shareholder activism in m&a: anticipating and responding...

Shareholder Activism in M&A: Anticipating

and Responding to Shareholder Challenges Planning for Activist Objections to Board Representation,

Deal Price and Appraisal Rights When Negotiating Deals

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THURSDAY, OCTOBER 30, 2014

Presenting a live 90-minute webinar with interactive Q&A

Kai Haakon E. Liekefett, Esq., Vinson & Elkins, Houston

William P. Mills, Partner, Cadwalader Wickersham & Taft, New York

Gary Finger, Director, Houlihan Lokey, New York

Darren Novak, Senior Vice President, Houlihan Lokey, New York

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Shareholder Activism in M&A:

Anticipating and Responding to

Shareholder Challenges

Strafford Live Webinar October 30, 2014

Program Agenda

Shareholder Activism in M&A

I. Current Trends in Shareholder Activism in M&A (Houlihan Lokey)

II. Forms of Shareholder Activism in M&A

A. Proxy Fights and Vote No Campaigns (Vinson & Elkins)

B. Appraisal Rights (Cadwalader)

C. Hostile Takeover Bids and Activists (Vinson & Elkins)

III. Responding and Preparing for Shareholder Activism in M&A

A. Identifying Vulnerabilities in a Transaction (Vinson & Elkins)

B. Addressing Activism in Deal Preparation and Negotiation (Cadwalader)

C. Communicating with Shareholders (Houlihan Lokey)

Appendix: Presenter Bios

6

I.

Current Trends in Shareholder

Activism in M&A

Gary Finger

7 ©2014 Houlihan Lokey, Inc.

Activists an Ever-Increasing Threat for Public Companies

Increased Dry Powder and Influence

Over $100 billion in assets under management, not including campaign-specific “side cars”

Firepower enhanced through leverage, derivatives and special purpose vehicles

Pension funds and other institutional investors willing to “pile on”

Increasingly significant influence with ISS and Glass Lewis

ISS and Glass Lewis make recommendations in favor of activists over half the time

New activists continue to enter the market

New activists, often acting in “wolf packs,” focus on small- to mid-cap targets

Increasing Institutional Investor Interest

Activists waged 90 proxy fights in 2013, and many more campaigns launched by activists owning less than a 5% position

Accelerated investments into activist funds in first half of 2014

Activist funds now an “accepted asset class”

Returns strongly uncorrelated with market and generate “alpha,” with an average annualized return of approximately 24% since 2006 on “13D positions”

Despite being classified as long/short by equity managers, activists placed by institutional investors in long-only allocation where “alpha” scarce

Significant investments by high profile pension funds, including CalSTERS, Florida State, New York State Common Retirement Fund and the New Jersey Division of Investment

Activists’ success over the last decade has made activism an accepted asset class, providing activists with ever-increasing dry powder and ensuring that they remain an ever-increasing threat to public companies

Activism's Success Driving Increased Investment and

Influence

Trends in Shareholder Activism and M&A

8

0

20

40

60

80

100

120

140

A Look at Activist Activity Broadly


Activist Campaigns1

Source: SharkRepellent Notes: 1. Defined as all US publicly disclosed activism excluding 13D filers with no publicly disclosed activism and targets with a market capitalization more than $500 million; Illustrative annual

rolling last twelve months 2. Yearly campaign totals reflect companies with market capitalization greater than $500 million

Number of Campaigns (Market Cap Greater than $500 million, July 2012 – July 2014

Selected Activist Activity2

Activists Target a Myriad of Companies Across All Industries

2009 2010 2011 2012 2013

87 Campaigns 112 Campaigns 129 Campaigns 148 Campaigns 180 Campaigns

9

U.S. Targets by Market Cap In 2014, half of all companies targeted by activist investors were mid-cap companies

The median market cap of targets in 1H 2014 grew to $260 million versus the median of $141 million for the same period in 2013

Source: Institutional Investor Services

33%

17%

50%

32%

50%

18%

0%

10%

20%

30%

40%

50%

60%

>$1 billion <$1 billion - $100 million <$100 million

2013 2014

Market Capitalization of Companies Targeted by Activists in 2013 and 2014


10

Increased Level of Activism

Percentage of Proxy Fights by Campaign Type Success Rates (1)

Number of Proxy Fights Activism has been on the rise since 2004

Compromise and settlement frequently reached prior to launch of proxy contest or shareholder vote

Activists’ success rates have continued to trend upward and reached a record approximately 71% through 2014

The vast majority of proxy fights continue to be focused on board representation rather than board control

(1) Calculated as the number of outright victories, partial victories or settlements by the dissident as a percentage of all proxy fights where an outcome has been reached

Source: SharkRepellent (FactSet Research) as of August 30, 2014

42

56

100 109

126 133

100 93

77

90 95

0

20

40

60

80

100

120

140

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

69%

58% 57% 55%

18%

38% 39%

33%

13%

4% 4%

12%

0%

10%

20%

30%

40%

50%

60%

70%

80%

2011 2012 2013 2014

Board Representation Board Control Other

49% 51%

54% 55%

59%

52%

60%

71%

40%

45%

50%

55%

60%

65%

70%

75%

2007 2008 2009 2010 2011 2012 2013 2014


11

2014 – M&A as a Weapon

Companies have used transformative transactions to attempt to thwart activist advances

Darden facing pressure from Barington Capital

Darden announces sale of Red Lobster

Starboard, unhappy with Red Lobster transaction currently

pursuing a campaign to replace the entire board

Strategic Hotels faces rumors of sale of the Company

Orange Capital announces campaign and calls upon the Board to sell the Company

Strategic Hotels sells Hotel del Coronado for $180 million

which was considered one of the company’s crown-jewel

assets

Men’s Wearhouse receives an unsolicited bid from Jos A.

Banks

Jos. A. Bank receives an unsolicited bid from Men’s

Wearhouse in revived pac-man defense

Jos A Bank announces defensive acquisition of Eddie Bauer but

eventually agreed to be acquired by Men’s Wearhouse, with

$100-150 million in projected annual synergies


12

Muted return of corporate

confidence due to uncertain

macroeconomic and political

outlook

Improved liquidity, with “fits and

starts” in the capital markets

Substantial corporate cash

balances

Managements refocus on growth in

selected areas

Narrower valuation gap between

buyers and sellers; periodic

volatility in the equity markets

stems deal-making momentum

Increased activity by private equity

buyers, but strategics dominate

Renewed shareholder activism

Recent mega-deal activity suggests

a return of corporate confidence

and participation by strategic

buyers, but continued political and

economic stability will be required

for a sustained comeback

Managements also continue to

drive growth via smaller, tuck-in

acquisitions

Shareholder support for

transactions (particularly those with

demonstrable synergies) is

increasing

Substantial corporate cash

balances remain

Monetary policies, investor demand

and relatively low volatility continue

to support the capital markets

Availability of capital supports

leverage and higher valuations

Structural drivers such as low

defensive barriers, high support for

activists and tax considerations are

shaping activity levels

Economic crisis

Liquidity constraints and lack of

confidence

Corporate focus on retrenchment

rather than expansion

Sharp decline in global M&A

activity

Scarce financing for transactions

Wide valuation gap between

buyers and sellers

Legislative and regulatory

uncertainty

2008 & 2009

Market Overview – Evolution of Key Themes

2010 – 1H ‘13 2H ‘13 & 2014 Outlook


13

M&A Market Overview

Historical Domestic M&A Activity

M&A activity has improved significantly over the past three years

Although 2011 M&A activity increased over 2010 levels, results in 2012 and much of 2013 reflected a “cooling-off” as

macroeconomic and political uncertainty dragged down confidence in the global economy

A more stable political and economic backdrop gave way to a pick-up in transactions announced in 2H ‘13, and deal

activity through Q2 ‘14 points to a continued rebound

Source: Thomson Reuters, as of 6/30/14.

