Archived entries for Legal

2010.47 Inside Job screening and my review

What should have been an important movie is marred by a slanted and biased attack.

First, thank you to The Wrap for inviting me to a screening of Inside Job (click Inside Job for webpage) last night in Sherman Oaks. And thank you also to director Charles Ferguson for speaking about the film and answering questions after the screening.

I wasn’t able to articulate the question I would have liked answered last night but now can: Why lose such an important message in mean spirited and malicious attacks?

The movie starts with some quotes from finance professionals and commentators that set up the audience for the tone of the movie. I’m okay with that; the documentary needs a mission statement and this one’s is clear from the beginning.

And the first half or so of the movie is great. A lot of these questions should be asked and the answers exposed. Many Wall Street and other firms did a lot of questionable things during the time frame covered and the public deserves answers. Ferguson spares no administration from Clinton, to Bush, to Obama…which I admire. He treads softly around certain governmental participation in the factors leading to the bubble then skewers them in others. For example, when regulating derivatives was proposed, the poor lawyer who suggested it was attacked from industry and government both. Ferguson’s clips of executives from various firms evading questions, even very direct ones, while in front of various government panels is painful to watch. Sure, answering some questions honestly exposes your firm to potential liability but a certain level of ethics and acceptance of responsibility when presented with facts would have been reassuring. The lead up to the financial crisis is informative, concise and understandable.

The film’s photography and imagery are beautiful. Technically the film is lovely. It follows a coherent narrative flow and explains complex issues in a way understandable to many. I especially loved the sweeping aerial shots of Manhattan. Ferguson is a very skilled film maker.

Ferguson does get a few facts wrong – for example, while Wall Street CEOs earned high numbers, much of this compensation was in the form of stock, deferred comp and other illiquid (in the short term) payments…and in some cases was only paper money that melted away during the financial crisis. And he also makes a few puzzling arguments (the increasing distribution of wealth to the top 1% of the population may be relevant when analyzing the financial meltdown but he doesn’t explain the tie…which makes it puzzling). I can forgive him these points; he is clearly using facts selectively to support his mission statement. Ferguson doesn’t owe us a fair minded portrayal…he’s been clear from the start in defining his agenda.

But Inside Job veered off course completely when the personal attacks began; both in not substantiating them and in the mean spited way many interviewees were attacked after agreeing to speak (leading questions with no answer being shown on film, accusations, assumptions…). I was puzzled when he criticized professors who had advised and been in government for getting paid for their work and public speeches (and, in like spirit, is Ferguson getting paid for the documentary or any related paid speeches he is asked to do?). Economic theory is just that – theory. Only in actual application can we see if it will work. I don’t understand why academic economists shouldn’t do advisory work inside or outside government.

And having Elliot Spitzer as a moral high ground making indirect accusations/innuendos about prostitution and sex in the industry seems bizarre. First, I have my own issues with Spitzer as I believe his actions directly contributed to the financial meltdown. Next, his innuendos are tied in with direct (but unsubstantiated) accusations of rampant drug use and prostitutes as a part of Wall Street culture by a madam and psychologist with “Wall Street clients”. With no direct information just sweeping statements the tactic appears to be a trick meant to deflect from the real issues and just smear the industry.

Interestingly, Ferguson uses interview clips with Raghuram Rajan, who wrote Fault Lines and was at the IMF during the time in question and warned of the risks, to support his argument. Yet Rajan’s excellent book is more moderate and realistic and much more powerful than this biased movie.

The question and answer period after the film revolved around a wall street bashing free for all so Ferguson clearly found his audience last night. Too bad he didn’t aim for a serious discussion of the issues instead of sensationalism. I thought the first half of the movie was excellent and was disappointed with the ending. Perhaps that’s what it takes to get big studio support in this day and age. But, I wonder if, had his viewpoint not been pre-determined and antagonistic, he would have gotten access to a broader range of key potential interviewees and been able to provide a more rounded picture.

That movie is still waiting to be made.

2010:44 Due diligence; better to identify problems early on

People entering the panel room.

I was a panelist at the recent Digital Hollywood conference. The topic was Venture Funding, Investment and Mergers. One question made me really think. In the context of a busted deal, we were asked how to head off surprise issues which can crater a potential company sale. The answer is to do your (generally extensive) due diligence both thoroughly and as quickly as possible.

