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Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom,
France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. The Law Office of Salman M. Al-Sudairi is Latham & Watkins’ associated office in the Kingdom of Saudi Arabia. In
Paul Tosetti, Partner, Latham & Watkins, PanelistDaniel Katcher, Partner, Frank │Wilkinson │Brimmer │Katcher, Panelist
Arthur B. Crozier, Chairman, Innisfree M&A, Panelist
Thursday, December 4, 2014
• Increase in amount of hostile takeover activity and
shareholder activism
• Increasing level of success
• Shareholder strategies for hostile takeovers and
activism
• What’s a board to do?
2
Overview
Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom,
France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. The Law Office of Salman M. Al-Sudairi is Latham & Watkins’ associated office in the Kingdom of Saudi Arabia. In
“A visit from an activist shareholder is now a possibility for any publicly
traded company.” – The Economist
5
Changing Times
Sources: John Carney, Welcome to the Golden Age of Activist Investors, CNBC (August 14, 2013), http://www.cnbc.com/id/100963166
Stephen Foley, Shareholder Activism: Battle for the Boardroom, Financial Times (April 23, 2014), http://www.ft.com/cms/s/2/a555abec-be32-11e3-961f-00144feabdc0.html
David Gelles, Hostile Takeover Bids for Big Firms Across Industries Make a Comeback, The New York Times (June 12, 2014),
Anything You Can Do, Icahn Do Better, The Economist (February 15, 2014), http://www.economist.com/news/business/21596556-pressure-companies-activist-shareholders-continues-grow-anything-you-can-do
“This much is clear: we're living in the golden age of activist
investors.” – CNBC
“More hedge funds today are styling themselves as activists and they
are notching up significant victories.” – Financial Times
“But the takeover effort . . . pointed to a change on Wall Street today:
Hostile deal making is back.” – The New York Times
Increased Number of Hostile Takeover and Activist Campaigns
6
Source: SharkRepellent.
Note: Data as of September 30, 2014.
Includes 13D’s filed without publicly disclosed activism.
*Indicates the number of campaigns YTD in 2013.
“Desperate” activists
respond to 2008 meltdown
The birth of modern-day
activism
317*
*Data undercounts campaigns because increasingly common, private campaigns are not tracked
Activist campaigns (2000 – 2014 YTD)*
• Only a few hostile takeovers occurred over the past few years, but 25 unsolicited
takeover attempts, with a combined value of around $290 billion, have been
made this year (as of August 2014)
• Sharp increase is due largely to an improving economy, greater availability to
capital and increased pressure against implementing corporate defenses against
take-overs
• Recent changes in corporate governance have also made it easier for companies
to make hostile bids, including decreases in the use of poison pills and staggered
board terms, and increases in the concentrations of company stock in the hands of
a small number of institutional investors
7
Recent Increase in Number of Hostile Takeover Campaigns Specifically
“‘This should be the easiest time on earth to win a hostile,’ said one
senior banker who declined to be named . . .”
- The New York Times
“The Allergan offer [ ] has the potential to upend how the takeover market works,
unleashing a powerful new force in the pairing of hedge funds and corporations . . .”
