&A Market Overview 2
SECTION 2 Hostile Activity and Hedge Fund Activism 8
SECTION 3 How to Prepare for a Hostile Bid 16
3
Rebound inM&A Activity
♦ 2006 volumes up 46% globally, 34% in the Americas♦ Resilient markets♦ Strategic imperatives
Rise of Hostile Activity and Shareholder
Activism
♦ Hostile bids comprise substantial portion of M&A volume♦ Market dynamics have resulted in a new era of aggressive
acquirors/agitators: hedge funds♦ Activists have increasingly attacked larger targets: Time
Warner, Heinz, McDonald’s
HistoricallyStrong Financing
Environment Continues
♦ Corporates across industries face the challenge of effectively deploying robust cash balances
♦ Leveraged loan market continues to be strong
Financial Sponsors Impact
♦ Mega-funds driving sponsors into mainstream of large cap M&A
♦ As a whole, sponsors are still sitting on over $230 billion of uninvested capital
♦ Low interest rate environment has helped make sponsors price-competitive with strategic acquirers
M&A Environment Overview
4
Global M&A Has Surpassed Record Levels
Source: Thomson Financial as of 12/31/06Note:1 All deals with disclosed deal value, excluding minority stake purchases, repurchases, spinoffs or withdrawn deals and deals less than $50 million
US M&A Announced Deal Volumes 1
Global M&A Announced Deal Volumes 1
0
500
1,000
1,500
2,000
2,500
3,000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
(US$
bn)
<US$1bn US$1bn - US$10bn >US$10bn
654818
1,228
2,015
2,726 2,676
1,297
9321,052
1,532
2,157
3,152
Down: 65%
Up:238%
1,667 2,074 2,840 3,160 3,406 3,592 2,399 2,225 2,484 2,955 3,571 4,067No. of Transactions
0200400600800
1,0001,2001,4001,600
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
(US$
bn)
<US$1bn US$1bn - US$10bn >US$10bn
Down: 73%
No. of Transactions
341499
711
1,393 1,3131,439
652
388483
683
983
1,226Up:
233%
827 1,096 1,520 1,652 1,573 1,588 960 906 1,041 1,185 1,368 1,576
5
Factors Influencing M&A Activity
Mid 1990s–2000 2001–2002 Today
Economic Environment
Stock Market Performance
Credit Market Strength
Investor Confidence
CEO Confidence
Corporate Scandals/Bankruptcies
Geopolitical Situation
Regulatory Environment
Shareholder Activism
6
Acquiror Target Value ($bn)
Type of Transaction
83.1 Stock
66.7 Raid
55.7 Stock 1
36.0 Raid
34.7 Stock
34.6 Stock
32.5 LBO
Investor Group 32.2 LBO
30.1 Stock
Investor Group 27.4 LBO
Total Top 10 433.0
Industry Consolidation Driving Biggest Deals2006 Top 10 Announced Transactions
Source: Bloomberg
Note:1 Merger occurred following takeover attempt by Enel
7
Leveraged Buyout EBITDA Multiples Have Rebounded to Pre-2000 Levels
Global M&A market continues to be supported by significant LBO activity
Source: Standard & Poor’s PMD (average purchase multiples are for Leveraged Buyouts with total sources of $500mm or greater). LTM figures as of 9/30/06
US Leveraged Buyouts Are Increasing as a Percentage of Overall Activity
♦ Total uninvested capital continues to exceed US$230 billion ♦ Recent industrial LBOs have been completed at historically high leverage levels (6.0x+ common)
Significant Leveraged Buyout Activity
56.7 51.940.5
19.5
47.0
130.3
171.3
22.1
94.4
6%
10%
14%
4% 4% 3% 3%
13%
18%
020406080
100120140
1998 1999 2000 2001 2002 2003 2004 2005 LTM2006
LBO
Vol
ume
(US$
bn)
0%2%4%6%8%10%12%14%16% LB
O V
olume as a %
of Total M
&A Volume
18%160
Significantly higher if financial institutions are
excluded
5.44.7
4.2 4.1 4.04.6 4.9
5.3 5.05.6
33%33%30%
33%35%35%34%
32%28%
37%
0
1
2
3
4
5
6
1998 1999 2000 2001 2002 2003 2004 2005 2006 LTM2006
Tota
l Deb
t / L
TM E
BITD
A (x
)
15%
20%
25%
30%
35%
40%
45% Equity Contribution (%
)
9
Historical Unsolicited and Hostile Activity Has Increased There has been a sharp increase in Global Hostile and Unsolicited M&A activity since 2004
Source: Thomson Financial, SDC as of 2/9/2007Note:1 All deals with disclosed deal value, excluding minority stake purchases, repurchases, spin-offs and deals less than $50 million. Includes withdrawn deals
57
47
11%
141
98
15%
82
75
7%
136
78
8%
96
76
4%
699
111
18%
115
83
3%
108
40
6%
43
38
4%
93
46
7%
239
50
12%
199
72
7%Unsolicited / Hostileas % of Total
Unsolicited / Hostile Deals
Hostile Volume ($bn) 402
79
11%
Global M&A Announced Hostile / Unsolicited Activity 1♦ CVRD acquired Inco
for C$22 billion after initialInco / Falconbridge merger was thwarted by separate hostile offers on both original merger partners
♦ Banta’s $1.3 billion White Knight sale to R.R. Donnelley after a successful defense against Cenveo, Inc.
