Hostile Takeover Defenses: Recent Decisions Evaluating and - - PowerPoint PPT Presentation

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Hostile Takeover Defenses: Recent Decisions

Evaluating and Structuring Anti‐Takeover Strategies

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1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific THURS DAY, JUNE 23, 2011

Today’s faculty features: Joseph J. Basile, Partner, Weil Gotshal & Manges, Boston Adam H. Offenhartz, Partner, Gibson Dunn & Crutcher, New Y

• rk

Eduardo Gallardo, Partner, Gibson Dunn & Crutcher, New Y

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Hostile Takeover Defenses Hostile Takeover Defenses

Joseph J. Basile Adam H. Offenhartz

5

Eduardo Gallardo

Overview Overview

I Introduction I. Introduction

• II. Takeover Defenses

III Wh t W C L F R t

• III. What We Can Learn From Recent

Takeover Decisions and State Statutory F k Frameworks

• IV. Best Practice Strategies

6

I Introduction

• I. Introduction

7

Overview of U.S. M&A Environment Environment

• 2010 public large-cap (>$1 billion) M&A activity increased following the end of

the economic downturn

• In 2011, upward trend has continued

8 8

Source: Thompson Financial; Year- to-Date Numbers as of June 14, 2011

Overview of U.S. M&A Environment (cont ) Environment (cont.)

• Large cap hostile and unsolicited takeover attempts on the rise

9 9

Source: Thompson Financial; Year-to- Date Numbers as of June 14, 2011

II Takeover Defenses

• II. Takeover Defenses

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Stockholder Rights Plans

• Mechanics

– Issuance to existing stockholders of rights to acquire common g g q stock at a 50% discount in the event a potential acquiror accumulates a specified percentage of voting shares (typically 10%-20%) H til i th t t i th i ht l i t itt d t – Hostile acquiror that triggers the rights plan is not permitted to exercise the rights, resulting in significant dilution

• Benefits of a Rights Plan

– Provides Boards with adequate time to consider and respond to unsolicited takeover proposals – Prevents the acquisition of a controlling interest that would preempt Board consideration of alternatives preempt Board consideration of alternatives – Limits the use of abusive takeover tactics

11

Stockholder Rights Plans (cont’d)

• Opposed by many institutional investors, stockholder activists and proxy

advisor firms I d f i t t i t th i i ht l

• Increased pressure for companies to terminate their rights plans
• Implementation of rights plan with a term of more than 12 months

may lead to “withhold vote” recommendation by ISS Stockholder Rights Plans – Changes from 2002-2011

60.00% 70.00% 30.00% 40.00% 50.00% 0.00% 10.00% 20.00%

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Percentage of S&P 500 *Source: 2002-2011 SharkRepellent.net

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Stockholder Rights Plans (cont’d)

• Recent Developments

Many companies have decided to follow an “on the shelf” strategy – Many companies have decided to follow an on-the-shelf strategy

• Rights plan is kept ready for implementations at such time as the

Company faces the actual threat of a hostile bid

– Definition of “Beneficial Ownership” expanded in some rights plans to include derivatives (e.g. cash-settled equity swaps) swaps) – Use against controlling stockholder (e.g. iBasis/KPN)

13

Rights Plan and Takeover Strategy

• Since rights plans make it economically impracticable for a hostile

bidder to close on an unsolicited tender offer, the end game in most h til t k i t t k t l f th t t b d hostile takeovers is to take control of the target board – If hostile bidder’s nominees take control of the board new directors could deactivate pill and permit bidder to complete tender offer tender offer

• A target’s ultimate vulnerability will depend on a hostile bidder’s

ability to take control of the board within a reasonable timeframe

• This highlights the importance of classified boards

14

Classified Boards

• A classified board is one in which directors are divided into

separate classes – Usually three classes, with directors in each class serving three-year terms and only one class elected annually

• Staggering directors’ terms makes it more difficult for raiders

Staggering directors terms makes it more difficult for raiders

• r dissidents to use proxy contest to take control of target

immediately

• Under Delaware law if you have a classified board your
• Under Delaware law, if you have a classified board, your

directors can be removed only for cause

• The use of classified boards have come under pressure from

corporate governance groups and activist stockholders corporate governance groups and activist stockholders.

