Carl Icahn's CVR Energy Tactics Are Already Paying Off

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When a company does something that corporate-governance activists really don't like, like adopting a poison pill, typically they announce that "the board decided unanimously to punch you in the face for your own good." There's some perception that, if they're all in it together, the directors can't be up to anything too unsavory. Forest Labs doesn't have that option:

Forest Laboratories, Inc. (NYSE: FRX) today announced that its newly constituted Board of Directors adopted a stockholder rights plan and declared a dividend distribution of one Preferred Share Purchase Right on each outstanding share of Forest Laboratories common stock.

The Board adopted the rights plan in response to the recent rapid accumulation of a significant portion of Forest’s outstanding common stock. The rights plan is intended to protect the Company and its stockholders from efforts to obtain control of the Company that are inconsistent with the best interests of the Company and its stockholders. The rights plan also has an exception for an offer for all shares that is accepted by a majority of the Company’s shares and treats all shareholders equally.

That must have been an awkward meeting! For those of you sensibly not following the Forest Labs saga, that "newly constituted Board" was newly constituted with Carl Icahn nominee Pierre Legault, who was elected two weeks ago in a proxy contest, beating out one of the company's nominees. The other nine directors are still the ones who opposed Icahn in the proxy contest. And the rights plan was designed to keep Icahn from buying any more of the company. Presumably it was approved 9-1.

Since the proxy fight Icahn has bought about 2% more of the company, giving him 11.2% of the shares, and management is clearly pretty sick of him. Thus they've adopted a poison pill that triggers at a non-standard 12% of the outstanding shares, because 12% is the smallest integer* that is greater than 11.2%, but that also manages to exempt Wellington, with 13%, even though 13% is more than 12%, because Wellington is the sort of investor that managements like. The press release is specific about the sorts of investors that management dislikes:

Howard Solomon, Chairman and Chief Executive Officer of Forest, said: “After concluding a second proxy contest during which he repeatedly – and erroneously – disparaged Forest’s business model and growth prospects, Mr. Icahn increased his already significant position in Forest with rapid open market purchases. In light of these recent developments, the Board has adopted a stockholder rights plan that is designed to ensure that all of Forest Laboratories’ stockholders receive fair and equal treatment in the event of any proposed takeover of the Company, to guard against abusive tactics to gain control of Forest Laboratories without paying all stockholders a premium for that control, and to enable all Forest Laboratories stockholders to realize the long-term value of their investment in the Company.”

So: I don't really know what's going on with Carl Icahn's CVR Energy machinations; I have my guesses, but basically, it's like, why did he buy 82% of a company that he doesn't want to buy 100% of? I don't know, you should ask him. But I did guess that those machinations might come back to bite him, because the more of a raging asshole you are, the more boards can do to keep you out of the next deal.

And that happened fast, huh? It took Forest Labs about a week. I mean, they lost a proxy fight.** Shareholders are let us say at least open to considering that Icahn may have a point when he talks about "the stark lack of corporate governance at Forest where an ineffective Board made up largely of non-independent directors is unwilling or unable to hold Howard Solomon and his management team accountable." And poison pills are traditionally viewed as an indication of a lack of corporate governance, possibly even a stark one.

But you run one coercive tender offer where you screw the minority shareholders and everything changes. This pill is perfectly tailored to Icahn, and not just in triggering at 12%. There's this:

Qualifying Offer Exemption. The rights plan also includes “qualifying offer” provisions, whereby the Rights will automatically expire concurrently with (but no earlier than 100 days after the commencement of such qualifying offer) the purchase of 50% of our outstanding common stock on a fully diluted basis pursuant to a tender or exchange offer for all of the outstanding shares of Company common stock at the same price and for the same consideration, provided that the offeror irrevocably commits to purchase all remaining untendered shares at the same price and the same consideration actually paid pursuant to the offer.

So Icahn can get around the pill - but only if he commits to acquire the entire company on the same terms, exactly as he didn't do with CVR.

Now, I confess that I dealt with poison pills mainly back in the bad old days, when men were men and poison pills were designed to allow boards to prevent shareholders from ever selling the company without management's permission, so I'm not too familiar with these "qualifying offer" provisions. But I gather that these wishy-washy "we'll let the shareholders have some say" provisions are now pretty common, accounting for over a third of new poison pills. ISS even demands them (along with a minimum 20% trigger, but whatever). My casual perusal of a few of thosepills show that, while they typically do require this "irrevocably commits" business," it is usually larded among a bunch of other requirements like that the offer be fully financed, be at a premium, etc., which seem more important in those deals.

Forest's pill, on the other hand, is solely focused on Icahn's recent behavior/misbehavior: he can offer shareholders whatever deal he likes, as long as he promises to give that offer to all shareholders, even the ones who don't tender and end up stuck in a minority. It's hard to imagine a court or a shareholder or ISS getting too mad about that: after all, it saves Forest shareholders from the limbo currently afflicting CVR. And without the threat of that limbo, it will be just a bit harder for Icahn to have his way with Forest Labs.

Forest Labs adopts poison pill plan, targets Icahn [AP]
Forest Labs poison pill 8-K [EDGAR]

* 12% ISN'T AN INTEGER, you say, but I can't hear you all the way down here.

** Sort of - Icahn got 1 of 4 nominees elected, it's a bit of a draw.

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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: