THE BOARD’S ROLE IN DEFENDING AGAINST HOSTILE BIDS 1:15 PM
Bryan Armstrong, Ashton Partners
Justin Friesen, UBS Securities LLC
Richard Grubaugh, D. F. King & Co., Inc.
Charles J. Hansen, Saks, Inc.
Cary Kochman, UBS Securities LLC
Steve Vazquez, Foley & Lardner LLP
©2007 Foley & Lardner LLP
Bryan Armstrong has been with Ashton Partners, a strategic investor relations and crisis management firm, for over nine years currently serving as one of the firm’s three Partners. In addition to business development, client oversight and execution, Mr. Armstrong leads the Quantitative and Fundamental Research group and is part of the Crisis and Transaction group at Ashton.
Mr. Armstrong regularly provides commentary on topics such as shareholder activism and hedge funds to respected national financial media outlets including the Chicago Tribune, Seattle Times, First Business, Investment Dealers Digest, Financial Week and Investor Relations Business. In addition, Mr. Armstrong has published several articles in national publications and has BRYAN ARMSTRONG presented at numerous conferences including the NASDAQ IR Seminar and the NIRI National conference. PARTNER ASHTON PARTNERS Prior to joining Ashton Partners, Mr. Armstrong was an investment analyst at Merrill Lynch conducting security research and analysis, portfolio allocation schemes and retirement planning for high net worth clients and small businesses.
Mr. Armstrong received his BBA in Finance at the University of Wisconsin Madison, with a concentration in International Business. In addition, Mr. Armstrong holds the Chartered Financial Analyst (CFA) designation, is a member of the Investment Analysts Society of Chicago (IASC) and the CFA Institute.
©2007 Foley & Lardner LLP
Justin Webb Friesen is an Executive Director, Mergers & Acquisitions in the Investment Banking Department of UBS and is based in Chicago. Mr. Friesen has been involved in a wide variety of strategic and capital raising transactions in the diversified industrials, consumer / retail and business services sectors. Mr. Friesen’s transaction experience includes hostile M&A defense, corporate acquisitions, mergers and divestitures along with high-yield, equity and private placement capital raising for Fortune 500 and middle-market companies. His most recent transactions include ADESA’s leveraged buy-out sale to a private equity consortium led by Kelso, Banta’s white knight hostile defense and sale to R.R. Donnelley & Sons, JLG Industries’ sale to Oshkosh Truck, Pentair Inc.’s acquisition of APW Limited’s thermal enclosure assets and The Shaw Group’s acquisition of JUSTIN FRIESEN 20% of Westinghouse Electric. EXECUTIVE DIRECTOR, Prior to joining UBS in May 2004, Mr. Friesen was a Vice MERGERS & ACQUISITIONS President at Credit Suisse First Boston where he UBS SECURITIES LLC participated in significant M&A assignments including: Cooper Industries’ successful defense of Danaher Corporation’s hostile raid; S.C. Johnson’s acquisition of Bayer AG’s global household insecticide business; Pentair’s acquisition of Everpure from Veolia Environnement; sale of Collegis, Inc. to Sungard Data Systems and Whitman Corporation’s asset realignment with PepsiCo and subsequent acquisition of PepsiAmericas. Mr. Friesen began his investment banking career in 1994 as an analyst at Dean Witter Reynolds Inc.
Mr. Friesen received his M.B.A. from The Wharton School at the University of Pennsylvania where he graduated with highest honors and was recognized as a Palmer Scholar. He graduated with distinction from the Indiana University School of Business earning a B.S. in Accounting.
©2007 Foley & Lardner LLP 2
RICHARD GRUBAUGH Richard H. Grubaugh is a Senior Vice President of D.F. King & Co., Inc. and co-manager of the firm’s SENIOR VICE-PRESIDENT Extraordinary Events Group. Primarily advises D. F. KING & CO., INC. corporations involved in complex shareholder transactions specializing in corporate control situations such as proxy contests, mergers and hostile tender offers. Formulates and recommends shareholder communications strategies for public companies in crisis situations. Prior speaking engagements include programs sponsored by the Practising Law Institute, the American Society of Corporate Secretaries and Governance Professionals and at Georgetown University on corporate governance issues.
©2007 Foley & Lardner LLP 3
Charles J. Hansen is the Executive Vice President and General Counsel of Saks Incorporated. Saks Incorporated, listed on the New York Stock Exchange under the ticker symbol “SKS,” owns and operates 62 Saks Fifth Avenue stores; 54 Saks Off 5th stores; and 24 Club Libby Lu specialty stores. Mr. Hansen is a graduate of the University of Kansas and has a J. D. degree from Boston College, where he was an editor of the Boston College Law Review. He was an associate at Shearman & Sterling, New York, New York, and served as General Counsel for Carson Pirie Scott & Co. prior to its acquisition by Saks Incorporated. He is a member of the bars of the States of Illinois, New York, and Wisconsin.
CHARLES HANSEN EXECUTIVE VICE-PRESIDENT & GENERAL COUNSEL SAKS INCORPORATED
©2007 Foley & Lardner LLP 4
Cary Allan Kochman is a Managing Director, Co-Head of Americas Mergers & Acquisitions, and serves as Co-Head of the Investment Banking Department’s (IBD’s) Chicago office and Midwest Region. He is a member of the Americas IBD Executive Committee. Mr. Kochman is also a member of the Business Review Group.
Mr. Kochman advised on numerous recent transactions including ISCAR’s $5 billion sale to Berkshire Hathaway, ADESA’s pending $3.7 billion LBO transaction, JLG’s $3.1 billion sale to Oshkosh Truck, Zimmer Holdings’ unsolicited, cross-border $3.7 billion takeover of Centerpulse AG, the successful defense of Cooper Industries, Banta Corporation’s White Knight sale to R.R. Donnelley & Sons, the merger of Case Equipment Company with New Holland N.V., Flowserve’s acquisition CARY A. KOCHMAN of IDP, Hussmann’s corporate sale to Ingersoll-Rand, MANAGING DIRECTOR Terex’s cross-border acquisition of Powerscreen Plc, S.C. Johnson’s acquisitions of DowBrands and Drackett, UBS INVESTMENT BANK Giddings & Lewis’ cross-border white knight sale to Thyssen AG, Whitman’s realignment with PepsiCo and subsequent acquisition of Pepsi Americas, Goodyear’s acquisition of Debica, the LBO of Jostens by Investcorp, the defense of Clark Equipment, as well as the sale of Specialty Equipment to United Technologies.
Before joining UBS, Mr. Kochman worked at Credit Suisse for 14 years where he was head of the U.S. M&A Department for his last 2 years. He holds both his J.D. and M.B.A. from the University of Chicago. He also has a B.S. in Accounting from the University of Illinois at Chicago. Mr. Kochman is a member of the Illinois Bar and is both a C.P.A. and C.M.A. Mr. Kochman is a Trustee of the Shedd Aquarium. He serves as a member of the Visiting Committee of The Law School of the University of Chicago. He is a member of the Business Advisory Council to the University of Illinois at Chicago College of Business. Mr. Kochman is also a member of The Economic Club of Chicago, The Executive’s Club of Chicago and The Commercial Club of Chicago. He is also a frequent lecturer at Northwestern University’s MergerWeek.
©2007 Foley & Lardner LLP 5
Steven Vazquez is a partner with Foley & Lardner LLP, where he is a member of its Transactional & Securities and Private Equity & Venture Capital Practices, as well as its Emerging Technologies, Life Sciences and Nanotechnology Industry Teams. He practices in the areas of securities law and mergers and acquisitions, concentrating on debt and equity securities offerings, public and private mergers and acquisitions, and venture capital financings.
Mr. Vazquez has represented issuers in numerous initial and secondary public offerings and regularly counsels public companies and special committees of public companies.
Mr. Vazquez’s mergers and acquisitions expertise includes public and private company transactions in a STEVEN W. VAZQUEZ variety of industries. He has specific experience in PARTNER mergers and acquisitions involving health care, real FOLEY & LARDNER LLP estate, and technology companies. Mr. Vazquez’s venture capital expertise includes representing emerging growth companies in the technology and telecommunications industries. Since 2000, Mr. Vazquez has represented investors and companies in more than 25 venture capital transactions raising an aggregate of more than $300 million.
Mr. Vazquez graduated, with honors, from the University of Florida College of Law in 1993, where he was elected to Order of the Coif and was an editor of the Florida Law Review and the Florida Tax Review. He received his bachelor's degree in finance from Florida State University in 1990.
Mr. Vazquez is named in The Best Lawyers in America®. In 2005, he was recognized as one of Florida’s Legal Elite™ by Florida Trend magazine.
©2007 Foley & Lardner LLP 6
STRICTLY CONFIDENTIAL
2007 National Directors Institute
Hostile Takeover Discussion Materials
March 2007 Table of Contents
SECTION 1 M&A Market Overview 2 SECTION 2 Hostile Activity and Hedge Fund Activism 8 SECTION 3 How to Prepare for a Hostile Bid 16
1 SECTION 1
M&A Market Overview M&A Environment Overview
♦ 2006 volumes up 46% globally, 34% in the Americas Rebound in ♦ Resilient markets M&A Activity ♦ Strategic imperatives
Historically ♦ Corporates across industries face the challenge of effectively Strong Financing deploying robust cash balances Environment ♦ Leveraged loan market continues to be strong Continues
♦ Mega-funds driving sponsors into mainstream of large cap M&A Financial Sponsors ♦ As a whole, sponsors are still sitting on over $230 billion of Impact uninvested capital ♦ Low interest rate environment has helped make sponsors price-competitive with strategic acquirers
♦ Hostile bids comprise substantial portion of M&A volume Rise of Hostile Activity and ♦ Market dynamics have resulted in a new era of aggressive Shareholder acquirors/agitators: hedge funds Activism ♦ Activists have increasingly attacked larger targets: Time Warner, Heinz, McDonald’s
3 Global M&A Has Surpassed Record Levels
Global M&A Announced Deal Volumes 1 3,152
3,000 2,726 2,676
2,500 Down: Up: 2,157 2,015 2,000 65% 238% 1,532 1,500 1,228 1,297 1,052 (US$bn) 1,000 818 932 654 500
0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 No. of Transactions 1,667 2,074 2,840 3,160 3,406 3,592 2,399 2,225 2,484 2,955 3,571 4,067
(US$bn) 600 499 483 388 400 341 200 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 No. of Transactions 827 1,096 1,520 1,652 1,573 1,588 960 906 1,041 1,185 1,368 1,576
4 Factors Influencing M&A Activity
Mid 1990s–2000 2001–2002 Today Economic Environment
Stock Market Performance
Credit Market Strength
Investor Confidence
CEO Conf idence
Corporate Scandals/Bankruptcies
Geopolitical Situation
Regulatory Environment
Shareholder Activism
5 Industry Consolidation Driving Biggest Deals
2006 Top 10 Announced Transactions
Value Type of Acquiror Target ($bn) Transact ion
83.1 Stock
66.7 Raid
55.7 Stock 1
36.0 Raid
34.7 Stock 34.6 Stock 32.5 LBO
Investor Group 32.2 LBO
30.1 Stock
Investor Group 27.4 LBO Total Top 10 433.0
Source: Bloomberg Note: 1 Merger occurred following takeover attempt by Enel
6 Significant Leveraged Buyout Activity Global M&A market continues to be supported by significant LBO activity ♦ Total uninvested capital continues to exceed US$230 billion ♦ Recent industrial LBOs have been completed at historically high leverage levels (6.0x+ common) Significantly higher if financial institutions are US Leveraged Buyouts Are Increasing as a Percentage of Overall Activity excluded 171.3 160 18%
140 130.3 18% 16% as a%of Volume LBO Total M&AVolume Total 120 14% 14% 100 94.4 13% 12% 10% 80 10% 56.7 8% 60 51.9 47.0 40.5 6% 6% 40 19.5 22.1 4% 20 4% 4% 2% LBO Volume(US$bn) 3% 3% 0 0% 1998 1999 2000 2001 2002 2003 2004 2005 LTM 2006 Leveraged Buyout EBITDA Multiples Have Rebounded to Pre-2000 Levels
6 5.4 5.3 5.6 45% Equity Contribution (%) 4.7 4.9 5.0 5 4.6 40% 4.2 4.1 4.0 4 35% 35% 37% 35% 3 34% 33% 30% 32% 33% 33% (x) 30% 2 28% 25% 1 20%
Total / LTM Debt EBITDA 0 15% 1998 1999 2000 2001 2002 2003 2004 2005 2006 LTM Source: Standard & Poor’s PMD (average purchase multiples are for Leveraged Buyouts with total sources of $500mm or greater). LTM figures as of 9/30/06 2006
7 SECTION 2
Hostile Activity and Hedge Fund Activism Historical Unsolicited and Hostile Activity Has Increased
There has been a sharp increase in Global Hostile and Unsolicited M&A activity since 2004
1 Global M&A Announced Hostile / Unsolicited Activity ♦ CVRD acquired Inco
$800 for C$22 billion after initial $699 $700 Inco / Falconbridge merger was thwarted $600 by separate hostile offers on both original $500 merger partners $402 $400 ♦ Banta’s $1.3 billion White Knight sale to
$300 R.R. Donnelley after $239 a successful defense $199 $200 against Cenveo, Inc. $141 $136 $115 $96 $108 $93 ♦ Cemex’s $13 billion $100 $82 $57 $43 hostile raid of Rinker via public Bear Hug $0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Hostile Volume ($bn) 57 141 82 136 96 699 115 108 43 93 239 199 402 Unsolicited / Hostile Deals 47 98 75 78 76 111 83 40 38 46 50 72 79 Unsolicited / Hostile as % of Total 11% 15% 7% 8% 4% 18% 3% 6% 4% 7% 12% 7% 11%
Source: Thomson Financial, SDC as of 2/9/2007 Note: 1 All deals with disclosed deal value, excluding minority stake purchases, repurchases, spin-offs and deals less than $50 million. Includes withdrawn deals
9 Hostile Activity Has Re-Emerged
Top 10 Hostile Deals—2006 Target Name Acquiror Name Value of Transaction ($bn)
66.7
36.0
24.1
The World’s Leading Airport Company 21.8
18.0
17.9
17.4
13.7
12.7
11.4
There has been a sharp increase in Global Hostile and Unsolicited M&A activity since 2002 10 Growth in Hedge Funds
Size of Hedge Fund Market Growth of Hedge Fund Assets
1,600 ’90 –’05 CAGR: 27% 1,337 Current 1,400 US$1.5 trillion - $2.4 trillion 1,105 Market Size 1,200 973 478 1,000 820 395 800 626 359 Active Hedge Funds 540 293 Approximately 9,225 600 456 491 Worldwide (US$bn) Assets 368 375 207 84 103 400 76 859 257 710 168 185 74 76 614 167 527 200 96 53 380 407 437 419 39 58 56 294 299 75 75 204 20 37 92 93 129 Fund of Hedge Funds 0 372 38 59 Approximately 1,895 Worldwide 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Q3 2006 Hedge Funds Funds of Hedge Funds
Number of Hedge Funds Hedge funds manage Context between 1–3% of global 10,000 9,228 assets ’90 –’05 CAGR: 21% 8,661 1,895 8,000 7,436 1,779 6,297 Market Up to 50% of daily NYSE 1,654 6,000 5,379 Volume trading volume 1,232 4,454 781 3,617 3,873 4,000 3,325 550 2,990 7,333 2,781 515 538 6,882 Source: Hedge Fund Research, Bloomberg Number of Funds 2,383 477 5,782 1,945 389 426 4,598 5,065 2,000 1,514 377 3,904 1,105 291 3,102 3,335 821 237 2,564 2,848 610 168 2,006 2,392 127 1,277 1,654 80 694 937 0 530 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Q3 2006 Hedge Funds Funds of Hedge Funds
11 Hedge Funds Are Increasingly Serving As Activist / Hostile Investors Continued corporate governance activism, increasing social acceptance to hostile activity, rapid accumulation of un- invested capital and the emergence of new low-risk / high-return investment strategies have reshaped the hostile M&A market and led to a wave of aggressive hedge fund activist investing
♦ Hedge funds control vast pools of capital — total AUM of approximately $2.5 trillion – Raider of 1980s had to rely on third party financing, while hedge funds control their own assets Control of Capital – Approximately $120 billion in assets controlled by hedge funds is invested in “event driven” strategies – Limited exposure to fluctuations in credit markets – Enhances credibility in M&A realm ♦ “Wolf pack” tactics Parallel – Hedge funds network extensively and take similar positions in other funds’ targets Investing – Success of takeover efforts have worked despite relatively small stakes in targets – Have avoided being treated as a “group” for Regulation 13D purposes
Diminishing ♦ Director’s increased sensitivity to shareholder activism Target Takeover – Corporate governance activists’ voices are increasingly heeded by Directors Defenses – Evidence that growing number of governance changes are initiated by hedge funds
♦ General positive perception of “hostile” deals Changing – Post-scandal era has led to increased corporate activism and the desire to eradicate all corporate Attitudes About malfeasance, which is thought to be a common goal of hedge funds Hostile M&A – Investors have a higher level of support for hedge funds as opposed to their 1980s predecessors Activity – Benefit to shareholders in that pressure is put on boards to explain why their chosen course will create the most value
♦ Activist investors have performed well over last 12-18 months which should drive continued activist investing – Success of recent proxy fights will drive future activity during upcoming proxy season 2007 and Beyond – Lower profile investors to search for activists to pursue selected situations – Successful acquisition of a company by an activist hedge fund will lead to further convergence of private equity and public equity worlds
12 Evolution of the Corporate Raider
Events: ♦ 1980s: ♦ 1990s: ♦ 2000s: – Unprecedented number of – End of cash bids and hostile – Continued corporate governance highly-levered takeovers and deals activism restructurings – New era of stock deals, synergy – New ISS policy concerning – Emergence of junk bond market claims and MOEs shareholder votes and poison pills – Peak of the hostile takeover – Foundations of new corporate – SEC proposed rule to allow and materialization of the governance activism movement shareholder direct access to proxies corporate raider to nominate directors – Late ‘80s market “bust” – Corporate scandals – Hedge funds emerge as new M&A sharks
1980 Takeover Boom 1990 Shifting Balance of Power 2000 Rising Shareholder Activism 2006
Impact: – Creation of poison pill and rise of – Anti-poison pill resolutions – Shareholder proposals on poison takeover defense – Declassification of Boards pills are regularly approved – Increased shareholder activisim – Opposition to takeover defenses – More US companies adhere – Council of Institutional to investor demands to halt takeover Investors (CII) formed in 1985 defenses – Institutional Shareholder – Increasing Director vulnerability Services (ISS) also formed in 1985
Raiders Seen As Hedge Funds/Activists “Enemies” Of Public Seen As “Friends” Of Investor Public Investor
13 Hedge Funds are Increasingly Successful in Contested Situations
Success breeds success and hedge funds are becoming more aggressive in their M&A investing activities
Primary Campaign Types, 2006 Proxy Fights Dissident Success Rate, Proxy Fights
Activism Other 120 64% 70% Against 10% 100 55% 60% Merger 46% 46% 50% 3% 80 44% 38% 40% 60 30% BoardBoard 40 RepresentRepresentation 62 67 74 56 101 20% ation56% 20 39 10% 56% Board 0 0% Control 2001 2002 2003 2004 2005 2006 31% Proxy Fi ght s Dissident Success Rate
Source: Shark Repellent
14 Hedge Fund Activists Have Increasingly Been Aggressive
Market Ownership Year Company cap. ($bn) Agitator Stake (%) Contested issue Results 2006 General Motors 16.8 Kirk Kerkorian/Tracinda 9.9 Directors Pending 2006 Knight Ridder 4.1 Private Capital Management 17.3 Sale V 2006 Heinz 12.5 Nelson Peltz/Trian Fund 5.4 Directors Pending 2006 Gencorp 1.1 Pirate Capital LLC 9.3 Directors V 2006 Acxiom Corp 2.1 ValueAct Capital 11.9 Directors Pending 2006 Motient Corp 1.2 Highland Capital 14.3 Directors Pending 2006 Massey Energy Co 2.8 Daniel Loeb(DNU) 5.9 Direct ors V 2006 New Century Financial 2.2 Greenlight Capital 6.2 Directors S 2005 Wendy’s 5.5 Nelson Peltz/Trian Fund 5.5 Spin off/elect directors V 2005 McDonald’s 34.7 Pershing Square Capital Management 0.0 Spin off/sell assets V 2005 Time Warner 76.5 Carl Icahn 1.4 Spin of f/share repurchases S 2005 Office Max 2.1 K Capital Partners 8.6 Directors S 2005 Career Education Corp. 3.6 Steve Bostic 1.2 Amend by-laws V 2005 Beverly Enterprises 1.4 Investor Group 8.1 Directors S 2005 Kerr-McGee 8.9 Carl Icahn 4.2 Directors V 2005 Sovereign Bancorp Inc 8.0 Relational Investors 8.4 Directors S 2005 Blockbuster 1.1 Carl Icahn 9.7 Directors V 2005 Circuit City 4.5 Highfields Capital 6.9 Unsolicited offer D 2004 Payless Shoesource 1.3 Barington Capital Group 1.1 Directors D 2004 Mylan Laboratories 3.9 Carl Icahn 10.0 Vote against merger D 2004 State Street 16.2 Patrick Jorstad n/a Amend by-laws D V = Victory for Agitator D = Defeat for Agitator S = Settled
15 SECTION 3
How to Prepare for a Hostile Bid How Could a Suitor Make an Approach?
Less Aggressive More Aggressive Less Pressure More Pressure
Casual Pass/ Tender/ Friendly Lunch Private Letter/“Bear Hug” Public “Bear Hug” Proxy Fight Exch ang e O f f er Comment ♦ CEO to CEO ♦ To CEO only ♦ More likely only after a ♦ More likely as a ♦ More likely as a ♦ CEO to friendly ♦ To CEO and rebuffed approach threatened course of threatened course of board member board members action or pursued with a action than one which is ♦ To board members only cash tender actually pursued ♦ With threat to go public if Target is unwilling to negotiate
Advantages to ♦ May be the easiest way ♦ Can gauge Target ♦ Degree of hostility can ♦ Can be effective even if ♦ Fastest approach Acquirer to get discussion going reaction without public be varied threatened and not ♦ Minimum reaction time ♦ An unsuspecting CEO knowledge ♦ Allows financial actually commenced ♦ Start clock running for may signal a willingness ♦ Keeps door open for flexibility ♦ Potentially least anti-trust and tender to consider a transaction friendly negotiations ♦ May provide opportunity expensive way to gain offer regulations ♦ May be a way to solicit to get an inside look control or effect change ♦ Pure economic basis board members without ♦ Allows bidder to get a ♦ Unilateral action doing anything overly reaction to a price ♦ Maximum pressure host ile vis-à-vis without initiating a management tender offer
Disadvantages ♦ Can easily be ♦ Less pressure put on ♦ Easier to reject than ♦ Management’s stronger ♦ Limited information to Acquirer discouraged by Target as compared to tender offer position via control of (public only) on Target management public alternatives ♦ May have to be backed proxy process ♦ Pure economic basis ♦ Doesn’t exert any ♦ May give Target t ime up with threat of tender ♦ War of words-limited ♦ Extremely “hostile” real pressure t o explore alternat ives offer to be effective chance to make approach if insufficient economic proposal ♦ Additional litigation pressure applied possibilities ♦ Risk of being topped
17 Strategic Preparedness
Why is preparedness important?
♦ Once a public proposal is received, enormous pressures are brought to bear on management and the Board, regardless of Target’s defenses Avoid Putting ♦ A hostile bid that escalates to a proxy battle can often cause irreparable harm to Target, regardless of who “wins” Target in Play ♦ Important to be offensively prepared
♦ Target’s Board and management team that provides appropriate and well rehearsed responses to casual inquiries Deter Suitors will convey preparedness, strength, solidarity and resolve from Going Convinces unwelcome suitor that they would lose if they went hostile Hostile ♦
♦ The timing and wording of Target’s early press releases following a public hostile overture can often define the chain of events that follows Keep Control ♦ First impressions are critical ♦ It is important to define the conflict and to brand the “raider” in the public domain
♦ The public pressure of a hostile bid can severely constrain the flexibility of Target to pursue growth ambitions if they Preserve are remotely controversial Options
♦ If and when Target is willing to relinquish its independence, it can do so on its own terms Set Your Retain flexibility to choose preferred partner and to begin negotiations at an appropriate time Own Terms ♦
Early preparation offers the maximum ability to maintain control of decisions which impact its long-term strategic direction
18 Pre-Unsolicited Overture Preparation
Establish a defense working group in order to remove the element of surprise
Defense Preparation
Investment Banker Legal Counsel Shareholder Relations CEO
♦ Prepare financial analysis ♦ Review Director duties in ♦ Financial public relations ♦ Sole spokesperson on and valuation with periodic context of 3rd party independence and takeover ♦ Contacts with research updates to the Board solicitations analysts, institutional holders issues ♦ Identify and prioritize ♦ Review and implementation and hedge funds ♦ Prepare responses to strategic alternatives of structural defenses different unsolicited ♦ Activist institutional investors approaches ♦ Prepare and periodically ♦ Understand Delaware and corporate governance update response playbook corporate law considerations and proxy issues ♦ Maintain communication with for different unsolicited Executive officers and Board ♦ Review of business for ♦ Ensure security of all forms approaches antitrust analysis of shareholder lists ♦ Gain Board endorsement of Prepare due diligence file business plan through ♦ ♦ Regulatory agency approvals ♦ Contact with specialist and regular updates ♦ Regular contact and for change of control monitor trading activity communication of material Prepare communication ♦ Disclosures that might cause ♦ Prepare internal employee ♦ developments a potential acquiror to look communications programs program Understand White elsewhere – employees ♦ ♦ Have “game plan” in the Squire/White Knight – clients ♦ Understand procedures event of activist shareholder –officers possibilities regarding Rule 14a-8 and proposals that identify – board ♦ Identify potential (hostile) shareholder proposals alternatives to satisfy suitors or hedge fund investors – public officials ♦ Monitor SEC responses aggressors during proxy season ♦ Assess impact of change of (reconsiderations) control on the business ♦ Review and analyze recapitalization alternatives
19 Target’s Fundamental Defense Profile
Strength Neutral Weakness Comments
Size
Valuation
Historical Stock Performance
Shareowner Confidence in Management and Plan
Leverage
Liquidity
Insider Control
Institutional Ownership
Availability of White Knights
20 Target’s Tactical Defense Profile - Illustration
♦ Company Name—Target ♦ Headquarters—Chicago, IL ♦ State Statutes ♦ State of Incorporation—Delaware – Expanded Constituency: Board may consider interests of customers, employees, creditors and communities, in addition to shareholders, when ♦ Annual Meeting—Last annual meeting held on June 30, 2006; annual taking any action meetings of stockholders held on such date and at such time as may be fixed – Freezeout with Fair Price Provision: Company may not enter into a by the BoD; notice of annual meeting shall be given to stockholders not less business combination with an interested shareholder (20%+ ownership) than ten (10) nor more than sixty (60) days before the date of such annual for five years from the date of becoming an interested shareholder. After meeting five years, any business combination must be approved by non-interested ♦ Board of Directors—The BoD can be no less than three (3) nor more than shareholder(s) or certain fair price provisions must be met ten (10); Board currently consists of five (5) directors – Anti-greenmail: Company may not purchase more than 10% of its stock – Board may increase or decrease size of Board without shareholder from a shareholder at more than market price without offering to purchase approval all outstanding shares ♦ Staggered Board—No; board of directors is elected annually ♦ Amendments ♦ Cumulative Voting—No – Bylaws: The Board of Directors shall have concurrent power with the shareholders to adopt, amend, or repeal the bylaws of the corporation as ♦ Special Meetings of the Board—Special meetings of the BoD may be held set forth in the bylaws but in no event less than a majority of the BoD upon 48 hours written notice or 24 hours oral notice by the Chairman of the (currently majority vote) Board or President or any two directors – Articles of Incorporation: May be amended by a majority vote of the BoD ♦ Board Vacancy/Removal—Any vacancy on the BoD may be filled by a and a majority vote of shareholders majority of the Board then in office, but shall be required to stand for election ♦ Authorized Capital at the next annual meeting; a director, or the entire BoD, may be removed – Common Stock—50,000,000 shares (par value $0.01) authorized, from office at any time, but only for cause with the affirmative vote of a 18,762,062 issued and outstanding (basic) majority of the directors currently in office – Preferred Stock—1,000,000 shares authorized, none issued or ♦ Special Meetings of the Stockholders—Special meetings of the outstanding stockholders may be called by (i) the Chairman of the Board, (ii) the Shareholder Rights Plan—Yes; flip-in/flip-over with an exercise price of President, (iii) resolution of the Board of Directors, or (iv) by shareholders ♦ $80.00 (3.8x recent price, 3.3x price at adoption). holding at least 20% of the vote – Occurs upon Acquiring Person obtaining 20% ownership ♦ Notice of Proposal—Stockholder notice (of business/proposal) must be delivered to or mailed and received at the principal executive offices of the – The shareholder rights plan expires 11/10/2007 Corporation not less than sixty (60) days nor more than ninety (90) days prior ♦ Ownership—97% float; largely traditional institutional ownership to the meeting – 3% insider ownership (primarily ESOP) ♦ Action by Written Consent—Any action required or permitted to be taken by – 87% institutional ownership (59% held by top 15 institutions) the Board of Directors may be taken without a meeting if all of the members of – 13% hedge fund ownership the Board of Directors consent in writing to the adoption of a resolution authorizing such action (unanimous written consent)
21 ISS Shareholder Rights Plan Overview
ISS General Approval of Pills ISS Recommends Shareholders Vote Against 1 Containing the Following Features
♦ Twenty percent or higher flip-in ♦ Dead-hand or no-hand features – Pills should not discourage potential bidders from – Only the incumbent directors may amend or redeem the accumulating a meaningful stake in the company or cause rights plan, thus preventing a hostile acquirer from effecting a large shareholder to inadvertently trigger the rights a merger until the pill elapses, even if it gains board control ♦ Two- to three-year sunset provision – The “continuing director” provisions pose severe restraints on a future board’s ability to manage the company’s affairs – Shareholders ought to have the opportunity to ratify or and should be excluded from shareholder rights plans reject pill at least every two to three years, thus permitting shareholders to reaffirm or redeem a pill based on how the ♦ Expanded constituency provision company’s board has used it in the past, market conditions, – Shareholders should vote against proposals that ask the or the firm’s performance board to consider non-shareholder constituencies or other ♦ Board redemption feature non-financial effects when evaluating a merger or business combination – A redemption clause allows the board to rescind or disapply a pill even after a potential acquirer has surpassed the ♦ No Redemption Features ownership threshold, thus giving the board sufficient flexibility when employing poison pill in negotiations ♦ Shareholder vote on poison pill – Shareholders ought to vote for proposals requesting that the company submit its poison pill to shareholder vote in order to redeem it ♦ Shareholder Redemption Features – If the Board refuses to redeem the pill 90 days after an offer is announced, 10% of the shares may call a special meeting or seek a written consent to vote on rescinding the pill Source: ISS Proxy U.S. Proxy Voting Manual Note: 1 If no shareholder vote, ISS withholds vote on director(s)
22 Takeover Defense Considerations
♦ Efficacy against hedge funds takeover activities is debatable ♦ Limiting hedge funds’ stake to even 10% of a company’s stock will not prohibit funds from undertaking effective Shareholder Rights destabilization campaigns Plans – “Wolf pack” tactics can effectively avoid Regulation 13D treatment and/or triggering poison pills ♦ Increasing number of companies are repealing shareholder rights plans to have one “on the shelf” instead
♦ Currently one of the most effective protections against proxy contests – Weakened by recent activist efforts such as direct access proposals and the push for majority elections Classified – Chairman may be vulnerable if his class of Directors is up for election at upcoming shareholder meeting Board ♦ Activist investors continue to demand de-staggered Boards and companies are generally complying to investor demands
♦ Prohibit the removal of Directors for any reason other than “for cause” and protect against proxy contests to “pack” the Board Charter Provisions ♦ Prevent raiders from finding end runs around staggered Boards ♦ Very difficult to amend public company charters to insert this type of “defensive” provision if not originally included
♦ By-law can be adopted requiring advance notice of board nominations by shareholders not less than a certain number of days (usually 60–90 days) and no more than a certain number of days (usually 90–120) before an Advance Notice annual meeting or shareholder meeting By-Law ♦ Limits a company’s chances of a proxy contest to a shorter period (usually 30 days)
23 Spectrum of Strategic Alternative Considerations - Illustration
Defense Preparedness Standalone Analysis
Hostile defense advisory Formulation of strategic plan Ongoing sense of value Internal valuation analysis / sensitivity Financial / tactical vulnerability Industry / competitor analysis Evaluation of potential unsolicited offers Communication with the Street
Change of Control / Ownership Capital Structure Realignment
Strategic sale of company Bank debt amendment Break-up Target Follow-on / secondary offering Re-IPO Rights offerings Going private transaction Exchange offer / equitization
Other Board Considerations Business / Asset Optimization
Pre-unsolicited overture preparation Acquisition Informed view of value implications of Divestitures various strategic alternatives Organic Investment Fiduciary duties in takeover situations Response alternatives to various approaches
24 Target’s Defensive Alternatives
♦ Highlight upside potential of business plan Do Nothing/ Intensity and tenor of independence campaign will signal whether or not it is simply a matter of price “Just Say No” ♦
♦ With the takeover battle in the public domain, potential interlopers will be encouraged to consider a move regardless of whether or not Target solicits them Auction Company ♦ Target could pursue a “just say no” campaign publicly, and still entertain interloper discussions privately ♦ Should Target’s Board succeed in securing another offer, it may still feel compelled to give Acquiror an opportunity to enter a competitive bidding situation
♦ Can be pursued in connection with an independence campaign as a means of bolstering the stock price by providing shareholders with near-term milestones Strategic Divestitures ♦ Presumes Target is fundamentally undervalued in the market
♦ Target could launch hostile bid on Acquiror ♦ Would validate strategic rationale of transaction “Pac-Man” ♦ Battle centered almost exclusively on management credibility ♦ Would suggest a compromise could be reached to the benefit of both sets of shareholders
♦ Excess cash could be distributed to stockholders ♦ Target could seek to break itself up into two or more separate pieces Spin-Offs/ Recapitalizations ♦ presumes sum-of-parts valuation is greater than current market ♦ Significant credit complications
25 Actions in Light of Unsolicited Public Offer
Active Takeover Defenses
Greater Immediate Auction Company Leveraged Buyout Impact Split-ups/ Recapitalization/ Spin-offs Share Repurchase Subsidiary White Squire Offerings ♦ Cash Arrangements (IPO) ♦ Stock ♦ Debt Capacity Strategic Business/Assets Acquisitions/ ♦ Dividends Divestitures/ ♦ Employees Joint Ventures
Structural Protections Employee Incentives Lesser (Rights Plan, Charter (ESOP/Options) Immediate Amendments) Impact Do Nothing
Corporate Capital Structure Structure
26 National Directors Institute
The Board’s Role in Defending Against Hostile Bids March 8, 2007 Ashton Partners Snapshot
Full service investor relations and crisis management firm National reputation for helping clients design and better execute high ROI programs Wide range of clients served by size, industry, issues faced, programs executed Flexible team staffing by individuals with strong financial backgrounds
2 Our Differentiation
Each client is staffed by seasoned financial advisors with advanced degrees and experience across a wide spectrum of corporate issues Focus on managing credibility through relationship management and specific messaging Emphasis on quantitative research with track record of predicting investor behavior Dedicated research team provides real-time intelligence on: SEC compliance Accounting issues Investor sentiment Shifts in portfolio focus
3 Value-Added Services
Improved Market Feedback Increased Visibility Benchmarked Perception Studies Buy-Side & Sell-Side Roadshows Investor Meeting Preparation & Investor Meeting Prioritization Follow-Up Financial Media Outreach Predicting Shareholder Movements
Enhanced Credibility Seamless Event Support Strategic Messaging & Positioning IPO/Secondary Programs Crisis Management Contested Proxy Support CEO/CFO Coaching Shareholder Activism Defense Transaction Support
4 Explosion of Shareholder Activism
Growing numbers…Over one hundred known shareholder activists with total equity AuM in excess of $150B Scarce returns…Number of activists and campaigns continues to grow while ‘alpha’ diminishes Over-crowed hedge fund class Limited returns from traditional hedge strategies Activism = Proven Opportunity…Based on recent research, of 94 campaigns over the past few years, activists succeeded in 75% of those cases
5 Hostile Bids – By Type
Last 10 Years Last Year
200 40
69% 59% 150 30
100 20 41% 31% 50 10
0 0 Financial Buyers Corporate Buyers Financial Buyers Corporate Buyers
6 All Activists Are Not Created Equal…
Partners Deephaven Capital ESL Investments Focus on long-term shareholder value Relational Investors Agitators Costa Brava Focus on short-term Copper Arch changes/catalysts Shamrock Holdings Quasi-Private Equity JANA Partners Focus on liquidity Steel Partners events Highfields Capital
7 Activist Scorecard
% of Campaigns with Particular Outcome
Board Presence 4% 70% 26%
Sale of Company 21% 55% 24% or Assets
New Management 20% 75% 5%
Share Repurchase 21% 47% 32%
Block M&A Bid 22% 44% 33%
E limination of Defensive 63% 38% Mechanisms
Special Dividend 50% 50%
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Company Success Company Defeat Ongoing
Source: Morgan Joseph & Co. Inc. 8 Why Do Activists Succeed?
They are well prepared before making an investment Know the by-laws of your company Know your shareholder base, trading environment, etc. Have a detailed plan/agenda that has worked in similar situations They often echo a sentiment many core holders share, but haven't acted upon Particularly strategic plans that are not deemed rational or defensible They are well versed in using influencers to support their agenda (e.g., sell-side, media, ISS) Activists sell the need for ‘change’ which hinges on the absence of a reasonable alternative
9 Companies At-Risk
Real/Perceived Issues Investment Protection
Business Typical Activist Angles Issue? Appeal? Characteristics Poor operating YES/NO performance High net cash YES/NO Unclear, unsubstantiated YES/NO strategy Recurring revenue and YES/NO cash flow Poor stock price YES/NO performance Cheap valuation YES/NO Missed opportunities YES/NO (e.g., M&A) Defensive business YES/NO model Inefficient use of cash YES/NO
Entrenched Significant operating YES/NO YES/NO management, BOD history
10 Activist Decision Matrix
Activist’s Target Return Expected Probability of Winning
ue al V e on c ti u si ed o R op Pr
Expected Value Creation from Control Transfer
11 Preventing Hostile Situations
Reduce expected probability of winning Share Distribution Recognize early warning signs of activist movements Passive Investors Activists 29% 24% Demand better shareholder intelligence Short-Term / Hedge Regular feedback from all types of 4% shareholders Insiders Build pipeline of long-term, active 8% institutional investors Long-Term Investors Gain support from third-party influencers 35% ISS typically influences at least 30% of shares outstanding
12 Preventing Hostile Situations
Reduce expected value creation from control transfer
Lead efforts to articulate a well Value Creation Opportunities
100% vetted strategy Credibility Communicate key priorities Gap 80% Cash Provide benchmarks and milestones Deployment Address messaging gaps 60% Operational Changes
Make proactive operation decisions 40% Address troubled areas of business Execution (e.g., sale/divestiture of 20% underperforming business units) 0% Restructure/cost alignment Value Creation Put excess cash to work
13 Preventing Hostile Situations
Recognize the early warning signs…
Moderate “Cheap Activism” Hostile
Accumulate stake Shareholder proposals Present detailed proposal Use trading and Withhold vote campaign hedging strategies to Demand Board seats increase position and Agitate for removal of leverage takeover defenses PR battle
Encourage other hedge Form alliance with other Solicit buyers shareholders funds to enter stock Enlist ISS/ Glass Lewis Observe and comment Interview customers to publicly support and employees dissident action Agitate privately Leak ideas to sell-side Litigation Aggressive questioning analysts on conference calls Tender offer File Schedule 13D Proxy fight Hire experts in sector
14 Preventing Hostile Situations
Demand better shareholder intelligence: Regular feedback from all types of shareholders Understand what’s driving shareholder interest in your story Determine support level, long-term commitment to story Proactive plan to build pipeline of attractive long-term investors that can serve as potential supporters in a hostile situation Window of opportunity to attract these types of investors will close if/when hostile situation turns public Stock surveillance (a.k.a. stockwatch) is not the answer Fraught with integrity issues and factual inaccuracies
