August 15, 2008, NYT Times DealBook, by Steven M. Davidoff, The Deal Professor.
In light of Delaware’s dominance of takeover regulation, it is easy to forget that other states have their own, sometimes very different, takeover laws and procedures.
California rejects Delaware’s Revlon doctrine, which requires that a board obtain the highest price reasonably available when a break-up or sale of the company is inevitable; Texas requires a two-thirds vote to approve a takeover via a merger; and Pennsylvania has the toughest antitakeover laws in the nation, the result of an attempt in the 1980s to protect its industrial enterprises from out-of-state acquirers.
I was thinking about this in light of Thursday’s moves by Harbinger Capital Management.
Harbinger, a hedge-fund firm much in the headlines these days, has delivered a control share acquisition statement to Cleveland-Cliffs under Ohio’s Control Share Acquisition Statute, proposing to acquire up to one-third of Cleveland-Cliffs.
Cleveland-Cliffs is a mining company incorporated under the laws of Ohio and therefore governed by Ohio’s takeover laws. Harbinger took this step in order to block Cleveland’s pending acquisition of Alpha Natural Resources.
Cleveland is the proposed acquirer of Alpha, but it is required to hold a vote to approve the acquisition under Ohio law (and New York Stock Exchange rules, for that matter).
A quirky Ohio antitakeover statute (Section 1701.83 of the Ohio General Corporate law) requires Cleveland-Cliffs to have a vote of its shareholders to approve any issuance of its shares in an acquisition transaction in which it issues stock representing more than than one-sixth of its voting power.
The vote requirement is not the quirk; NYSE rules require a similar vote if a company issues more than 20 percent of its voting power. But rather the quirk is that two-thirds of Cleveland’s shareholders must approve the acquisition under the statute.
This is a problem for Cleveland. Harbinger already owns 15.57 percent of the company. If it acquires all of the shares it seeks, or even a significant portion of them, it will be able to block Cleveland-Cliffs’ acquisition of Alpha.
But before Harbinger can acquire this position, it must comply with another Ohio law, the Ohio Control Share Acquisition Statute (Section 1701.831 of the Ohio General Corporate Law).
This species of law is common in many states, but is not the law of Delaware. Control share acquisition statutes, along with other state antitakeover laws, were often passed in the 1980s to stem hostile takeovers of local enterprises.
Ohio’s version of the control share acquisition statute requires that shareholders pre-approve any acquisition that, when added to the proposed buyer’s current share ownership, would equal one-fifth or more of the company’s voting power as relates to the election of directors.
So, Harbinger’s delivery of a control share acquisition statement is the first step required in this process.
Ultimately, the statute requires that Harbinger’s acquisition be approved by a majority of those shares that are present at the shareholder meeting voting on this acquisition. However, the count excludes all interested shares; interested shares are defined to include the acquiring person’s shares (in this case Harbinger).
Notably, Ohio, in its infinite wisdom, has also adopted an anti-arbitrageur provision to this statute. This so-called “arb” provision was added in 2003 after Northrop Grumman’s acquisition of TRW, which was based in Ohio. It effectively disenfranchises from voting at the meeting, for the purposes of the control share acquisition statute, any shareholder who acquires a block of shares constituting more than 0.5 percent of the company — in this situation, Cleveland-Cliffs — after the announcement of the control share acquisition.
In Cleveland’s case, that cutoff date was Thursday. Be careful out there.
Now, Cleveland is in a race, with two separate shareholder meetings on the horizon. One is to approve or reject the Alpha Natural Resources acquisition. The second will decide whether or not Harbinger can acquire a sufficient number of shares to block the Alpha transaction.
The question is this: Can Cleveland hold a vote to approve the acquisition of Alpha before the vote to authorize Harbinger’s acquisition of more shares in order to block the transaction?
Or, more appropriately, can Cleveland set the record date for the Alpha meeting — the date on which it counts shareholders eligible to vote — before Harbinger acquires the shares it seeks?
If Cleveland can do so, then Harbinger will need to obtain the votes of other shareholders to block the transaction. Harbinger is stuck until then. Though it can conduct a proxy solicitation against the vote, under the law it can’t acquire more than one-fifth of Cleveland without this shareholder approval.
For those handicapping this race, the determinant of whether or not Cleveland can indeed set this record date before the Alpha meeting will be Cleveland’s ability to clear its pending registration statement with the Securities and Exchange Commission in time.
Under Ohio law, the Harbinger meeting can be set by the Cleveland board on a date any day 50 days after Thursday, and the record date any day in that period.
That is a decent amount of time, and so I am betting that Cleveland will win this race.
Of course, Cleveland could simply cut through all this by adopting a poison pill to block the acquisition.
Ultimately, Harbinger is posturing here: At this point, Harbinger can likely pull together the remaining shares to block this deal even if it cannot purchase them. The Alpha deal is unlikely to be completed and the question is whether or not Cleveland actually pushes this to a vote and Alpha, out of hope or simply because they are furious, requires that Cleveland do so.
In the meantime, Alpha disclosed in the Cleveland registration statement that it had other suitors (Arcelor Mittal?) though not at the right price.
Will those suitors return? Of course, there are other questions too, such as, what does Harbinger really want? And why didn’t Cleveland get better assurances from Harbinger before agreeing to this acquisition?
This battle also points to the absurdity of the Ohio Control Share Acquisition statute and similar laws. They were adopted back in the 1980s, before the poison pill, to provide companies a defense against tender offers.
Putting aside the appropriateness of states protecting inefficient enterprises and their doubtful economic efficiency, the threat the tender offer posed back then no longer exists. A company can adopt a poison pill to stop a tender offer in its tracks.
So at this point, these statutes are a needless procedural formality. Though for companies like Cleveland Cliffs and Diebold, which is the subject of a hostile offer by United Technologies, they’re a nice protective boon.
Harbingers control share acquisition statement is available here.