Is Your Company Shark-Proof?

Marty Lipton, others, offer what's new in takeover defenses.
Craig SchneiderJanuary 22, 2001

In the James Bond film “Tomorrow Never Dies,” an undercover 007 posing as a banker quips early on that he specializes in “hostile takeovers.”

It’s not lost on the audience who know that he’s about to begin an explosive escapade to destroy a corrupt corporate executive’s plan.

While few companies on this side of the silver screen have international spies to worry about, hostile takeovers can be a very real threat. And having appropriate takeover defenses is a definite need considering there is no warning. But don’t take Mr. Bond’s word for it.

Last year, the U.S. domestic market saw 32 announced hostile takeovers worth $39 billion, according to Thompson Financial Securities Data. In 1999, $100 billion in hostile mergers were announced.

And with many stock prices way down from their highs, there is strong likelihood that 2001 will be a busy year for M&A, and many of the deals don’t figure to be of a friendly nature.

This means corporate execs who want their companies to remain independent must re- evaluate their takeover defenses to make sure they are up-to-date and shark-proof.

Sure, the financially motivated, bust-up corporate raider bids of the 1980s are over. Today’s takeover attempts are typically more strategically motivated, whereby an interloper tries to breakup proposed mergers as in Pfizer’s bid for Warner-Lambert or GE’s bid for Honeywell.

Or very simply, the raiding company happens to be in the same industry as the target-company.

Interestingly though, takeover defenses are little changed from the 1980s, when many of these tactics were first adopted.

Poison pills, also known as shareholders rights plans, basically entail the creation of a special class of stock designed specifically to discourage or ward off hostile takeovers by making the ultimate price tag much higher. A popular form of the pill enables existing shareholders to buy more stock for, say, half the current market price.

These pills are typically triggered after the unwanted suitor buys up a pre-determined percentage of the target’s outstanding shares.

“We strongly advise companies to continue to have a pill,” says Martin Lipton, the corporate lawyer credited with inventing the poison pill defense nearly 20 years ago. This is critical since very few companies fail to renew the pill after it expires, notes Lipton, a partner at Wachtell, Lipton, Rosen & Katz in New York City.

However, the best takeover defense is to combine a poison pill with a staggered board of directors, says Lipton and other takeover defense experts.

And experts say a staggered board of directors is a good way to keep a poison pill in place, as it allows for only a portion of the corporate board of directors to be elected each year. This prevents hostile acquirers from successfully staging a proxy fight because they won’t be able to gain a majority on the board of directors in one year.

Companies with expired pills coming up for renewal or those putting in pills for the first time have some new variations to choose from. “I think a defensive tactic that hasn’t been employed yet but is ripe for use, and someone will successfully use it, is a joint venture,” says Dennis Block, a partner with Cadwalader, Wickersham & Taft in New York City and a major player in the 1980s.

He explains: “You have a change of control feature in the joint venture saying that if either company is acquired without the permission of that company then the other joint venturer has the right at some reasonably discounted figure to acquire the assets of the joint venture.”

For the most part, though, “it’s a fairly well developed set of defenses,” says Michael Coleman, partner at Shearman & Sterling in New York City.

Shareholder rights plans, however, have not been popular with many institutional shareholders, who feel that poison pills scare away potential buyers, and therefore crimp the movement of the potential target’s stock price.

As a result, several companies have adopted pills over the last couple of years that make the shareholder rights plan more palatable to shareholders.

“Chewable” pills, or qualifying offer provisions, for instance essentially strip the board of its ability to negotiate with a third party and let a company’s stockholders decide whether to accept a proposed transaction that satisfies certain criteria.

Others have adopted “TIDE” (Three-year Independent Director Evaluation) plans, which require the company’s board to establish a corporate governance committee of independent directors to review the stockholder rights plan every three years or sooner if it sees fit.

And while most rights plans in the U.S. have a 10-year duration, some companies have opted for shorter terms–typically between one and three years–in response to a perceived “short- term threat.”

But perceiving that threat, let alone a growth in overall hostile takeover activity, is no easy task. “I’ve found over the years that it’s not easy to predict,” Lipton says. The bids rely on changes to various macroeconomic factors and governmental policies.

Even with shares of technology firms trading as much as 90 percent off their highs, Lipton is not very confident that 2001 will be a hotbed for hostile bids.

“When you have a situation like that, people are tempted to acquire the company and tempted to make a hostile tender offer,” Lipton says. “But it depends on the nature of the business. When the assets go down in the elevator every evening, you don’t normally make a hostile tender offer because you don’t want to lose the people.”

In fact, Block thinks one reason we may witness a slowdown in hostile deals is the mere fact that the targets just might be more willing to speak to unsolicited suitors. “I think for the most part boards are willing to listen to anything that makes economic sense,” he explains.

Meanwhile, new SEC rules regarding exchange offers could also lead to more hostile takeovers.

Prior to the M&A rules that went into effect in January 2000, cash tender offers were given speedier review by the SEC than an exchange offer, or stock tender offer. A cash tender offer could commence as soon as a tender offer statement was filed and disseminated to stockholders.

However, a stock tender offer could not commence until the SEC declared its related registration statement effective and definitive prospectus/tender offer materials were first published, sent, or given to stockholders.

Under the new M&A rules exchange offers can commence upon filing, which enables bidders to solicit the tender of stock from security holders. Therefore, the SEC staff’s expedited review allows exchange offers to better compete with their cash counterparts.

Feels like the 1980s all over again, huh?

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