Poison Put Provisions in Debt Financing: Lessons on Enforceability From Recent Cases Navigating Change-in-Control Provisions That Protect Against Shareholder Activists and Hostile Takeovers
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
WEDNESDAY, FEBRUARY 4, 2015
Presenting a live 90-minute webinar with interactive Q&A
Kai Haakon E. Liekefett, Partner, Vinson & Elkins, Houston
Muir Paterson, Managing Director, Goldman Sachs & Co., New York
David W. Wicklund, Partner, Vinson & Elkins, New York
Tips for Optimal Quality
Sound Quality
If you are listening via your computer speakers, please note that the quality
of your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory, you may listen via the phone: dial
1-866-869-6667 and enter your PIN when prompted. Otherwise, please
send us a chat or e-mail [email protected] immediately so we can
address the problem.
If you dialed in and have any difficulties during the call, press *0 for assistance.
Viewing Quality
To maximize your screen, press the F11 key on your keyboard. To exit full screen,
press the F11 key again.
FOR LIVE EVENT ONLY
Continuing Education Credits
For CLE purposes, please let us know how many people are listening at your
location by completing each of the following steps:
• In the chat box, type (1) your company name and (2) the number of
attendees at your location
• Click the SEND button beside the box
If you have purchased Strafford CLE processing services, you must confirm your
participation by completing and submitting an Official Record of Attendance (CLE
Form).
You may obtain your CLE form by going to the program page and selecting the
appropriate form in the PROGRAM MATERIALS box at the top right corner.
If you'd like to purchase CLE credit processing, it is available for a fee. For
additional information about CLE credit processing, go to our website or call us at
1-800-926-7926 ext. 35.
FOR LIVE EVENT ONLY
Program Materials
If you have not printed the conference materials for this program, please
complete the following steps:
• Click on the ^ symbol next to “Conference Materials” in the middle of the left-
hand column on your screen.
• Click on the tab labeled “Handouts” that appears, and there you will see a
PDF of the slides for today's program.
• Double click on the PDF and a separate page will open.
• Print the slides by clicking on the printer icon.
FOR LIVE EVENT ONLY
©2015 Vinson & Elkins LLP
Source: Carl Icahn’s website www.shareholderssquaretable.com
Poison Puts in Debt Financings
Strafford Live Webinar February 4, 2015
©2015 Vinson & Elkins LLP
Program Agenda
Poison Puts in Debt Financings
I. Poison Puts, Hostile Bids and Shareholder Activism
(Muir Paterson, [email protected], Goldman Sachs)
II. Case Law on Poison Put Provisions
(Kai Haakon E. Liekefett, [email protected], Vinson & Elkins)
III. Drafting, Negotiation and Use of Poison Puts
(David W. Wicklund, [email protected], Vinson & Elkins)
Appendix: Presenter Bios
6
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
I.
Poison Puts and
Shareholder Activism
Muir Paterson
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
• Change of control provisions (a.k.a. “poison puts”) became popular during
the wave of junk bond-fueled hostile tender offers in the 1980s
In the 1988 leveraged buyout of RJR Nabisco by KKR, KKR borrowed billions to
finance the acquisition and did not refinance RJR Nabisco’s existing debt
After the acquisition, RJR Nabisco was in greater debt and more likely to default,
thereby significantly reducing the value of the pre-existing debt
• In response to investor demand for protection against this ‘event risk,’
issuers started to give investors the right to sell their bonds back to the
issuer, either at par or a premium
Initially, the puts were exercisable only if there was the threat of a hostile takeover
Since most target boards eventually agreed to a ‘friendly’ takeover at gunpoint, it
became common to make these puts exercisable upon any change in ownership
• Today, most public companies have poison puts in their credit agreements,
bond indentures or both
Poison Puts, Hostile Bids and Shareholder Activism
Introduction
The History of Poison Puts
8
Today, there are approximately 4,500 debt instruments with poison puts
©2015 Vinson & Elkins LLP
• Usually contains a covenant
relating to a change of control
• Requires the issuer to offer to
purchase all of the bonds at a
purchase price in cash equal to
101% of the principal amount
plus accrued and unpaid interest
• Usually contains an event of
default relating to a change of
control
• Requires the administrative agent,
upon the written request of a
majority of the lenders, to: (i)
terminate the commitments; (ii)
declare the principal amount and
interest outstanding immediately
due and payable; and (iii)
terminate any letters of credit
Types of Poison Puts
Indentures Credit Agreements
Bond Indentures vs. Credit Agreements
Poison Puts, Hostile Bids and Shareholder Activism
9
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
• Companies often gloss over the fine print of the poison put provisions
