Score one for the activists and two for entrenched management.
Three different courts made rulings in the past few weeks that directly impact activist hedge funds and other corporate rabble rousers. One of the rulings helps these aggressive investors while two either make their efforts harder or delay the use of a new weapon.
The most recent of the three cases wound up being good news for the activist set. The Delaware Chancery Court made it easier for outsiders to crack a company’s classified board structure, also known as staggered boards. As a result, dissidents will be able to wrest control of a company’s Board of Directors sooner than the target might have hoped.
The case involves a bylaw amendment adopted by Airgas shareholders at the company’s September 2010 annual meeting that moves up the date of Airgas’s 2011 annual meeting to January, just four months after its 2010 annual meeting was held. The bylaw amendment was proposed by Air Products and Chemicals, which has been trying to buy Airgas for $5.5 billion in a hostile takeover.
In a proxy fight at the 2010 meeting, Air Products was able to win all three board seats that were up for election. Airgas has a nine-member staggered board, which means each year just three directors come up for election. Thanks to the bylaw amendment, Airgas will be able to elect three more directors to the Air Products board much earlier than it otherwise would have been able to, the law firm DavisPolk points out in a recent memo to clients.
Airgas has appealed the ruling to the Delaware Supreme Court. However, DavisPolk concedes that unless it is overturned or companies are able to modify their charter or bylaw provisions to address this issue, Chancellor Chandler’s decision “may substantially weaken the defenses of a number of companies with classified boards.”
This is good news for investors trying to mount proxy fights, since staggered boards make it impossible for outsiders to gain majority control in one year.
On the other hand, the Delaware Supreme Court recently defended the use of the poison pill. This time it addressed the use of a shareholder rights plan to protect valuable net operating loss carryforwards (NOLs).
Currently 61 companies with NOLs have poison pills, according to FactSet SharkWatch. These companies are concerned about an unwanted suitor triggering a technical ownership change under the tax code and impairing the value of their very valuable NOLs.
In the latest court case, Versata Enters., Inc. v. Selectica, Inc., Selectica instituted a pill with a 4.99 percent trigger designed to protect its $160 million of NOLs, according to the law firm Wachtell Lipton Rosen & Katz, widely recognized as the inventor of the poison pill.
It seems Selectiva rival Trilogy had quickly scooped up more than 5 percent of its stock. The law firm explains that Selectiva’s board adopted the pill to deter the creation of additional blocks of more than 5 percent and prevent current 5 percent holders from increasing their positions by more than 0.5 percent.
However, Trilogy apparently wanted to press the issue and continued to buy shares of Selectiva, intentionally triggering the new rights plan. The law firm points out that after Trilogy refused to enter into a standstill agreement to stop buying more stock, the Selectica board deployed the exchange feature of the pill. This immediately diluted Trilogy’s stake from 6.7 percent to 3.3 percent, and Selectiva adopted a reloaded NOL pill to deter further potential acquisitions.
Wachtell Lipton notes that after a full trial, Vice Chancellor Noble upheld the board’s actions as a reasonable response to a threat to the corporate enterprise. The Court, in effect, said the board had reasonably identified the potential impairment of the NOLs as a threat to Selectica and had “acted in good faith reliance on the advice of experts.”
However, Justice Holland cautioned that the Court’s holding “should not be construed as generally approving the reasonableness of a 4.99 percent trigger in the Rights Plan of a corporation with or without NOLs,” according to the law firm.
Warns Wachtell Lipton: “Directors, in consultation with their advisors, must appropriately tailor their defensive actions to meet the specific threats their companies face, including as the facts and circumstances may change over time.”
The third case involved Proxy Access, a weapon activists have for several years been campaigning for and was included in the Dodd-Frank bill. It permits certain shareholders under certain circumstances to nominate their own slate of directors, which would be included in the company’s proxy.
The SEC was set to implement this policy in time for the 2011 annual meetings, which would have made it much easier for long-time holders of stocks to put up their own slate of directors without the cost and difficulty associated with a traditional proxy fight. However, as expected, the US Chamber of Commerce and the Business Roundtable have challenged the SEC’s authority to implement the rule.
So, the regulator immediately put it on hold pending a ruling from the courts. This is not expected to come until the spring of 2011.
Very likely, there will be no proxy access for the upcoming annual meeting season.
However, given the rash of recent activist moves by Carl Icahn, Bill Ackman and other hedge funds, the recent court rulings are not exactly discouraging them from taking aggressive action.