♦ Cemex’s $13 billion hostile raid of Rinker via public Bear Hug
$57
$141
$82
$136 $96
$699
$115 $108
$43
$93
$239 $199
$402
$0
$100
$200
$300
$400
$500
$600
$700
$800
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006
10
Target Name Acquiror Name Value of Transaction ($bn)
66.7
36.0
24.1
21.8
18.0
17.9
17.4
13.7
12.7
11.4
Hostile Activity Has Re-Emerged
Top 10 Hostile Deals—2006
The World’s Leading Airport Company
There has been a sharp increase in Global Hostileand Unsolicited M&A activity since 2002
11
37 38 59 92 93 129 204 294 299 380 407 437 419 527 614 710859
2 20 37 75 75 5653
74 7676 84 103 207
293359
395
478
0
200
400
600
800
1,000
1,200
1,400
1,600
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Q32006
Ass
ets
(US$
bn)
Hedge Funds Funds of Hedge Funds
39 58 96 167168 185
257368 375
456 491 540626
820
9731,105
1,337
530 694 937 1,277 1,654 2,006 2,392 2,564 2,848 3,102 3,335 3,9044,598 5,065
5,7826,882 7,333
80 127 168237
291377
389 426 477 515 538550
7811,232
1,654
1,7791,895
0
2,000
4,000
6,000
8,000
10,000
1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Q32006
Num
ber o
f Fun
ds
Hedge Funds Funds of Hedge Funds
610 821 1,1051,514
1,9452,383
2,781 2,9903,325 3,617 3,873
4,454
5,379
6,297
7,436
8,6619,228
Growth in Hedge Funds
Size of Hedge Fund Market Growth of Hedge Fund Assets
Number of Hedge Funds
Source: Hedge Fund Research, Bloomberg
Current Market Size
US$1.5 trillion - $2.4 trillion
Active Hedge Funds Worldwide
Approximately 9,225
Fund of Hedge Funds Worldwide
Approximately 1,895
Context
Hedge funds manage
between 1–3% of global assets
Market Volume
Up to 50% of daily NYSE
trading volume
’90 –’05 CAGR: 21%
’90 –’05 CAGR: 27%
12
Hedge Funds Are Increasingly Serving As Activist / Hostile Investors
♦ General positive perception of “hostile” deals– Post-scandal era has led to increased corporate activism and the desire to eradicate all corporate
malfeasance, which is thought to be a common goal of hedge funds– Investors have a higher level of support for hedge funds as opposed to their 1980s predecessors– Benefit to shareholders in that pressure is put on boards to explain why their chosen course will create
the most value
Control of Capital
ParallelInvesting
DiminishingTarget Takeover
Defenses
ChangingAttitudes About
Hostile M&AActivity
♦ Hedge funds control vast pools of capital — total AUM of approximately $2.5 trillion– Raider of 1980s had to rely on third party financing, while hedge funds control their own assets– Approximately $120 billion in assets controlled by hedge funds is invested in “event driven” strategies– Limited exposure to fluctuations in credit markets– Enhances credibility in M&A realm
♦ “Wolf pack” tactics– Hedge funds network extensively and take similar positions in other funds’ targets– Success of takeover efforts have worked despite relatively small stakes in targets– Have avoided being treated as a “group” for Regulation 13D purposes
♦ Director’s increased sensitivity to shareholder activism– Corporate governance activists’ voices are increasingly heeded by Directors– Evidence that growing number of governance changes are initiated by hedge funds
2007 and Beyond
♦ Activist investors have performed well over last 12-18 months which should drive continued activist investing– Success of recent proxy fights will drive future activity during upcoming proxy season– Lower profile investors to search for activists to pursue selected situations– Successful acquisition of a company by an activist hedge fund will lead to further convergence of private
equity and public equity worlds
Continued corporate governance activism, increasing social acceptance to hostile activity, rapid accumulation of un-invested capital and the emergence of new low-risk / high-return investment strategies have reshaped the hostile M&A market and led to a wave of aggressive hedge fund activist investing
13
Evolution of the Corporate Raider Events:
Impact:
♦ 1980s:– Unprecedented number of
highly-levered takeovers and restructurings
– Emergence of junk bond market– Peak of the hostile takeover
and materialization of the corporate raider
– Late ‘80s market “bust”
– Creation of poison pill and rise of takeover defense
– Increased shareholder activisim– Council of Institutional
Investors (CII) formed in 1985– Institutional Shareholder
Services (ISS) also formedin 1985
– Anti-poison pill resolutions– Declassification of Boards– Opposition to takeover defenses
– Shareholder proposals on poison pills are regularly approved
– More US companies adhereto investor demands to halt takeover defenses
– Increasing Director vulnerability
♦ 1990s:– End of cash bids and hostile
deals– New era of stock deals, synergy
claims and MOEs– Foundations of new corporate
governance activism movement
♦ 2000s:– Continued corporate governance
activism– New ISS policy concerning
shareholder votes and poison pills– SEC proposed rule to allow
shareholder direct access to proxiesto nominate directors
– Corporate scandals– Hedge funds emerge as new
M&A sharks
Takeover Boom Shifting Balance of Power Rising Shareholder Activism 2006 1980 2000 1990
Raiders Seen As “Enemies” Of Public
Investor
Hedge Funds/Activists Seen As “Friends” Of
Public Investor
14
Hedge Funds are Increasingly Successful in Contested Situations
Other10%
Board Represent
ation56%
Activism Against Merger
3%
Board Control31%
Primary Campaign Types, 2006 Proxy Fights
10156
39
62 67 74
64%
55%46%46%
44% 38%
0
20
40
60
80
100
120
2001 2002 2003 2004 2005 20060%
10%
20%
30%
40%
50%
60%
70%
Proxy Fights Dissident Success Rate
Dissident Success Rate, Proxy Fights
Success breeds success and hedge funds are becoming more aggressive in their M&A investing activities
Source: Shark Repellent
Board Representation
56%
15
Hedge Fund Activists Have Increasingly Been Aggressive
Year Company Market
cap. ($bn) Agitator Ownership Stake (%) Contested issue Results
2006 General Motors 16.8 Kirk Kerkorian/Tracinda 9.9 Directors Pending 2006 Knight Ridder 4.1 Private Capital Management 17.3 Sale V 2006 Heinz 12.5 Nelson Peltz/Trian Fund 5.4 Directors Pending 2006 Gencorp 1.1 Pirate Capital LLC 9.3 Directors V 2006 Acxiom Corp 2.1 ValueAct Capital 11.9 Directors Pending 2006 Motient Corp 1.2 Highland Capital 14.3 Directors Pending 2006 Massey Energy Co 2.8 Daniel Loeb(DNU) 5.9 Directors V 2006 New Century Financial 2.2 Greenlight Capital 6.2 Directors S 2005 Wendy’s 5.5 Nelson Peltz/Trian Fund 5.5 Spin off/elect directors V 2005 McDonald’s 34.7 Pershing Square Capital Management 0.0 Spin off/sell assets V 2005 Time Warner 76.5 Carl Icahn 1.4 Spin off/share repurchases S 2005 Office Max 2.1 K Capital Partners 8.6 Directors S 2005 Career Education Corp. 3.6 Steve Bostic 1.2 Amend by-laws V 2005 Beverly Enterprises 1.4 Investor Group 8.1 Directors S 2005 Kerr-McGee 8.9 Carl Icahn 4.2 Directors V 2005 Sovereign Bancorp Inc 8.0 Relational Investors 8.4 Directors S 2005 Blockbuster 1.1 Carl Icahn 9.7 Directors V 2005 Circuit City 4.5 Highfields Capital 6.9 Unsolicited offer D 2004 Payless Shoesource 1.3 Barington Capital Group 1.1 Directors D 2004 Mylan Laboratories 3.9 Carl Icahn 10.0 Vote against merger D 2004 State Street 16.2 Patrick Jorstad n/a Amend by-laws D
V = Victory for AgitatorD = Defeat for AgitatorS = Settled
17
How Could a Suitor Make an Approach?