Note: 2014 data shown on an annualized basis, based on data through 6/30/14.

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800

1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014

Nu

mb

er

of

Deals

($ i

n b

illi

on

s)

Value of Deals Number of Deals


14

M&A Market Overview: Average Domestic Transaction Size


Average Size of Announced Domestic M&A Transactions

Notes: 10-year median based on 2004 – 2013.

Includes transactions with estimated values.

Excludes terminated transactions. Future terminations of pending transactions will reduce totals shown.

Excludes minority stake acquisitions and most minority capital infusions into major financial institutions.

Average transaction values increased substantially in 1H ‘14 to $533 million, driven by several

announced mega-deals

$234

$310

$381$367

$290 $285 $291

$350

$268

$370

$533

10-year median: $301

$0

$100

$200

$300

$400

$500

$600

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 1H '14


15

M&A Market Overview: Acquisition Premiums



Notes: Premiums are relative to target share prices one day and four weeks prior to announcement for deals with U.S. targets valued over $100 million.

Excludes terminated transactions, ESOPs, self-tenders, spin-offs, share repurchases, minority interest transaction, exchange offers, recapitalizations, and restructurings.

Excludes negative premiums and premiums over 100%.

After decreasing in Q1 ‘14, average 1-day prior and 4-week prior acquisition premiums rebounded in Q2 ‘14

28% 27% 27% 25%27%

33%36% 37%

34% 33%31%

28%31%

0%

10%

20%

30%

40%

50%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Q1 '14 Q2 '14

Acq

uis

itio

n P

rem

ium

35%

29% 29% 30% 30%

37%

43%39%

36% 38%35%

30%34%

0%

10%

20%

30%

40%

50%

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Q1 '14 Q2 '14

Acq

uis

itio

n P

rem

ium

Average 4-Week Prior Acquisition Premiums

Average 1-Day Prior Acquisition Premiums


16

M&A Market Overview: Multiples by Transaction Size

Median EV/EBITDA Multiples


Note: Based on U.S. deals and excludes multiples below 0.0x and above 25.0x.

Although transactions in excess of $500 million have historically commanded higher multiples, a

different pattern was evident in 2013 and thus far in 2014

9.8x

9.0x

9.7x

10.9x

9.5x

7.5x

8.1x 8.3x

9.7x9.2x

15.0x 15.3x

11.4x11.2x

10.4x10.9x 10.7x

10.3x

7.4x

9.9x

8.8x

9.8x

10.9x

12.3x11.9x

9.0x

11.5x12.0x

11.3x

12.0x

10.5x

9.2x

9.8x 9.7x10.1x

9.4x

12.8x

11.9x

12.5x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

18.0x

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Q1 '14 Q2 '14 Q3 '14

Under $250 million $250 to $500 million Over $500 million


17

M&A Market Overview: Unsolicited Bids

Value as a Percentage

of

Overall Domestic M&A

Activity

Sources: FactSet Mergerstat and Thomson Reuters, as of 6/30/14.

* 2008 includes InBev’s unsolicited bid for Anheuser-Busch and Microsoft’s unsolicited bid for Yahoo!.

** 2014 data has been annualized.

Notes: The above chart includes both unsolicited and hostile bids.

FactSet classifies unsolicited bids as offers in which there were no prior discussions between the target and the acquirer.

FactSet classifies hostile bids as unsolicited bids that were rejected by the board of directors of the target.

Domestic M&A includes minority equity deals, equity carve-outs, exchange offers, open market repurchases, and deals with undisclosed transaction values.

Hostile and unsolicited bids have been driven by continued shareholder activism, inflows into

activist funds and the importance of acquisitions to growth objectives

Unsolicited M&A bids in 2014 are on pace for a record year on an aggregate value basis, due to the $61.9 billion bid by

Charter Communications for Time Warner Cable and the $56.3 billion bid by Valeant Pharmaceuticals for Allergan

10.2% 10.4% 8.9% 6.6% 26.3% 5.3% 9.6% 9.8% 6.7% 9.5% 19.3%

$82.9

$120.2$134.0

$99.3

$243.1

$39.9

$78.7

$102.1

$54.6

$96.0

$280.6

26

51

71 71

94

56 57 57

3732 32

0

20

40

60

80

100

$0

$50

$100

$150

$200

$250

$300

$350

2004 2005 2006 2007 2008* 2009 2010 2011 2012 2013 2014**

Num

ber

of

Bid

s

Valu

e (

$ i

n b

illions)

Value

Count

Value and Number of Domestic Unsolicited M&A Bids


18

20%

60% 58%

29%

0%

10%

20%

30%

40%

50%

60%

70%

2011 2012 2013 2014 (through July)

Success of Activist Attacks on Announced M&A Deals

Percentage of Activism Attacks That Have Been

Successful in Raising Deal Price or Stopping Deal

4/20

Successful includes:

Metro PCS

Plains Expl./Freeport-McMoran

Spring/Softbank/DISH

Clearwire/Sprint/DISH

Dell/Silver Lake

Outdoor

Channel/InterMedia/Kroenke

American Realty/Realty Income

EnergySolutions/Energy Capital

American Greetings/Weiss Family

Atlantic Coast Financial/Bond Street

Source: FactSet

2013 saw a significant increase in the success of activists attacking announced M&A transactions

6/10 11/19

2/7

Since 2011, ISS has recommended in favor of activists in the context of M&A transactions only 16.2% of the time


19

II.

A. Proxy Fights and Vote No

Campaigns

Kai Haakon E. Liekefett

©2014 Vinson & Elkins LLP 20

• There has always been shareholder opposition to public M&A deals, but it used to

take a different form: shareholder litigation

– 94% of all public M&A deals in 2013 were subject to shareholder lawsuits, but most of them

were settled for de minimis concessions

• Opposition to M&A deals in the form of proxy fights or “vote no” campaigns

(“bumpitrage”) used to be rare events and rarely successful

• Recent years have seen an unprecedented number of highly successful

campaigns against M&A transactions. In the following high-profile transactions, the

parties were forced to postpone the shareholder vote and improve the deal terms:

– Sprint/Clearwire (Crest Financial Limited, Mount Kellett Capital Management)

– Freeport-McMoRan Copper & Gold/Plains Exploration & Production (Paulson & Co.)

– Energy Solutions/Energy Capital Partners (Carlson)

– T-Mobile/MetroPCS (P. Schoenfeld Asset Management, Paulson & Co.)

– Softbank/Sprint (Paulson & Co.)

