We have just sent our March-April issue of our new newsletter – Deal Lawyers – to the printer. Join the many others that have discovered how Deal Lawyers provides the same rewarding experience as reading The Corporate Counsel. To illustrate this point, we have posted the March-April issue of the Deal Lawyers print newsletter for you to check out at no charge. Feel free to share it with your deal-minded brethren.
This issue includes pieces on:
– Private Equity Clubs: Seller Beware? Latest Developments and Practice Tips
– Falling into the “Going Private” Trap: A Cautionary Tale for Private Equity Fund Buyers
– In Vogue: The “Entire Fairness” Doctrine
– The Practice Corner: Special Committees
– The “Sample Language” Corner: Providing for a California Fairness Hearing
– An M&A Conversation with Chief Justice Myron Steele
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From Travis Laster: Last week, Vice Chancellor Strine of the Delaware Court of Chancery issued an opinion – In re: Netsmart Technologies – enjoining the cash sale of a small public corporation to a private equity firm until the directors (i) supplemented the disclosures regarding the sale process and (ii) disclosed their investment bankers’ projections. Vice Chancellor Strine was quite critical of the sale process used in the case, which he described as “a microcosm of a current dynamic in the mergers and acquisitions market.” Here are some high points from the 75-page opinion (ed. note: we have posted memos analyzing the opinion in the “Auctions” Practice Area):
1. VC Strine found that the Board and Special Committee did not act reasonably in failing to contact strategic buyers. The defendants attempted to justify this refusal based on sporadic contacts with strategic buyers over the half-decade preceding the deal. VC Strine held that “[t]he record, as it currently stands, manifests no reasonable, factual basis for the board’s conclusion that strategic buyers in 2006 would not have been interested in Netsmart as it existed at that time.” In later discussion, he carefully distinguished such informal contacts from a targeted, private sales effort in which authorized representatives seek out a buyer. He viewed the record evidence regarding prior contacts as “more indicative of an after-the-fact justification for a decision already made, than of a genuine and reasonably-informed evaluation of whether a targeted search might bear fruit.”
2. VC Strine rejected a post-agreement market check involving a standard window-shop and 3% termination fee as a viable method for maximizing value for a micro-cap company. He noted that such an approach has “little basis in an actual consideration of the M&A market dynamics relevant to the situation Netsmart faced” and would not have attracted topping bids “in the same manner it has worked … in large-cap strategic deals.”
3. VC Strine was quite critical of the lack of minutes for key board and Special Committee meetings, as well as the fact that most of the minutes were prepared in omnibus fashion after the litigation was filed.
4. VC Strine criticized the Special Committee for permitting management to conduct the due diligence process without supervision. “In easily imagined circumstances, this approach to due diligence could be highly problematic. If management had an incentive to favor a particular bidder (or type of bidder), it could use the due diligence process to its advantage, by using different body language and different verbal emphasis with different bidders. ‘She’s fine’ can mean different things depending on how it is said.” The Vice Chancellor ultimately found no harm, no foul on this issue because management did not have a favored PE backer and there was no evidence that they tilted the process in favor of any participant.
5. VC Strine found that the proxy’s disclosures regarding the company’s process and its reasons for not pursuing strategic buyers had no basis in fact. Adhering to his opinion in Pure Resources, he also found that the latest management projections relied on by the Special Committee and their financial advisor in its fairness opinion needed to be disclosed.
Each of these issues underscores the benefits of bringing Delaware counsel into the transactional process early, both for purposes of structuring the exploration of alternatives and reviewing the proxy statement. The issues that VC Strine addresses in his opinion are frequent subjects of counseling by Delaware practitioners. Although this is the first opinion to bring many of them to judicial light, all have been on the radar screen for some time. There are many other nuggets to be gleaned from this important decision, particularly for those of us currently involved in processes with PE players (and in this market, who isn’t?).
