CVR Energy Shareholders Surprised To Find Carl Icahn Acting Like A Corporate Raider

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If you want to buy a company you can do it in one of two ways: you can negotiate a merger with the board, put it to a shareholder vote, and if you get above 50% then all the other shareholders are basically forced into the deal and you pay the merger price. Or you can buy shares, typically in a tender offer, and if you get above 50% then you ... sort of own the company. But not exactly, because there are still other people who own 49%. And, generally speaking, those other people don't like you.

Today some of those other people are suing Carl Icahn because (1) he owns about 80% of independent refiner CVR Energy, (2) they own about 20%, and (3) he is being kind of mean to them. Specifically, after tendering for the company and buying most of the shares at $30, he's been taking advantage of the fact that no one really wants to be a minority shareholder in a controlled company by buying more shares at around $27.50.*

Some of those minority shareholders want to stop him doing this, claiming that "Once any genuinely independent board of directors learned of Icahn’s scheme, such a board would have adopted a poison pill to stop Icahn from making any more open market purchases unless and until the Board was able to negotiate a cash-out merger that provided the Company’s remaining shareholders with fair value." And so they're suing to force Icahn's board to adopt a poison pill and prevent him from buying at market prices. That is strange:

The plaintiffs are asking for an order to require the board to adopt a poison pill to stop Icahn from acquiring more shares. Now, these days the typical case that shows up in court involves shareholders asking courts to order boards to pull pills so that a takeover can proceed. For the same reason courts are loathe to order boards to drop pills, they are going to be loathe to order boards to adopt pills.

Indeed. The whole deal is good fun; here is some quick background.
1. Icahn started buying shares of CVR Energy, eventually accumulating about 14.5% of the shares.
2. Icahn met with management and suggested that they put the company up for sale. They said no.
3. In February, he launched a tender offer to buy the rest of the shares at $30 + a contingent cash payment** for each share of CVR that he didn't own.
4. The company recommended against the tender offer, arguing that (1) the offer was too low and (2) the offer was stuffed with conditions that made it more of a suggestion than a real offer.
5. Shareholders mostly disagreed.
6. Some shareholders convinced CVR to waive its poison pill on April 18, in exchange for some concessions from Icahn, so the board allowed the tender to go through even though it continued to say that it was insufficient.
7. Shareholders continued to disagree with the board, and tendered into Icahn's offer, leaving him with 69% of the company.
8. Icahn extended his offer so that others could have the chance to join in, as required by his concessions to the board in step 5.
9. He ended up with about 80% of the shares when the offer finished on May 21.
10. He replaced the board with his directors.

So, victory: Icahn owns 80% of CVR and appointed the board, so he's free to run it on his personal whim, mostly. Then what? Well, one possible answer would be "then nothing": maybe Icahn just always wanted to be in the gas-and-fertilizer business and now he is, with a few public minority shareholders along for the ride. (See, e.g., Mark Zuckerberg, who invited public minority shareholders to join him in his dream of paying taxes and complying with securities regulations.)

But in fact Icahn had no such lifelong dream of being a fertilizer salesman, and his original plan was to resell CVR to the highest bidder, as he's said:

PLANS FOR THE COMPANY. ... If the Offer is consummated, we expect that the new Board will commence a process to put the Company up for sale. Any such transaction would be subject to approval of CVR’s new Board and stockholders, if necessary.

So Icahn's plan was basically to flip this house from public shareholders, constrained by a board that doesn't want to sell, to a friendly acquiror. He's playing a middleman function that, if you believe him that the board was obstructing value-creating sales process, is useful: the pool of buyers who would take a hostile run at CVR, risking legal fees and negative publicity and an un-due-diligenced acquisition was small, so Icahn put his own money at risk to buy the company, create a sales-friendly board, and invite in buyers from the broader pool. In theory that broader pool of buyers, with access to management and due diligence, should be willing to pay a higher price than Icahn was, and so he should capture the spread between the hostile price and the fully shopped price.

Except that he wouldn't capture the spread: the contingent cash payment right that he gave to each tendering CVR shareholder gives those shareholders the right to receive whatever value above $30 he can get from selling the company in the next 15 months. And he can't find a buyer. Here's his description of those contingent cash payments in their final form:

The Offeror included the CCPs in the Offer to allow tendering stockholders to participate, on the terms set forth in the Contingent Cash Payment Agreement, in the potential upside under any agreement to sell the entire Company entered into within 15 months following the closing of the Offer. In connection with the establishment of the 60-day Marketing Period to be commenced promptly following the closing of the Offer, the Offeror is providing the following information concerning the CCPs.