15

Action by Written Consent and Special Meetings Meetings

• What is “action by written consent”?

– Stockholders can take corporate action in writing, as opposed to at annual or special meeting special meeting – Provision denying stockholders ability to act by written consent must be in Charter in Delaware

• Provisions regarding calling special meetings also may vary

– Some permit stockholders owning over a specified percentage to call a special meeting – Some permit only management and/or board to call special meetings

• Stockholders’ ability to act by written consent and/or call a special

Stockholders ability to act by written consent and/or call a special meeting can significantly impact the vulnerability of a company with a declassified board

– Window to react to a hostile bidder is reduced from up to 13 months to 2-3 th months

• Corporate governance groups and activist investors have increased

pressure on public companies to allow for action by written consent and give stockholders ability to call special meetings.

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and give stockholders ability to call special meetings.

State Takeover Statutes

• Come in many varieties

– Control Share Acquisition Statutes C S ( ) – Business Combination Statutes (e.g. Delaware 203) – Business Combination with Fair Price Provisions

• Most of these statutes will play a secondary role in the takeover

context, as rights plan will typically be the main deterrent that a hostile bidder will face

• However, parties to a hostile bid must play close attention to these
• e e , pa t es to a
• st e b d

ust p ay c ose atte t o to t ese provisions, as they can be a trap for the unwary (e.g. inadvertent triggering of “beneficial ownership” definition under state statutes)

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• III. What We Can Learn From

R t T k D i i Recent Takeover Decisions and State Statutory and State Statutory Frameworks

18

Selectica, Inc. v. Versata Enterprises, Inc. (Del Ch 2010) (Del. Ch. 2010)

• Selectica and Versata had a tumultuous relationship in prior years, including

multiple lawsuits and takeover attempts multiple lawsuits and takeover attempts.

• In 2006, Selectica enlisted the help of outside experts to evaluate its net-
• perating loss (“NOL”) assets.
• Versata’s parent company began acquiring Selectica stock in 2008, and

quickly bought over 5% of the company.

• Selectica lowered the trigger from its pre-existing shareholder rights plan

from 15% to 4.99%.

– The rights plan was amended to grandfather in entities that already owned more than 4.99%, including Versata, but provided that the rights plan would be triggered if any grandfathered entity increased its holdings by .5% of Selectica triggered if any grandfathered entity increased its holdings by .5% of Selectica common stock.

• Versata then intentionally triggered the rights plan, and litigation followed.

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Selectica, Inc. v. Versata Enterprises, Inc. (Del Ch 2010) (Del. Ch. 2010)

• The Court of Chancery upheld Selectica’s use of an NOL rights plan
• Background on NOLs.

Federal tax law permits corporations to carry forward NOLs in order to offset – Federal tax law permits corporations to carry forward NOLs in order to offset taxes on future profits. – However, a company may lose its ability to use NOLs if it experiences an “ownership change,” as that term is defined by federal tax law, which may be t i d b t k t Sh h ld h h ld l th 5% f th triggered by stock turnover. Shareholders who hold less than 5% of the company are not counted.

• Applying Unocal, the Court held that Selectica’s Board had reasonable

grounds for considering Versata a threat.

– Although the value of NOLs are, ex ante, inherently unknowable, and “by their very nature, have the potential of ultimately providing zero value to the company,” a board might properly conclude that a company's NOLs are worth protecting where it does so reasonably and in reliance upon expert advice.

• The Board’s use of the NOL rights plan was a reasonable response to the

threat.

– The rights plan did not preclude the possibility of a successful proxy contest, even though there was a staggered board

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even though there was a staggered board. – The Board consulted with experts in order evaluate its response to Versata.

Airgas, Inc. v. Air Prods. & Chems., Inc.,: Bylaw Amendment Issue Bylaw Amendment Issue

• Airgas had a staggered Board with nine directors, three elected every year

to a three year term. A t f it h til t k tt t Ai P d t i t d th

• As part of its hostile takeover attempt, Air Products nominated three

directors to the Airgas Board.