• When the supply of credit is abundant, these provisions have no impact on
M&A activity
• However, during economic downturns such as the 2008/09 financial crisis
(or currently in the oil and gas industry), it can become difficult to
refinance bank or bond debt
• In difficult market conditions, poison puts can act as an impediment to
friendly M&A activity. By contrast, it is rare for poison puts to deter
hostile takeover offers because hostile bidders are typically financially
strong enough to refinance the target’s debt (as long it still makes economic
sense for them despite the potentially substantial refinancing cost)
Poison Puts, Hostile Bids and Shareholder Activism
Poison Puts and Hostile Takeovers
Poison Puts Rarely Deter Hostile Bids
10
In practice, poison puts rarely deter hostile takeover bids
©2015 Vinson & Elkins LLP
Source: Thomson Reuters, Capital IQ, MergerMetrics, public sources as of 12/31/2014
$149
$442$468
$249
$74
$171$132
$66$111
$499
$265
$640
$728
$393
$128
$273
$170
$115
$127
$577
56%
69%
64% 63%
58%
63%
78%
57%
87% 87%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
With
dra
wn
as %
of
To
tal
Vo
lum
e (
$bn
)
Withdrawn Volume Completed / Pending Volume Withdrawn Volume as % of Total Hostile Activity
Unsolicited and Hostile Takeover Offers 2005 – 2014
Poison Puts, Hostile Bids and Shareholder Activism
Unsolicited and Hostile Activity is at Record Levels
11
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
• Today, most public companies have negotiated poison put provisions that
are triggered not only if the company is acquired, but also if a shareholder
dissident unseats a majority of the company’s incumbent directors
(a.k.a. “proxy puts”)
• Incumbent boards have used the specter of a debt default in proxy
contests during the current wave of shareholder activism
• Recent case law has challenged change-of-control triggers tied to
board seat changes on the basis that they dilute the shareholder franchise
This will be discussed in Part II today
Poison Puts, Hostile Bids and Shareholder Activism
Poison Puts and Shareholder Activism
Poison Puts have Impacted Shareholder Activism
12
Proxy puts have impacted shareholder activism campaigns,
but recent case law may change this
©2015 Vinson & Elkins LLP
EAUM:
$8.9 bn Recently raised $2.5 bn
EAUM:
$16.8 bn
Raised ~$3 bn through a
European IPO
EAUM:
$9.4 bn
Raised $2 bn over the course of
2014
EAUM:
$9.8 bn
Received commitments for $3.3
bn over a 3-month span in 2013
EAUM:
$14.6 bn
Plans to raise up to $1.5 bn in
new funds
$219.8
$162.3
$113.5 $102.7
$94.7
Current Q4 2013 Q4 2012 Q4 2011 Q4 2010
Activist Fund AUM 2010 – 2014
Activists can Access Increasing Amounts of Capital
Poison Puts, Hostile Bids and Shareholder Activism
Source: Thomson, public sources (includes reported equity assets under management of activists included in the FactSet “SharkWatch 50”)
13
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Hedge Funds CAGR 2009 – 2013
Activist Funds have Outperformed other Hedge Funds
14
Source: Goldman Sachs & Co.
Poison Puts, Hostile Bids and Shareholder Activism
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
The Tide of Shareholder Activism is Rising
Shareholder Activism 2003 – 2014
113 110
249
443
511 499
373 364 363 383 378
450
69 44
67
107 109 121
133
94 94 77
91 95
0
100
200
300
400
500
600
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Activist Campaigns
Activist Proxy Fights
15
Source: SharkRepellent
Poison Puts, Hostile Bids and Shareholder Activism
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Large Cap Companies have Increasingly Become Targets
Targets with > 500 million Market Cap 2010 – 2014
16
Poison Puts, Hostile Bids and Shareholder Activism
Source: Thomson, public sources
44
59 63
82
2010 2011 2012 2013 2014
101
©2015 Vinson & Elkins LLP
Pension Funds and Some Long-Only Investors Have Been
Willing to Go “Public” in Support of Activist Positions
Company Institutional
Investor Activist
Pershing Square
Icahn /
Southeastern
Starboard
Trian
Icahn
Trian
JANA
Willingness to Support Activist Nominees in Proxy Fights1
Firm Name
% Proxy Fights Voted “FOR”
a Dissident Nominee
Acti
vely
Man
ag
ed
T. Rowe Price Associates 73.9 %
Janus Capital Management 60.0
Fidelity Management & Research 58.6
Morgan Stanley Wealth Management 50.0
MFS Investment Management 50.0
TIAA – CREF 50.0
Franklin Advisors 33.3
Ind
ex F
un
ds
Norges Bank Investment Mgmt 50.0 %
Mellon Capital 47.4
Geode Capital 47.2
BlackRock 33.3
State Street Global 20.0
Northern Trust 16.7
The Vanguard Group 4.3
1 Institutional Shareholder Services. Results of definitive proxy fights at Russell 3000 companies, Jan 2010 – 2014 (defined as the percentage of situations in which the majority of sub-
funds voted either for management or dissident nominees)
Poison Puts, Hostile Bids and Shareholder Activism
Growing Support From Mainstream Investors
17
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
*Percentage of outright or partial victories or settlements
by dissidents of total nominations of opposing slates
36%
50%
55% 57%
49% 51%
54% 55%
59%
52%
60%
73%
30%
40%
50%
60%
70%
80%
90%
100%
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Su
ccess R
ate
(%
)*
Activist Success Rate 2003 – 2014
Activists Have Become Very Successful
18
Source: SharkRepellent
Poison Puts, Hostile Bids and Shareholder Activism
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Minority Board Representation
57%
Board Control 31%
Oppose Management Proposal
1%
Withhold the Vote Campaign
2%
Stockholder Proposal 4%
Oppose M&A Transaction
4%
The Majority of Proxy Contests are for Short Slates
Campaign Types in 2014
19
Source: SharkRepellent
Poison Puts, Hostile Bids and Shareholder Activism
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
ISS Support for Dissidents has been Significant
ISS Recommendations 2009 – 2014
20
Source: SharkRepellent
20092010
20112012
2013
2014
45% 45% 55%
32% 50% 57%
50% 48% 41%
52%
47% 37%
5% 6% 5%
16% 6%
7%
For Dissident (1)
For Incumbent (2)
Split
(1) Support for more than half of the dissident slate
(2) Support for more than half of the incumbent board slate
Poison Puts, Hostile Bids and Shareholder Activism
©2015 Vinson & Elkins LLP
Activist Attainment of Board Seats – 2005 Activist Attainment of Board Seats – 2014
“I'm even surprised… being admitted to all these boards without a proxy fight would
have been unthinkable only a year ago.”
-Carl Icahn
Today, over three quarters of activist board seats are
now gained through settlement agreements
Source: FactSet, Shark Repellent, The Wall Street Journal
Note: Includes all proxy fights at companies with market cap greater than $500mm at time of campaign.
In the mid-2000s, companies became increasingly
willing to settle with activists in order to avoid a proxy
contest
Settled Without Fight
31%
Settled Before Vote
31%
Went to Vote 38%
Settled
Without Fight 41%
Settled Before Vote
35%
Went to Vote 24%
Board Seats Through Settlements 2005 vs. 2014
Poison Puts, Hostile Bids and Shareholder Activism
21
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
II.
Case Law on
Poison Put Provisions
Kai Haakon E. Liekefett
©2015 Vinson & Elkins LLP
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
The Amylin Case
Delaware Court of Chancery, May 12, 2009
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Case Law on Poison Put Provisions
The Amylin Case: Facts
24
• On June 8, 2007, Amylin Pharmaceuticals, Inc. issued a series of
convertible senior notes due 2014 under an indenture with The Bank of
New York Mellon Trust Company as the trustee
• The indenture was governed by New York law and contained a change of
control provision
• The change of control provision included a proxy put prong, which gave
the noteholders the right to require Amylin to repurchase their notes at face
value upon a “Fundamental Change”
The Facts
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Case Law on Poison Put Provisions
The Amylin Case: Facts (Cont’d)
25
• The language of the indenture’s proxy put was as follows:
“Fundamental Change” included if “at any time the Continuing Directors
do not constitute a majority of the Company's Board of Directors….”
“Continuing Directors” was defined as: “(i) individuals who on the Issue
Date constituted the Board of Directors and (ii) any new directors whose
election to the Board of Directors or whose nomination for election by the
stockholders of the Company was approved by at least a majority of
the directors then still in office (or a duly constituted committee thereof)
either who were directors on the Issue Date or whose election or
nomination for election was previously so approved.”
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Case Law on Poison Put Provisions
The Amylin Case: Facts (Cont’d)
26
• On January 28, 2009, Carl Icahn notified Amylin of its intention to nominate
a slate of five directors to Amylin’s 12-member board
• On January 29, 2009, Eastbourne Capital Management notified Amylin of its
intention to nominate its own five-person slate
• On March 9, 2009, Eastbourne sent a letter to the board urging it to
“approve” the dissident slates for purposes of the indenture
• On March 24, 2009, a shareholder of Amylin filed a class action
complaint against Amylin and each of its directors alleging breaches of the
fiduciary duties of care and loyalty by the board (i) in the adoption of the
indenture regarding the proxy put provision; (ii) in failing to approve the
dissident nominees in order to defuse the proxy put and (iii) for misleading
and coercive disclosure of the risks presented by the proxy put provision in
the company’s Form 10-K
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Case Law on Poison Put Provisions
The Amylin Case: Facts (Cont’d)
27
• Amylin believed that its board had the ability to approve the dissident
slates for purposes of the indenture and sought confirmation of its view
from the trustee
• The trustee declined to provide the requested confirmation. The trustee
argued that the incumbent directors cannot “approve” as a “Continuing
Director” any person whose election the incumbent directors publicly oppose.