- The New York Times
Sources: Arash Massoudi and Ed Hammond, Hostile takeovers rise to 14-year high in M&A as confidence grows, Financial Times (June 8, 2014),; http://www.ft.com/intl/cms/s/0/a8a8f608-eee5-11e3-8e82-
00144feabdc0.html?siteedition=intl#axzz3K0nxfDjq; David Gelles, Hostile Takeover Bids for Big Firms Across industries Make a Comeback, The New York Times (June 12, 2014),
http://dealbook.nytimes.com/2014/06/12/hostile-takeover-bids-for-big-firms-across-industries-make-a-comeback/?_r=0; Steven Davidoff Soloman, Allergan Bid Charts New Territory in Takeovers, The New York Times (April
Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom,
France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. The Law Office of Salman M. Al-Sudairi is Latham & Watkins’ associated office in the Kingdom of Saudi Arabia. In
Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom,
France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. The Law Office of Salman M. Al-Sudairi is Latham & Watkins’ associated office in the Kingdom of Saudi Arabia. In
• Creeping accumulations or aggressive block purchases
• Partial tender offers
• Public “bear hug” to put company “in play”
Stockholder Activism
• Disproportionate governance role relative to ownership
• Ill-advised or untimely extraordinary corporate transactions
• Leveraged recap or other capital restructuring
• Sale or spin of business segments
• Sale of the entire company
18
Activists’ Specific Demands and Platforms
19
DEMANDS
M&A Activism Sale of company
Sell or spin-off divisions
Hold up transactions for sweeteners
Balance Sheet Activism Share buybacks, special dividends
Operational Activism Replace management
Rationalize cost structure
Governance Activism Replace directors
Push for governance “best practices”
PLATFORMS COMPANY ACTIVIST
Change board (most common)
Stock buyback/special dividend
Spin-off or sell division
Sale of company
Operational/change management
COMPANY ACTIVIST/BIDDER CAMPAIGN OUTCOME
Activists (8.8%) requested
2 board seats
2 directors added
Pershing (9.8%) seeks
operational improvements
3 directors replaced;
Chairman/CEO to retire
Elliott (4.5%) proxy fight for
5 seats
3 directors added; CEO
resigns Chairman role
Icahn (7.5%) seeks to
replace 4 directors
4 directors replaced with
dissident nominees;
Chairman/CEO replaced
JANA (7.4%) seeks
changes in business,
corporate structure, etc.
Board is declassified, 1
director added
JANA (9.7%), previously
passive, seeks changes
4 directors added
Written consent to replace
full board, remove CEO
4 dissident nominees elected;
CEO removed
Air Products seeks to
replace 3 directors
3 directors replaced;
abandoned hostile takeover
attempt
Pershing (9.7%) seeks to
replace 6 directors
Abandoned hostile takeover
attempt
20
Selected Campaigns to Add or Replace Directors
Replacing directors is the most common activist demand, and is often used as a
springboard to achieve other objectives
Hostile Takeover Activity and Activism Is Year Round2015 Illustrative Calendar
21
DATE FOR
COMPANY
EVENT DESCRIPTION IMPLICATIONS FOR
ACQUIRORS /
ACTIVISTS
December
4, 2014
Deadline for
14a-8
Proposals
Most proposals are non-binding recommendations to
address corporate governance matters, which, if adopted
by the stockholders, the Company will feel substantial
pressure to implement.
Rarely used by activists or
would-be acquirors to seek to
influence Board or
management but may be
used for weakening defenses.
January 16
– February
15, 2015
Window for
Stockholder
Nominations
and Proposals
Under the Company’s bylaws, stockholders who are
prepared to mail their own proxy statement may submit
director nominations and business proposals for
consideration at the annual meeting if the stockholder
complies with certain notice and disclosure rules. Window
tied to date of annual meeting and can therefore shift if
date of annual meeting is moved.
Often critical juncture in
negotiations with activists or
would-be acquirors as to
resolution or settlement of
fight.
March 17,
2015
Approximate
Record Date
Stockholders of record on this date will be entitled to vote
at the annual meeting, regardless of whether they own
stock as of the date of the meeting.
Activists, would-be acquirors
and “wolf pack” will want to
maximize ownership by this
point.
April 16 –
July 15,
2015
Meeting Date
Window
If the annual meeting falls outside this period, pursuant to
the Company’s bylaws the window for submission of
stockholder nominations and proposals for independent
solicitation shifts to no earlier than the 120th day prior to the
meeting and the later of the 90th day prior to the meeting
and the 10th day following the announcement of the
meeting date.
A new deadline gives
stockholders another
opportunity to submit
nominations and proposals.