Regarding the latest Caremark decision, there seems to be a fair amount of confusion regarding the structure of the fees payable to Caremark’s investment bankers leading the Delaware Chancery Court to believe that additional, corrective disclosure is required and, in part, justified injunctive relief. In an attempt to resolve such confusion, a more detailed discussion and analysis/explanation of the fee arrangements seems appropriate (albeit by someone not involved in the transaction and without access to the actual engagement letters):
According to the decision: “By their terms, both the UBS and JP Morgan agreements require an opinion as to the advisability of the Caremark/CVS merger in the first instance. Such an opinion, regardless of the conclusion reached therein, triggers the payment of $1.5 million to each advisor. Upon the consummation of the transaction (the Caremark/CVS merger) or alternative transaction (i.e., a merger with a third party) within a specified time period, an additional $17.5 million becomes payable to each company. As a technical matter, the financial advisors must approve the CVS/Caremark merger to trigger their respective $17.5 million fees. Both the UBS and JP Morgan agreements state that “in the event that, following the public announcement of a Transaction with the Counterparty [CVS], the Company pursues a transaction structured in a manner contemplated by the definition of “Transaction” herein, with a third party other than the Counterparty (an “Alternative Transaction”)…with nine months,” the $17.5 million fee becomes payable.”
While it may not be exactly the way negotiations transpired, I believe the following story/mock negotiation explains the motives of the parties and why the UBS and JP Morgan fee structures reflect a rational fee structure intended to protect both sides and should not be assumed to be unique or unusual, much less suspect, in the MOE context.
First, from Caremark’s perspective, Caremark is engaging UBS and JP Morgan as its financial advisors with respect to a specific transaction – the proposed merger of equals with CVS. Caremark is not asking for advice on and, most importantly, does not want to pay UBS or JP Morgan a fee if it pursues a different transaction following the termination of negotiations with CVS. [Note: Caremark is not in Revlon mode and is not trying to sell itself to whomever is willing to pay the highest price. It has a specific long term value maximizing strategy in mind.] This fee structure is the most common structure in buyside engagement letters (where a buyer hires an advisor to help pursue a specific target) and consequently it should not be surprising that its structure has spilled over into MOE engagement letters which have elements of buyside and sellside.
Next, Caremark presumably proposes that it pay the agreed fee of $19 million to each advisor upon the consummation of the contemplated transaction. This ensures that Caremark will not be required to pay UBS and JP Morgan substantial fees if its discussions with CVS terminate or a deal with CVS doesn’t otherwise pan out. The contingent nature of the fee means that Caremark will only be required to pay its advisors if it consummates a transaction providing substantial benefits to its shareholders. [Note: In TCI, the same Chancellor questioned contingent fees for financial advisors to special committees but did not seem to question contingent fees payable to a company’s financial advisors. It is also worth noting that, if they could, bankers would love to be paid on a noncontingent basis.]
UBS and JP Morgan presumably raised two issues regarding Caremark’s fee proposal:
1. The financial advisors would point out that Caremark will likely request a fairness opinion in connection with the contemplated transaction with CVS and the financial advisors should receive a portion of their fees upon the rendering of any such opinion – after all such opinions aren’t without risk and shouldn’t be free. UBS and JP Morgan can’t request to be paid for rendering an opinion on any other transaction as they had not been engaged to advise on any other transaction.
They can only request an opinion fee for rendering a fairness opinion with respect to a transaction with CVS because that is the transaction on which they have been engaged to advise. Presumably, Caremark accepts this argument and agrees to pay a small portion of their financial advisors’ fees upon receipt of their fairness opinion, regardless of the conclusion reached therein. [Note: Caremark continues to insist that a substantial portion of the bankers’ fees be contingent on consummation of a transaction in order to avoid paying large sums to its advisors in the absence of a transaction providing substantial benefits to its shareholders.]
2. UBS and JP Morgan point out that, as a practical matter, the public announcement of a Transaction with CVS will likely put Caremark “in play”, susceptible to rival bids, etc. and it would not be fair for UBS and JP Morgan not to get paid if their hard work in assisting Caremark on the proposed CVS deal ultimately resulted in Caremark engaging in transaction providing even greater benefits to Caremark’s shareholders. [Note: this type of backstop/fee protection is common in sellside engagement letters where a target engages financial advisors with respect to a potential stock-for-stock strategic transaction with a specific buyer but recognizes that once a transaction is announced, anything can happen and they may end up being sold to a rival bidder.]
