July 10, 2014

Out of This World! A Unique Tender Offer Disclosure

This WSJ article led me to this disclosure you’re unlikely to see in a Schedule 14D-9 filed by an independent director of a Delaware company in response to a tender offer by a controlling stockholder – as highlighted below, it includes disclosure that the financial advisor declined further participation in the process! Here is an excerpt:

As described in more detail below, Mr. Spachman believes that the Tender Offer is a brazen attempt by a majority shareholder to force minority shareholders of the Company to sell their Shares at a price that is unfairly low, pursuant to a flawed process orchestrated by the majority shareholder, on terms which are designed to be extremely coercive and with inadequate disclosure to the public holders of Shares.

The Tender Offer is being made by Purchaser, which is a wholly owned subsidiary of Parent. Purchaser currently owns approximately 51.7% of the outstanding Shares of the Company, and Purchaser and Parent have averred that the Tender Offer is being made as a first step in acquiring all of the Shares of the Company. Pursuant to Ohio corporation law, the vote of two-thirds of the outstanding Shares is required for major corporate matters such as shareholder approval of a merger or a sale of substantially all assets, amendment of the articles of incorporation and amendment of regulations relating to the calling and conduct of shareholder meetings and the size, composition and classification of the board of directors of the Company (the “Board”). Therefore, the Purchaser seeks by the Tender Offer to acquire Shares which would ultimately result in its obtaining control of the Company, a position which, in Mr. Spachman’s view, it has not heretofore achieved.

Purchaser currently owns a sufficient number of Shares to ensure that a majority of the members of the Board are directors chosen by Purchaser. Although Purchaser’s shareholdings are sufficient to elect a majority of the Board, Ohio corporation law provides for mandatory cumulative voting unless the contrary is specifically provided for in the articles of incorporation. Therefore, absent an amendment of the articles of incorporation (which amendment would require a two-thirds vote of the outstanding Shares), Purchaser cannot be assured of controlling the election of all the directors on the Board, notwithstanding Purchaser’s current majority ownership of the Company. However, Purchaser has used its majority voting power to ensure that a majority of the ten-person Board consists of persons who are or were recently executive officers of Parent or Purchaser and the Company’s Chief Executive Officer (these six directors, the “Conflicted Directors”). The six Conflicted Directors have refused to recuse themselves from the Board’s deliberations concerning the Tender Offer, have prevented the Board from forming a special committee of the four independent directors for purposes of evaluating and negotiating the Tender Offer on behalf of the Company’s public shareholders and of making a recommendation to such public shareholders, and have denied the repeated requests of the independent directors to authorize the independent directors to retain, at the Company’s expense, their own independent counsel and financial advisors. In addition, Mr. Spachman believes that the Conflicted Directors have provided to Purchaser confidential information prepared by the Board’s financial advisor, thus using that information directly against the interests of the public shareholders.

The Conflicted Directors selected a nationally-recognized financial advisor (the “Financial Advisor”) to provide an opinion with respect to the fairness of the Original Offer Price of $28 per Share in connection with the Tender Offer. On the evening of February 15, 2014, the Financial Advisor expressed its intention to opine that the Original Offer Price was not fair, from a financial point of view, to the public shareholders of the Company. The Financial Advisor’s executive summary, as provided to the Board, included a conclusion regarding a per-Share value range, and the Original Offer Price was below the bottom end of this range. In the course of a Board meeting on February 17, 2014 purportedly called to determine the recommendation the Board should make to the Company’s shareholders concerning the Tender Offer, Joseph Consolino, the Chairman of the Company’s Board and the Chief Financial Officer of Parent, after reviewing that executive summary, indicated to the independent directors, on behalf of Parent and Purchaser, that Purchaser would increase its offer from $28 to $30, contingent upon a vote of neutrality by the Board with respect to the Tender Offer (as opposed to a vote to recommend that shareholders not tender into the Tender Offer). Shortly thereafter the contingency was removed. The independent directors did not agree to support or remain neutral on an increased offer price of $30 per share.

Following adjournment of the Board meeting on February 17th, David Michelson, the Company’s Chief Executive Officer, and Arthur Gonzales, the Company’s Vice President, General Counsel and Secretary, asked whether the Financial Advisor could provide an opinion with respect to the fairness of the Tender Offer at the Increased Offer Price of $30 per Share.

    The Financial Advisor declined any further participation in the process, noting that it had conducted an internal review of the possibility of further participation in advance of that request. (emphasis added)

Notwithstanding these circumstances, at a meeting on February 18th, the Conflicted Directors caused the Board to vote six to four (with the independent directors voting against) to remain neutral on the Tender Offer. Mr. Consolino adjourned the meeting abruptly based on the votes of the Conflicted Directors approximately four minutes after the meeting had begun, before the independent directors could make any proposal or even vote on the adjournment, and denied a request for further discussion.

The Tender Offer has been designed to be extremely coercive. Specifically, the announcement of the Increased Offer Price by Purchaser stated that the Increased Offer Price is its “best and final price” and that “no further increase to the offer price will be made,” and Purchaser specifically noted in such brief announcement the fact that Purchaser’s “minimum tender” condition of 90% of the outstanding Shares is waivable by Purchaser. Purchaser has made clear that if it waives the minimum tender condition and acquires two-thirds of the Shares, it will have complete control of the Company, including the power to approve a squeeze-out merger without any further approvals from any other shareholder. Further, the Tender Offer is scheduled to expire on March 6, 2014, a mere eleven business days from now.