• Air Products also proposed a bylaw that would move Airgas’s 2011 annual

meeting to four months after the 2010 annual meeting meeting to four months after the 2010 annual meeting.

• Airgas’s charter required an affirmative vote of at least 67% to alter, amend
• r repeal the staggered board provision or to adopt any bylaw inconsistent

with the provision: p

– “At each annual meeting of the stockholders of the Corporation, the successors to the class of Directors whose term expires at that meeting shall be elected to hold office for a term expiring at the annual meeting of stockholders held in the third year following the year of their election ” third year following the year of their election. – “[The staggered board provision of the Airgas Charter] shall not be altered, amended or repealed and no provision inconsistent therewith shall be adopted without the affirmative vote of the holders of least 67% of the voting power of all h h f h C i i l d ll i h l i f

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the shares of the Corporation entitled to vote generally in the election of Directors.”

Airgas, Inc. v. Air Prods. & Chems., Inc., Bylaw Amendment Issue (Delaware Chancery Court)

• At the 2010 annual meeting, Air Products successfully passed its requested

bylaw and elected its slate to Airgas’s Board.

• Airgas sued Air Products, arguing that the bylaw was inconsistent with the

Airgas charter’s requirement of a 67% vote to amend the staggered board g q gg provision.

• The Chancery Court upheld the bylaw.

The charter pro ides that the ann al meeting m st be “held in the third ear – The charter provides that the annual meeting must be “held in the third year following the year of their election.” – The bylaw moves the 2011 annual meeting to January, only four months after the 2010 meeting. – But January is still 2011, the “third year” of the directors’ terms.

22

Airgas, Inc. v. Air Prods. & Chems., Inc., Bylaw Amendment Issue (Delaware Supreme Court)

• The Supreme Court reversed the Chancery Court, striking down the

bylaw bylaw.

• Like the Chancery Court, the Supreme Court found the charter’s

language ambiguous because it does not define “annual,” “year,” or “full term ” term.

• But extrinsic evidence indicated that directors should serve three full

years:

Other Delaware state and federal court precedents “reflect[] the understanding – Other Delaware state and federal court precedents reflect[] the understanding . . . that directors of staggered boards serve a three year term.” – As practiced, most companies with staggered boards provide that their directors serve three year terms. – Academic commentary indicates that directors on staggered boards serve three year terms. – The Court declined to state “with exactitude” how much of a deviation from a precise three years is acceptable but a third year that lasts only four months is

23

precise three years is acceptable, but a third year that lasts only four months is certainly unacceptable.

Air Products & Chemicals, Inc. v. Airgas, Inc. Rights Plan Rights Plan

• Issue Presented – How long can a public company board of

directors keep a rights plan in place to effectively prevent shareholders from tendering their shares into a premium offer when the shareholders are fully informed and the tender offer is fully financed and non-coercive? – Or, in other words, under what circumstances can a board “just say no”?

• Holding: A board cannot “just say no” unless it can justify its refusal to pull
• Holding: A board cannot just say no unless it can justify its refusal to pull

the rights plan under Unocal.

– That is, the board must be able to show that (i) it reasonably perceived a threat to corporate policy and effectiveness and (ii) its response (here the rights plan) to corporate policy and effectiveness and (ii) its response (here, the rights plan) was reasonable in relation to the threat posed. – Airgas makes clear that process matters.

24

A Prolonged Fight: The Airgas Timeline

• 10/15/09 – Air Products & Chemicals, Inc. makes a private offer to acquire Airgas,
• Inc. for $60 per share in stock.

11/ /09 Th f ll Ai b d d id h ff l i i – 11/5-7/09 – The full Airgas board meets and considers the offer; relying in part

• n an internal stock price analysis and Airgas’s five year plan, it decides to reject

the offer. – 11/11/09 – Airgas calls Air Products to reject the offer. g j – 11/20/09 – Air Products sends Airgas a letter that puts its offer in writing. – 12/7/09 – Airgas board again considers the offer, along with legal and financial analyses from outside advisors. – 12/8/09 – Airgas formally rejects the proposal via letter to Air Products.