– Dell (Carl Icahn, Southeastern Asset Management)

Proxy Fights and Vote No Campaigns

Introduction

There is a New Sheriff in Town for M&A Transactions

21 ©2014 Vinson & Elkins LLP

• Proxy contest to solicit proxies

from the target’s shareholders to

vote against the transaction

• Vote no campaign to encourage

the target’s shareholders to vote

against the transaction

• Proxy contest to solicit proxies

from the target’s shareholders to

replace the target company’s

board of directors

Challenging the Transaction vs. Challenging the Board


Choosing a Strategy

Against the Transaction Against the Target Board


• Federal Securities Laws

– Regulation 13D: Reporting under the Securities Exchange Act of 1934

– Regulation 14A: Proxy rules under the Securities Exchange Act of 1934

• State Corporate Laws

– Determined by jurisdiction of incorporation of the company (e.g., Delaware)

• Governing Documents

– Charter and bylaws

– Board and committee policies (e.g., nominating committee guidelines)

• Other Documents

– Debt instruments (i.e., loan agreements and indentures)

– Other agreements with change-of-control provisions


Regulatory Framework

A Myriad of Rules Applies


File definitive proxy statement, issue press release with 1st fight letter

Mail 2nd fight letter, issue press release

Mail 5th fight letter, issue press release

35 to 45 Days

30 to 35 Days

Day 0

7 to 15 Days ISS and GL decisions; issue press releases in response

Proxy

Campaign

15 to 20 Days

Shareholder meeting

ISS meeting/GL outreach; mail 4th fight letter, issue press release

2 to 5 Days

25 to 30 Days Mail 3rd fight letter, issue press release

5 to 10 Days

Issue open shareholder letter as press release

45 to 60 Days File preliminary proxy statement (10 day SEC review period; multiple rounds possible)

45 to 75 Days Demand for shareholder list

Campaign

• Telephone campaign

• Final calls or visits with

major investors

• Meetings

with major

shareholders

• Media interviews

Days before Meeting

24


Proxy Fights: Sample Timeline

©2014 Vinson & Elkins LLP

• The initial step of an activist is typically to make a demand for the shareholder list

because an activist needs it to wage an effective proxy contest

• The proxy rules require that the proxy statement be mailed to all shareholders

– The shareholder list enables an activist to prepare a comprehensive shareholder profile

• Most activists make their demands for the shareholder list under state corporate law

because typically the target company is required to comply with a books and

records demand under state corporate law if the shareholder specifies a “proper

purpose“ (e.g., DGCL Section 220)

– Courts generally deem a proxy solicitation a “proper purpose” (unclear for vote no

campaigns)

– Most statutes give the company a certain time period (e.g., 5 business days) to comply and

the company is well advised to wait out the statutory response period

– Delaware courts have allowed companies to condition the access to the shareholder list on the

execution of a reasonable confidentiality agreement by the shareholder

• Occasionally activists make their demand pursuant to Rule 14a-7 of the proxy rules

– This rule gives the target company the choice to either provide the shareholder list or mail

the activist’s proxy materials itself


Demand for the Shareholder List



Proxy Rules: Overview

• The proxy rules govern all “solicitations” of votes or proxies

– The SEC and the courts have broadly interpreted “solicitation” to include any

communication that appears to be designed to influence shareholders’ voting decisions

– In practice, this means that almost all communications with shareholders (and employees)

during the proxy season will be deemed to be governed by the proxy rules

• The proxy rules require the filing of a preliminary proxy statement and form of

proxy card with the SEC

– The proxy rules contain detailed disclosure requirements for these documents

– The SEC reviews and provides comments on proxy materials within 10 calendar days

– Sometimes, multiple rounds are necessary to obtain SEC clearance

• All written soliciting materials (in particular all “fight letters” setting forth campaign

messages) must be filed by 5:30 pm ET on the first day of use with the SEC

– Unlike proxy statements, there is no SEC pre-clearance

– All soliciting materials need to include a legend advising investors to read the proxy statement

– The SEC has adopted a broad view of what constitutes “written” (may include even

informal email correspondence with a single shareholder)



Proxy Rules: Important Exemptions

• State Your Mind: The term “solicitation” does not include a “communication by a

security holder who does not otherwise engage in a solicitation ... stating how the

security holder intends to vote and the reasons therefor” (Rule 14a-1(l)(iv))

– Allows influential investors to publicly announce their voting intentions

– Not available to the company

• No Seeking of Proxy: Any solicitation by a person who does not seek power to act

as proxy and does not furnish or request a proxy is exempt (Rule 14a-2(b)(1))

– Used in “just vote no” campaigns against the election of incumbent directors

– Written materials must be filed with the SEC within three days after the date of first use

– Not available to the company and certain other persons, such as Schedule 13D filers who do

not disclaim control intent

• Rule of Ten: Any solicitation where the total number of persons solicited is not

more than ten is exempt from the proxy rules (Rule 14a-2(b)(2))

– At companies with extremely concentrated share ownership, it may be possible to obtain the

votes or consents needed to prevail in a contest without soliciting more than ten holders

– It is unclear whether “persons” is to be determined by record or beneficial ownership

– Unfortunately, the SEC has provided no guidance and there is a very limited case law

– Not available to the company


• Fight Letters – “Fight letters” are sent to shareholders multiple times, accompanied by proxy cards

– Commonly issued as press releases and included in SEC filings

– Sometimes sent only as private letters (but sent to reporters as well)

• Press Releases – Primary method to reach all audiences and directly communicate key messages

• Presentations – Used in meetings with investors and proxy advisory firms

– Help educate media and other key constituencies

• Standby Statements – Respond to attacks by stating company’s platform and correcting inaccuracies

• SEC Filings

– Proxy statement

– Fight letters, press releases and other written proxy materials to be filed with the SEC

• Other Communications – Company website

– Interviews with reporters (on-the-record vs. off-the-record)


Proxy Fights: Means of Communication


No Confidentiality

• Unless the shareholder signs a confidentiality agreement, there is no confidentiality obligation or

legal privilege protecting the company against disclosure by the shareholder

• Most shareholders will refuse to sign a confidentiality agreement with the company because it

implies the sharing of material non-public information, which would impede their ability to trade

Reg FD/Insider Trading

• Unless the shareholder signs a confidentiality agreement, the company must not disclose any

“material non-public information” because it is restricted by Reg FD and the insider trading rules

• Generally, any information about the activist is unlikely to constitute material non-public

information but there is a risk that a court could view the company’s proxy fight strategy as

material non-public information

Section 10b-5

• Section 10b-5 and Section 14a-9 of the proxy rules prohibit misleading, unsubstantiated and

inflammatory language

Proxy Rules

• A company should limit all communications with shareholders to telephone conversations and other

oral communications because under the proxy rules it is required to file all written proxy soliciting

material with the SEC on the same day (see “Proxy Rules: Overview”)


Legal Considerations for Shareholder Communications


Institutional Shareholder Services (ISS)

• ISS is the world’s largest proxy advisory firm and greatly influences voting

decisions of institutional investors (up to 20-30% of the vote)

• Meets with both sides in a proxy contest before releasing its recommendation

• ISS frequently supports dissidents

Glass Lewis

• Glass Lewis, while less influential than ISS, can still have a significant impact

on the outcome of an election contest

• It does not meet with parties but sometimes hosts a “Proxy Talk”

• Glass Lewis supports dissidents less frequently than ISS

Egan-Jones

• Egan-Jones does not wield much influence but receives media reaction


Role of Proxy Advisory Services


Case Study:

Crest Financial vs.

