Valeant Pharmaceutical International Inc.’s unsolicited takeover bid for Allergan Inc.AGN +0.88% shines a spotlight on how seemingly minor corporate minutiae can determine the results of corporate takeovers. And how those corporate details are determined frequently had a big dose of randomness in them.
Under Delaware corporate law, directors have substantial authority to choose to negotiate or resist a takeover proposal. That is why Airgas Inc.ARG -0.65% was able to resist Air Products and Chemicals Inc.APD -1.10%’s hostile tender offer several years ago. And how Jos. A. Bank Clothiers Inc. was able to force Men’s Wearhouse Inc.MW -1.31% to repeatedly increase its offer price before agreeing to a deal. In short, majority shareholder approval is required to complete a takeover but not to authorize directors to resist it.
But the details of corporate governance documents can counteract this principle. Take the case of Allergan: Allergan’s corporate documents permit directors to be removed without cause by a majority vote of shareholders. And holders of 25% of the shares can quickly call a meeting to vote to do so.
It wasn’t always this way. Until three years ago, Allergan had a staggered board. That means one-third of the directors were elected each year, and each director had a three-year term. So it would have taken two years to change a majority of the directors. Under Delaware law, staggered boards cannot be removed without cause. Staggered boards, together with poison pills like the one Allergan adopted earlier this week, can be almost bullet-proof takeover defenses.
But at the company’s 2011 annual meeting, the Allergan Corporate Governance Committee determined to recommend the elimination of its staggered board. Under Delaware law that meant directors could also be removed without cause.
Then at last year’s annual meeting the same committee went a step further. It recommended shareholders owning 25% of the shares be given the right to call a special meeting of shareholders. At such a meeting the removal of directors can be put to a vote.
What may have seemed like details when proposed in plain-vanilla annual meeting proxies (who really reads those?) will have an enormous impact on Valeant’s takeover proposal. Directors can still adopt a poison pill, as they did at Allergan, but since shareholders can replace the directors, the new directors can then eliminate it. Thus, if a majority of shareholders eventually support the Valeant proposal, there is a clear mechanism for effecting the deal. Of course Allergan’s directors and advisers know this and will have to conduct their defense and negotiations accordingly.
It is a much different dynamic than Jos. A. Bank directors faced where the board was staggered: Directors could not be removed without cause and shareholders had no authority to call a special meeting. The board called the shots there, and Men’s Wearhouse had to satisfy it regardless of whether shareholders were satisfied with Men’s lower bids.
Many corporate governance experts support the Allergan-type provisions under which 50% plus one share can force a sale of a company. On the corporate side there is concern that such quick access by shareholders could promote “short-termism” and be bad for both companies and, in the long run, their shareholders. Whoever is right in that argument, what seems to me to be troubling is that which companies are subject to which provisions has a substantial element of randomness.
How did the changes in the details of corporate document happen? In 2009 an individual named John Chevedden who owned “no less than 90 shares” of Allergan, according to his broker, began to make a series of shareholder proposals calling for changes to the company’s corporate documents. In the words of one report, Mr. Chevedden’s “method is to target deep-in-the-weeds details of corporate governance.” Mr. Chevedden files these types of proposals by the dozens at a wide spectrum of companies. Some refer to him as a corporate gadfly, but he reportedly rejects that characterization and prefers to be called an activist.
At Allergan, some of Mr. Chevedden’s proposals were rewritten by management, then recommended by the board and adopted by shareholders. One was approved despite management’s opposition.
The result of his largely successful campaign is to give Allergan very little wiggle room once a majority of shareholders wants a deal. In the absence of a competing bid, if there is a deal with Valeant, Allergan shareholders are likely to receive a lower price than if the board could have engaged in a full-throated defense in which Valeant could be forced to continue to raise its price to overcome director “entrenchment.”
On the other hand, supporters of shareholders rights would point out that, without these provisions, Valeant may not have made a buyout proposal at all or the board might have been able to chase Valeant away entirely.
Mr. Chevedden says: “It is most likely that the informed shareholders are paying attention when corporate governance changes are adopted after a shareholders proposal wins a majority vote.”
Which model of governance is better can be fairly debated. But making the result largely a function of small shareholders’ initiatives doesn’t make a lot of sense to me.
Many other countries have fixed rules for takeovers which are much less dependent on the minutiae of corporate documents. In the U.K., for example, directors are not permitted to adopt poison pills or take other actions that would remove the decision on a takeover from shareholders. And the takeover proceeds on a fixed timetable. But for a hostile bidder to acquire the entire ownership of a company and squeeze out non-tendering shareholders (as many buyers need to do), the bidder must acquire at least 90% of the shares. Although the directors can’t resist, the buyer must pay a price satisfying 90% of shareholders, as opposed to just over 50% in the case of Allergan.
As a result of a small shareholder’s activism and disclosure in boring annual meeting proxies, Allergan shareholders have put their directors at a major disadvantage in negotiating with Valeant. Maybe it is better governance, but it is hard to salute the process in which Allergan arrived at this point.
Under Delaware corporate law, directors have substantial authority to choose to negotiate or resist a takeover proposal. That is why Airgas Inc.ARG -0.65% was able to resist Air Products and Chemicals Inc.APD -1.10%’s hostile tender offer several years ago. And how Jos. A. Bank Clothiers Inc. was able to force Men’s Wearhouse Inc.MW -1.31% to repeatedly increase its offer price before agreeing to a deal. In short, majority shareholder approval is required to complete a takeover but not to authorize directors to resist it.
But the details of corporate governance documents can counteract this principle. Take the case of Allergan: Allergan’s corporate documents permit directors to be removed without cause by a majority vote of shareholders. And holders of 25% of the shares can quickly call a meeting to vote to do so.
It wasn’t always this way. Until three years ago, Allergan had a staggered board. That means one-third of the directors were elected each year, and each director had a three-year term. So it would have taken two years to change a majority of the directors. Under Delaware law, staggered boards cannot be removed without cause. Staggered boards, together with poison pills like the one Allergan adopted earlier this week, can be almost bullet-proof takeover defenses.
But at the company’s 2011 annual meeting, the Allergan Corporate Governance Committee determined to recommend the elimination of its staggered board. Under Delaware law that meant directors could also be removed without cause.
Then at last year’s annual meeting the same committee went a step further. It recommended shareholders owning 25% of the shares be given the right to call a special meeting of shareholders. At such a meeting the removal of directors can be put to a vote.
What may have seemed like details when proposed in plain-vanilla annual meeting proxies (who really reads those?) will have an enormous impact on Valeant’s takeover proposal. Directors can still adopt a poison pill, as they did at Allergan, but since shareholders can replace the directors, the new directors can then eliminate it. Thus, if a majority of shareholders eventually support the Valeant proposal, there is a clear mechanism for effecting the deal. Of course Allergan’s directors and advisers know this and will have to conduct their defense and negotiations accordingly.
It is a much different dynamic than Jos. A. Bank directors faced where the board was staggered: Directors could not be removed without cause and shareholders had no authority to call a special meeting. The board called the shots there, and Men’s Wearhouse had to satisfy it regardless of whether shareholders were satisfied with Men’s lower bids.
Many corporate governance experts support the Allergan-type provisions under which 50% plus one share can force a sale of a company. On the corporate side there is concern that such quick access by shareholders could promote “short-termism” and be bad for both companies and, in the long run, their shareholders. Whoever is right in that argument, what seems to me to be troubling is that which companies are subject to which provisions has a substantial element of randomness.
How did the changes in the details of corporate document happen? In 2009 an individual named John Chevedden who owned “no less than 90 shares” of Allergan, according to his broker, began to make a series of shareholder proposals calling for changes to the company’s corporate documents. In the words of one report, Mr. Chevedden’s “method is to target deep-in-the-weeds details of corporate governance.” Mr. Chevedden files these types of proposals by the dozens at a wide spectrum of companies. Some refer to him as a corporate gadfly, but he reportedly rejects that characterization and prefers to be called an activist.
At Allergan, some of Mr. Chevedden’s proposals were rewritten by management, then recommended by the board and adopted by shareholders. One was approved despite management’s opposition.
The result of his largely successful campaign is to give Allergan very little wiggle room once a majority of shareholders wants a deal. In the absence of a competing bid, if there is a deal with Valeant, Allergan shareholders are likely to receive a lower price than if the board could have engaged in a full-throated defense in which Valeant could be forced to continue to raise its price to overcome director “entrenchment.”
On the other hand, supporters of shareholders rights would point out that, without these provisions, Valeant may not have made a buyout proposal at all or the board might have been able to chase Valeant away entirely.
Mr. Chevedden says: “It is most likely that the informed shareholders are paying attention when corporate governance changes are adopted after a shareholders proposal wins a majority vote.”
Which model of governance is better can be fairly debated. But making the result largely a function of small shareholders’ initiatives doesn’t make a lot of sense to me.
Many other countries have fixed rules for takeovers which are much less dependent on the minutiae of corporate documents. In the U.K., for example, directors are not permitted to adopt poison pills or take other actions that would remove the decision on a takeover from shareholders. And the takeover proceeds on a fixed timetable. But for a hostile bidder to acquire the entire ownership of a company and squeeze out non-tendering shareholders (as many buyers need to do), the bidder must acquire at least 90% of the shares. Although the directors can’t resist, the buyer must pay a price satisfying 90% of shareholders, as opposed to just over 50% in the case of Allergan.
As a result of a small shareholder’s activism and disclosure in boring annual meeting proxies, Allergan shareholders have put their directors at a major disadvantage in negotiating with Valeant. Maybe it is better governance, but it is hard to salute the process in which Allergan arrived at this point.