• 12/17/09 – Air Products sends Airgas a revised proposal, which raises its offer to $62

per share in cash and stock – 12/21/09 – The Airgas board holds a telephonic meeting to consider the offer. – 1/4/10 – On another teleconference the board resumes its meeting, including the review of financial analyses provided by Airgas’s investment bankers; Airgas writes Air Products that the offer “grossly undervalues Airgas ”

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writes Air Products that the offer grossly undervalues Airgas.

A Prolonged Fight: The Airgas Timeline

• 2/4/10 – Air Products sends a public letter to the Airgas board announcing its

intention to launch a tender offer for $60 per share, all-cash, all-shares. 2/8 9/10 Ai b d d h i f G ld S h – 2/8-9/10 – Airgas board meets and hears presentations from Goldman Sachs and Bank of America Merrill Lynch, which indicate that the offer is inadequate; the board unanimously agrees that $60 is too low. – 2/10/10 – Airgas rejects the offer. g j

• 10/15/09 – Air Products & Chemicals, Inc. makes a private offer to acquire Airgas,
• Inc. for $60 per share in stock.

– 11/5-7/09 – The full Airgas board meets and considers the offer; relying in part 11/5 7/09 The full Airgas board meets and considers the offer; relying in part

• n an internal stock price analysis and Airgas’s five year plan, it decides to reject

the offer. – 11/11/09 – Airgas calls Air Products to reject the offer. 11/20/09 Air Products sends Airgas a letter that puts its offer in writing – 11/20/09 – Air Products sends Airgas a letter that puts its offer in writing. – 12/7/09 – Airgas board again considers the offer, along with legal and financial analyses from outside advisors. – 12/8/09 – Airgas formally rejects the proposal via letter to Air Products.

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A Prolonged Fight: The Airgas Timeline

• 12/17/09 – Air Products sends Airgas a revised proposal, which raises its offer to $62

per share in cash and stock 12/21/09 Th Ai b d h ld l h i i id h ff – 12/21/09 – The Airgas board holds a telephonic meeting to consider the offer. – 1/4/10 – On another teleconference the board resumes its meeting, including the review of financial analyses provided by Airgas’s investment bankers; Airgas writes Air Products that the offer “grossly undervalues Airgas.” g y g

• 2/4/10 – Air Products sends a public letter to the Airgas board announcing its

intention to launch a tender offer for $60 per share, all-cash, all-shares. – 2/8-9/10 – Airgas board meets and hears presentations from Goldman Sachs 2/8 9/10 Airgas board meets and hears presentations from Goldman Sachs and Bank of America Merrill Lynch, which indicate that the offer is inadequate; the board unanimously agrees that $60 is too low. – 2/10/10 – Airgas rejects the offer.

27

A Prolonged Fight: The Airgas Timeline

• 2/11/10 – Air Products launches a $60 per share all-cash, all-shares tender offer.

– 2/20/10 – The Airgas board holds a telephonic meeting to discuss the tender ff G ld S h d B k f A i i d i d i i

• ffer; Goldman Sachs and Bank of America again render inadequacy opinions.

– 2/22/10 – Airgas files a Form 14D-9 with the SEC in which it recommends against tendering shares.

• 3/13/10 – Air Products nominates a slate of three candidates for election to the Airgas

board and proposes amendments to Airgas’s bylaws.

• 7/8/10 – Air Products raises its bid to $63.50.

– 7/9/10 – Air Products writes Airgas to reiterate its willingness to negotiate. – 7/15 and 20/10 – The Airgas board meets and its financial advisors again render inadequacy opinions. – 7/21/10 – In a public letter, Airgas rejects Air Products’ revised offer and its invitation to meet; Airgas also files an amendment to its 14D-9 rejecting the $63.50 offer as “grossly inadequate” and recommending against tendering.

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A Prolonged Fight: The Airgas Timeline

• 9/6/10 – Air Products again increases its offer, to $65.50 per share.

– 9/7/10 – The Airgas board meets to consider the revised offer; it receives d d i d i i d i j h ff updated inadequacy opinions and again rejects the offer. – 9/8/10 – Airgas again amends its 14D-9 and recommends against tendering.

• 9/15/10 – Airgas annual meeting at which the Air Products nominees are elected to

g g the Airgas board and the Air Products-backed bylaw amendments are adopted.