Casual Pass/ Friendly Lunch Private Letter/“Bear Hug” Public “Bear Hug” Proxy Fight
Tender/ Exchange Offer
Comment ♦ CEO to CEO ♦ CEO to friendly
board member
♦ To CEO only ♦ To CEO and
board members ♦ To board members only ♦ With threat to go public
if Target is unwilling to negotiate
♦ More likely only after a rebuffed approach
♦ More likely as a threatened course of action or pursued with a cash tender
♦ More likely as a threatened course of action than one which is actually pursued
Advantages to Acquirer
♦ May be the easiest way to get discussion going
♦ An unsuspecting CEO may signal a willingness to consider a transaction
♦ May be a way to solicit board members without doing anything overly hostile vis-à-vis management
♦ Can gauge Target reaction without public knowledge
♦ Keeps door open for friendly negotiations
♦ Degree of hostility can be varied
♦ Allows financial flexibility
♦ May provide opportunity to get an inside look
♦ Allows bidder to get a reaction to a price without initiating a tender offer
♦ Can be effective even if threatened and not actually commenced
♦ Potentially least expensive way to gain control or effect change
♦ Fastest approach ♦ Minimum reaction time ♦ Start clock running for
anti-trust and tender offer regulations
♦ Pure economic basis ♦ Unilateral action ♦ Maximum pressure
Disadvantages to Acquirer
♦ Can easily be discouraged by management
♦ Doesn’t exert any real pressure
♦ Less pressure put on Target as compared to public alternatives
♦ May give Target time to explore alternatives if insufficient pressure applied
♦ Easier to reject than tender offer
♦ May have to be backed up with threat of tender offer to be effective
♦ Management’s stronger position via control of proxy process
♦ War of words-limited chance to make economic proposal
♦ Limited information (public only) on Target
♦ Pure economic basis ♦ Extremely “ hostile”
approach ♦ Additional litigation
possibilities ♦ Risk of being topped
Less AggressiveLess Pressure
More AggressiveMore Pressure
18
Strategic Preparedness
Avoid Putting Target in Play
Deter Suitors from Going
Hostile
Keep Control
Preserve Options
Set Your Own Terms
♦ Once a public proposal is received, enormous pressures are brought to bear on management and the Board, regardless of Target’s defenses
♦ A hostile bid that escalates to a proxy battle can often cause irreparable harm to Target, regardless of who “wins”
♦ Important to be offensively prepared
♦ Target’s Board and management team that provides appropriate and well rehearsed responses to casual inquiries will convey preparedness, strength, solidarity and resolve
♦ Convinces unwelcome suitor that they would lose if they went hostile
♦ The timing and wording of Target’s early press releases following a public hostile overture can often define the chain of events that follows
♦ First impressions are critical
♦ It is important to define the conflict and to brand the “raider” in the public domain
♦ The public pressure of a hostile bid can severely constrain the flexibility of Target to pursue growth ambitions if they are remotely controversial
♦ If and when Target is willing to relinquish its independence, it can do so on its own terms
♦ Retain flexibility to choose preferred partner and to begin negotiations at an appropriate time
Why is preparedness important?
Early preparation offers the maximum ability to maintain control of decisions which impact its long-term strategic direction
19
Pre-Unsolicited Overture PreparationEstablish a defense working group in order to remove the element of surprise
Defense Preparation
Investment Banker Legal Counsel Shareholder Relations CEO
♦ Prepare financial analysis and valuation with periodic updates to the Board
♦ Identify and prioritize strategic alternatives
♦ Prepare and periodically update response playbook for different unsolicited approaches
♦ Prepare due diligence file♦ Regular contact and
communication of material developments
♦ Understand White Squire/White Knight possibilities
♦ Identify potential (hostile) suitors or hedge fund aggressors
♦ Assess impact of change of control on the business
♦ Review and analyze recapitalization alternatives
♦ Review Director duties in context of 3rd party solicitations
♦ Review and implementation of structural defenses
♦ Understand Delaware corporate law considerations
♦ Review of business for antitrust analysis
♦ Regulatory agency approvals for change of control
♦ Disclosures that might cause a potential acquiror to look elsewhere
♦ Understand procedures regarding Rule 14a-8 and shareholder proposals
♦ Monitor SEC responses during proxy season (reconsiderations)
♦ Financial public relations♦ Contacts with research
analysts, institutional holders and hedge funds
♦ Activist institutional investors and corporate governance and proxy issues
♦ Ensure security of all forms of shareholder lists
♦ Contact with specialist and monitor trading activity
♦ Prepare internal employee communications programs
♦ Have “game plan” in the event of activist shareholder proposals that identify alternatives to satisfy investors
♦ Sole spokesperson on independence and takeover issues
♦ Prepare responses to different unsolicited approaches
♦ Maintain communication with Executive officers and Board
♦ Gain Board endorsement of business plan through regular updates
♦ Prepare communication program– employees– clients– officers– board– public officials
20
Target’s Fundamental Defense Profile
Strength Weakness Neutral Comments
Liquidity
Size
Valuation
Historical Stock Performance
Shareowner Confidence in Management
and Plan
Leverage
Insider Control
InstitutionalOwnership
Availability of White Knights
21
Target’s Tactical Defense Profile - Illustration♦ Company Name—Target
♦ Headquarters—Chicago, IL
♦ State of Incorporation—Delaware
♦ Annual Meeting—Last annual meeting held on June 30, 2006; annual meetings of stockholders held on such date and at such time as may be fixed by the BoD; notice of annual meeting shall be given to stockholders not less than ten (10) nor more than sixty (60) days before the date of such annual meeting
♦ Board of Directors—The BoD can be no less than three (3) nor more than ten (10); Board currently consists of five (5) directors– Board may increase or decrease size of Board without shareholder
approval
♦ Staggered Board—No; board of directors is elected annually
♦ Cumulative Voting—No
♦ Special Meetings of the Board—Special meetings of the BoD may be held upon 48 hours written notice or 24 hours oral notice by the Chairman of the Board or President or any two directors
♦ Board Vacancy/Removal—Any vacancy on the BoD may be filled by a majority of the Board then in office, but shall be required to stand for election at the next annual meeting; a director, or the entire BoD, may be removed from office at any time, but only for cause with the affirmative vote of a majority of the directors currently in office
♦ Special Meetings of the Stockholders—Special meetings of the stockholders may be called by (i) the Chairman of the Board, (ii) the President, (iii) resolution of the Board of Directors, or (iv) by shareholders holding at least 20% of the vote
♦ Notice of Proposal—Stockholder notice (of business/proposal) must be delivered to or mailed and received at the principal executive offices of the Corporation not less than sixty (60) days nor more than ninety (90) days prior to the meeting
♦ Action by Written Consent—Any action required or permitted to be taken by the Board of Directors may be taken without a meeting if all of the members of the Board of Directors consent in writing to the adoption of a resolution authorizing such action (unanimous written consent)
♦ State Statutes– Expanded Constituency: Board may consider interests of customers,
employees, creditors and communities, in addition to shareholders, when taking any action
– Freezeout with Fair Price Provision: Company may not enter into a business combination with an interested shareholder (20%+ ownership) for five years from the date of becoming an interested shareholder. After five years, any business combination must be approved by non-interested shareholder(s) or certain fair price provisions must be met
– Anti-greenmail: Company may not purchase more than 10% of its stock from a shareholder at more than market price without offering to purchase all outstanding shares
♦ Amendments– Bylaws: The Board of Directors shall have concurrent power with the
shareholders to adopt, amend, or repeal the bylaws of the corporation as set forth in the bylaws but in no event less than a majority of the BoD(currently majority vote)
– Articles of Incorporation: May be amended by a majority vote of the BoDand a majority vote of shareholders
♦ Authorized Capital– Common Stock—50,000,000 shares (par value $0.01) authorized,
18,762,062 issued and outstanding (basic)– Preferred Stock—1,000,000 shares authorized, none issued or
outstanding
♦ Shareholder Rights Plan—Yes; flip-in/flip-over with an exercise price of $80.00 (3.8x recent price, 3.3x price at adoption).
– Occurs upon Acquiring Person obtaining 20% ownership
– The shareholder rights plan expires 11/10/2007
♦ Ownership—97% float; largely traditional institutional ownership– 3% insider ownership (primarily ESOP)– 87% institutional ownership (59% held by top 15 institutions)– 13% hedge fund ownership
22
ISS Recommends Shareholders Vote Against 1
ISS Shareholder Rights Plan Overview
♦ Twenty percent or higher flip-in– Pills should not discourage potential bidders from
accumulating a meaningful stake in the company or cause a large shareholder to inadvertently trigger the rights
♦ Two- to three-year sunset provision– Shareholders ought to have the opportunity to ratify or
reject pill at least every two to three years, thus permitting shareholders to reaffirm or redeem a pill based on how the company’s board has used it in the past, market conditions, or the firm’s performance
♦ Board redemption feature– A redemption clause allows the board to rescind or disapply
a pill even after a potential acquirer has surpassed the ownership threshold, thus giving the board sufficient flexibility when employing poison pill in negotiations
♦ Shareholder vote on poison pill– Shareholders ought to vote for proposals requesting that
the company submit its poison pill to shareholder vote in order to redeem it
♦ Shareholder Redemption Features– If the Board refuses to redeem the pill 90 days after an offer
is announced, 10% of the shares may call a special meeting or seek a written consent to vote on rescinding the pill
♦ Dead-hand or no-hand features– Only the incumbent directors may amend or redeem the
rights plan, thus preventing a hostile acquirer from effectinga merger until the pill elapses, even if it gains board control