May 16,
2015
Anniversary of
Last Annual
Meeting
The annual meeting is typically held around the same time
each year, but in some circumstances may be moved for
appropriate reasons.
Proxy statements commonly
mailed 30-45 days ahead of
meeting.
June 15,
2015
“Deadline” for
Holding Annual
Meeting
If the election of directors has not occurred for 13 months
after the last annual meeting (or within 30 days of the date
designated for the annual meeting), then upon the request
of a stockholder, the Delaware Court of Chancery can
order a meeting.
Limits ability of the Board to
indefinitely postpone meeting.
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22
Common Undermining Tactics for Hostile Bids or Other Activist Activities
• While activists or hostile acquirors may employ a number of tactics, a key objective is to create an impression of
inevitability, encouraging other like-minded investors to buy into the situation
• By generating a high degree of post-announcement turnover in the shares, activists and hostile acquirors are
often able to shift a significant amount of stock to like-minded investors thereby creating a “self-fulfilling
prophecy”
Public Announcement of Significant Stake
Announce a stake in a company and activist’s or would-be acquiror’s intentions
Send a Letter to
Management/Board
Send a public letter to management or board demanding financial/strategic action; often critical of current management
Attack Corporate
Governance
Pinpoint vulnerability in the corporate governance structure and submit shareholder proposals or publicly use weakness to achieve goal
Coordinate With
Other Funds Informally or formally “partner” with other investors
Encourage
Buyer Interest
Directly solicit interest from potential buyers; publicly leak level of potential buyer interest
Pursue
Litigation Use legal system to help pressure the company and distract management
Attempt to Obtain
Significant Influence
Seek board seats with goal of disrupting leadership or embedding directors supportive of activist’s agenda
Proxy Fight
Launch full or “short-slate” proxy fight to replace board and force key objectives or call a special meeting as a referendum is unable to force removal of directors
Inc
rea
sin
gly
Ac
tive
/ H
os
tile
Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom,
France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. The Law Office of Salman M. Al-Sudairi is Latham & Watkins’ associated office in the Kingdom of Saudi Arabia. In
• Set Board meeting as soon as possible (within 24-48 hours)
• If public “bear hug” or other bid received, issue “stop, look & listen” press
release
Review unsolicited bid; prepare for Board
meeting
Next 24-48
hours
• Provide current or updated strategic plan and projections to financial
advisor
• Conduct financial advisor due diligence sessions
• Review and prepare financial presentation and valuation analyses
• Review legal aspects of bid with outside counsel, including likely process
path and possible litigation and other stockholder protection strategies
• Develop communications strategy and plan with IR and PR advisors
Convene Board meeting to review bid 24-48 hours,
or sooner
• Board should review the financial and legal aspects of unsolicited bid
• Board should also review and consider the bid in the context of:
• Standalone business plan
• Valuation analyses
• Strategic alternatives available to the Company
• Determine initial response
Provide initial response to bidder, if any Within 24-72
hours
• Issue press release announcing Board’s rejection of bid, if applicable
• Hold one-on-ones with key stockholders; communicate with media on key
stockholder messages
• Initiate communications plan for employees, customers and other
constituencies
Advance Planning for Hostile Takeover Attempts and Activism: Consider Structural Defenses
DEFENSE IMPACT
MOST EFFECTIVE
AGAINST MARKET
FREQUENCYUnsolicited
OffersActivism
Classified Board; Directors Serve
Staggered 3-Year Terms
Requires at least two proxy contests to replace
a majority of directors ● ●
Directors Removable Only for Cause Difficult to remove and replace directors outside
of annual meeting ● ●
Board Authority to Fix Size of Board
and Fill Vacancies
Stockholders are not able to increase the
number of directors and fill newly created
vacancies●
Stockholder Rights Plan “On the
Shelf”
Prepared for adoption in response to threat
while avoiding negative stockholder response ● *Stockholder Rights Plan in Force Deters substantial stock accumulations and
abusive takeover transactions ●
Statutory Freeze-Out Provision Restricts business combinations and other
transactions with 15% or more stockholder,
unless prior board approval of share acquisition●
Other Statutory Defenses Some states provide control share acquisition,
fair price, disgorgement, anti-greenmail,
expanded constituency or other protections ● N/A
Supermajority Vote for Mergers Creates high hurdle for bidder to acquire the
Company without Board approval ●
Source: SharkRepellent Russell 3000 data as of October 2014.