• 10/4-8/10 – Week-long trial in the Delaware Chancery Court relating to Airgas’s

rejection of the $65.50 offer and the board’s decision to keep the company’s takeover defenses in place in response to that offer.

• 10/8/10 – Chancellor Chandler upholds the January Bylaw.

/ / f

• 11/4/10 – Principals from both sides meet to discuss the proposed transaction, but

the meeting does not yield any results.

• 11/23/10 – The Delaware Supreme Court unanimously reverses Chancellor Chandler

d h ld th t th J B l i i lid (S N 29 2010 Cli t Al t)

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and holds that the January Bylaw is invalid (See Nov. 29, 2010 Client Alert).

A Prolonged Fight: The Airgas Timeline

• 12/2/10 – In light of the Supreme Court’s decision concerning the January Bylaw,

Chancellor Chandler issues a Letter Order asking each side to answer a number of questions and submit supplemental post trial briefing questions and submit supplemental post-trial briefing.

• 12/8/10 – In response to a letter from the Air Products-nominated directors, Airgas

agrees to the retention of a third financial advisor to advise the board.

• 12/9/10 – Just before the supplemental briefing is due, Air Products announces its

“best and final” offer of $70 per share in cash.

• 12/10/10 – Airgas’s independent directors retain Credit Suisse and the Air Products-

12/10/10 Airgas s independent directors retain Credit Suisse and the Air Products nominated directors retain Skadden, with expenses to be paid by Airgas.

• 12/10/10 – Responses to Chancellor Chandler’s December 2 Letter Order due.
• 12/21/10 – The Airgas board meets, and, after considering its five-year plan and

inadequacy opinions from three financial advisors, it unanimously rejects Air Products’ final offer. – 12/22/10 – Airgas amends its 14D-9 to announce the board’s rejection of the $70

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– 12/22/10 – Airgas amends its 14D-9 to announce the board s rejection of the $70

• ffer.

A Prolonged Fight: The Airgas Timeline

• 12/23/10 – Chancellor Chandler issues a Letter Order that rejects Air Products’

request for a new trial in light of the $70 offer; however, Chancellor Chandler does permit additional discovery and a supplemental evidentiary hearing related to the $70 permit additional discovery and a supplemental evidentiary hearing related to the $70

• ffer.
• 1/25-27/11 – Supplemental evidentiary hearing in order to complete the record on the

$70 offer $70 offer.

• 2/15/11 – The Chancery Court upholds the Airgas rights plan; Air Products rescinds

its offer.

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Airgas Stock Price

$70 00 $75.00

• Sept. 6: $65.50
• Dec. 9: $70

$65.00 $70.00 Feb 11: $60 July 8: $63.50 $60.00

• Feb. 11: $60

$50.00 $55.00

Stock Price Tender Offer Price

$45.00 Oct- Nov Dec Jan Feb Mar Apr May Jun Jul- Aug Sep Oct- Nov Dec Jan Feb Mar

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• 09

v-09 c-09

• 10

b-10 r-10

• 10

y-10

• 10
• 10

g-10 p-10

• 10

v-10 c-10

• 11

b-11 r-11

Chancellor Chandler Credited Airgas’s Process of Evaluating the Offers Process of Evaluating the Offers

• Airgas regularly updated its five year plan.
• Airgas retained Wachtell, Goldman Sachs and Bank of America Merrill Lynch.

Airgas retained Wachtell, Goldman Sachs and Bank of America Merrill Lynch. The Board received updated analysis from its financial advisors each time Air Products increased its offer.

• After Air Products waged a successful proxy contest and installed 3

g y independent directors on the Airgas board, Airgas held a new director

• rientation session. The new directors challenged the board’s economic

assumptions underlying the five year plan, yet left the meeting convinced that the five year plan was conservative. the five year plan was conservative.

• Airgas retained independent outside legal counsel for the three Air Products

nominated-directors, and at the request of these directors, retained Credit Suisse to conduct an independent financial analysis. When Air Products made p y its best & final $70 offer, management presented an updated five year plan, Goldman & BOA made updated financial presentations, and Credit Suisse presented its independent analysis, explaining its evaluation and how its methodology differed from Goldman & BOA.