In this trustee’s view, the word “approve” is synonymous with “endorse
or recommend”
• Amylin filed a cross-claim against the trustee, and sought declaratory relief
that it can approve the dissident nominees for purposes of the indenture while
simultaneously recommending against their election to the board
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Case Law on Poison Put Provisions
The Amylin Case: Facts (Cont’d)
28
• Prior to trial, the shareholder dropped its fiduciary duty claims against
Amylin’s board under a partial settlement. As a result, the only matters
before the court were whether the board has the power and the right under
the indenture to approve the dissident nominees
• Moreover, Eastbourne reduced the number of its candidates to three and
Icahn reduced the number of his candidates to two. As a result, only five of
the 12 board seats of Amyln remained contested. This made a majority
board turnover impossible
• Nevertheless the Court agreed to rule on whether the board had the power
to approve the dissident nominees
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Case Law on Poison Put Provisions
The Amylin Case: Decision
29
• Power to Approve:
Vice Chancellor Lamb held that, in the abstract, generally a board has the power
to approve a slate of dissident nominees for purposes of an indenture without
endorsing them and may simultaneously recommend and endorse its own slate
instead
• Right to Approve:
The court then turned to the question of whether the Amylin board properly
exercised the right to approve in this case
The court stated that a company has an implied duty of good faith and fair
dealing under an indenture. Therefore, a board may approve the dissident
nominees only if it determines in good faith that the election of the dissident
nominees would not be materially adverse to the interests of the corporation
or its stockholders
Due to an underdeveloped record, the court treated this issue as unripe
The Decision
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
The SandRidge Case
Delaware Court of Chancery, March 8, 2013
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Case Law on Poison Put Provisions
The SandRidge Case: Facts
31
• TPG-Axon is a hedge fund that held approximately 7% of the shares of
SandRidge Energy, Inc.
• Beginning in November 2012, TPG-Axon started to publicly demand
various governance reforms while asserting that SandRidge had been
underperforming
• The SandRidge board responded to these demands by adopting a poison
pill and amending its bylaws to inhibit stockholder action by written
consent
• In December, TPG commenced a formal consent solicitation to declassify
SandRidge’s seven-member board and to remove and replace all of its
incumbent directors, prompting the SandRidge board to initiate its own
consent revocation solicitation to defeat TPG’s dissident slate
The Facts
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Case Law on Poison Put Provisions
The SandRidge Case: Facts (Cont’d)
32
• In its preliminary consent revocation statement, the SandRidge board
warned stockholders that replacing all of the company’s directors, as
TPG intended, would trigger a put right in respect of the company’s
outstanding $4.3 billion principal amount of debt, and that “[a] mandatory
refinancing of this magnitude would present an extreme, risky and
unnecessary financial burden”
• The language of the indenture’s proxy put was as follows:
“During any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors […] (together
with any new directors whose election to such board or whose nomination
for election by the stockholders of the […] was approved by a vote of 66
2/3% of the directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved), cease for any reason to constitute a majority of
such Board of Directors then in office”
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Case Law on Poison Put Provisions
The SandRidge Case: Facts (Cont’d)
33
• As the SandRidge board itself acknowledged, it could negate the risk
posed by the proxy put by approving the dissident nominees, thereby
averting a “change of control” that would trigger the proxy put
• Gerald Kallick, a SandRidge stockholder unaffiliated with TPG-Axon,
initiated litigation on January 7, 2013, seeking a mandatory injunction
ordering the SandRidge board to “approve” TPG-Axon’s nominees for
the limited purpose of neutralizing the effect of the proxy put
• In a Form 8-K filed on February 8, 2013, the SandRidge board made, in the
court’s words, an “about-face,” claiming noteholders would be unlikely to
exercise the put because the notes were trading above the redemption price
• Furthermore, Morgan Stanley, SandRidge’s financial advisor, had offered
to refinance the debt, thus providing the backup financing necessary to
ameliorate the financial risks attributable to approving the TPG-Axon slate
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Case Law on Poison Put Provisions
The SandRidge Case: Facts (Cont’d)
34
• The SandRidge board continued to withhold approval of TPG-Axon’s
slate, citing concern over their supposed lack of relevant experience and
fear that credit would become more difficult to obtain if SandRidge
obtained a reputation for “circumventing” change of control provisions
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Case Law on Poison Put Provisions
The SandRidge Case: Decision
35
• Chancellor Strine decided not to apply the Blasius standard of review, but
to apply the intermediate standard of review set forth in Unocal instead
• The court, relying on Amylin, reaffirmed that the duty of loyalty requires the
board to exercise contractually conferred discretion in the best
interests of the corporation and its stockholders, limited only by honoring
its contractual obligations to creditors under the implied covenant of good
faith and fair dealing
• Therefore, “a board that acts in good faith must seek to protect the
stockholders’ ability to make an uncoerced choice of directors.”