– The “continuing director” provisions pose severe restraints on a future board’s ability to manage the company’s affairs and should be excluded from shareholder rights plans
♦ Expanded constituency provision– Shareholders should vote against proposals that ask the
board to consider non-shareholder constituencies or other non-financial effects when evaluating a merger or business combination
♦ No Redemption Features
Source: ISS Proxy U.S. Proxy Voting Manual
ISS General Approval of PillsContaining the Following Features
Note:1 If no shareholder vote, ISS withholds vote on director(s)
23
Takeover Defense Considerations
♦ Efficacy against hedge funds takeover activities is debatable
♦ Limiting hedge funds’ stake to even 10% of a company’s stock will not prohibit funds from undertaking effective destabilization campaigns– “Wolf pack” tactics can effectively avoid Regulation 13D treatment and/or triggering poison pills
♦ Increasing number of companies are repealing shareholder rights plans to have one “on the shelf” instead
Shareholder Rights Plans
ClassifiedBoard
CharterProvisions
Advance NoticeBy-Law
♦ Currently one of the most effective protections against proxy contests– Weakened by recent activist efforts such as direct access proposals and the push for majority elections– Chairman may be vulnerable if his class of Directors is up for election at upcoming shareholder meeting
♦ Activist investors continue to demand de-staggered Boards and companies are generally complying to investor demands
♦ Prohibit the removal of Directors for any reason other than “for cause” and protect against proxy contests to “pack” the Board
♦ Prevent raiders from finding end runs around staggered Boards
♦ Very difficult to amend public company charters to insert this type of “defensive” provision if not originally included
♦ By-law can be adopted requiring advance notice of board nominations by shareholders not less than a certain number of days (usually 60–90 days) and no more than a certain number of days (usually 90–120) before an annual meeting or shareholder meeting
♦ Limits a company’s chances of a proxy contest to a shorter period (usually 30 days)
24
Spectrum of Strategic Alternative Considerations - Illustration
Hostile defense advisory
Ongoing sense of value
Financial / tactical vulnerability
Evaluation of potential unsolicited offers
Other Board Considerations
Pre-unsolicited overture preparation
Informed view of value implications of various strategic alternatives
Fiduciary duties in takeover situations
Response alternatives to various approaches
Business / Asset Optimization
Acquisition
Divestitures
Organic Investment
Capital Structure Realignment
Bank debt amendment
Follow-on / secondary offering
Rights offerings
Exchange offer / equitization
Formulation of strategic plan
Internal valuation analysis / sensitivity
Industry / competitor analysis
Communication with the Street
Change of Control / Ownership
Strategic sale of company
Break-up
Re-IPO
Going private transaction
Target
Defense Preparedness Standalone Analysis
25
Do Nothing/ “Just Say No”
♦ Highlight upside potential of business plan♦ Intensity and tenor of independence campaign will signal whether or not it is simply a matter of price
Auction Company
♦ With the takeover battle in the public domain, potential interlopers will be encouraged to consider a move regardless of whether or not Target solicits them
♦ Target could pursue a “just say no” campaign publicly, and still entertain interloper discussions privately
♦ Should Target’s Board succeed in securing another offer, it may still feel compelled to give Acquiroran opportunity to enter a competitive bidding situation
Strategic Divestitures
♦ Can be pursued in connection with an independence campaign as a means of bolstering the stock price by providing shareholders with near-term milestones
♦ Presumes Target is fundamentally undervalued in the market
“Pac-Man”
♦ Target could launch hostile bid on Acquiror♦ Would validate strategic rationale of transaction♦ Battle centered almost exclusively on management credibility♦ Would suggest a compromise could be reached to the benefit of both sets of shareholders
Spin-Offs/Recapitalizations
♦ Excess cash could be distributed to stockholders♦ Target could seek to break itself up into two or more separate pieces♦ presumes sum-of-parts valuation is greater than current market♦ Significant credit complications
Target’s Defensive Alternatives
26
GreaterImmediateImpact
LesserImmediateImpact
CorporateStructure
CapitalStructure
White SquireArrangements
Dividends
Employee Incentives(ESOP/Options)
Do Nothing
Structural Protections(Rights Plan, CharterAmendments)
StrategicAcquisitions/Divestitures/Joint Ventures
SubsidiaryOfferings(IPO)
Leveraged BuyoutRecapitalization/Share Repurchase
Split-ups/Spin-offs
Auction Company
Active Takeover Defenses
♦ Cash♦ Stock♦ Debt Capacity♦ Business/Assets♦ Employees
Actions in Light of Unsolicited Public Offer
2
Ashton Partners Snapshot
Full service investor relations and crisis management firm
National reputation for helping clients design and better execute high ROI programs
Wide range of clients served by size, industry, issues faced, programs executed
Flexible team staffing by individuals with strong financial backgrounds
3
Our Differentiation
Each client is staffed by seasoned financial advisors with advanced degrees and experience across a wide spectrum of corporate issues
Focus on managing credibility through relationship management and specific messaging
Emphasis on quantitative research with track record of predicting investor behavior
Dedicated research team provides real-time intelligence on:
SEC complianceAccounting issuesInvestor sentimentShifts in portfolio focus
4
Increased Visibility Buy-Side & Sell-Side RoadshowsInvestor Meeting PrioritizationFinancial Media Outreach
Seamless Event SupportIPO/Secondary ProgramsContested Proxy SupportShareholder Activism DefenseTransaction Support
Improved Market FeedbackBenchmarked Perception StudiesInvestor Meeting Preparation & Follow-UpPredicting Shareholder Movements
Enhanced CredibilityStrategic Messaging & PositioningCrisis ManagementCEO/CFO Coaching
Value-Added Services
5
Explosion of Shareholder Activism
Growing numbers…Over one hundred known shareholder activists with total equity AuM in excess of $150B
Scarce returns…Number of activists and campaigns continues to grow while ‘alpha’ diminishes
Over-crowed hedge fund class
Limited returns from traditional hedge strategies
Activism = Proven Opportunity…Based on recent research, of 94 campaigns over the past few years, activists succeeded in 75% of those cases
6
Hostile Bids – By Type
0
50
100
150
200
Financial Buyers Corporate Buyers
Last YearLast 10 Years
0
10
20
30
40
Financial Buyers Corporate Buyers
31%
69%
41%
59%
7
All Activists Are Not Created Equal…
Relational Investors
ESL Investments
Deephaven Capital
Shamrock Holdings
Copper Arch
Costa Brava
Partners
Agitators
Focus on long-term shareholder value
Focus on liquidity events
Highfields Capital
Steel Partners
JANA Partners
Quasi-Private Equity
Focus on short-term changes/catalysts
8
Activist Scorecard
% of Campaigns with Particular Outcome
22%
21%
20%
21%
4%
50%
63%
44%
47%
75%
55%
70%
50%
38%
33%
32%
5%
24%
26%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Special Dividend
Elimination of DefensiveMechanisms
Block M&A Bid
Share Repurchase
New Management
Sale of Companyor Assets
Board Presence
Company Success Company Defeat Ongoing
Source: Morgan Joseph & Co. Inc.