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methodology differed from Goldman & BOA.

Air Prod. & Chem., Inc. v. Airgas, Inc. – Emerging Law Emerging Law

• Applied Unocal in analyzing Airgas’s rights plan.

Prong 1: Target board had reasonable ground to believe a danger to corporate – Prong 1: Target board had reasonable ground to believe a danger to corporate policy and effectiveness existed. – Prong 2: The defensive measures were reasonable in relation to the threat posed.

• Recognized inadequate price as a possible threat under Unocal Prong 1.

– Board must reasonably believe that the tender offer price is inadequate.

• Recognized the reasonableness of the defensive measures under Unocal

Prong 2.

– Rights Plan not preclusive.

• Upheld the Rights Plan but suggested that the Delaware Supreme Court

might want to revisit the law regarding Rights Plans.

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Air Prod. & Chem., Inc. v. Airgas, Inc. – Unocal Prong 1 Unocal Prong 1

• Chancellor Chandler emphasized the Airgas Board’s process in

investigating the threat of Air Product’s offer, the reasonableness of the process used in its investigation and the reasonableness of the results the process used in its investigation and the reasonableness of the results the Board reached.

• Three types of threats implicitly recognized in Paramount Commc’ns, Inc. v.

Ti I (“Ti ”) Time, Inc. (“Time”):

– Structural Coercion–Risk that disparate treatment of non-tendering shareholders might distort shareholders’ tender decisions. – Opportunity Loss—Dilemma that hostile offer might deprive target shareholders Opportunity Loss Dilemma that hostile offer might deprive target shareholders

• f the opportunity to select a superior alternative offered by target management.

– Substantive Coercion—Risk that shareholders will mistakenly accept an underpriced offer because they disbelieve management’s representations of intrinsic value intrinsic value.

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Airgas - Substantive Coercion, Inadequate Price Price

• Delaware Court of Chancery has attempted to cut back on a broad

conception of substantive coercion: – Key issue is whether inadequate price alone is sufficient to be a threat.

• Inadequate price was the only threat alleged by Airgas board.
• Airgas argued that merger arbitrageurs/short term investors threatened the
• Airgas argued that merger arbitrageurs/short-term investors threatened the

long-term goals of the company and long-term investors.

– Merger arbitrageurs – bought stock when Air Products announced its interest in acquiring Airgas and would be willing to tender an inadequate offer because they q g g g q y are focused on short term returns.

• Chancellor Chandler: Found Airgas acted in good faith and relied on advice
• f its financial and legal advisers.
• BUT Chancellor Chandler arguably did not go all the way and say that

inadequate price alone is sufficient to justify defensive measures.

– Included notion that there must be a fear that shareholders will actually tender

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y into the offer.

Airgas - Reasonableness of Defensive Measures – Unocal Prong 2 Measures – Unocal Prong 2

• Airgas defensive measures were not preclusive “if they delay Air Products

from obtaining control of the Airgas board (even if that delay is significant) l bt i i t l t i t i th f t i li ti ll so long as obtaining control at some point in the future is realistically attainable.”

– Chancellor Chandler: “an Air Products victory at the next annual meeting is very realistically attainable.” y

• “The board’s actions do not forever preclude Air Products, or any bidder,

from acquiring Airgas or from getting around Airgas's defensive measures if the price is right. In the meantime, the board is preventing a change of control from occurring at an inadequate price.”

– Airgas’s defensive measures were within the range of reasonable responses to the perceived threat of the inadequate bid by Air Products the perceived threat of the inadequate bid by Air Products.

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Delaware Alternatives: Nevada

• Nevada corporate code grants greater deference to directors in the takeover

contest:

Th b i j d t l i h i d i th N d d (NRS 78 138) – The business judgment rule is enshrined in the Nevada code. (NRS 78.138) – Directors may consider “other constituencies” in exercising their fiduciary duties. (NRS 78.139) – Directors may schedule an annual meeting within 18 months of the prior annual

• meeting. (NRS 78.330; 78.345)

– Directors do not automatically consent to personal jurisdiction in Nevada by virtue of their board membership. (compare 8 Del. C. 3114)

Di t l th i d b t t t t i l t i ht l i

• Directors are expressly authorized by statute to implement a rights plan in

response to a takeover attempt (NRS 78.139; 78.195; 78.350).