• Chancellor Strine held that a board has an affirmative obligation to nullify
a proxy put by approving a dissident slate unless there is a “specific and
substantial risk to the corporation or its creditors posed by the rival
slate”
The Decision
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
The Healthways Case
Delaware Court of Chancery, October 14, 2014
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Case Law on Poison Put Provisions
The Healthways Case: Facts
37
• In 2010, Healthways, Inc. and Sun Trust entered into an amended and
restated revolving credit and term loan agreement that contained a proxy
put
• Subsequently, Healthways came under pressure from stockholders, and,
in 2012, the stockholders approved a precatory proposal to declassify
Healthways’ board. In response, Healthways amended its articles of
incorporation to phase out the staggered board
• Less than two weeks after the 2012 stockholder vote on declassification,
Healthways and SunTrust amended the credit agreement. The amendment
revised the definition of “Continuing Director” to exclude directors
nominated as a result of an actual or threatened proxy contest even if the
board approved such directors (a.k.a. “dead hand feature”)
The Facts
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Case Law on Poison Put Provisions
The Healthways Case: Facts (Cont’d)
38
• The amended language of the credit agreement’s proxy put was as
follows:
“Continuing Directors” was defined as: “with respect to any period, any
individuals (A) who were members of the board of directors on the first
day of such period, (B) whose election or nomination to that board was
approved by individuals referred to in clause (A) above constituting at the
time of such election or nomination at least a majority of that board, or (C)
whose election or nomination to that board was approved by individuals
referred to in clauses (A) and (B) above constituting at the time of such
election or nomination at least a majority of that board (excluding, in the
case of both clauses (B) and (C), any individual whose initial
nomination for, or assumption of office as, a member of that board
occurs as a result of an actual or threatened solicitation of proxies
or consents for the election or removal of one or more directors by
any person or group other than a solicitation for the election of one
or more directors by or on behalf of the board of directors)”
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Case Law on Poison Put Provisions
The Healthways Case: Facts (Cont’d)
39
• In January 2014, North Tide Capital, a company that owned 11% of
Healthways’ stock, indicated to the Healthways board that it intended to
wage a proxy fight. After negotiation, North Tide gained representation
on the Healthways board. The North Tide directors were not considered
“Continuing Directors” for purposes of the “dead hand” proxy put
• Stockholders of Healthways filed a class action lawsuit against Healthways’
directors and SunTrust, alleging that (1) the directors breached their
fiduciary duties by entering into a credit agreement with a “dead hand”
proxy put and (2) SunTrust aided and abetted these breaches
• The plaintiffs also sought a declaratory judgment that the “proxy put” was
invalid and unenforceable under Delaware law
• The defendants filed motions to dismiss
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Case Law on Poison Put Provisions
The Healthways Case: Decision
40
• Fiduciary Duty Claim:
In a bench ruling, Vice Chancellor Laster denied the directors’ motion to
dismiss. In denying the motion, he rejected Healthways’ claim that the
dispute was not ripe because the proxy put had not yet been triggered
The court likened the “dead hand” proxy put to poison pills and deal
protection provisions in merger agreements. It found that the existence
of this provision “necessarily has an effect on people’s decision-
making” about running a proxy contest – a “Sword of Damocles”
Furthermore, the court pointed to the fact that the North Tide directors
were not considered “Continuing Directors” and thus as different for
purposes of the proxy put. In the court’s view, this presented a current
injury
The Decision
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Case Law on Poison Put Provisions
The Healthways Case: Decision (Cont’d)
41
The denial of the motion to dismiss does not mean that the adoption of
a dead hand proxy put was a per se breach of fiduciary duty
Rather, the courts emphasized that the facts will need to be developed,
“namely, what the board did or didn’t do or knew or didn’t know and what
the back and forth was, if there was any, with SunTrust”
• Aiding and Abetting Claim:
The court also denied SunTrust’s motion to dismiss on the aiding and
abetting claim
Vice Chancellor Laster stated that the Amylin and SandRidge precedents
put lenders on notice that “dead hand” proxy puts were “highly
suspect” because of their “recognized entrenching effect” and could lead
to a fiduciary duty breach by borrowers
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Case Law on Poison Put Provisions
The Healthways Case: Decision (Cont’d)
42
Moreover, the court pointed to the fact that the credit agreement was
amended to include the “dead hand” feature only after there were
threats of a proxy contest by certain stockholders
The court recognized that evidence of an arm’s-length negotiation
