Avon's New CEO Seems To Actually Want To Work For Her Paycheck


This thing about new Avon CEO Sheri McCoy is sort of a good corporate-governance-exam question. You're the board of a public company. You've got a cash offer on the table from a rival but blah blah blah opportunistic offer doesn't reflect fundamental value and standalone prospects and contingent etc. etc., all of which is more plausible than it usually is. Also you need a new CEO. For some reason, CEOs who could plausibly run your business independently don't like to be hired to just do three months of work and then be kicked out with just their $1.9mm signing bonus and $1.2mm base salary, so to lure a good CEO you need some sort of promise of independence.* How do you make promises in business? With money of course! So you say something along the lines of "no, really, we're not going to sell out and leave you high and dry, and to prove it we will pay you three years' worth of salary and bonus on a change of control, which is (a) more than our change in control policy generally provides because these are special times what with a hostile bid actually being on the table, (b) $9mm in cash salary and bonus plus it looks to me like $7.2mm of LTIP awards** so y'know that's kind of a lot, and (c) objectively better than working for three years to get paid the same amount of money, right?"

But here's the thing: let's say Coty comes back tomorrow and offers a 150% premium, minimal-diligence, all-cash bid for AVP. What do you do now, as a board? Well, if you do sell, then your new CEO cashes out that payment that you just got done telling her was vastly more attractive than actually working at Avon for three years. And this is a bit of a problem because hey remember how every merger ends up getting everyone involved sued for conflicts of interest? Remember how that Goldman banker got scolded for a conflict of interest where he indirectly owned $340k of bidder stock in his PA and that stock might go up slightly if the bidder underpaid? Well here accepting pretty much any bid from Coty makes Sheri McCoy $9mm+ of pretty much free money, which seems like a bigger conflict than that.

Of course, CEOs sell companies and cash out their golden parachutes all the time, and plaintiffs' lawyers whine about it all the time and rarely get anywhere, but those CEOs typically weren't hired with a bigger-than-policy golden parachute while the merger offer was on the table. That set of facts, I suspect, would be helpful to an enterprising plaintiffs' lawyer in pushing up the price of a settlement. (Remember: all of these cases settle.) Which is stupid! Because it seems like McCoy's golden parachute was actually intended to do what it did: to convince a respected executive who wants to and can actually run the business independently to come join a company that is in play.

I guess I'd be complaining if I were a shareholder who wanted Avon sold. There was an amusing case a while back where a board was sued for issuing bonds that made it more likely to be sued if it got taken over by activists. (That is a highly stylized description but whatever, the case, and the solution the company came to, are sort of interesting if you're an indenture nerd.) This parachute strikes me as a lower-key version of the same thing: by creating a somewhat silly appearance of conflict for its CEO, Avon has actually made it a bit harder for her and, more importantly, for its board to agree to a takeover. Perhaps that difficulty will help them negotiate a better deal with Coty; perhaps it will keep them from negotiating altogether. But generally speaking investors can't really sue you for not doing a merger - only for doing one that they don't like. Which I guess makes this a pretty effective promise from the board to McCoy that they won't be selling the company out from under her.

Avon 8-K [EDGAR]
Avon’s New CEO Get’s Sweetened Change In Control Clause [Deal Journal]

* Isn't that weird btw? I'm definitely the sort who'd prefer to do three months of work and then cash out with my barely-earned signing bonus, which I guess is why I don't run a public company. In general there are a lot of jobs in the financial world where the people who take them are all "ehhhhh, I'm not so sure about this," and I just want to say "I WILL DO IT FOR CHEAP." I know it sucks to be a corporate director these days what with SOX and increased scrutiny and more shareholder lawsuits, but if you want me on your board, I'm in, seriously, "pseudo-financial blogger" looks awesome in a proxy statement. You want me to be the CEO of a struggling company that is just trying to sell itself, and after it's sold I'll be unemployable? Done. I'm unemployable now.

** She gets $1.2mm/year in base, 150% target cash bonus, and LTIP (70% RSUs and 30% cash) "with an annual target award equal to 600% of base salary, subject to achievement of performance goals." Under the change in control policy, as modified by her contract, she gets three years' salary and bonus on a no-cause termination after a change in control, but it looks to me like the LTIP isn't tripled.