15 Preventing Hostile Situations
Gain support from third-party influencers: Proxy advisory firms Primary audience: passive institutional investors Focus: ISS will conduct side-by-side evaluation of strategic plans from management and dissident group Media Primary audience: individual investors Focus: steady stream of positive press releases Sell-side Primary audience: active institutional investors Focus: consistent participation in non-deal road shows, investor conferences
16 Preventing Hostile Situations
Lead efforts to articulate a well vetted strategy: Status quo is not enough Don’t let your historical performance speak for itself Don’t assume investors have unabated confidence/trust in management Articulate key priorities for the company/management Provide realistic/achievable benchmarks, milestones that investors can use to evaluate management’s execution progress Address messaging gaps in your story
17 Preventing Hostile Situations
Make proactive operational decisions: Address the tough decisions where appropriate Restructure Sell/divest underperforming business units Cost realignment Put cash to work under your own terms Reinvestments in the business Initiate/expand share repurchase program Make strategic acquisitions
18 Other Do’s and Don’ts
What not to do: Don’t wait for a full blown issue, be prepared early Don’t avoid communications with the activist Don’t engage in a PR battle unless you are willing to fully commit and can show signs of recovery
What to do: Consider standstill or confidentiality agreements with the activist Keep negotiating door open at all times
19 Contact Information
Bryan Armstrong, CFA Partner Ashton Partners 312-553-6707 [email protected] National Director’s Institute
HYPOTHETICAL SHARE OWNERSHIP AND PRELIMINARY VOTE OUTLOOK ABC Company Preliminary Shareholder Profile December 31, 2006
December 31, 2006 Change as % December 1, 2006 Shareholder Category Share Holdings % of the O/S Change of the O/S Share Holdings % of the O/S
Hedge Funds & Event Driven Investors 25,000,000 25.00% 20,000,000 20.00% 5,000,000 5.00%
Institutional Investors 64,500,000 64.50% (16,000,000) -16.00% 80,500,000 80.50%
Retail Holders 8,000,000 8.00% (4,000,000) -4.00% 12,000,000 12.00%
Officers & Directors 2,500,000 2.50% 0 0.00% 2,500,000 2.50%
Total: 100,000,000 100.00% 0 0.00% 100,000,000 100.00%
Note: December 1, 2006 and December 31, 2006 share holdings are reflective of trade settlements on each day. ABC Company Preliminary Shareholder Profile December 31, 2006 Pre-Announcement Post-Announcement
Institutional Institutional Investors Investors 80,500,000 64,500,000 80.5% 64.5%
Hedge Funds Officers & Officers & Hedge Funds 5,000,000 Retail Holders Directors Retail Holders Directors 25,000,000 5.0% 12,000,000 2,500,000 8,000,000 2,500,000 25.0% 12.0% 2.5% 8.0% 2.5%
¾ Hedge Fund Ownership increased from 5,000,000 shares (5.00% O/S) to 25,000,000 shares (25.00% O/S) between December 1, 2006-December 31, 2006
¾ Institutional Ownership decreased from 80,500,000 shares (80.50% O/S) to 64,500,000 shares (64.50% O/S) between December 1, 2006-December 31, 2006
¾ Retail Ownership decreased from 12,000,000 shares (12.00% O/S) to 8,000,000 shares (8.00% O/S) between December 1, 2006-December 31, 2006 ABC Company Required Institutional Support for Board Victory in an Election Contest Assumes ISS and Glass Lewis Support Dissident TheThe BoardBoard’’ss RoleRole inin DefendingDefending AgainstAgainst HostileHostile BidsBids——DirectorsDirectors’’ DutiesDuties
•• TheThe DelawareDelaware courtscourts havehave developeddeveloped threethree standardsstandards ofof judicialjudicial reviewreview forfor directorsdirectors’’ decisionsdecisions inin thethe takeovertakeover contextcontext –– BusinessBusiness judgmentjudgment rulerule –– EnhancedEnhanced scrutinyscrutiny –– EntireEntire fairnessfairness
Charles J. Hansen 1 TheThe BoardBoard’’ss RoleRole inin DefendingDefending AgainstAgainst HostileHostile BidsBids——DirectorsDirectors’’ DutiesDuties •• BusinessBusiness judgmentjudgment rulerule——DelawareDelaware’’ss basicbasic standardstandard ofof judicialjudicial reviewreview –– DirectorsDirectors’’ decisionsdecisions areare presumpresumeded toto havehave beenbeen mademade onon anan informedinformed basis,basis, inin goodgood faith,faith, andand inin thethe honesthonest beliefbelief thatthat thethe actionaction takentaken waswas inin thethe bestbest interestinterest ofof thethe company.company. IvanhoeIvanhoe PartnersPartners v.v. NewmontNewmont MiningMining Corporation,Corporation, 535535 A.2dA.2d 13341334 (Del.(Del. 1987).1987).
Charles J. Hansen 2 TheThe BoardBoard’’ss RoleRole inin DefendingDefending AgainstAgainst HostileHostile BidsBids——DirectorsDirectors’’ DutiesDuties
•• IfIf thethe courtcourt determinesdetermines thethe businessbusiness judgmentjudgment rulerule isis applicable,applicable, thethe courtcourt willwill deferdefer toto thethe directorsdirectors’’ decisiondecision unlessunless thethe plaintiffplaintiff carriescarries itsits burdenburden ofof proofproof thatthat thethe directorsdirectors diddid notnot meetmeet theirtheir dutyduty ofof carecare oror dutyduty ofof loyaltyloyalty
Charles J. Hansen 3 TheThe BoardBoard’’ss RoleRole inin DefendingDefending AgainstAgainst HostileHostile BidsBids——DirectorsDirectors’’ DutiesDuties
•• DutyDuty ofof carecare——directorsdirectors mustmust actact onon anan informedinformed basisbasis afterafter appropriateappropriate considerationconsideration ofof relevantrelevant information,information, includingincluding financialfinancial andand legallegal advice,advice, andand dulyduly deliberate.deliberate. SmithSmith v.v. VanVan Gorkom,Gorkom, 488488 A.A. 2d2d 858858 (Del.(Del. 1985).1985). •• DutyDuty ofof loyaltyloyalty——directorsdirectors maymay notnot engageengage inin selfself-- dealingdealing andand cannotcannot havehave anan improperimproper interestinterest inin thethe transaction.transaction. IvanhoeIvanhoe PartnersPartners v.v. NewmontNewmont MiningMining Corporation,Corporation, 535535 A.2dA.2d 13341334 (Del.(Del. 1987).1987).
Charles J. Hansen 4 TheThe BoardBoard’’ss RoleRole inin DefendingDefending AgainstAgainst HostileHostile BidsBids——DirectorsDirectors’’ DutiesDuties
•• EnhancedEnhanced scrutinyscrutiny——businessbusiness judgmentjudgment rulerule maymay notnot applyapply when,when, forfor example:example: –– BoardBoard respondsresponds toto aa taketakeoverover threatthreat byby adoptingadopting anan antianti--takeovertakeover device.device. –– BoardBoard approvesapproves aa changechange--inin controlcontrol transaction.transaction.
Charles J. Hansen 5 TheThe BoardBoard’’ss RoleRole inin DefendingDefending AgainstAgainst HostileHostile BidsBids——DirectorsDirectors’’ DutiesDuties
•• IfIf thethe enhancedenhanced scrutinyscrutiny standardstandard isis applicable,applicable, thethe courtcourt willwill :: –– ReviewReview thethe boardboard’’ss processesprocesses andand actionsactions –– DetermineDetermine whetherwhether thethe boardboard’’ss decisionsdecisions werewere reasonablereasonable •• UnocalUnocal CorporationCorporation v.v. MesaMesa PetroleumPetroleum Co.Co.,, 493493 A.2dA.2d 946946 (Del.(Del. 1985)1985) andand Revlon,Revlon, Inc.Inc. v.v. MacAndrewsMacAndrews && ForbesForbes Holdings,Holdings, Inc.Inc.,, 506506 A.A.