– In Delaware, most rights plans are evaluated under a Unocal-like, but takeover defenses that disenfranchise shareholders must have a “compelling justification” under Blasius. – In Nevada, most rights plans are evaluated with the business judgment rule, but takeover defenses that disenfranchise shareholders are evaluated under Unocal.

M b d d l l ti d t i ht l i lt l ?

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• May a board delay an annual meeting and enact a rights plan simultaneously?

Delaware Alternatives: Georgia

• Invacare Corp. v. Healthdyne Techs., Inc., 968 F. Supp. 1578 (N.D. Ga.

1997).

• Healthdyne’s Board adopted a “dead hand” rights plan
• Healthdyne s Board adopted a dead hand rights plan.

– A dead hand rights plan restricts the ability of future boards to redeem the plan. – In this case, Healthdyne was facing a proxy contest, and therefore designed the rights plan so that only “continuing directors,” i.e., the directors who voted for the plan, could redeem it.

• The Court refused to enjoin the plan, holding that Georgia corporate law

embraces continuing director provisions as part of a takeover response.

• O.C.G.A. 14-2-624(c) (board has the “authority to determine, in its sole

discretion, the terms and conditions of the rights, options, or warrants” it issues)

• Note: no other court has allowed dead hand rights plans
• Note: no other court has allowed dead hand rights plans.
• See Carmody v. Roll Bros., Inc., 723 A.2d 1180 (Del. Ch. 1998) (invalidating

dead hand rights plan on the grounds that any differential voting power of directors is void unless provided for in the certificate of incorporation per 8

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directors is void unless provided for in the certificate of incorporation per 8

• Del. C. § 141(d)).

IV Best Practices

• IV. Best Practices

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Suggested Best Practice Strategies

• Develop, Review and Manage Execution of Long-Term

Business/Strategic Plan – Key assumptions – Projections – Benchmark performance against peers – Regular Board updates

• Assemble the Team

Key officers – Key officers – Counsel – Investment banker PR fi – PR firm – Proxy solicitor

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Suggested Best Practice Strategies (continued) Suggested est act ce St ateg es (co t ued)

• Review Defensive Profile

– Charter – By-laws – State anti-takeover statutes State anti takeover statutes – “Change of control” provisions in employment agreements and key contracts

• Regular Team Meetings
• Regular Team Meetings

– Review recent developments – Consider potential hostile acquirers, activist stockholders “white knights” stockholders, white knights – Consider issues that a potential hostile acquirer may face

42

Suggested Best Practice Strategies (continued) Suggested est act ce St ateg es (co t ued)

• Attention to Relationships with Stockholders

p – Maintain current list – Monitor trading activity – Develop plan for meeting with key stockholders and proxy advisory services

43

Suggested Best Practice Strategies (continued) Suggested est act ce St ateg es (co t ued)

• Develop Communications Plan

p

– Designate one spokesman – Identify and develop messages for key constituencies Monitor news stories blogs message boards etc – Monitor news stories, blogs, message boards, etc.

• Regular Board Discussions

– Usually no need for a special committee – Important to maintain a good record

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Panelists Panelists

Joseph J. Basile, Partner Josep J as e, a t e Weil, Gotshal & Manges LLP 100 Federal Street, Floor 34 Boston, MA 02110 Tel: +1 617 772 8334 Fax: +1 617 772 8333 joseph basile@weil com joseph.basile@weil.com Eduardo Gallardo, Partner Gibson, Dunn & Crutcher LLP 200 Park Avenue New York, New York 10166 Tel: +1 212.351.3847 Fax: +1 212.351.5245 egallardo@gibsondunn.com Adam H. Ofenhartz, Partner Gibson, Dunn & Crutcher LLP 200 Park Avenue New York, New York 10166 T l 1 212 351 3808

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Tel: +1 212 351 3808 Fax: +1 212 351 5272 aoffenhartz@gibsondunn.com