Sprint–Clearwire


Case Study: Sprint-Clearwire


The Merger Parties:

• Clearwire Corporation was a public company listed on the NASDAQ

• Sprint Nextel owned a 48% stake in Clearwire (later increased to 50.2%)

Important Shareholders:

• Comcast, Intel and BHN Spectrum owned collectively 13% of Clearwire

and were parties to a shareholder agreement with Sprint

(the “Group of 13%”)

• Mount Kellett Capital, Glenview Capital, Chesapeake Partners and

Highside Capital owned collectively 9% of Clearwire

(the “Mount Kellett Group”)

• Crest Financial Limited was a long-term shareholder since 2009 and

owned approximately 4% of Clearwire




2012

OCTOBER – DECEMBER JUNE




January – March 2013

JANUARY – MARCH




April 2013

APRIL




May 2013

MAY




JUNE – JULY

June – July 2013




II.

B. Appraisal Rights

William P. Mills

38 ©2014 Cadwalader, Wickersham & Taft LLP

Appraisal Rights Generally

• Definition

o An appraisal right allows for a stockholder to elect not to accept consideration offered

in the transaction, and instead seek a fair value appraisal of its shares as determined

by a court

• Delaware Law

o Found in DGCL § 262

o Appraisal rights are available in all transactions in which the consideration to be

received is other than all stock

• According to various data sources, the number of transactions in which

appraisal proceedings have been filed or threatened has increased

significantly in recent years

39

Appraisal Rights

What Are Appraisal Rights?

©2014 Cadwalader, Wickersham & Taft LLP

Appraisal Rights Generally (Cont’d)

• Increased activity can be traced to “appraisal arbitrage”

• Stockholder activists and hedge funds focused on appraisal as an investment

or an activist tool

• Appraisal claims, or the threat of a claim, can be used to challenge a deal

and affect the certainty of closing and potentially the price of the transaction

40

Appraisal Rights

Appraisal Arbitrage



• Creates potential for significant payments to dissenting stockholder post

closing

• Dissenters do not vote which could upset the required stockholder vote to

approve the deal

• Dissenters have the option to withdraw their claim post closing and not follow

through on a threat

41

Appraisal Rights

The Threat of Appraisal Creates Deal Uncertainty


Background

• In February 2013, Dell announced a going

private transaction with Silver Lake

Partners and Michael Dell for $13.65 per

share

• Because Michael Dell was part of the

buying group, the Dell board appointed an

independent committee to negotiate the

transaction terms

• The Dell Special Committee negotiated a

majority of the minority voting requirement

for the transaction

• An activist campaign against the

transaction was launched by Southeastern

Asset Management and Carl Icahn

• One of the tools that Icahn used in the

campaign was a call for investors to not

vote in favor of the transaction and exercise


Result

• Initially, the transaction was not able to

obtain the majority of the minority vote

required to approve the transaction

• The parties agreed to raise the

transaction price to $13.75 per share in

exchange for a modification to the

majority of the minority requirement

Takeaway

• A no vote and appraisal rights campaign

contributed to the increased offer price.

42

Appraisal Rights

Case Study: Dell & Carl Icahn


Factors that Influence the Increase in Appraisal Claims

Salomon Bros. v. Interstate Bakers Corp., 576 A.2d 650 (Del. Ch. 1989)

• As long as all other statutory requirements are met, if the shares are

purchased after the merger announcement date, they are not disqualified

from appraisal rights

Transkaryotic Therapies Inc., C.A. No. 1554-CC (Del. Ch. May 2, 2007)

• Appraisal rights attach on the date of the merger vote and not on the record

date

• In addition, shares held in street name should be treated as voted in the

aggregate without allocating the votes to each beneficial owner

• Beneficial holders of the shares held in street name are entitled to appraisal so

long as the total number of shares seeking appraisal does not exceed the

number of shares that voted against the transaction

• Stockholders therefore can delay, until the meeting date, a decision on

whether to buy target stock and pursue an appraisal

43

Appraisal Rights

Stockholders can Purchase Shares after the Record Date


Factors that Influence the Increase in Appraisal Claims (Cont’d)

• DGCL Section 262(e) allows stockholders to withdraw an appraisal demand

and accept merger consideration at any time within 60 days of the effective

date of the merger so long as the stockholder has not commenced appraisal

proceedings

• Provides investors with a timing advantage: The investor can weigh factors

that go to the valuation of the shares including trends in the company’s

business, and market and industry factors at a date closer to the closing date

44

Appraisal Rights

Stockholders Who Elect Appraisal have a 60 Day Option



• From 2010 until June 2014, only one appraisal case came out with a lower fair

value determination, and one case with equal consideration. All others had a

premium

• But the entire appraisal process can be lengthy; final rulings rarely occur

earlier than 2 years after the date of the appraisal petition and can occur

significantly later

• Appraisal proceedings can result in significant expenses

45

Appraisal Rights

Delaware Courts have Generally Awarded a Value That is a

Premium to the Transaction Value


Background • In October 2009, Dimensional Associates, a

controlling stockholder, offered outstanding

stockholders $1.68 per share

• Dimensional owned 42% of the outstanding

common stock and 99% of the Series A

preferred stock, with approximately 53% of the

total voting power

• A third party bidder, offered a price per share

significantly higher than Dimensional’s original

offer

• The transaction was approved by a special

committee and included a majority of the

minority voting provision

• In July 2010, Orchard Enterprises was

acquired by Dimensional Associates for $2.05

per share

• Minority investors brought an appraisal

proceeding


Result

• The minority investor shares were

appraised at $4.67 per share,

significantly higher than the original offer

price and the deal price

• The court took issue with Orchard’s use

of an inflated discount rate to calculate

the stock value

Takeaway

• Courts will apply their own valuation

analysis which can lead to significant

increase in share valuation

46

Appraisal Rights

Case Study: Orchard Enterprises



The Interest Rate Advantage

• Compounded quarterly interest from the date of merger

• Set by statute in Delaware; DGCL § 262(h)

• Rate: federal reserve discount rate + 5%

Appraisal Settlements Are Less Attractive To Investors

• The value of pursuing the claim, as opposed to settling the claim, is more

attractive to investors because interest continues to accrue while the case is

pending

Many managed funds have become interested in taking advantage of this

arbitrage

• Hedge funds (e.g., Merion LP) have started to specialize in this investment

area and have raised funds in excess of $1 billion 47

Appraisal Rights

Stockholders are Entitled to a

Favorable Interest Rate on Their Shares



• Delaware courts have consistently held that the consideration negotiated in a

merger need not be given any presumptive weight in the determination of fair

value

• The court will determine the valuation methodology

• The Delaware courts have generally used the Discounted Cash Flow Method

(DCF) which often leads to a calculated value excess of the merger price

48

Appraisal Rights

Delaware Courts Use Discretion in

Determining Fair Value of the Shares



• Valuation is determined at the merger date and not announcement date

• Any increase in the underlying business performance occurring between the

announcement date and closing date could increase the appraised value of the

shares

• The share value could also decrease between the offer date and the merger

date

49

Appraisal Rights

Shares are Appraised as of the Merger Date



• While other stockholder challenges to a transaction such as a derivative claim

or class action require that a plaintiff prove wrongdoing by the board or the

company, wrongdoing or flawed sale process does not need to be proven in an

appraisal proceeding

50

Appraisal Rights

Investors Do Not Need To Prove Liability


Background

• In June 2013, Dole announced a

management buyout by its chief executive

David H. Murdock for $12 per share

• Mr. Murdock owned approximately 39% of

Dole. He had previously taken Dole private

in 2003 and then public again in 2009

• The price was raised to $13.50 per share

• The price was not considered to be fair in

the market

Current Issues

Result

• In August 2013, the transaction was

approved by the stockholders but only

by a very slim majority (50.9%)

• Approximately 25% of Dole stockholders

decided to exercise their appraisal rights

• Stockholders are seeking appraisal for

up to $190 million

Takeaway

• Even when a transaction is approved by

stockholders the threat of appraisal

proceeding can leave a company open

to significant additional financial liability

• Risk of large appraisal awards is

especially problematic if financing is not

sufficient

51

Appraisal Rights

Case Study: Dole


Current Issues (Cont’d)

• Transkaryotic held that stockholders holding shares in street name are entitled

to seek appraisal

• Open issues from this holding:

o In the Ancestry.com transaction, a group of investors led by Pemira, paid $32

per share to buy Ancestry.com

Merion acquired its shares after the record date and was unsure of how the shares

were voted because they were held in street name

Ancestry is arguing that this disqualified Merion from seeking appraisal because

those shares must have not voted for the transaction

o In the Dole transaction, more shares are seeking appraisal than the number

of shares that voted against the merger

The Delaware court must determine how to award appraisal in such a situation,

when tracing share ownership is difficult

Appraisal Rights

The Transkaryotic Holding Has Left Open Some Issues

©2014 Cadwalader, Wickersham & Taft LLP 52

Current Issues (Cont’d)

• Reduce the statutory interest rate prescribed in Delaware for appraisal rights

• Limit the types of transactions where appraisal rights are available

• Restrict the timing that someone could file for appraisal rights

53

Appraisal Rights

The Delaware Legislature Could Reduce

the Advantage That Appraisal Rights Offers to Activists


II.

C. Hostile Takeover Bids and

Activists



• Historically, a hostile takeover was the greatest threat to the ability of the

board and management to set a company’s strategy

• In the last couple of years, the number of hostile takeovers has declined

significantly

• Today, the greatest threat to the control of a public company’s strategy is

from activists who acquire a small stake and threaten to launch a proxy

fight to push for change

• Recently, activists have become increasingly involved in hostile

takeover activity

Introduction

“Hostile” Activists

The new confluence of activism and hostile bids

may breathe new life into the hostile takeover

55

Hostile Takeover Bids and Activists


The Hostile Takeover has been on the Wane…

13

22

46

66

57

72

39

43

47

42

34

29

10 9 8 18 15 18 18 15 15 12 5 7 0

10

20

30

40

50

60

70

80

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014*

Unsolicited Takeover Bids

Hostile Takeover Bids

Source: FactSet Mergers (through October 20, 2014)

Unsolicited and Hostile Takeover Offers 2003 – 2014 YTD

56



Activist Supports

Hostile Bid of Strategic

Acquiror

Activist Launches

Hostile Bid

Activist and Strategic

Acquiror are Co-Bidders

in a Hostile Bid

The New Page in the Activist’s Playbook


57

Forms of Activist Involvement in Hostile Takeovers

Carl Icahn Bill Ackman

(Pershing Square)

Ricky Sandler

(Eminence Capital)


http://www.google.com/url?sa=i&rct=j&q=&esrc=s&frm=1&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRw&url=http://www.cecildaily.com/business/article_fb1067c2-fd54-11df-856d-001cc4c03286.html?mode=image&photo=0&ei=JiFPVKHIDPPV8AHnm4EI&bvm=bv.77880786,d.b2U&psig=AFQjCNEZGOqpLyBj_jbhMdW7ia96bpu-LQ&ust=1414558380333222

http://www.google.com/url?sa=i&source=images&cd=&cad=rja&uact=8&ved=0CAgQjRw&url=http://www.businessweek.com/news/2014-05-23/hillshire-investor-eminence-plans-to-vote-against-pinnacle-deal&ei=ASJPVNXNHKaO8gHBzYCADA&psig=AFQjCNFRA5E0QsbzEmaw7wNFkKArgVFiZg&ust=1414558593558436

The Target: Allergan

• Large cap multi-specialty health care company with a $44.7 billion market cap when

the bid was announced, traded on the NYSE

• Allergan has 9 directors, all of whom are up for election at the 2014 annual meeting

• Chairman and CEO is David Pot (since 2001)

The Bidder: Valeant Pharmaceuticals International

• Large cap pharmaceutical and medical device company with a $44.5 billion market

cap, traded on the NYSE and TSX

• Manufactures and markets generic pharmaceuticals, over-the-counter products and

medical devices, in the eye health, dermatology, and neurology therapeutic classes

The Activist: Pershing Square Capital

• Led by Bill Ackman, Pershing Square is a hedge fund that manages approximately

$13 billion in capital and invests in North American equity securities

• Launched activist campaigns against McDonalds, Wendy’s, Target, JC Penney, Air

Products & Chemicals and Canadian Pacific Railway

• Shown a willingness to launch proxy fights and acquire the entire company at the

right price (i.e., Plains Resources)

The Parties

58



PRIVATE

Timeline of Initial Events

February – May 2014

PUBLIC

59



The Terms of Valeant’s Takeover Bid

Valeant’s Offer

• Valeant issued its public “bear hug” letter the day after the filing of the

Schedule 13Ds and sent Allergan a draft merger agreement

• Initially, Valeant offered Allergan shareholders $48.30 in cash and 0.83

Valeant shares for each Allergan share, valuing the target at $152.89 a share

at the time of the offer (a 38% premium over Allergan’s unaffected stock price)

– Subsequently, Allergan increased its offer several times

– On October 27, it stated “Valeant is prepared to improve its offer and provide value

to your shareholders of at least $200 a share”

• Valeant offered to assume the entire antitrust risk (“hell or high water”)

• There is no financing contingency; Valeant has committed financing

• Valeant is “open to discussing and addressing social issues such as board

composition, senior management team composition and headquarters”

60



• Valeant and Pershing Square form a jointly owned entity (the “Co-Bidder

Entity”) as the exclusive entity for the stake accumulation in Allergan

• Valeant is not required to pursue a business combination with Allergan

and Pershing Square is not required to acquire Allergan equity

• Valeant contributes $75.9 million to the Co-Bidder Entity and Pershing

Square contributes additional amounts in its discretion

• Profits and losses of the Co-Bidder Entity on $75.9 million in value of

Allergan equity are allocated to Valeant and the remainder is allocated

to Pershing Square

o Exception: Valeant receives 15% of the net profits otherwise allocable to

Pershing Square in the event Allergan enters into a business combination

with a third party

The Relationship Agreement

Terms of the Pershing Square/Valeant Partnership

61



• Pershing Square directs the management of the Co-Bidder Entity

• The Co-Bidder Entity may not sell any Allergan equity after the filing of a

Schedule 13D by Pershing Square

o However, this covenant terminates under certain circumstances (described on

the next slide)