generally negates claims for aiding and abetting liability. However,
Vice Chancellor Laster stated that negotiating for the best deal does not
accord a party the privilege afforded to arm’s-length negotiators if they
“take advantage of a conflict of interest that the fiduciary counterparts
on the other side of the negotiating table face”
According to the court, these facts were sufficient at the pleading stage
to show “knowing participation” by SunTrust and therefore sufficient to
survive a motion to dismiss. The court noted that it is possible that
SunTrust did not aid or abet anything and that discovery was needed
to understand whether the “dead hand” proxy put was added in response
to stockholder pressure or for another reason
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Case Law on Poison Put Provisions
Executive Summary
43
• Amylin: A board has the power and right to approve an opposing director
slate for purposes of a proxy put if it determines that the dissident nominees
would not be materially adverse to the interests of the corporation or its
stockholders
• SandRidge: A board has an affirmative obligation to approve a dissident
slate unless there is a specific and substantial risk to the corporation or its
creditors posed by the rival slate
• Healthways: Directors who agree to a “dead hand” proxy put may be liable
for breach of fiduciary duty. A lender may be liable for aiding and abetting if it
knowingly participates in these breaches
Summary
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
III.
Drafting, Negotiation and
Use of Poison Puts
David W. Wicklund
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Drafting, Negotiation and Use of Poison Puts
Drafting of Poison Put Provisions
45
“Change of Control” shall mean the occurrence of any of the following:
(1) the direct or indirect sale, lease, transfer, conveyance or other disposition
(other than by way of merger or consolidation), in one or more series of
related transactions, of all or substantially all of the Company’s assets and
the assets of the Company’s subsidiaries, taken as a whole, to any person,
other than the Company or one of its subsidiaries;
(2) the consummation of any transaction (including, without limitation, any merger
or consolidation) the result of which is that any person becomes the
beneficial owner, directly or indirectly, of more than 50% of the
Company’s outstanding voting stock;
(3) the Company consolidates with, or merges with or into, any person, or any
person consolidates with, or merges with or into, the Company;
(4) the adoption of a plan relating to the Company’s liquidation or dissolution;
(5) at any time the Continuing Directors do not constitute a majority of the
Company’s Board of Directors.
A Common “Change of Control” Definition
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Drafting, Negotiation and Use of Poison Puts
Drafting of Poison Put Provisions (Cont’d)
46
• “Change of Control” shall mean the occurrence of any of the following: […]
(5) at any time the Continuing Directors do not constitute a majority of the
Company's Board of Directors
• “Continuing Directors” shall mean individuals (A) who were members of the
board on the date hereof, (B) whose election or nomination to that board was
approved by individuals referred to in clause (A) above constituting at the
time of such election or nomination at least a majority of that board, or (C)
whose election or nomination to that board was approved by individuals
referred to in clauses (A) and (B) above constituting at the time of such
election or nomination at least a majority of that board
Basic “Proxy Put”
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Drafting of Poison Put Provisions (Cont’d)
Without a record that a board obtained tangible economic benefits for the company, or
at a minimum negotiated vigorously to protect the shareholder franchise, a poison put
provision with all of the above listed debtholder/board friendly provisions will come
under heightened scrutiny
47
Drafting, Negotiation and Use of Poison Puts
Component Shareholder Friendly (i.e., narrow change-of-control trigger)
Debtholder/Board Friendly (i.e., broad change-of-control trigger)
Determination
Period
Any 12 month period (or 24 month
period)
Any time since the issuance of the
bonds or closing of the loan
Approval
Threshold
Approval of a majority of the original
directors or subsequent “Continuing
Directors”
Approval of 66-2/3% of the original
directors or subsequent “Continuing
Directors”
“Dead Hand”
Feature
None Any individual whose initial
nomination for or assumption of
office as a director occurred as a
result of an actual or threatened
solicitation of proxies or consents
Primary Proxy Put Drafting Variations
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Drafting, Negotiation and Use of Poison Puts
Drafting of Poison Put Provisions (Cont’d)
48
• “Change of Control” shall mean the occurrence of any of the following: […]
(5) [at any time] OR [during any period of [12/24] consecutive months]
the Continuing Directors do not constitute a majority of the Company's Board
of Directors
• “Continuing Directors” shall mean individuals (A) who were members of the
board [on the date hereof] OR [on the first day of any period of [12/24]
consecutive months], (B) whose election or nomination to that board was