9
Why Do Activists Succeed?
They are well prepared before making an investment
Know the by-laws of your company
Know your shareholder base, trading environment, etc.
Have a detailed plan/agenda that has worked in similar situations
They often echo a sentiment many core holders share, but haven't acted upon
Particularly strategic plans that are not deemed rational or defensible
They are well versed in using influencers to support their agenda (e.g., sell-side, media, ISS)
Activists sell the need for ‘change’ which hinges on the absence of a reasonable alternative
10
Companies At-Risk
YES/NOInefficient use of cash
YES/NOMissed opportunities (e.g., M&A)
YES/NOEntrenched management, BOD
YES/NOPoor stock price performance
YES/NOUnclear, unsubstantiated strategy
YES/NOPoor operating performance
Issue?Typical Activist Angles
YES/NOSignificant operating history
YES/NODefensive business model
YES/NOCheap valuation
YES/NORecurring revenue and cash flow
YES/NOHigh net cash
Appeal?Business Characteristics
Real/Perceived Issues Investment Protection
11
Activist Decision Matrix
Expected Probability of Winning
Expected Value Creation from Control Transfer
Activist’s Target Return
Reduce V
alue
Proposit
ion
12
Preventing Hostile Situations
Reduce expected probability of winning
Long-Term
Investors
35%
Activists
24%
Short-Term /
Hedge
4%
Passive Investors
29%
Insiders
8%
Share DistributionRecognize early warning signs of activist movements
Demand better shareholder intelligence
Regular feedback from all types of shareholders
Build pipeline of long-term, active institutional investors
Gain support from third-party influencers
ISS typically influences at least 30% of shares outstanding
13
Preventing Hostile Situations
Reduce expected value creation from control transfer
Value Creation OpportunitiesLead efforts to articulate a well vetted strategy
Communicate key priorities
Provide benchmarks and milestones
Address messaging gaps
Make proactive operation decisions
Address troubled areas of business (e.g., sale/divestiture of underperforming business units)
Restructure/cost alignment
Put excess cash to work
Execution
Operational
Changes
Cash
Deployment
Credibility
Gap
0%
20%
40%
60%
80%
100%
Value Creation
14
Preventing Hostile Situations
Moderate
Accumulate stake
Use trading and hedging strategies to increase position and leverage
Encourage other hedge funds to enter stock
Observe and comment
Agitate privately
Aggressive questioning on conference calls
“Cheap Activism”
Shareholder proposals
Withhold vote campaign
Agitate for removal of takeover defenses
Form alliance with other shareholders
Interview customers and employees
Leak ideas to sell-side analysts
File Schedule 13D
Hire experts in sector
Hostile
Present detailed proposal
Demand Board seats
PR battle
Solicit buyers
Enlist ISS/ Glass Lewis to publicly support dissident action
Litigation
Tender offer
Proxy fight
Recognize the early warning signs…
15
Preventing Hostile Situations
Demand better shareholder intelligence:
Regular feedback from all types of shareholders
Understand what’s driving shareholder interest in your story
Determine support level, long-term commitment to story
Proactive plan to build pipeline of attractive long-term investors that can serve as potential supporters in a hostile situation
Window of opportunity to attract these types of investors will close if/when hostile situation turns public
Stock surveillance (a.k.a. stockwatch) is not the answer
Fraught with integrity issues and factual inaccuracies
16
Preventing Hostile Situations
Gain support from third-party influencers:
Proxy advisory firms
Primary audience: passive institutional investors
Focus: ISS will conduct side-by-side evaluation of strategic plans from management and dissident group
Media
Primary audience: individual investors
Focus: steady stream of positive press releases
Sell-side
Primary audience: active institutional investors
Focus: consistent participation in non-deal road shows, investor conferences
17
Preventing Hostile Situations
Lead efforts to articulate a well vetted strategy:
Status quo is not enough
Don’t let your historical performance speak for itself
Don’t assume investors have unabated confidence/trust in management
Articulate key priorities for the company/management
Provide realistic/achievable benchmarks, milestones that investors can use to evaluate management’s execution progress
Address messaging gaps in your story
18
Preventing Hostile Situations
Make proactive operational decisions:
Address the tough decisions where appropriate
Restructure
Sell/divest underperforming business units
Cost realignment
Put cash to work under your own terms
Reinvestments in the business
Initiate/expand share repurchase program
Make strategic acquisitions
19
Other Do’s and Don’ts
What not to do:
Don’t wait for a full blown issue, be prepared early
Don’t avoid communications with the activist
Don’t engage in a PR battle unless you are willing to fully commit and can show signs of recovery
What to do:
Consider standstill or confidentiality agreements with the activist
Keep negotiating door open at all times
ABC Company Preliminary Shareholder ProfileDecember 31, 2006
Shareholder CategoryDecember 31, 2006
Share Holdings % of the O/S ChangeChange as %
of the O/SDecember 1, 2006 Share Holdings % of the O/S
Hedge Funds & Event Driven Investors 25,000,000 25.00% 20,000,000 20.00% 5,000,000 5.00%
Institutional Investors 64,500,000 64.50% (16,000,000) -16.00% 80,500,000 80.50%
Retail Holders 8,000,000 8.00% (4,000,000) -4.00% 12,000,000 12.00%
Officers & Directors 2,500,000 2.50% 0 0.00% 2,500,000 2.50%
Total: 100,000,000 100.00% 0 0.00% 100,000,000 100.00%
Note: December 1, 2006 and December 31, 2006 share holdings are reflective of trade settlements on each day.