UBS and JP Morgan are not asking to be compensated if Caremark engages in an alternative transaction absent the public announcement of a transaction with CVS as they weren’t engaged to advise on such transaction and couldn’t argue that their work on the CVS transaction led to such alternative transaction since the CVS transaction was never publicly announced. UBS and JP Morgan only ask to get paid if its clear that their hard work on the proposed CVS transaction leads to a superior transaction with another party because the superior transaction was proposed after the public announcement of the CVS transaction effectively put Caremark into play. [Note: this is not dissimilar to many merger agreement breakup fees that are payable if target shareholders voted the originally proposed transaction down after public announcement of an alternative transaction and an alternative transaction is subsequently consummated but are not payable if target shareholders vote the originally proposed transaction down in the absence of an alternative transaction proposal.]
Caremark likely recognizes the logic of the bankers’ position but to ensure that the “alternative transaction” truly resulted from the hard work of UBS and JP Morgan insists that it only be obligated to pay them a transaction fee if the alternative transaction is pursued within nine months of the public announcement of the CVS deal.
Finally, as the court correctly noted, there is case law that “the contingent nature of an investment banker’s fee can be material.” [emphasis added]. It is not always the case and here, once Express Scripts came forward with its alternative transaction proposal, the bankers’ fairness opinions on the original CVS transaction became irrelevant. Caremark shareholders no longer care whether the original CVS transaction was fair or the bankers had improper incentives to render a fairness opinion on that proposal. They only care about the merits of the revised CVS transaction as compared to the proposed Express Scripts transaction. To the extent the bankers’ fee structure is material, it is because the bankers have no reason to favor one bidder over the other, they get paid whichever wins, and will consequently provide unbiased advice to the Caremark board.
From Travis Laster of Abrams & Laster: In a case decided last week – Ortsman v. Green – Vice Chancellor Stephen Lamb granted a motion to expedite, finding that the complaint stated colorable claims with respect to (i) the investment banker’s involvement in the transaction and (ii) certain disclosure claims, including disclosures relating to investment banker compensation. [Because the opinion refers by number to key paragraphs in the complaint, we have posted both the complaint and opinion in our “M&A Litigation” Portal.]
VC Lamb first held that the complaint stated a colorable claim sufficient to merit expedition with respect to the role of UBS in acting as the financial advisor to Adesa and leading the sale process. After commencing the sale process, “UBS advised Adesa that it wished to be able to offer debt financing to potential acquirers.” The plaintiffs alleged that this conflict affected the sale process “when UBS advised the Adesa board not to pursue an indication of interest from a strategic buyer that UBS believed would not be interested in a leveraged transaction and, thus, would not be a source for it of fees from debt financing.”
In the Toys-R-Us decision a few years ago, Vice Chancellor Strine criticized the practice of a sell-side banker asking to participate in financing on the buy side. Notwithstanding this criticism, we see such requests with relative frequency, and it regularly creates counseling problems. VC Lamb’s grant of expedition in Adesa is proof-positive of the types of litigation risks that this practice creates.
Second, Vice Chancellor Lamb held in Adesa that the complaint stated a series of colorable disclosure claims sufficient to merit expedition. Most notable was a claim related to investment banker compensation. After UBS assumed its dual role, Adesa hired Credit Suisse to provide a fairness opinion. The proxy disclosed only that Credit Suisse received “a customary fee” for its services. The Vice Chancellor noted that “a reader of the proxy statement is not told how much Credit Suisse was paid, whether it would have received the same payment even if it was unable to render a fairness opinion at $27.85, or how much Credit Suisse has earned in recent periods from Kelso or other members of the buyer group.” The Vice Chancellor ultimately found that the 8 issues identified in paragraph 50(viii) of the complaint raised colorable disclosure claims and merited expedited discovery. At a minimum, practitioners will want to review investment banker compensation disclosures in light of this decision.
At the top to the year, I blogged extensively about issues arising from tender offers for backdated options. One of the issues related to the “prompt payment” requirement in the tender offer rules (because new Section 409A of the Internal Revenue Code requires that any cash amounts paid in connection with an option repricing be paid in the year after the option repricing; a requirement which contravenes the SEC’s prompt payment rules).