2d2d 173173 (Del.(Del. 1886).1886).Charles J. Hansen 6 TheThe BoardBoard’’ss RoleRole inin DefendingDefending AgainstAgainst HostileHostile BidsBids——DirectorsDirectors’’ DutiesDuties
•• UnocalUnocal standardstandard——defensivedefensive measuresmeasures inin responseresponse toto perceptionperception ofof threatthreat –– DidDid boardboard reasonablyreasonably believebelieve corporatecorporate policypolicy threatened?threatened? –– WasWas boardboard’’ss responseresponse reasonablereasonable inin relationrelation toto thethe perceivedperceived threat?threat? –– IfIf thethe answeranswer toto thesethese questionsquestions isis ““yes,yes,”” thethe boardboard’’ss decisiondecision isis protectprotecteded byby thethe businessbusiness judgmentjudgment rule.rule. Charles J. Hansen 7 TheThe BoardBoard’’ss RoleRole inin DefendingDefending AgainstAgainst HostileHostile BidsBids——DirectorsDirectors’’ DutiesDuties
•• RevlonRevlon testtest——enhancedenhanced judicialjudicial reviewreview forfor salesale--ofof--controlcontrol transactions.transactions. •• UnderUnder RevlonRevlon,, whenwhen thethe boardboard decidesdecides toto sellsell thethe company,company, thethe directorsdirectors’’ rolerole changeschanges fromfrom ““defendersdefenders ofof thethe corporatecorporate bastionbastion toto auctioneersauctioneers chargedcharged withwith gettinggetting thethe bestbest priceprice”” forfor thethe stockholders.stockholders. •• TheThe boardboard mustmust mademade aa reasonablereasonable decision.decision.
Charles J. Hansen 8 TheThe BoardBoard’’ss RoleRole inin DefendingDefending AgainstAgainst HostileHostile BidsBids——DirectorsDirectors’’ DutiesDuties
•• EntireEntire fairnessfairness——ifif aa majoritymajority ofof thethe directorsdirectors havehave aa conflictconflict ofof interest,interest, thethe DelawareDelaware courtscourts willwill determinedetermine ifif thethe transactiontransaction isis entirelyentirely fairfair toto stockholders.stockholders. CedeCede && Co.Co. v.v. Technicolor,Technicolor, Inc.,Inc., 634634 A.2dA.2d 345345 (Del.(Del. 1993).1993). •• CourtsCourts’’ focus:focus: –– BoardBoard processprocess –– QualityQuality ofof resultresult –– QualityQuality ofof disclosuresdisclosures mademade toto thethe stockholdersstockholders
Charles J. Hansen 9 TheThe BoardBoard’’ss RoleRole inin DefendingDefending AgainstAgainst HostileHostile BidsBids——DirectorsDirectors’’ DutiesDuties
•• JustJust--saysay--nono defensedefense continuescontinues toto bebe aa validvalid boardboard responseresponse toto aa hostilehostile bidbid ifif thethe boardboard’’ss conductconduct meetsmeets thethe applicableapplicable standard.standard. •• DecisionsDecisions byby aa disinteresteddisinterested boardboard aboutabout howhow toto sellsell aa companycompany areare protectedprotected byby thethe businessbusiness judgmentjudgment rulerule ifif thethe enhancedenhanced-- scrutinyscrutiny standardstandard isis met.met.
Charles J. Hansen 10 TheThe BoardBoard’’ss RoleRole inin DefendingDefending AgainstAgainst HostileHostile BidsBids——DirectorsDirectors’’ DutiesDuties
•• DirectorsDirectors’’ bestbest practices:practices: –– AssumeAssume anan activeactive rolerole anandd remainremain fullyfully informedinformed duringduring thethe entireentire process.process. –– RetainRetain andand fullyfully utilizeutilize experiencedexperienced legallegal andand financialfinancial advisors.advisors. –– CarefullyCarefully analyzeanalyze andand deliberate.deliberate. –– LetLet thethe independentindependent directdirectorsors makemake thethe decisions.decisions. –– CarefullyCarefully documentdocument thethe decisiondecision--makingmaking processprocess toto demonstratedemonstrate thethe directdirectorsors werewere fullyfully informed.informed.
Charles J. Hansen 11
The Business Judgment Rule—Counsel’s Script for the Board of Directors
Charles J. Hansen
February 15, 2007
The business judgment rule is alive and well, at least in Delaware, despite attention- grabbing headlines that suggest that service on a corporate Board of Directors is hazardous to one’s financial health. See Walt Disney Co. Derivative Litigation, 906 A.2d 27 (Del. 2006).
The business judgment rule protects the decisions of board of directors from second guessing by presuming that the directors acted in good faith and on an informed basis. This presumption may be overcome only if the plaintiff can demonstrate that the directors breached their duties of care and loyalty or acted in bad faith.
When a board of directors convenes to consider taking important action, counsel can protect the board by reminding the board about the requirements of the business judgment rule. Counsel can use the following script to explain to the board the requirements of the business judgment rule. Usually the best time to do this is after management, the investment bankers, and the lawyers have made their presentations to the directors and the directors have engaged in a full discussion. The script assumes that the board is disinterested and has preliminarily decided to “just say no” to a hostile takeover bid from Steal-The-Upside Partners, Inc.
Note: the script is merely a template and must be modified to reflect the circumstances and details of each situation.
The courts should defer to the business judgment decision by this Board of Directors to reject the unsolicited takeover bid from Steal-The-Upside Partners, Inc. if you exercise due care. Due care means that you have acted to assure yourselves that you have the information required to take the action under consideration, that you have devoted sufficient time to the consideration of the information, and that you have obtained, where useful, advice from experts and counsel.
With respect to the unsolicited takeover bid from Steal-The-Upside Partners, Inc. under consideration today, the requirement to exercise due care means that each of you must, at a minimum, understand the following items:
1. [The details of the offer, including its amount, form, and timing; 2. The Company’s financial condition, new products, general outlook; 3. The Company’s short-, medium-, and long-term strategies;
©2007 Foley & Lardner LLP
4. Management’s best estimates of the Company’s future financial performance; 5. The [investment banker’s] assessment of the adequacy of the offer; 6. The benefits and risks to the shareholders if the Company remains independent; 7. The benefits and risks to the shareholders if the Company accepts the offer; 8. The process management and the [investment bankers] used to analyze the offer; 9. Strategic alternatives to the offer; 10. Impact on constituencies other than the shareholders; 11. The adequacy of the Company’s takeover defenses; and 12. The obstacles to completing the transaction that have been identified by [counsel]].
Taking into account your discussions with management and among yourselves, the information you have received, including the oral and written presentations by management, [the investment bankers], and the transaction summaries and other information prepared by [counsel], and the other information that we have discussed today, the following three statements should reflect your state of mind at the end of this meeting with respect to the offer if you intend to reject it:
a) First, you understand the offer, the consequences of accepting and rejecting it, and the other information discussed at today’s meeting, because you believe you believe the information you have been given is sufficient to enable you to make an informed decision, and you have been given adequate time to consider the information; b) Second, you believe that, where necessary, you are relying in good faith on outside experts with appropriate skills; and c) Third, after giving due consideration to the foregoing, you believe that the offer is not in the best interests of shareholders [and other reasons].
If these statements do reflect your state of mind as to the offer, then the courts should conclude that the Board of Directors has exercised appropriate due care and that the Board’s business judgment to reject the offer, if that’s the action taken, is entitled to deference by the courts.
©2007 Foley & Lardner LLP