Institutional Investors80,500,000
80.5%
Hedge Funds5,000,000
5.0%
Officers & Directors2,500,000
2.5%
Retail Holders12,000,000
12.0%
Pre-Announcement Post-Announcement
ABC Company Preliminary Shareholder ProfileDecember 31, 2006
Hedge Fund Ownership increased from 5,000,000 shares (5.00% O/S) to 25,000,000 shares (25.00% O/S) between December 1, 2006-December 31, 2006
Institutional Ownership decreased from 80,500,000 shares (80.50% O/S) to 64,500,000 shares (64.50% O/S) between December 1, 2006-December 31, 2006
Retail Ownership decreased from 12,000,000 shares (12.00% O/S) to 8,000,000 shares (8.00% O/S) between December 1, 2006-December 31, 2006
Institutional Investors64,500,000
64.5%
Hedge Funds25,000,000
25.0%
Officers & Directors2,500,000
2.5%
Retail Holders8,000,000
8.0%
ABC Company Required Institutional Support for Board Victory in an Election ContestAssumes ISS and Glass Lewis Support Dissident
Charles J. Hansen 1
The BoardThe Board’’s Role in Defending Against Hostile s Role in Defending Against Hostile BidsBids——DirectorsDirectors’’ DutiesDuties
•• The Delaware courts have developed The Delaware courts have developed three standards of judicial review for three standards of judicial review for directorsdirectors’’ decisions in the takeover decisions in the takeover contextcontext–– Business judgment ruleBusiness judgment rule–– Enhanced scrutinyEnhanced scrutiny–– Entire fairnessEntire fairness
Charles J. Hansen 2
The BoardThe Board’’s Role in Defending Against Hostile s Role in Defending Against Hostile BidsBids——DirectorsDirectors’’ DutiesDuties
•• Business judgment ruleBusiness judgment rule——DelawareDelaware’’s basic s basic standard of judicial reviewstandard of judicial review–– DirectorsDirectors’’ decisions are presumed to have been decisions are presumed to have been
made on an informed basis, in good faith, and in made on an informed basis, in good faith, and in the honest belief that the action taken was in the the honest belief that the action taken was in the best interest of the company. best interest of the company. Ivanhoe Partners v. Ivanhoe Partners v. Newmont Mining Corporation, Newmont Mining Corporation, 535 A.2d 1334 535 A.2d 1334 (Del. 1987).(Del. 1987).
Charles J. Hansen 3
The BoardThe Board’’s Role in Defending Against Hostile s Role in Defending Against Hostile BidsBids——DirectorsDirectors’’ DutiesDuties
•• If the court determines the business judgment If the court determines the business judgment rule is applicable, the court will defer to the rule is applicable, the court will defer to the directorsdirectors’’ decision unless the plaintiff carries decision unless the plaintiff carries its burden of proof that the directors did not its burden of proof that the directors did not meet their duty of care or duty of loyaltymeet their duty of care or duty of loyalty
Charles J. Hansen 4
The BoardThe Board’’s Role in Defending Against Hostile s Role in Defending Against Hostile BidsBids——DirectorsDirectors’’ DutiesDuties
•• Duty of careDuty of care——directors must act on an informed directors must act on an informed basis after appropriate consideration of relevant basis after appropriate consideration of relevant information, including financial and legal advice, information, including financial and legal advice, and duly deliberate. and duly deliberate. Smith v. Van Gorkom,Smith v. Van Gorkom, 488 A. 488 A. 2d 858 (Del. 1985).2d 858 (Del. 1985).
•• Duty of loyaltyDuty of loyalty——directors may not engage in selfdirectors may not engage in self--dealing and cannot have an improper interest in the dealing and cannot have an improper interest in the transaction. transaction. Ivanhoe Partners v. Newmont Mining Ivanhoe Partners v. Newmont Mining Corporation, Corporation, 535 A.2d 1334 (Del. 1987).535 A.2d 1334 (Del. 1987).
Charles J. Hansen 5
The BoardThe Board’’s Role in Defending Against Hostile s Role in Defending Against Hostile BidsBids——DirectorsDirectors’’ DutiesDuties
•• Enhanced scrutinyEnhanced scrutiny——business judgment rule business judgment rule may not apply when, for example:may not apply when, for example:–– Board responds to a takeover threat by adopting Board responds to a takeover threat by adopting
an antian anti--takeover device.takeover device.–– Board approves a changeBoard approves a change--in control transaction.in control transaction.
Charles J. Hansen 6
The BoardThe Board’’s Role in Defending Against Hostile s Role in Defending Against Hostile BidsBids——DirectorsDirectors’’ DutiesDuties
•• If the enhanced scrutiny standard is If the enhanced scrutiny standard is applicable, the court will :applicable, the court will :–– Review the boardReview the board’’s processes and actionss processes and actions–– Determine whether the boardDetermine whether the board’’s decisions were s decisions were
reasonable reasonable
•• Unocal Corporation Unocal Corporation v. v. Mesa Petroleum Co.Mesa Petroleum Co., , 493 A.2d 946 (Del. 1985) and 493 A.2d 946 (Del. 1985) and Revlon, Inc. Revlon, Inc. v.v.MacAndrews & Forbes Holdings, Inc.MacAndrews & Forbes Holdings, Inc., 506 A. , 506 A. 2d 173 (Del. 1886).2d 173 (Del. 1886).
Charles J. Hansen 7
The BoardThe Board’’s Role in Defending Against Hostile s Role in Defending Against Hostile BidsBids——DirectorsDirectors’’ DutiesDuties
•• UnocalUnocal standardstandard——defensive measures in defensive measures in response to perception of threatresponse to perception of threat–– Did board reasonably believe corporate policy Did board reasonably believe corporate policy
threatened?threatened?–– Was boardWas board’’s response reasonable in relation to s response reasonable in relation to
the perceived threat?the perceived threat?–– If the answer to these questions is If the answer to these questions is ““yes,yes,”” the the
boardboard’’s decision is protected by the business s decision is protected by the business judgment rule.judgment rule.
Charles J. Hansen 8
The BoardThe Board’’s Role in Defending Against Hostile s Role in Defending Against Hostile BidsBids——DirectorsDirectors’’ DutiesDuties
•• Revlon Revlon testtest——enhanced judicial review for enhanced judicial review for salesale--ofof--control transactions.control transactions.