Structural defenses limit the ability of third parties to obtain control or influence without paying an appropriate price
and protect against an acquisition of control without Board or disinterested stockholder approval.
43%
61%
48%
9%
80%
18%
29
*Companies do not publicly announce whether they have put a “stockholder rights plan ‘on the shelf’” but
doing so is highly advisable for most public companies.
Advance Planning for Hostile Takeover Attemptsand Activism: Consider Procedural Defenses
DEFENSE IMPACT
MOST EFFECTIVE
AGAINST MARKET
FREQUENCYUnsolicited
OffersActivism
Stockholders Cannot Call Special
Meetings
Board calls special meetings; stockholders only
able to initiate proxy contest at annual meeting ● ●
No Stockholder Action by Written
Consent
Stockholders only able to act at annual or
special meetings ● ●
Advance Notice of Stockholder
Nominations and Business
• Specific Notice Period
• Nominee/Proponent Information
• Synthetic Equity
Board has time to evaluate alternatives and
provide complete information to stockholders
● ●
●
●
N/A
Directors Elected by Plurality Vote,
Without a Resignation Policy
Majority vote not required to elect
management’s slate of directors; limits impact
of “withhold” campaigns●
Board Compensation by Third Parties
Restricted (“Golden Leash”)
Disqualifies candidates who are compensated
by a third party for standing for election ●
No Direct Access to Proxy Statement
for Stockholder Nominations
Process access permits stockholder nominees
to be included on the company’s proxy card ●
Disputes Litigated Exclusively in a
Specified Forum
Avoids plaintiff forum shopping and costs and
uncertainty of parallel litigation ● ●
Locked-in Charter or Bylaw
Provisions
High threshold to change Charter or Bylaws to
weaken or eliminate takeover defenses ●
Source: SharkRepellent Russell 3000 data as of October 2014.
71%
93%
99%
21%
<1%
61%
51%
Procedural defenses channel takeover efforts and activism into a predictable timeline and provide stockholders and
directors adequate time to fully consider and respond to acquisitions, nominees and other proposals.
52%
53%
30
• Proxy advisory firms, including Institutional Shareholder Services (“ISS”)
and Glass Lewis & Co., LLC, issue guidance to institutional investors on
how to vote on proxy matters and helps institutional investors execute
their votes
• ISS is the largest such proxy advisory firm, with a 61% market share• ISS helps over 1,700 clients execute nearly 7 million ballots representing 2.7 trillion shares
31
Proxy Advisory Firms’ Practical Role in Hostile Takeover Activity and Activism
Sources: James R. Copland and Margaret M. O’Keefe, Proxy Monitor 2014, Proxy Monitor, http://www.proxymonitor.org/Forms/pmr_09.aspx; Liz Hoffman, Proxy Firm ISS Urges Shareholder Vote at Allergan, The Wall
Street Journal (October 1, 2014), http://online.wsj.com/articles/proxy-firm-iss-urges-hareholder-vote-at-allergan-1412175544; Glass Lewis, ISS Side with Starboard in Darden Board Fight, The Wall Street Journal
• In 2012, it was found that an ISS recommendation “For” a given
shareholder proposal was associated with a 15% increase in the
shareholder vote for any given proposal
• Research has shown that ISS has been almost eight times as likely as
the median shareholder to support a shareholder proposal
• By the nature of its policies and its relationships with hedge funds,
ISS tends to side with activists and hostile acquirors
32
Proxy Advisory Firms’ Practical Role in Hostile Takeover Activity and Activism
Sources: James R. Copland and Margaret M. O’Keefe, Proxy Monitor 2014, Proxy Monitor, http://www.proxymonitor.org/Forms/pmr_09.aspx; Liz Hoffman, Proxy Firm ISS Urges Shareholder Vote at Allergan, The Wall