• Pershing Square will cause the Co-Bidder Entity to vote in favor of any

Valeant-Allergan business combination with Allergan and against any

other transactions or conflicting proposals

• Valeant will consult with Pershing Square before making any material

decisions relating to a business combination with Allergan and requires

Pershing Square’s consent for launching any tender offer

Terms of the Pershing Square/Valeant Partnership (Cont’d)

62



• If Valeant and Allergan consummate a business combination:

o Pershing Square will purchase Valeant common stock for $400 million at a

15% discount to the then current market price

o Pershing Square will cause the Co-Bidder Entity to elect to receive Valeant

common stock

o Pershing Square will hold at least $1.5 billion of Valeant common stock and

continue to hold at least $1.5 billion for at least one year

• The rights and obligations under the Relationship Agreement terminate if:

o Valeant informs Pershing Square that it is no longer interested in a business

combination with Allergan

o Valeant does not make a proposal for a business combination with Allergan

within 10 days after the filing of a Schedule 13D or withdraws such a proposal

o No definitive agreement has been reached with Allergan within 12 months

o Valeant does not make a superior proposal within a specified time period

following a third party proposal, agreement or tender offer for Allergan


63



• The Co-Bidder Entity will be dissolved upon:

o Mutual agreement of Pershing Square and Valeant

o Consummation of a business combination of Allergan with Valeant

o Consummation of a business combination of Allergan with a third party

(would not include a minority stake or other “white squire” investment)

o Sale of all Allergan equity by the Co-Bidder Entity

o Valeant informs Pershing Square that it is no longer interested in a business

combination with Allergan

o Valeant does not make a proposal for a business combination with Allergan

within 10 days after the filing of a Schedule 13D or withdraws such a proposal

o No definitive agreement has been reached with Allergan within 12 months

• Each party will bear its own costs and expenses


64



Note: Chart shows Allergan’s share price, volume, and the number of shares, options, and forwards purchased by Pershing Square

beginning February 25, 2014, the day Pershing Square began its purchases, through April 21, 2814. Data are from Capital IQ.

Pershing Square’s Stakebuilding

65

Source: Pershing Square, Definitive Additional Proxy Materials, filed with the SEC on April 22, 2014



Schedule 13D Filing

Legal Issues of Pershing Square’s Stakebuilding

• Federal securities laws require the filing of a Schedule 13D within 10 days

of crossing 5% beneficial ownership in a public company

• Pershing Square used this 10-day window to increase its ownership stake

from 5% to 9.7%

• This 10-day window dates back to 1968 with the adoption of the Williams

Act and Congress has been urged to shorten the window for many years,

as almost every other developed market has a much shorter period

• The Dodd-Frank Act (adopted in 2010) authorized the SEC to close the

10-day window but the SEC has not yet exercised its authority

• Ongoing policy debate between corporate lobbyists and hedge fund

supporters

66



Hart-Scott Rodino Act (HSR)

Legal Issues of Pershing Square’s Stakebuilding (Cont’d)

• The HSR Act requires the filing of a notification upon acquiring shares with

a market value exceeding $75.9 million

• Valeant avoided this requirement by limiting its investment in the Co-

Bidder Entity to exactly $75.9 million

• Pershing Square invested $3.2 billion in Allergan equity but the Co-Bidder

Entity primarily acquired options and forward purchase contracts, which do

not count towards the HSR threshold until exercised and settled

• Pershing Square filed its HSR notification after the filing of its Schedule 13D

and was granted early termination of the 30-day waiting period on May 1st

o This enabled Pershing Square to obtain actual voting power quickly

o By contrast, Valeant filed for HSR clearance on July 14th and received a second

request from the FTC on August 11th

67



Insider Trading


• Many have wondered whether this stake accumulation constituted illegal

insider trading because Pershing Square possessed material non-public

information about Valeant’s interest in bidding for Allergan

• The U.S. Court of Appeals for the 2nd Circuit held in 1968 in SEC v. Texas Gulf

Sulphur Co. that “anyone in possession of material inside information must

either disclose it or … abstain from trading” (“possession theory”)

• However, the Supreme Court rejected this theory in 1980 in Chiarella v. United

States when it required a breach of a confidentiality obligation

• Pershing Square did not breach any confidentiality obligation to Allergan (not

the source of the information) or Valeant (consented to the stake accumulation)

• Also, a bidder’s own intention to pursue an acquisition does not constitute

“inside information” and Pershing Square was designated as “co-bidder”

68



Tender Offer Rules


• There is a special SEC insider trading rule that deals with tender offers

• Rule 14e-3 provides that once a prospective bidder has “taken a substantial

step or steps to commence a tender offer,” then any person other than the

bidder who is in possession of material non-public information is prohibited

from acquiring shares in the target

• In the Relationship Agreement, Pershing Square and Valeant expressly state

that “no steps have been taken towards a tender for securities of Allergan

and the parties agree that the consent of both Pershing Square and

[Valeant] shall be required for launching such a tender offer”

• Furthermore, the Relationship Agreement provides that Pershing Square and

Valeant will be “co-bidders” in any tender offer and that Pershing Square

will be a significant shareholder (and even affiliate) of “New Valeant”

69



The Structure Facilitates Hostile Takeovers …

Benefits of the Pershing Square/Valeant Partnership

• A hostile bidder usually takes a significant amount of risk, but the arrangement

with Pershing Square substantially lowers Valeant’s risk:

o In the event Allergan remains independent, Valeant takes little economic risk

because 98% of the funds for the Allergan stake came from Pershing Square

o In the event Allergan is rescued by a “white knight,” Pershing Square

compensates Valeant with a 15% break-up fee

o Valeant can utilize Pershing Square’s expertise and experience in secret stake

accumulations and proxy contests

o Allows a strategic bidder to quickly obtain HSR clearance for the toehold stake

• The structure also lowers Pershing Square’s risk because it received:

o Advance knowledge of Valeant’s hostile bid, which guaranteed Pershing Square a

significant lift in Allergan’s stock price

o 15% discount on $400 million of Valeant stock

70



… But There are Also Risks

Risks of the Pershing Square/Valeant Partnership

• In the event Allergan remains independent, it is likely that its stock price will

drop back to pre-bid levels (and possibly lower), and Pershing Square stands

to incur significant losses

• Activists and corporations may team up on hostile takeovers, but companies

that join with activists may soon discover they are targets themselves

o If the hostile bid succeeds, Pershing Square will own approximately 6% of the

combined company

• There is a legal risk that a court will come to the conclusion that Pershing

Square’s stake accumulation violated the federal securities laws (in

particular Rule 14e-3)

• Lastly, there is a legislative risk: The high-profile hostile bid for Allergan may

put pressure on the SEC (and Congress) to close various legal loopholes

71



Pershing Square and Valeant’s Choices

The Fight for Allergan

• Allergan’s poison pill effectively limits Valeant and Pershing Square to a

10% stake

• This forced Valeant and Pershing Square to either:

o abandon the pursuit of a transaction or

o try to negotiate a friendly transaction with Allergan’s board of

directors or

o run a proxy contest to replace the incumbent directors of Allergan in

the hope that a new board will redeem the poison pill

• An insurgent’s ability to replace the incumbent’s board through a proxy

contest depends on a target company’s structural defenses

72



Strengths

• Poison pill in effect (1)

