Well, no sooner did I post “It’s Déjà Vu All Over Again” that I started getting requests for suggestions of what to include on a company’s M&A defense checklist.
You know, it’s simply good practice for a company to periodically review its M&A defenses.
But now, the task of reviewing a company’s M&A defenses takes on greater urgency. The risk of a company getting an unsolicited offer is higher than usual now because many large companies are loaded with cash but short on revenue growth.
So what would I recommend for the checklist?
Please understand, these are not necessarily recommending implementation of these provisions but rather suggestions they be on a company’s M&A defense review list.
First on my list is a recent hot topic – proxy access rules and advance notice bylaw provisions. Public companies should be aware of recent developments and consider updating to what’s known as “second generation” provisions.
Next on my list would be a couple charter provisions which slow aggressors. These would be (i) restrictions on a shareholder’s ability to call a special meeting, and (ii) a prohibition on shareholder action by written consent.
Of course, we can’t forget the “poison pill” or shareholder rights plan. While poison pills have declined in popularity over the last decade, we’ve seen several recent instances, Barnes & Noble (BNS), Airgas (ARG) and Lions Gate (LGF), where a pill has played a key role in a company’s M&A defenses.
Even if you have a pill in place, there are a couple developments to note. One development is the special purpose pill which, for example, may be used to dissuade a shareholder from triggering tax law change of ownership provisions which impairs use of a company’s net operating loss. The second development involves expanding the definition of beneficial ownership to include sophisticated new forms of corporate ownership now available.
Another checklist item would be the classified or “staggered” board, where only a portion of the board members, typically a third, are up for shareholder vote each year. This slows an aggressor’s efforts to change a board through a proxy battle. A staggered board plus a pill is a powerful defensive combination.
Another defense provision is the supermajority vote which requires a high percentage of shareholders to approve an action, that is, once you’ve got your defense provisions in place.
In contrast, if your company permits cumulative voting, a small but organized minority shareholder group might be able to install a board member despite the group’s small ownership.
Certain states laws permit additional defenses or variations on these provisions. For example, certain states permit what are known as constituency statutes which enable a board to consider the impact of an acquisition on constituencies including employees or the community, rather than just shareholders. Depending upon your state, these extra features may be useful.
I would note here that some defense provisions can be implemented unilaterally by board action. Others require shareholder approval which affects implementation feasibility.
In addition to these items, there are a number of tactical actions like stock buybacks and recapitalizations which can be used defensively in response to or to pre-empt hostile activity.
I recommend that a company set aside time at an upcoming board meeting for a review of its M&A defense provisions. Company management, its attorneys, bankers and IR professionals can brief the board and make recommendations.
Dennis McCarthy specializes in helping companies to consider all the actions described above in response to a lower stock price in a timely and cost efficient manner. He can be contacted here for more information.