Street Journal (October 1, 2014), http://online.wsj.com/articles/proxy-firm-iss-urges-shareholder-vote-at-allergan-1412175544; Glass Lewis, ISS Side with Starboard in Darden Board Fight, The Wall Street Journal
•Grandfather Clause:Stockholders exceeding trigger at adoption of plan must be excluded as to the shares held at that time, but additional accumulations will customarily trigger the Rights Plan
•Duration: Historically, rights plans had 10-year terms, but a shorter term of 1 to 3 years may be appropriate, depending on the nature of the threat, and may reduce risk of “withhold” recommendations in subsequent director elections (Note: ISS will typically recommend against a stockholder rights plan that exceeds 1 year in duration)
Implementation of Rights Plan
•Approve Rights Plan and Certificate of Designation
•Declare dividend of rights
•Execute Rights Plan with Rights Agent, upon which Rights Plan is effective
• Issue press release
•File Certificate of Designations with Delaware
•File with SEC and NYSE or NASDAQ, as applicable
•Distribute a summary of the Rights Plan to stockholders of record
Adopting a Rights Plan: Details
37
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Monitoring the Market: Early Warning and Defensive Mechanisms
MECHANISM “TRIPWIRE” /
NOTICE
EFFECT CONSIDERATIONS
Hart-Scott-Rodino Antitrust
Improvements Act
$75.9M, requires filing with
federal government and
notice to company
Freezes further
accumulation until
antitrust approval
• Less useful at smaller cap companies
• Does not capture securities without voting
power
Schedule 13D 5% of outstanding shares,
requires filing within 10
days with amendments
filed promptly for additional
1% accumulations
Notice only, but does
require disclosure of
“purposes”
• Will not capture initial derivative accumulations
• Ten day filing window allows large additional
accumulations
• Does not capture “wolf pack activities”
• If initial filing on 13G, conversion to 13D not
necessary until intent of filer has changed, a
standard that is not well defined
Stockholder Rights Plan Typically 10% or 15%,
depending on the terms of
the Rights Plan adopted by
the board; 4.9% for “NOL
plans” that are structured to
protect tax assets
Freezes accumulation
until board approval or
rights are redeemed
• “In place” rights plans (without shareholder
approval) draw negative ISS recommendations
• Implementation “in play” can draw additional
activist criticism
Freezeout Statutes
(e.g. DGCL §203)
15% Limits ability of
accumulating stockholder
to engage in subsequent
transactions with
company, including
“second step” mergers
• Limited deterrent to activists
38
. . . but the best monitoring mechanism is your IR Team and Senior Management.
Standard of Review: Unocal / Unitrin
• Board must justify the relative reasonableness of specific
defensive tactics employed
• Defensive tactics must be reasonable in relation to the nature of
the particular hostile threat to stockholder and corporate interests
• Defensive measure will be found “disproportionate” or
improper if it is:
• “Draconian” (coercive or preclusive) or
• Falls outside a “range of reasonable” responses
39
Standard of Review for Defensive Action under Delaware Law
Other Standards of Review for Board Actions under Delaware Law
BOARD ACTIONSTANDARD OF
REVIEWESSENTIAL TERMS
Sale for cash (or to a
controlled company for
stock) or liquidation of the
company
Revlon Once the Board decides to sell or liquidate the Company, the duty of the Board changes
from preserving the corporate entity to maximizing stockholder value through pursuit of
the best transaction reasonably available for the stockholders. Delaware courts indicated
in subsequent cases (Paramount Communications Inc. v. QVC Network, Inc., Barkan v.
Amsted Indus., Inc.) that there is “no single blueprint that a board must follow to fulfill its
duties.”
But remember: The Company is not for sale until the Board decides it is for sale.
Conflict of interest
transaction involving
controlling or dominant
stockholders
Entire Fairness Directors are “required to demonstrate their utmost good faith and the most scrupulous
inherent fairness of the bargain.” Fundamentally, a transaction is “entirely fair” if it
mimics a hypothetical arms’ length negotiated transaction. The standard has two
component parts – “fair dealing” and “fair price” – although the analysis is more fluid in
practice and looks to all aspects of the transaction.
Actions intentionally
affecting stockholder
franchise
Blasius Directors must prove a “compelling justification” for their actions, which has been
interpreted to mean the board bears the burden of proving that their action: (1) serves,
and is motivated by, a legitimate corporate objective; and (2) is reasonable in relation to
this legitimate objective and not preclusive or coercive with respect to shareholder voting.
All other Board decisions
and actions
Business Judgment
Rule
Creates a presumption that a decision was made by directors who were disinterested
and independent, acted in subjective good faith, and employed a reasonable decision
making process. Under those circumstances, the directors’ decision is reviewed not for
reasonableness but for rationality. A director will not be held liable for a decision—even
one that is unreasonable—that results in a loss to the corporation, so long as the
decision is rational.
40
41
What’s a Board To Do?: Overview
PREPAREDNESS
The Company should monitor and communicate regularly
with its stockholder base
• Inquire as to issues, accumulations
• Helps frame alternatives should bid be made or insurgency
arise
• Consider using stock watch service
The Board should regularly consider its strategic alternatives
and the associated financial implications
• Allows Board to assess likelihood of unsolicited offer or likely
activist recommendations
• Enables rapid initial response to unsolicited public offer or
activism
• Provides Board firm foundation to negotiate with
bidder/insurgent and assess alternatives
The Board should clearly define overall leadership
and allocation of responsibilities in advance
• Board and management
• Among outside advisors
The Board and management should develop “stop-look-listen”
materials as an initial response
• Board process
• Investor communications
• Employee communications
• Outside advisor engagement, responsibilities
RESPONSE TO THREAT
Company should speak with “one voice” (typically the CEO) and
avoid leaks
• Avoids ambiguous messages or misunderstandings
• All statements may be used against the Company
• Board members are likely to be approached
• No response should be given
• Should be promptly reported to CEO
Adopt “no comment” policy on market rumors and activity
Board review must be deliberate, informed, conflict-free and well
documented
• Boards are well protected when relying on outside experts
• No Board has been criticized by a court for taking time to
determine its response to an unsolicited offer
• Absent a material conflict of interest, no director has been
held monetarily liable in the M&A context for errors in
process or outcome
• Defensive actions, once unsolicited interest becomes known
to the Company, are carefully scrutinized
Never underestimate the Board’s leverage
• Board can exercise business judgment to, among other
things, (i) pursue stand-alone business plan, (ii) consider
available strategic alternatives or (iii) act as auctioneer to
sell the Company
• Substantial time and expense is required to overcome
Board’s opposition, and Board will not end up with a lower
price by saying no to the first pass
The Company is not for sale until the Board says so
Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom,
France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. The Law Office of Salman M. Al-Sudairi is Latham & Watkins’ associated office in the Kingdom of Saudi Arabia. In
Latham & Watkins operates worldwide as a limited liability partnership organized under the laws of the State of Delaware (USA) with affiliated limited liability partnerships conducting the practice in the United Kingdom,
France, Italy and Singapore and as affiliated partnerships conducting the practice in Hong Kong and Japan. The Law Office of Salman M. Al-Sudairi is Latham & Watkins’ associated office in the Kingdom of Saudi Arabia. In