Shareholders Seem Unfazed By Evildoing In Kinder Morgan - El Paso Deal

The shareholder meeting to approve the sale of a public company is always a special occasion, both intense and bittersweet. Shareholders who have loyally stood by the target through its ups and downs over the years want to take some time to say goodbye, but they also know that the debate will be lively and spontaneous and that anything can happen: one passionate orator can sway the crowd for or against the deal. With so much riding on the meeting, space is at a premium; smart shareholders book their flights early, and I would not be surprised if El Paso shareholders camped out outside the Hyatt Regency Houston*, 1200 Louisiana Street, Houston, Texas 77002, far in advance of the shareholder meeting scheduled for 9 a.m. tomorrow. And they will be distraught to learn that the meeting was just moved to Friday. No, just kidding, nobody goes to these** and they're pointless formalities. You can tell because: El Paso today said it was adjourning the shareholder vote on its proposed sale to Kinder Morgan until Friday, instead of Tuesday, following a judge’s criticism of the company’s sale negotiations. But at the same time, El Paso said as of Friday it has received votes from 70% of the outstanding shares, with 98.5% of those shares voting in favor of the deal. That tally is not official and could change. Shareholders that had already cast their ballots now have until Friday’s deadline to change their votes. A simple majority is all that is needed for the vote to be approved. Votes could change until Friday. ARE YOU DYING OF SUSPENSE? I guess everyone already knows this but here we are with an internet so it bears repeating: Shareholder litigation challenging merger and acquisition (M&A) deals has increased substantially in recent years. To study this increase and characterize the recent litigation, Cornerstone Research and Professor Robert Daines of the Stanford Law School reviewed reports of M&A shareholder litigation in Securities and Exchange Commission (SEC) filings related to acquisitions of U.S. public companies valued over $100 million and announced in 2010 or 2011. We found that almost every acquisition of that size elicited multiple lawsuits, which were filed shortly after the deal’s announcement and often settled before the deal’s closing. Only a small fraction of these lawsuits resulted in payments to shareholders; the majority settled for additional disclosures or, less frequently, changes in merger terms, such as deal protection provisions. Interestingly, while requiring additional disclosures is a common outcome, we have not encountered a case in which shareholders rejected the deal after the additional disclosures were provided. That's from this blog post; the slightly longer paper is here. The emphasis is mine and, y'know, look at it: every M&A deal is challenged (actually 96% of deals over $1bn), virtually none (5%) of the challenges result in any improved payment to shareholders, and all the terrible information about conflicts that plaintiffs' lawyers discover somehow never convinces shareholders to change their votes. The one constant is that plaintiffs' lawyers get paid - an average of $1.2mm in the settlements that Cornerstone and Daines looked at. These suits often focus on incentives of the target's investment bankers, who are paid only if a deal is completed; I suspect those bankers would love to be in an industry where they could be paid on 100% of assignments while only succeeding at 5% of them. The El Paso case is interesting because judge is pretty pissed at the conflicts there and how they were handled, and sort of made known that he was thinking about awarding damages to El Paso shareholders - possibly in the form of judicially raising the deal price by 68 cents or so. (That's the difference between, roughly, the price that KMI and EP ultimately agreed on and the higher price of $27.55 in cash that KMI had initially offered.) That's pretty rough justice. Your model of merger negotiations could be that you negotiate to the one market-clearing price where, for a penny more, the acquirer would say no, and for a penny less, the target would say no, but that of course isn't the case. There's just a range of plausible prices and you sort of hope that the deal shakes out in that range based on negotiating acumen or whatever on either side. You sort of hope - I do, anyway - that it doesn't shake out based on a judge picking a number out of a hat. You see that here. Kinder Morgan of course has every incentive now to testify that the final price - call it $26.87, loosely - was as high as it was willing to go, and that it would have walked if El Paso had pushed for any more. But it's willing to close the deal even though it seems like, I dunno, a 50/50 chance that a judge will in effect force it to $27.55. And El Paso shareholders - well, maybe they were screwed by missing out on the chance to get paid $27.55. But of course if that was the only price they were willing to sell at, they wouldn't be selling at $26.87. And 98.5% of them seem fine right there. El Paso Delays Shareholder Vote, But Early Tally Shows Approval Likely [Deal Journal] El Paso Delays Vote on Kinder Morgan Deal (by a Few Days) [DealBook] Developments in M&A Shareholder Litigation [Harvard Law School Monstrosity] * As it happens I've probably spent more time at that hotel than any other in the world, and would be remiss not to recommend the burger at the Shula's in the lobby.. ** I actually went to one once and it was exactly what you'd expect: some executives say nice things about each other for 20 minutes, then about half a dozen retirees get up one at a time to be like "I remember when stamps were a nickel."