• No shareholder action by written consent (2)

• No proxy contest at 2014 annual meeting

possible under the advance notice provisions

for nominations and shareholder proposals (3)

• Board is authorized to change the size of the

Board without shareholder approval

• Board fills all director vacancies (including

due to removal) (4)

• No cumulative voting for election of directors

• Board may amend or repeal bylaws unilaterally

• Blank check preferred stock

• Board approval or affirmative vote of holders

of a majority of disinterested shares required

for transactions with 5% shareholders (5)

• Section 203 of the Delaware General

Corporation Law (DGCL)

• In contested elections, directors are elected by

plurality vote (6)

Weaknesses

• Annually elected directors

• Shareholders holding at least 25% of the

outstanding stock can call special meetings

• Low insider ownership (approx. 1.6%)

• Directors may be removed without cause by a

majority of the shares entitled to vote

• No supermajority vote requirement to approve

mergers or amend charter

• Board has proposed to allow shareholders to

act by written consent -------------------- (1) Poison pill was adopted April 22, 2014

(2) However, Allergen’s Board has proposed amending the Company’s certificate

at the 2014 annual meeting to allow shareholders to act by written consent

(3) Advance notice for director nominations and shareholder proposals for the

2014 annual meeting had to be given by April 6, 2014

(4) However, if all directors are removed, any officer or any shareholder may call a

special meeting or may apply to the Delaware Court of Chancery for a decree

summarily ordering an election (DGCL Section 223(a))

(5) Majority of disinterested shares are required to approve a business

combination with a 5% shareholder unless approved by majority of

independent directors

(6) In a contested election, shareholders are given the choice to cast “for” or

“withhold” votes for the election of directors; in a non-contested election,

shareholders have the choice to either cast votes “for” or “against” the election

of directors and directors are elected by majority vote standard

The Fight for Allergan: Allergan’s Structural Defense Profile

73



Allergan has Certain Achilles’ Heels

The Fight for Allergan: Allergan’s Weaknesses

• Allergan had an annual meeting scheduled for May 6th and the deadline for

director nominations had already passed

• However, Allergan’s structural defense profile has significant weaknesses:

o Allergan allows shareholders holding 25% of the shares to call a special meeting

o Allergan’s Board submitted a proposal for the May 6th annual meeting to allow

25% of the shareholders to demand an action by written consent

o Directors may be removed without cause by a majority vote of the shareholders

• However, Allergan limits the shareholders’ ability to call special meetings (and

act by written consent) by barring a “Similar Item” from being presented to

shareholders within one year prior to the request

• Therefore, a key question was whether the removal and new election of

Allergan’s directors would be a “Similar Item” to the annual director election

74



The Fight for Allergan: Allergan’s Weaknesses (Cont’d)

Allergan’s Own Interpretation Came to Haunt It

75

Source: Allergan, Definitive Additional Proxy Materials, filed with the SEC on April 22, 2014



Allergan was Not Always Vulnerable

The Fight for Allergan: History of Allergan’s Defenses

• Staggered Board

Allergan’s board of directors proposed to eliminate the staggered board at the

2011 annual meeting and Allergan’s shareholders voted to approved the

proposal

• Shareholder Power to Call Special Meetings

Allergan’s board of directors proposed to introduce shareholder power to call

special meetings at the 2013 annual meeting and Allergan’s shareholders voted

to approved the proposal

• Shareholder Action by Written Consent

Allergan’s board of directors has proposed to introduce shareholder action by

written consent at the 2014 annual meeting and Allergan’s shareholders voted

are expect to approve the proposal

76



The Fight for Allergan: Timeline of Subsequent Events

May – June 2014

77


MAY – JUNE


The Fight for Allergan: Timeline of Subsequent Events (Cont’d)

August – September 2014

78


AUGUST – SEPTEMBER


The Fight for Allergan: Timeline of Subsequent Events (Cont’d)

October – December 2014

79


OCTOBER DECEMBER


III.

A. Identifying Vulnerabilities in a

Transaction



Identifying Vulnerabilities in a Transaction

Introduction

Activists are Looking at Every Deal

• Activists are looking at each and every announced deal:

o Looking to either get a “bump” or derail the deal

o Assessing vulnerabilities

• How activist investors become involved in an M&A transaction:

o As an existing shareholder that was urging a review of strategic alternatives or

sale process

o As a new shareholder that acquires a position post-announcement of the deal



Deal Announcement

A. Investors are in favor of the deal, but they think the terms could be

sweetened

o Believe that maybe some value was left on the table

o Do not want to risk ‘deal in hand’

Initial Investor Reaction as Cue

82

B. Investors are not necessarily against the deal, but they think that the

proposed consideration undervalues the company on current terms

o Believe that amount or form of consideration is unacceptable

o Criticize lack of pre-signing market check or robust process

C. Investors oppose the deal for grossly undervaluing the company or lack of

strategic sense

o Believe that consideration is grossly inadequate

o Argue that more attractive strategic alternatives would have been available


• Financial terms

• Shareholder vote

requirements

• Other closing

conditions

(including regulatory

and appraisal

conditions)

• Deal protection

provisions

The Activist’s Analysis


Deal Terms

83

• Review

background to the

merger section

• Determine process

deficiencies or

conflicts of

interest

Deal Process

• Nomination deadline

for next annual

meeting

• Ability to remove

directors prior to

the next annual

meeting at a special

meeting or through

action by written

consent

Governance Profile


III.

B. Addressing Activism in

Deal Preparation and Negotiation

William P. Mills


Advanced Planning

• Analyze the potential vulnerabilities of the transaction

o Valuation: Fully vet management’s model and forecast, including underlying

assumptions

o Is there a controlling stockholder?

o Is there a conflict of Interest?

o Would a special committee be required?

o Is a shareholder vote required?

• Analyze stockholder base

o Are activists in the stock?

o What is the estimated cost basis for significant stockholders?

• Review company’s takeover defenses

o Can shareholder remove directors?

o When is the next annual meeting?

Addressing Activism in Deal Preparation and Negotiation


Advanced Planning (Cont’d)

• Prepare investor relations communication plan

o “Black hat” review of transaction

• Put in stock monitoring

o To alert parties to large share purchases and turnover in stockholder base

• Retain qualified investors

• Consider pre-signing market check



Negotiating the Transaction Terms

• Sellers should negotiate effectively and establish a record that they obtained

the best available transaction terms, including price

• Evaluate and consider pre- announcement market check, and limited auction to

qualified financial and strategic buyers

• Minority Protections o Special committee

o Majority of the minority vote

Pro: can provide business judgment protection for directors

Con: could encourage activists/arbs to seek to establish a blocking position

87



Negotiating the Transaction Terms (Cont’d)

• Deal protection provisions

o Go shop

o Fiduciary out

o Termination fees

o Voting agreements with significant shareholders

o Appraisal rights condition Parties can include a condition that shares seeking appraisal do not exceed a

threshold (e.g. 5-10% of outstanding shares)