But how exactly does company’s management go about doing that diligence?

Again, an easy answer does exist: hire the right investment bankers, lawyers and perhaps accountants. Sometimes a private investigator is also hired. But that answer only gets someone part way. Because ultimately management will live with the results of that diligence and therefore must stay involved, or appoint someone senior from the company to fill that role.

So what does doing your due diligence entail?

On a typical M&A transaction the bankers or lawyers representing the seller will put together a data room based on an extensive list of documents. We’ll then set up conference calls between the relevant parties to discuss questions that aren’t covered within the documents provided, or that stem from them.

Confidentiality of information is always an issue; even if an NDA is in place. Anything too proprietary must be kept confidential (and can be covered in any purchase or other agreement) and information is typically provided on a need to know basis. Sometimes it can also be disclosed to a company’s lawyers or accountants but not directly to management. Such sensitive information includes: technology, customer information, product sales mix and employee information. Indeed, some contracts may also limit what information can be shared with third parties.

On the disclosure side most bankers (and lawyers!) will encourage their clients to disclose any potential “smoking guns” upfront. If you have an issue which may scuttle the deal better to let the party know before you open the kimono, give them more information and ultimately waste everyone’s time. Either they can accept the information and move forward or not. And, nothing undermines credibility more than such an issue being discovered by the other party later in the process (which can scuttle the deal and possibility lead to a lawsuit).

Experts can also be brought in to do the diligence in niche, specialized areas like technology, industry or product.

What general topic areas are covered in the diligence process? Each list of items is customized for the respective company and its industry. Generally, the basics include: financials (audited, if possible) going back five years, customer and sales information, product information, facilities, legal information, general corporate information (such as articles of incorporation, board minutes, etc), marketing, employee information, retirement and health plans, environmental information, patents or other technology-related information and more.

Due diligence is a process that must be done thoroughly and with care. Missing something important can be a very costly mistake. In the long run, hiring experts when necessary is a wise financial decision.

2010.46 Confidentiality

I was in San Francisco earlier this week meeting with some very exciting companies. These trips are always fascinating as I learn about the related company, its industry and often much more. After the last trip I sat down and tried to encapsulate some of what I learned in a blog posting. And threw what I wrote away.

The posting read like gibberish: in order to honor the requisite confidentiality requirements (inherent in such a meeting) I had to leave the best details out.

I’m like that at dinner parties too. In such a social context I can be the most boring person in the room.

“What are you working on?”
“This and that,” I’ll reply.
“Oh, not busy; too bad,” may be the response.
“No it isn’t that; I just can’t discuss any of my transactions,” I’ll say and get an eye roll and then maybe a joke.

Investment bankers walk a fine line. On the one hand, our core value proposition is what and who we know. We make introductions and can update management on what we’re seeing in the industry and on the financing or M&A front. But we can’t disclose any information that has been shared in confidence. The balance is delicate.

I always say that if I mention a company to someone I’m not currently working with that company (unless I’m mentioning it in the context of bringing you into a deal). But, I have gotten calls from management out of the blue when they received an unexpected offer. Facts change. But the need for discretion does not.

Having been to law school I have an innate sense of caution when it comes to information sharing. Early in my career I then worked with numerous public companies (where the wrong slip can be catastrophic). I also (many moons ago) had a senior managing director threaten me if I didn’t stop sharing confidential information over a cell phone (land line only – not easy in that he traveled 80% of the time – I learned).

On this trip I took a few pictures in San Francisco; one of which headlines this blog posting. None were of buildings in which I had a meeting. Confidentiality agreement or not, we carefully protect the information with which we’re entrusted.

2010.42 ESOP: an alternative to a traditional company sale or outside investment

An ESOP is a tax qualified retirement plan in which the ESOP becomes a shareholder of the company and also provides retirement benefits to employees. Unlike most retirement plans it can borrow money to buy company stock while also providing tax benefits to business owners selling stock to the plan. Essentially, in a leveraged ESOP the ESOP or its corporate sponsor borrows money and provides the lender with a guarantee that it will make contributions to the trust enabling the trust to pay back the loan on schedule. Related Internal Revenue Code provisions include 1986 provisions Section 401(a), Section 4975(e) and Section 407(d) (6).