Yesterday, Corp Fin’s Office of Merger & Acquisitions issued the first exemptive letter – to CNET Networks – relating to Section 409A and the tender offer prompt payment rules.
On Friday, Chancellor Chandler of the Delaware Court of Chancery again enjoined Caremark from proceeding with its meeting of stockholders to vote on its proposed merger with CVS. The Chancellor granted the injunction based on two disclosure issues, one regarding investment banker compensation, the other regarding the triggering of appraisal rights under Delaware law. We have posted a copy of the opinion in our “M&A Litigation” Portal.
Here is some analysis of the case from Travis Laster of Abrams & Laster: There are several key points in the opinion for M&A practitioners. First, the Chancellor criticized the combination of deal protection measures in the Caremark-CVS merger-of-equals. The combination is one that many M&A practitioners would regard as relatively standard: an approximately 3% breakup fee, a no shop with a superior proposal out, and a 5-day last-look matching right for CVS. The Chancellor rejected the view that these provisions are beyond question because they are a “customary set of devices.” (p. 11 n.10).
He instead cautioned that any analysis of deal protection devices must depend on the facts: “[A] court focuses upon ‘the real world risks and prospects confronting [directors] when they agreed to the deal protections.’ That analysis will, by necessity, require the Court to consider a number of factors, including without limitation: the overall size of the termination fee, as well as its percentage value; the benefit to shareholders, including a premium (if any) that directors seek to protect; the absolute size of the transaction, as well as the relative size of the partners to the merger; the degree to which a counterparty found such protections to be crucial to the deal, bearing in mind differences in bargaining power; and the preclusiveness or coercive power of all deal protections included in a transaction, taken as a whole. The inquiry, by its very nature fact intensive, cannot be reduced to a mathematical equation. Though a ‘3% rule’ for termination fees might be convenient for transaction planners, it is simply too blunt an instrument, too subject to abuse, for this Court to bless as a blanket rule.” Id. (citation omitted).
The Chancellor did not in fact rule on the deal-protection measures because, in his words, “I conclude that plaintiffs are not subject to any irreparable harm so long as shareholders are given the opportunity to exercise a fully-informed vote.” This, of course, necessarily means that the Chancellor did not find the combination of measures to be coercive or preclusive: If he had, the measures would interfere with the stockholder vote.
In light of this holding and the lack of any definitive guidance in the opinion, the Chancellor’s comments may well be a rhetorical effort to restrain the customary level of termination fees, which started years back at 1-2%, climbed to 2-3%, and now rests in the 3-4% range. It also remains to be seen whether the Court’s language will have any impact on the ability of defendants to obtain dismissals of complaints challenging what previously would have been seen as garden-variety combinations of defensive measures. I predict it will not.
Second, the Chancellor held that the disclosures regarding the Caremark investment bankers’ $35 million fee were materially misleading because they did not make clear that the bulk of the investment bankers’ fees, as a practical matter, were contingent upon their opining in favor of a Caremark-CVS deal. Caremark’s two bankers stood to receive $1.5 million each if they issued opinions as to the advisability of the Caremark/CVS merger, regardless of the conclusion. Upon the consummation of the transaction, each would receive an additional $17.5 million.
The bankers also would receive their additional $17.5 million if, after the announcement of the merger, Caremark completed a similar transaction within nine months. The Chancellor noted that as a technical matter, the $35 million was contingent upon opining in favor of the merger, because the bankers had no ability to receive their full fee if they did not. The Chancellor found the proxy to be materially misleading because it failed to explain adequately the contingent nature of the $35 million, which gave the bankers an incentive to approve the deal.
Third, the Chancellor found that Caremark and CVS’s agreement to issue a special dividend in connection with the merger triggered appraisal rights in what otherwise was a stock-for-stock merger to which appraisal rights would not have applied. Concluding that the Caremark $6 special dividend “is fundamentally cash consideration paid to Caremark shareholders on behalf of CVS,” the Chancellor held that this constituted consideration other than publicly traded stock of the acquirer and hence gave rise to appraisal rights.