These conditions have become less common but may be considered in light of the

upward trend in appraisal proceedings

Protects seller against risk of significant appraisal cost; could be required for

financing

Shifts to buyer risk of appraisal proceeding

o Target’s adoption of a shareholder rights plan in conjunction with merger

agreement

A conflict free transaction with a market check, a strong record of negotiation and

reasonable deal protections is less likely to attract activist attention

88



Respond to an Activist Approach or Public Campaign

• Assume private approach could lead to a public campaign

• Investor relations plan in place to communicate compelling rationale for

transaction

• Continue to focus on company performance

• Consider the activists position and recommendations and whether they are in

the best interest of all the stockholders

• Determine when to engage and negotiate with the activist

• Negotiation and compromise should be considered when optimal for

stockholders

89



Important Factors

Communicating with Shareholders

Create Deal Team Monitor Shareholder Base and Trading

Senior management, financial advisor, legal counsel and possibly other advisors, including proxy soliciting firm and public relations advisors

Maintain war list of updated contacts Prepare Board with periodic updates by advisors Prepare CEO Require coordinated and rapid response on all levels Momentum established in first hours following public announcement Delay may significantly lend air of credibility to activist campaign

Monitor changes in institutional and hedge fund holdings Trading activity, parallel trading and group activity (the activist “wolf

pack”) Proxy solicitation firms can analyze raw settlement data

from DTC Schedule 13D/13(f)/HSR filings Monitor peer groups, analysts, ISS, Glass Lewis, activist-like

institutions CalSTRS and TIAA-CREF, internet commentary and make reports that may attract attention

Retain stock watch service

Disclosure/Public Relations Communication of Transaction

Review investor presentations, analyst presentations and other financial public relations matters

Be consistent with the Company’s basic strategic message Proactively address reasons for any shortfall versus peer

company benchmarks Anticipate key questions and challenges from analysts and activists –

be prepared with answers Maintain regular close contact with major institutional investor – CEO

and CFO (and potentially lead independent director) participation very important – first meeting should not be after activist surfaces

Investor relations team should know names of likely activists and identify and log all incoming calls

Should meet with ISS often, as activists likely will and send ISS favorable research reports as it relates to public information (and not specify tailored presentations)

Create compelling investor presentation that provides rationale

Basis for all shareholder communications

Create plan to proactively communicate strategic plan (and proactively address activist concerns) with investment community

Communicate directly with analyst community

Maintain ongoing dialogue with investors, including portfolio managers and governance teams

Avoid being put in play – psychological and optical factors may be more important than financial factors in outcome of activist campaign against M&A transaction

Thank you

92

Presenter Bios

93

William P. Mills

Bill Mills concentrates his practice in the area of corporate law, with emphasis on mergers and

acquisitions, securities law, corporate finance and corporate governance. Bill represents clients

in a wide range of complex transactions, including mergers, acquisitions, divestitures, public

and private securities offerings, proxy contests, spin-offs, restructurings, leveraged buyouts,

tender offers, exchange offers, and joint ventures.

He also represents investment banks as financial advisers on M&A and other transactions. Bill

advises listed public companies in the areas of corporate governance, activist defense, crisis

management, executive compensation, contractual negotiations, and general regulatory

compliance.

Select Representative Experience

• Forbes Media’s sale of a majority stake to a consortium of international investors

• Towers Watson's acquisitions of Extend Health and Liazon Corporation and sale of its

Reinsurance Brokerage Business

• AngioDynamics' acquisitions of Navilyst Medical, Microsulis Medical, Vortex Medical and

Clinical Data

• Elan Corporation's $3.25 billion sale of Tysabri rights to Biogen Idec

• Pfizer Inc.'s sale of its Capsugel business to KKR

• DPL Inc.'s merger with AES Corp.

• Pfizer Inc.'s $3.2 billion acquisition of King Pharmaceuticals

• Bear Stearns Companies Inc. acquisition by JPMorgan Chase

• Pfizer Inc.'s $68 billion acquisition of Wyeth

• Trian Fund Management in the $2.34 billion sale of Wendy's International to Triarc

Companies

• Pfizer Inc.'s $16 billion sale of its consumer health care division to Johnson & Johnson

• Xstrata Plc's sale of its Noranda aluminum division to Apollo Management

• Trian Partners’ successful proxy contest with H.J. Heinz Company

New York

212.504.6436

[email protected]

Presenter Bios

William P. Mills

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Gary W. Finger

Mr. Finger is a Director and member of Houlihan Lokey’s M&A Group and the M&A Committee.

During an investment banking career spanning over three decades, he has been responsible

for a variety of public and private M&A assignments in a broad range of industries. He has

represented corporate clients and boards, hedge funds, and hostile raiders. Recent notable

transactions during Mr. Finger’s career include the campaign by PSAM to amend the terms of

the MetroPCS merger with T-Mobile, the going private transactions of Claxson Interactive and

Virbac; the merger of Salton and Applica; the merger of IASG and Protection One; and the sale

of Ameriserve to Wal-Mart. Mr. Finger is based in the firm’s New York office.

Before joining Houlihan Lokey, Mr. Finger was a Managing Director at Chemical Securities. His

experience includes positions as an Associate Director at Bear, Stearns & Co., and earlier stints

in M&A at E.F. Hutton and Morgan Stanley.

Mr. Finger received a B.S. and B.A., cum laude, from the University of Pennsylvania and an

MBA from Stanford Graduate School of Business. He is registered with FINRA as a General

Securities Principal (Series 24).

New York

212.497.4125

[email protected]

Presenter Bios

Gary W. Finger

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Since 2000, Kai has advised domestic and international companies, as well as financial

advisors, in connection with public and private M&A transactions, both hostile and friendly. Kai

has significant experience with shareholder activism, advising both target companies and

activists.

Prior to joining V&E, Kai was an associate at Cravath, Swaine & Moore in New York (2006 to

2011) and a legal trainee at Linklaters in Düsseldorf, London, Hong Kong and Tokyo (2000-

2004). Kai holds a Ph.D., magna cum laude, from Freiburg University; an Executive MBA,

summa cum laude (best of his class) from Münster Business School; an LL.M., James Kent

Scholar, from Columbia Law School; and a J.D., summa cum laude (best of his class), from

Osnabrück School of Law. He is admitted to practice in New York, Texas and Germany.

Select Representative Experience

• Conn’s in connection with activist activity by Luxor Capital and Greenlight Capital

• Endeavour International in its proxy contest defense against the Talisman Group

• Miller Energy in its proxy contest defense against Bristol Capital and Lone Star Value

• Gastar Exploration in connection with activist activity by Kleinheinz Capital Partners

• Crest Financial in its proxy contest against the $6 billion Clearwire-Sprint merger, resulting in

an increase of the merger consideration by approximately 70% from $2.97 to $5.00

• Oil States in connection with activist activity by JANA Partners

• Endeavor in connection with activist activity by Steelhead, O-Cap and Lone Star Value

• C&J Energy in its $2.86 billion merger with Nabors’ completion and production businesses

• Energy XXI in its $2.3 billion acquisition of EPL Oil & Gas

• Inergy in its $8 billion merger with Crestwood (2nd largest 2013 energy deal)

• Citigroup in LinnCo’s $4.9 billion acquisition of Berry Petroleum (5th largest 2013 energy deal)

• Evercore in Kinder Morgan’s $38.5 billion acquisition of El Paso (largest 2011 M&A deal)

• Westlake Chemical in its unsolicited $1.2 billion takeover offer for Georgia Gulf Corporation

Houston

713.758.3839

[email protected]

Presenter Bios


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