As a defined contribution plan the ESOP must comply with certain requirements. It must meet minimum eligibility and participation levels. It must be non-discriminatory with respect to highly compensated employees relative to those not highly compensated, and meet related limits on contributions. It must be designed to invest mainly in the company’s securities . The purchased stock is held in trust to be released to employees over time. For existing shareholders the plan provides liquidity and a favorable tax treatment when the ESOP buys over thirty percent of the company’s shares. As stock is vested to employees the company gets a tax-deductible compensation expense. Thus existing shareholders can cash out and other employees can purchase company shares. This structure is an alternative to an outright sale of the company and especially useful where the founders or other shareholders want to achieve liquidity while other shareholders want to retain or expand their ownership (but can’t necessarily fund the related share purchases upfront).

Investment in the company’s securities, should, on balance, be over 50% of the holdings. Permissible securities are typically most classes of public and private stock (the latter subject to voting right and dividend preference requirements), with certain debt sometimes making the grade. An independent appraiser must value the securities once a year. The securities of S corporations qualify but the sponsor loses certain tax benefits (and state law must be checked: California, for example, imposes a 1.5% income tax on all S Corporations).

If the requisite conditions are met, capital gains on non-publicly tradable stock of a C corporation can be deferred or permanently avoided. Since ESOP contributions are tax deductable, a corporation which repays an ESOP loan can essentially deduct principal and interest from taxes. And, dividends paid on ESOP stock passed through to employees or used to repay the ESOP are tax deductible if the corporate sponsor is a C corporation. If the sponsor is an S corporation, dividends can be used to pay the ESOP but there is no tax deduction (an S corporation doesn’t pay corporate income tax).
Typically annual contributions of 25% of eligible payroll are allowed, the funds being used to pay off debt principal and interest. Exception on interest payments (allowing them to be paid with contributions above the 25% above) exist.

A participant reaching 55 years old with at least ten years participation in the plan must be given the option to diversify his/her assets outside of the company stock. The percentage goes up over a defined period of years. The diversification can either be done within the plan or cash distributed to the individual for outside diversification.

Some common uses of ESOPS in ownership succession planning:
-Minority interest stock purchase in which only a minority of shares are sold to the ESOP
-100% ESOP leveraged buyout where existing shareholders cash out entirely

This explanation is a very simplified overview of a leveraged ESOP. Check with your advisors for specifics on the applicability for your company.

This data is based upon a more detailed piece written by lawyer Laurence A Goldberg, Esq. of Sheppard, Mullin in San Francisco. Feel free to email me for more information at jones@hadleypartners.com

2010.38 Carl Icahn Sues Lions Gate and Rechesky over Debt to Equity Deal: Why Good Advisors Matter When Contemplating M&A

The ten-day truce between Carl Icahn and Lions Gate management is very clearly over.

Icahn has let it be known that he doesn’t support the merger discussions between Lions Gate and MGM.

On July 20, Icahn also launched a new takeover offer for Lions Gate common stock at $6.50 per share, lower than his previous $7.00 offer. The offer is contingent on management not entering into a major transaction outside the normal course of business. The tender offer will expire August 25; Icahn will then nominate a slate of directors to replace Lions Gate’s current board. The election will occur at the company’s annual board meeting; most likely in October.

Lions Gate, in an effort to reduce debt, issued common shares at $6.20 per share to retire $100 million in convertible debt, the stock price represented a 2.8% premium to Monday’s share price. Icahn’s holdings were reduced to about 33.5% from 37.9%. The move doesn’t only dilute Icahn; it dilutes all existing shareholders. The 16.2 million new shares went to Mark Rachesky (MHR Fund Management), who already held almost 20% of the company’s common shares; his percentage is now 29%. The debt, due in 2026 and 2027, was acquired from Kornitzer Capital. Kornitzer also owns a small number of Lions Gate shares which he hasn’t tendered to Icahn.

Icahn must now acquire almost another 17% of shares to accomplish his takeover goal – assuming that management doesn’t convert more debt to equity.

This morning Icahn filed a law suit in New York state court against Lions Gate and Mark Rachesky seeking damages, an injunction rescinding the debt-to-equity swap and the prohibition of the defendants from voting their shares in a vote to elect directors. Icahn also filed a petition to the Supreme Court of British Columbia – a hearing to be held on Wednesday – regarding whether to grant orders against Lions Gate and Rachesky. Both sides are engaging in some general public mud slinging; the specifics of their accusations won’t be covered herein.

The battle continues. Lions Gate stock closed at $6.90 today, July 26.

The fight over Lions Gate reflects the importance of good advisors. Both sides are now exploring creative transactions and strategies to ensure that the outcome of this M&A battle is in their favor. Clearly the bankers and lawyers involved are working hard on behalf of their respective clients.

2010.35 Different M&A bidder types; as demonstrated in recent content library-related announcements: Miramax, Lions Gate, MGM, EMI and the Weinstein Company.

A slew of recent media-related deals and announcements has me wondering. Blogs have reported that Colony Capital is teaming up with Ronald Tutor to buy Miramax. While Colony is known as a real estate private equity fund, it started out buying distressed assets during the S&L crash. Richard Nanula, a Colony partner, was Disney’s CFO years ago so he probably grasps studio economics as well as anyone. Also as covered here before, Carl Icahn – known as a corporate raider – is making a run at Lions Gate. Lions Gate is reported to be in talks with MGM about a possible merger. MGM’s debt holders, in turn, reportedly rejected a $1.5 billion bid from Time Warner. EMI’s owner, private equity firm Terra Firma, invested an additional £105 million into EMI to avoid a default on the music company’s debt; if the bankers hadn’t gotten paid they could have taken over EMI. The Weinstein Company recently negotiated a restructuring agreement in which its lenders are relieving it of $450 million in debt and providing new cash in exchange for a $115 million payment from Ambac and the rights to 200 Weinstein movies, including the $233 million in related accounts receivable (Once Goldman and Assured Guaranty recoup their money the film titles will revert to Weinstein).

What do all of these (possible) transactions have in common? All of the related companies have content libraries; their valuations are functions of both legacy assets and in some cases efforts to create new content. Lenders are also having an impact on deal negotiations. Lions Gate and Weinstein’s lenders have been working with them to give them time to address their business issues, while EMI’s lenders (led by Citigroup) have been more aggressive in their willingness to potentially take over the company. In all cases, investors and debt holders are assigning value to libraries of content (music in the case of EMI, film content otherwise).

What they also have in common is that a wide range of buyers is demonstrating interest in these content library-based businesses (potentially including existing debt holders).

So, the using these transactions to illustrate the types of buyers common in M&A transactions and depending on circumstances:

Strategic buyers: Strategic buyers are essentially other corporations, most typically in the same or a related business. MGM and Lions Gate – should one buy the other – are examples.

Financial buyers: most typically private equity firms. They buy businesses that have enough stable cash flow to support the addition of debt (added to leverage their investment and, hopefully, their return). Their goal is to run the company better than the prior management team and sell a few years down the road at a profit.

Distressed investor: comes in when they think an asset is (generally grossly) underpriced. Defaults on debt, market turmoil (and an overreaction with respect to valuations which plunge as the panicked or illiquid dump related assets), bankruptcies and predictions of gloom are all signals. Colony Capital made its name buying distress bank and commercial real estate holdings.

Corporate raider: targets a company whose publically traded equity he believes is undervalued. The raider then pressures management to make certain changes in an effort to raise the share price. Carl Icahn made his name as a corporate raider. The goal is typically to turn a quick profit.

White knight: What Lions Gate is likely looking for. A white knight is a bidder who comes in and usurps a corporate raider – typically by working with management to come up with a higher or more favorable bid. Example? None thus far in any of the transactions discussed herein.

In the above related transactions existing debt holders are also sometimes expressing interest in taking over the company – either to liquidate the assets of the business or assume operations.

An investment banker can and will tailor potential buyer lists in advance of any solicitation to maximize long term benefits from any transaction to shareholders, employees, management teams and even the company’s customers.