approved by individuals referred to in clause (A) above constituting at the
time of such election or nomination at least a majority of that board, or (C)
whose election or nomination to that board was approved by individuals
referred to in clauses (A) and (B) above constituting at the time of such
election or nomination at least a majority of that board
Determination Period
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Drafting, Negotiation and Use of Poison Puts
Drafting of Poison Put Provisions (Cont’d)
49
• “Change of Control” shall mean the occurrence of any of the following: […]
(5) at any time the Continuing Directors do not constitute a majority of the
Company's Board of Directors
• “Continuing Directors” shall mean individuals (A) who were members of the
board on the date hereof, (B) whose election or nomination to that board was
approved by individuals referred to in clause (A) above constituting at the
time of such election or nomination at least [a majority of the directors] OR
[66 ⅔% of the directors] of that board, or (C) whose election or nomination
to that board was approved by individuals referred to in clauses (A) and (B)
above constituting at the time of such election or nomination at least a
majority of that board
Approval Threshold
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
Drafting, Negotiation and Use of Poison Puts
Drafting of Poison Put Provisions (Cont’d)
50
• “Change of Control” shall mean the occurrence of any of the following: […]
(5) at any time the Continuing Directors do not constitute a majority of the
Company's Board of Directors
• “Continuing Directors” shall mean individuals (A) who were members of the
board on the date hereof, (B) whose election or nomination to that board was
approved by individuals referred to in clause (A) above constituting at the
time of such election or nomination at least a majority of that board, or (C)
whose election or nomination to that board was approved by individuals
referred to in clauses (A) and (B) above constituting at the time of such
election or nomination at least a majority of that board (excluding, in the
case of both clauses (B) and (C), any individual whose initial
nomination or assumption of office occurs as a result of an actual or
threatened election contest)
“Dead Hand” Feature
©2015 Vinson & Elkins LLP
• Deterrence against proxy
contests by dissident
shareholders (excludes short
slates)
• Increased marketability of
the debt
• Potentially lower cost of debt
Negotiation of Poison Put Provisions
Company Debtholders
The Interests of Companies and Debtholders
Drafting, Negotiation and Use of Poison Puts
51
• Ability to refinance might be
limited at the time of the
triggering
• Potential disenfranchisement
of shareholders
• Liability exposure for board
Co
ns
of
Pro
xy P
ut
Pro
s
of
Pro
xy P
ut • Ability to re-evaluate
investment in the event of a
board turnover
• Protection against potential
downgrade of the debt
P
ros
of
Pro
xy P
ut
• Liability exposure for
underwriters and arrangers
• Reputational risk for
underwriters and arrangers
Co
ns
of
Pro
xy P
ut
©2015 Vinson & Elkins LLP
• Mega and large cap IG
bonds often do not an have
any CoC provisions
• IG bonds with CoC typically
(1) exclude the “proxy put”
prong and (2) use a “double
trigger” (ratings downgrade)
• Credit agreements typically include CoC
provisions
• Most CoC provisions include the “proxy
put” prong
• Certain lenders are pushing hard for the
“dead hand” feature in light of the
current shareholder activism wave and
the large number of settlements
• By contrast, other lenders shy away from
the “dead hand” feature due to the
potential liability post-Healthways
Negotiation of Poison Put Provisions (Cont’d)
Bonds Credit Facilities
Current Market Dynamics
Drafting, Negotiation and Use of Poison Puts
52
• HY bonds issues typically
include CoC provisions
• However, new HY bond
issues typically exclude the
“proxy put” prong (at least for
first time issuers)
Hig
h-Y
ield
Bo
nd
s
Investm
en
t
Gra
de
Bo
nd
s
©2015 Vinson & Elkins LLP ©2015 Vinson & Elkins LLP
• Companies should be cautious about using the specter of a debt default as
an argument for shareholders to vote in favor of the incumbent directors
• If requested, a board should approve a dissident slate unless there is a
specific and substantial threat to the company
• If the approval of a dissident slate is not in the company’s best interests, the
board should maintain a consistent message regarding its reasons for not
approving the slate and provide tangible evidence of the potential threat
• A board should not amend a poison put in a way that makes it more board
friendly once a proxy contest is pending, threatened or expected
• If a company’s debt includes a “dead hand” feature, the board should
consider requesting a waiver or amendment, and the trustee or administrative
agent should consider the liability risk in evaluating such request
Use of Poison Put Provisions
How to use Proxy Puts in Proxy Contests
A board’s contractual obligations to debtholders are limited,
but its fiduciary obligations to shareholders are omnipresent
53
Drafting, Negotiation and Use of Poison Puts
©2015 Vinson & Elkins LLP
Muir Paterson
Muir is a senior member of the Mergers & Acquisitions Group, focused on advising clients
globally on how to prepare for and respond to shareholder activism and hostile mergers and
acquisition.
Prior to joining the firm, Muir worked at Wellington Management Company, where he served as
director of corporate governance and was responsible for governance analytics, proxy voting
and company engagement. Before that, he was co-head of the M&A and Proxy Fight Research
Group at Institutional Shareholder Services (ISS), where he co-created the M&A Edge suite of
products to provide analysis and voting recommendations on M&A and shareholder activism.
During this period, Muir also served on ISS’ Global Policy Committee. Prior to ISS, Muir held
various M&A investment banking positions in London, Hong Kong and New York.
Muir earned an LLB (First Class Honours) in Law from The University of Edinburgh in 1994, and
is a CFA charterholder.
Managing Director
New York
781.369.0430
Presenter Bios
Muir Paterson
54
©2015 Vinson & Elkins LLP
Kai Haakon E. Liekefett
Kai is the head of Vinson & Elkins’ Shareholder Activism Response Team and a corporate
partner with more than decade of experience practicing in Houston, New York, London,
Duesseldorf, Hong Kong and Tokyo. He has extensive experience advising both target
companies and activists on shareholder activism campaigns, including proxy contests and just
vote no campaigns. Moreover, he advises domestic and international companies, as well as
financial advisors, in connection with public and private mergers and acquisitions.
Kai holds a Ph.D., magna cum laude, from Freiburg University; an Executive MBA, summa cum
laude (best of his class) from Münster Business School; and an LL.M., James Kent Scholar,
from Columbia Law School. He is admitted to practice in New York, Texas and Germany.
Select Representative Experience
• Conn’s in connection with activist activity by Luxor Capital and Greenlight Capital
• Dakota Plains in connection with activist activity by Lone Star Value
• Endeavour International in its proxy contest defense against the Talisman Group
• Miller Energy in its proxy contest defense against Bristol Capital and Lone Star Value
• Gastar Exploration in connection with activist activity by Kleinheinz Capital Partners
• Crest Financial in its proxy contest against the $6 billion Clearwire-Sprint merger
• Oil States in connection with activist activity by JANA Partners
• Endeavor in connection with activist activity by Steelhead, O-Cap and Lone Star Value
• Oiltanking Partners in its $6 billion sale to Enterprise Products
• C&J Energy in its $2.86 billion merger with Nabors’ completion and production businesses
• Energy XXI in its $2.3 billion acquisition of EPL Oil & Gas
• Inergy in its $8 billion merger with Crestwood (2nd largest 2013 energy deal)
• Evercore in Kinder Morgan’s $38.5 billion acquisition of El Paso (largest 2011 M&A deal)
• Westlake Chemical in its unsolicited $1.2 billion takeover offer for Georgia Gulf
• Plains All American in its unsolicited $1 billion takeover offer for SemGroup
Partner
Houston
713.758.3839
Presenter Bios
Kai Haakon E. Liekefett
55
©2015 Vinson & Elkins LLP
David W. Wicklund
David is a partner based in the New York office and is a member of the firm’s Finance Practice
Group. David’s practice focuses primarily on complex acquisition and leveraged financings.
David has experience representing private equity sponsors and their portfolio companies and
other public and private borrowers (both investment grade and non-investment grade) in a
variety of domestic and cross-border financings, in the context of acquisitions and otherwise.
David’s experience extends to the areas of syndicated loans, high-yield bond offerings, asset-
based facilities and uni-tranche facilities. He also has significant experience representing
lenders in connection with mezzanine financings.
David holds a J.D. from Georgetown University Law Center and a B.A. from Williams College.
He is admitted to practice in New York.
Select Representative Experience
• Targa Resources Partners and Targa Resources Corp. in a secured acquisition financing in
furtherance of the acquisition of Atlas Energy and Atlas Pipeline Partners in a transaction
valued at $7.7 billion
• TPG Capital in the financing of the $1.8 billion acquisition of natural gas properties in
Wyoming’s Jonah field from Encana Corporation
• Energy XXI in the financing of the $2.3 billion acquisition of EPL Oil & Gas, Inc., creating the
largest publicly traded independent producer on the Gulf of Mexico shelf
• The Carlyle Group in its $3.3 billion acquisition of Getty Images
• Privately held corporation in its $6 billion acquisition of an NYSE-listed global manufacturer
and supplier of consumer food and beverage packaging and storage products
• Private equity firm in its $1.9 billion acquisition of a provider of technology and strategic
consulting services
• Private equity firms in their $1.1 billion acquisition of a claims management services
company
Partner
New York
212.237.0021
Presenter Bios
David W. Wicklund
56