As the Offeror has previously announced, the Offeror has attempted to find buyers for the Company without success. As far as the Offeror is aware, the Board has not attempted to sell the Company. While the Offeror believes that prospective purchasers of the Company may be found during the Marketing Period, no assurances can be given that any offers will be forthcoming or that a transaction will be completed during the 60-day Marketing Period or during the subsequent 13 months. If that is the case, the CCPs will expire worthless.

Once the Marketing Period ends, the Offeror will be under no obligation to attempt to sell the Company and does not currently intend to actively seek to do so. If the Marketing Period ends without an offer for the Company being accepted, the Offeror currently intends to focus on operating the Company’s business for the benefit of its shareholders because the Offeror believes that continual shopping of the Company could be disruptive to the Company’s operations.

What is going on here? For Icahn, the answer is straightforward: if he can sell the company at a profit in the next 15 months, he only makes money on the 12mm-ish shares that he bought before launching his tender - and the 1.6mm-ish (and growing?) shares that he's bought since the end of the tender. He has no upside in the publicly held shares, or in the ones he bought in the tender subject to CCP rights. Buying shares in the market now doesn't have much effect if he's just planning to run the company independently, but is a pretty good way to increase his compensation for putting CVR on the block.

The holdout shareholders claim that this is "abusing" them, and an "unlawful scheme," and maybe,*** but I have to say they look like doofuses here. As part of the April 18 Transaction Agreement that CVR and Icahn signed on April 18, waiving the poison pill and reducing the conditions to Icahn's offer, the pre-Icahn board imposed some sensible shareholder-protection requirements on Icahn. In particular, they required that Icahn extend his offer if he got above 50%, so that shareholders who didn't like his offer could nonetheless tender if the alternative was being stuck in minority-shareholder limbo like this. And they required that if Icahn got to 90%, he complete a Delaware short-form merger to give everyone the same price, meaning that the not-paying-attention-retiree segment of the shareholder base would have a fair chance to get the offered merger consideration.

The fact that he ended up in this limbo - over 80% but below the 90% short-form threshold - is kind of the fault of the shareholders who are now suing. They had the choice of (A) take Icahn's $30 plus CCP or (B) don't, and wind up a minority shareholder in a company Icahn controls - and once 80% of shareholders chose option (A), they had no particular reason to think that option (B) would be palatable. Had the deal been structured as a merger, they would have been automatically cashed out at $30 + CCP; the fact that it was a tender offer means that they had the option to hang around for the giggles and lawsuits, but it's not clear why that would have looked like a superior option. In fact, their lawsuit isn't even claiming that they deserve better than $30 + CCP - they're just asking to get what they turned down three weeks ago.**** My best guess is that they concluded they could extract more nuisance value from lawsuits like this than they'd get by tendering with everyone else, and if that's the case it's hard to begrudge Icahn abusing them a little bit.

Man bites dog in CVR suit [M&A Law Prof Blog, and complaint (pdf)]
In unusual lawsuit, CVR investors seek poison pill [Reuters]

* That's the weighted average of his purchases reported so far - with the stock now in the $24s he's presumably buying more.

** Normally called a "contingent value right" and abbreviated "CVR" but I guess that would be too confusing here, though note that CVR (the company) is actually normally abbreviated CVI so the confusion is less, or possibly more, than you might think.

*** You can read more here about the Delaware legal standards. Majority shareholders do have some obligations to the minority in Delaware, and buying shares from some shareholders at a lower price than you paid in a previous tender is the sort of thing that sometimes gets courts worked up.

**** And, of course, nobody's forcing them to sell to Icahn - if he eventually resells CVR, they can cash out at the same price he gets - though, as they note, if he does get above 90% he can force them to sell via statutory short-form merger, and not necessarily at a price they like.


Goldman Surprised To Find Carl Icahn Being Kind Of A Dick

Sell-side M&A work is mostly a pretty good and lucrative business model but it has a few flaws. Try to spot a key one here: (1) you represent a target; (2) you spend your days fighting tooth and nail with the buyer to try to make them pay more and give up optionality, and generally to get more of the benefits of the deal for the target than for the buyer; (3) then the buyer acquires the target, fires all the directors and officers, changes the locks, and replaces the stationery; (4) then you get paid. Did you spot the problem? Carl Icahn did: