RE: news - Closure Plan acceptedHow to get taken over, not taken
JACQUIE MCNISH
Wednesday, May 02, 2007
One of the most influential corporate judges in North America warns that boards need to move faster to seize control of takeover negotiations. It's the only way to ensure that public company executives aren't compromised by "powerful self-interest" when cash-rich private equity buyers come calling with lucrative buyout offers.
In an interview with the Law Page during a New York mergers conference last week, Delaware Court Vice-Chancellor Leo Strine had harsh words for boards that don't take "strong steps" to impose what he calls a "new model" for selling public companies. His characteristically blunt remarks follow a chilling warning he sent to public company directors in March when he temporarily stalled a private equity takeover of New York's Netsmart Technologies Inc. after he found its board failed to take enough steps to ensure a robust auction.
Although senior company executives have traditionally quarterbacked takeover negotiations, Judge Strine says boards today have to take control of negotiations immediately because managers run the risk of being biased in favour of powerful private equity buyers that typically offer rich contracts for the bosses to remain if their bids succeed. Another worry is the reluctance of private equity buyers to compete with each other in takeover auctions, thereby limiting the potential for bidding wars.
In this environment, he said boards have to take charge as soon as a company is approached by a buyer so that its advisers can fully canvass all potential acquirers and attract the highest offer possible for shareholders.
"Running your company and selling your company are two different things today," he said. "If you are going to make a decision as fundamental as putting your company up for sale shouldn't independent directors be involved right from the beginning?"
Judge Strine has no jurisdiction in Canada, but the former Wall Street lawyer's keen grasp of business issues and elegantly worded decisions carry enormous weight with corporate advisers north of the border. In Canada he is best known as the author of a gripping 134-page judgment that derailed Conrad Black's "cunning and calculated" manoeuvre in 2004 to sell his U.S. company's prized British newspaper The Telegraph.
Even more widely read is a trimmer, 29-page Netsmart decision that slammed its board for allowing managers to give preferential treatment to a pair of private equity buyers that ultimately prevailed with a takeover bid. Judge Strine was so dismayed by the board's inertia that he temporarily delayed the takeover of Netsmart so that the company's board could disclose their spotty auction efforts to shareholders.
Faced with Judge Strine's Netsmart decision and hordes of private equity goliaths that are targeting nearly every breathing corporate animal in sight, directors everywhere are scrambling to redefine their role and duties in this deal-crazed world.
Last month a senior Dow Chemical Co. adviser was fired after the company alleged he was involved in a clandestine buyout effort. The official denies the charges, but the message is clear. Boards today are under increased pressure to take drastic action if executives threaten their negotiating leverage at the takeover table.
Judge Strine's observations about boardroom conduct should make directors at BCE Inc. blanch. The communications company's board waited until last week to form a special committee of directors to oversee takeover talks, months after private equity buyers had come calling and more than a week after New York buyout giant Kohlberg Kravis Roberts & Co. collared three of Canada's largest pension funds for a syndicate that is studying a potential takeover.
Judge Strine won't talk about specific companies, but he warns that lining up the biggest acquirers in one group unfairly stacks the auction in favour of one bidder.
"If all of the big dogs have formed one club and all we have left is tiny poodles, do we really have any doubt about who is going to win the auction?" he said. "You have to ensure there are three or four clubs in an auction, otherwise it isn't a fair auction."
For lawyers and other advisers who help public company executives and boards navigate these evolving takeover rules, one of the thorniest issues will be when managers should inform directors about potential buyers. CEOs complain they get calls of interest almost every week and most of them lead nowhere.
So when should executives sound the alert? "As soon as they make a decision in their minds that they would like to explore an offer," Judge Strine said. "The board needs to know about these approaches right away."
To eliminate any confusion about the board's role, Judge Strine advises that directors have a "candid discussion" with managers to establish protocols for informing the board and talking to potential buyers or advisers about a sale. If directors don't assert their authority to conduct takeover discussions at the outset, he warns, boards could be left scrambling to hire independent advisers on short notice to evaluate or attract superior bids.
"Boards really have to step up to the plate ... they have to do it in a way that inspires confidence," he said.
Judge Leo Strine
Who Vice-Chancellor of the Delaware Court of Chancery, which reigns as the leading court for business law in the United States. He is widely regarded as a leading voice on the role and duties of directors of public companies. His decisions are delivered with disarming speed and often read like small novels.