The Chancellor rejected an argument that the dividend had independent legal significance and was therefore not merger consideration triggering appraisal rights. This holding has significant implications for transactional planners in stock-for-stock deals: bumps in an exchange ratio will not trigger appraisal rights, but bumps in the form of cash, whether by dividend or directly in the merger, will trigger appraisal rights.
Fourth, the Chancellor noted in the footnote the distinction between (i) a merger agreement provision that maintains the existing indemnification rights of officers and directors under a corporation’s charter and bylaws and (ii) a provision that provides additional, direct contractual indemnification rights from the acquirer. See p. 30 n.33.
The former are clearly limited by the scope of Section 145 of the General Corporation Law; the latter arguably are not. (In what would seem to be a typographical error, the Chancellor refers to Section 102(b)(7), rather than to Section 145). In my experience, practitioners who do not deal regularly with indemnification rights often are unaware of or do not focus on this important distinction.
The Chancellor concludes by enjoining Caremark from proceeding with the meeting for a period of 20 days after the issuance of supplemental disclosures, which he notes corresponds to the notice period required by the appraisal statute.
In addition to these highlights, the opinion contains a number of other comments that give flavor to the decision. A full read is necessary to infer how the Court viewed the transaction and the related process.
Here is an article from Sunday’s NY Times: When hedge funds buy shares of a company and start agitating for changes in the way it is being managed, they may seem to be gunning for a quick killing at the expense of longer-term shareholders.
But, in fact, the evidence shows that for the most part, buy-and-hold investors ought to cheer when hedge funds jump aggressively into a stock, according to a new study. Titled “Hedge Fund Activism, Corporate Governance and Firm Performance,” it was written by Alon Brav, a finance professor at Duke; Wei Jiang, an associate professor of finance and economics at Columbia; Frank Partnoy, a law professor at the University of San Diego; and Randall S. Thomas, a professor of law and business at Vanderbilt. The study has been circulating in academic circles since the fall.
The authors examined nearly 900 instances from 2001 through 2005 of what they call hedge fund activism. The professors compiled their database in large part from the reports that hedge funds must file with the Securities and Exchange Commission whenever they acquire at least 5 percent of a company’s outstanding shares and intend to get involved in running the company.
Though the professors concede that they have no way to know whether their sample included every instance over this five-year period of hedge funds trying to change a company’s behavior, they write that they believe the sample “includes all the important events.” Included in the professors’ database are not only aggressively hostile actions like threats of lawsuits, proxy fights and takeovers, but also offers to help management enact policies intended to bolster the company’s stock price. Inherent in such cases, Professor Brav said, is an implied threat of hostile actions if management rebuffs those offers.
The professors found that the stock of the average company singled out by a hedge fund outperformed the overall market by 7 percentage points over a four-week period: the two weeks before and the two weeks after the hedge fund’s public acknowledgment that it was aiming at the company. Why would a stock start moving two weeks before the public announcement? One possible factor, Professor Brav said, is heavy buying by the hedge funds. After all, hedge funds have two weeks after obtaining a 5 percent stake in a company to report their ownership stake in a public filing.
If hedge funds did nothing to improve the target company’s profitability, this short-term boost to its stock price would be temporary, and the stock would fall back. But that is not what the professors found.
In the year after that initial month of market-beating performance, the average target company’s stock kept pace with the overall market. And over the subsequent two years, the professors also found, the operating performance of the target companies improved markedly.
As an example, Professor Brav referred to the continuing efforts of Pirate Capital, a hedge fund, to raise the stock price of Walter Industries, a widely diversified industrial company. In May 2005, Pirate Capital indicated in a public filing that it had acquired more than 5 percent of the company’s shares. In a letter sent that month to Walter Industries’ management, Pirate Capital made a number of proposals that it said would bolster the company’s stock, like spinning off certain of its divisions. The hedge fund indicated that, if management refused to act on the proposals, it would try to elect new directors at the next shareholder meeting. In the nearly two years since then, the management of Walters Industries has put into effect many of Pirate Capital’s proposals, and the stock price has outperformed that of the average stock in its industry.
In finding that the market’s reaction to this type of activism was the rule, not the exception, the professors concluded that the average long-term investor in companies singled out by hedge funds has benefited significantly. Because only a little over a year has passed since the end of his sample period, Professor Brav conceded that it was theoretically possible that the companies singled out by hedge funds would be worse off over the longer term. But he asserted that the data compiled for the study provided little support for this possibility, and that he thought it was unlikely.
The professors also examined whether hedge funds that try to change corporate behavior typically focus more on the short term or the long term. They found that in nearly half the cases they studied, the hedge fund still owned a large stake in the target company in October 2006. And in those cases when the hedge fund had sold its stake, the average holding period was close to one year. From this evidence, the professors conclude that “activist hedge funds are not excessively short term in focus.”
“Hedge funds provide an example of effective shareholder activism,” Professor Brav says. He noted that “when other institutional investors engage in activism — such as pension funds or mutual funds — they typically have not been effective in improving firm performance.”
Given this new research, it makes sense for investors to pay close attention to the holdings of activist hedge funds. One approach, of course, would be to buy stock of a target company immediately after a hedge fund notifies the S.E.C. that it has acquired at least a 5 percent stake, with the intention of getting involved in running the company. Professor Brav cautions that such a stock will have already begun to outperform the market by the time an investor buys it. But if the pattern in the study holds, that stock should also continue outperforming for at least a couple of more weeks.
As more investors jump into the target companies, however, beating the market this way could become more challenging.
Yesterday, Chancellor Chandler of the Delaware Court of Chancery enjoined any stockholder vote on the pending merger between Caremark and Express Scripts until not earlier than March 9th. The Chancellor issued his decision because of the materiality of supplemental disclosures made by Caremark on February 12th, just 8 days before the stockholder vote scheduled for February 20th. We have posted a copy of the opinion in the “M&A Litigation” Portal.
Here is some analysis from Travis Laster of Abrams & Laster: The 8 days provided by Caremark was definitely towards the short end of the spectrum for supplemental disclosures, but it was not unprecedented. The Chancellor instead appears to have been influenced by the combination of the brief time period and the his view of the significance of the disclosures, which included “the revelation that Caremark has considered, on at least three separate occasions, potential transactions with Express Scripts.”
The Chancellor juxtaposed this disclosure with the Caremark board’s “present protestations that antitrust difficulties loom so large as to prevent the board of directors from even discussing an offer with an admittedly higher dollar value.” (Emphasis in original). The Chancellor also noted the materiality of Caremark’s disclosure that the CVS merger would extinguish stockholder standing to pursue derivative litigation regarding claims for stock option backdating. This statement comes on the heals of the Chancellor’s two recent and quite strong decisions criticizing stock option practices.
At 2 typed pages, the opinion is quite short and worth a first-hand read, particularly for deal counsel and litigators who frequently must consider whether – and when – to make supplemental disclosures.
From ISS’ Friday Report: This year, individual shareholders are taking the lead in filing proposals that target takeover defenses, such as classified boards, “poison pill” plans, supermajority voting rules, and requirements for holding special meetings.
Proposals to declassify corporate boards will be well represented this proxy season. As of Feb. 5, ISS was tracking more than 40 such proposals. Labor pension funds submitted seven resolutions, including a third-time proposal filed at Peabody Energy by the AFL-CIO. Peabody says the proposal was intended to “pressure the company into adopting policies being promoted by union officials that would be detrimental” to the firm, shareholders, and employees.
The Amalgamated Bank’s LongView fund has withdrawn a declassification proposal at Martek Biosciences after the company adopted the proposal. New York City’s pension funds have also filed proposals to declassify boards, as have a number of individual shareholders. In recent years, U.S. companies have become increasingly receptive to this governance reform. A majority of S&P 500 firms now allow for the annual election of all directors, according to an ISS study on boards at S&P “Super 1,500” companies.
Several issuers that have begun the process of declassifying their boards or plan to put the matter to a shareholder vote have asked for “no-action” letters from the Securities and Exchange Commission on the grounds that the proposals have been “substantially implemented.” These companies include Avista, Lear, Piper Jaffrey, and Visteon. Three other proposals to declassify boards have been withdrawn in the face of no-action challenges.
Individual shareholders thus far appear to be the only proponents who have submitted resolutions to limit poison pills, according to ISS records, with a total of 18 filed. Hewlett-Packard sought to exclude a poison pill bylaw proposal filed by investor Nick Rossi, but the SEC staff rejected that request on Dec. 21. Boeing, Home Depot, and Honeywell have asked the SEC for permission to exclude similar proposals. Honeywell argued that it has “substantially implemented” the proposal by adopting a new pill policy in December.
At Walt Disney’s annual meeting on March 8, investors will vote on a bylaw proposal by Harvard Law Professor Lucian Bebchuk that calls for a 75 percent vote by directors to adopt or amend a poison pill plan and would impose a one-year limit on pills that are not ratified by shareholders. Management opposes the proposal, arguing that it would limit the board’s ability to respond to hostile takeover offers and may not be enforceable under Delaware law. The media-and-entertainment company also warns that the 75 percent threshold would allow “a small group of directors” (such as representatives of an acquirer) “to block action that other directors believe is in the best interests of shareholders.”
A similar Bebchuk bylaw proposal received 48.5 percent support at CA last year and prompted the business software company to modify its pill and agree to put the defense to a shareholder vote.
Members of the Chevedden, Rossi, and Steiner families have filed 20 proposals this year seeking to strengthen shareholder rights to call special meetings. The proposal calls for boards to amend bylaws to give “holders of 10 percent of outstanding common stock the power to call a special shareholder meeting.”
Shareholder activist Evelyn Y. Davis has submitted at least 14 proposals calling for cumulative voting. Her targets this year include Aetna, General Electric, IBM, Safeway, and Bank of New York. Other individual investors have filed another 10 proposals. Last season, ISS tracked 23 proposals calling on companies to allow for cumulative voting that went to a vote between Jan. 1, and June 30, 2006. Average support for those proposals amounted to 39.8 percent.
Proposals to eliminate supermajority vote requirements also will be well represented this season, according to ISS records. Thirty such proposals were filed prior to Jan. 1, with slightly more than half by members of the California-based Rossi family. The California Public Employees’ Retirement System also intends to file proposals on the issue, fund officials tell ISS. Proponents intend to capitalize on strong support for such proposals in recent years. Last year, resolutions to eliminate supermajority requirements averaged 67.8 percent support for 19 proposals that came to a vote between Jan. 1 and June 30, according to ISS records.
While labor funds are less focused this year on takeover defense-related measures, they continue to file at companies that have failed to act on past majority votes on shareholder proposals. This year, union funds will be filing proposals asking companies to create committees to respond to cases where a majority of shareholders supported a resolution and the company failed to act.
The International Brotherhood of Electrical Workers (IBEW) filed such a proposal at Genzyme (where an IBEW-filed golden parachute proposal won 57.9 percent of votes cast last year) and at OfficeMax, where a similar IBEW proposal received 53 percent support in 2006.
Companies Take Action
Meanwhile, a number of companies have acted to dismantle takeover defenses. Last year, at least seven firms, including Amgen, Hilton Hotels, Motorola, and Newell Rubbermaid, terminated their poison pills following majority votes for shareholder proposals requesting the redemption or submission for investor approval of any pill.
Last month, the board of McKesson, a San Francisco-based healthcare services firm, amended the company’s poison pill to let it expire on Jan. 31. The board also agreed to ask shareholders to vote to institute annual elections for all directors.
“These actions demonstrate our board’s continuing commitment to strong, stockholder-focused, contemporary corporate governance practices, which we believe are consistent with our goal of creating long-term, sustainable value for McKesson stockholders,” John H. Hammergren, the company’s chairman and chief executive officer, said in a statement.
In December, Schering-Plough said it will rescind its poison pill and accelerate the declassification of its board from 2008 to this year’s annual meeting. The New Jersey-based pharmaceutical company also plans to recommend that shareholders vote to reduce the 80 percent supermajority requirement to simple majority approval for the removal of directors, and for mergers and acquisitions.
Marathon Oil and IBM recently said in regulatory filings that they will ask for shareholder approval at their 2007 annual meetings to eliminate supermajority voting rules. 3M, FedEx, and Lockheed Martin are among other companies that recently lowered their vote requirements, according to The Wall Street Journal.