•• Under Under RevlonRevlon, when the board decides to sell , when the board decides to sell the company, the directorsthe company, the directors’’ role changes role changes from from ““defenders of the corporate bastion to defenders of the corporate bastion to auctioneers charged with getting the best auctioneers charged with getting the best priceprice”” for the stockholders.for the stockholders.
•• The board must made a reasonable decision.The board must made a reasonable decision.
Charles J. Hansen 9
The BoardThe Board’’s Role in Defending Against Hostile s Role in Defending Against Hostile BidsBids——DirectorsDirectors’’ DutiesDuties
•• EntireEntire fairnessfairness——if a majority of the directors if a majority of the directors have a conflict of interest, the Delaware have a conflict of interest, the Delaware courts will determine if the transaction is courts will determine if the transaction is entirely fair to stockholders. entirely fair to stockholders. Cede & Co. Cede & Co. v. v. Technicolor, Inc., Technicolor, Inc., 634 A.2d 345 (Del. 1993).634 A.2d 345 (Del. 1993).
•• CourtsCourts’’ focus:focus:–– Board processBoard process–– Quality of resultQuality of result–– Quality of disclosures made to the stockholdersQuality of disclosures made to the stockholders
Charles J. Hansen 10
The BoardThe Board’’s Role in Defending Against Hostile s Role in Defending Against Hostile BidsBids——DirectorsDirectors’’ DutiesDuties
•• JustJust--saysay--no defense continues to be a valid no defense continues to be a valid board response to a hostile bid if the boardboard response to a hostile bid if the board’’s s conduct meets the applicable standard.conduct meets the applicable standard.
•• Decisions by a disinterested board about Decisions by a disinterested board about howhowto sell a company are protected by the to sell a company are protected by the business judgment rule if the enhancedbusiness judgment rule if the enhanced--scrutiny standard is met.scrutiny standard is met.
Charles J. Hansen 11
The BoardThe Board’’s Role in Defending Against Hostile s Role in Defending Against Hostile BidsBids——DirectorsDirectors’’ DutiesDuties
•• DirectorsDirectors’’ best practices:best practices:–– Assume an active role and remain fully informed Assume an active role and remain fully informed
during the entire process.during the entire process.–– Retain and fully utilize experienced legal and Retain and fully utilize experienced legal and
financial advisors.financial advisors.–– Carefully analyze and deliberate.Carefully analyze and deliberate.–– Let the independent directors make the decisions.Let the independent directors make the decisions.–– Carefully document the decisionCarefully document the decision--making process making process
to demonstrate the directors were fully informed.to demonstrate the directors were fully informed.
©2007 Foley & Lardner LLP
The Business Judgment Rule—Counsel’s Script for the Board of Directors
Charles J. Hansen
February 15, 2007
The business judgment rule is alive and well, at least in Delaware, despite attention-grabbing headlines that suggest that service on a corporate Board of Directors is hazardous to one’s financial health. See Walt Disney Co. Derivative Litigation, 906 A.2d 27 (Del. 2006).
The business judgment rule protects the decisions of board of directors from second guessing by presuming that the directors acted in good faith and on an informed basis. This presumption may be overcome only if the plaintiff can demonstrate that the directors breached their duties of care and loyalty or acted in bad faith.
When a board of directors convenes to consider taking important action, counsel can
protect the board by reminding the board about the requirements of the business judgment rule. Counsel can use the following script to explain to the board the requirements of the business judgment rule. Usually the best time to do this is after management, the investment bankers, and the lawyers have made their presentations to the directors and the directors have engaged in a full discussion. The script assumes that the board is disinterested and has preliminarily decided to “just say no” to a hostile takeover bid from Steal-The-Upside Partners, Inc.
Note: the script is merely a template and must be modified to reflect the circumstances
and details of each situation.
The courts should defer to the business judgment decision by this Board of Directors to reject the unsolicited takeover bid from Steal-The-Upside Partners, Inc. if you exercise due care. Due care means that you have acted to assure yourselves that you have the information required to take the action under consideration, that you have devoted sufficient time to the consideration of the information, and that you have obtained, where useful, advice from experts and counsel.
With respect to the unsolicited takeover bid from Steal-The-Upside Partners, Inc. under consideration today, the requirement to exercise due care means that each of you must, at a minimum, understand the following items:
1. [The details of the offer, including its amount, form, and timing; 2. The Company’s financial condition, new products, general
outlook; 3. The Company’s short-, medium-, and long-term strategies;
©2007 Foley & Lardner LLP
4. Management’s best estimates of the Company’s future financial performance;
5. The [investment banker’s] assessment of the adequacy of the offer;
6. The benefits and risks to the shareholders if the Company remains independent;
7. The benefits and risks to the shareholders if the Company accepts the offer;
8. The process management and the [investment bankers] used to analyze the offer;
9. Strategic alternatives to the offer; 10. Impact on constituencies other than the shareholders; 11. The adequacy of the Company’s takeover defenses; and 12. The obstacles to completing the transaction that have been
identified by [counsel]]. Taking into account your discussions with management and among yourselves, the information you have received, including the oral and written presentations by management, [the investment bankers], and the transaction summaries and other information prepared by [counsel], and the other information that we have discussed today, the following three statements should reflect your state of mind at the end of this meeting with respect to the offer if you intend to reject it:
a) First, you understand the offer, the consequences of accepting
and rejecting it, and the other information discussed at today’s meeting, because you believe you believe the information you have been given is sufficient to enable you to make an informed decision, and you have been given adequate time to consider the information;
b) Second, you believe that, where necessary, you are relying in good faith on outside experts with appropriate skills; and
c) Third, after giving due consideration to the foregoing, you believe that the offer is not in the best interests of shareholders [and other reasons].
If these statements do reflect your state of mind as to the offer, then the courts should conclude that the Board of Directors has exercised appropriate due care and that the Board’s business judgment to reject the offer, if that’s the action taken, is entitled to deference by the courts.