2010.33 Carl Icahn now owns close to 38% of Lions Gate shares; Mark Cuban did tender his shares

Carl Icahn now owns almost 38% of Lions Gate’s stock. His offer to buy shares from Lions Gate shareholders ended last Wednesday (June 30). Mark Cuban did tender his shares to Icahn. Thursday he purchased 4.64 million more shares on the open market. With other recent purchases he now owns 44.8 million shares, or almost 38%. Due to Canadian law he can’t buy more shares in the open market (Lions Gate is legally a Canadian company). Icahn has declared that he will wage a proxy fight for control.

Later Thursday Lions Gate management adopted a shareholders rights plan triggered at 38% ownership. In it is a provision which allows shareholders excluding a bidder (for the company) to buy shares at a discount. Previously, trying to fend off Icahn, management had raised the “change of control trigger threshold” from in excess of 20% of shares to in excess of 50%. Last April they attempted to put in place a different poison pill but it was voided by the British Columbia Securities Commission. Icahn has already accumulated enough equity to veto mergers and acquisitions, and he has also tripped a provision which grants $16 million in severance to management should they decide to leave the company (they have assured the board that they will stay and fight Icahn).

Management is using classic hostile takeover defense strategies in an effort to slow Icahn down (looking for alternative transactions or ways of building shareholder value). Recent operating results were also strong which helps support their contention that Icahn’s bid is too low. For example, they have discussed a possible merger with MGM and clearly continue listening to counsel with respect to allowable corporate actions. Hostile takeover law is quite sophisticated and management teams must be careful in their attempts to thwart a potential acquirer, or, if the acquirer can’t be thwarted what steps they must take to maximize shareholder value.

The recent operating results? Lions Gate recently reported adjusted earnings for the fiscal year ended March 31, 2010 of $128 million. Film library revenues were up 15% to $323 million, with television revenues rising 60% to $351 million.

Icahn has taken his battle not only to the shareholders but also to the press. Will he start spending more time in the courts as well? Hostile takeover attempts very often involve costly litigation; under Delaware law it is often the only way for a potential acquirer to scuttle anti-takeover provisions. Icahn must act under Canadian law. Indeed, he has already gotten a Receipt of Approval under The Investment Canada Act, in which he made several commitments to government entities regarding how he would run certain Lions Gate businesses should he gain control.

Icahn wants management to clean up the company’s balance sheet, stop producing independent films and just distribute them, stop trying to acquire other film libraries and cut “absurd” overhead costs. Clearly, some shareholders still aren’t siding with him in this battle. The final tally? We’ll find out.

Note for Tuesday, July 5, Lions Gate shares dropped below $7.00 last Friday and remain there today.

2010.31 When to declare bankruptcy or call a turnaround expert; thoughts after the Turnaround Management Association’s 8th Annual Night of Excellence

Last Thursday I attended the Turnaround Management Association’s 8th Annual Night of Excellence – a charity event benefitting the City of Hope. It was held at The Petersen Automotive Museum and included dinner and a wine tasting. One wine was named “Ponzi” which in this crowd means you just drink it while hearing about their recent Ponzi scheme related assignments.

I was talking to George Blanco from Avant Advisory Group, who headed the event and he said something interesting: that many restructurings or bankruptcies were transactions that didn’t happen. My mind automatically recalled a few CEOs I’d worked with that had turned down capital because they thought the deal valuations was too low and then proceeded to go bankrupt.

When I mentioned this topic idea to David he said, “Why not. We advise business owners cradle to grave, right?” So in that spirit, when to call a turnaround or bankruptcy expert:
1. Management has exhausted all other forms of capital and the company is not cash flow positive.
2. Your top line business continues to decline with little hope for an upswing.
3. Burdensome contracts or leases can’t be re-negotiated any other way (and are too expensive to afford as is).
4. Management lacks the specific expertise or skill set to turn the company around or has already tried and failed.
5. Creditors are threatening aggressive actions.
6. Industry wide challenges are creating disruptive results for all market participants and a speedy, well crafted response is required.
7. And, at the extreme, there is little value left in the business and you need experts skilled at liquidating or winding down.

And the transaction that didn’t happen? History does repeat in that funding is not always available or at least not available on reasonable terms. Raise money before you’re running out (if you are going to or just might need it); sell the company before business deteriorates to the point at which little value is left. Turnaround and bankruptcy experts have very specialized skills, relationships and knowledge that are valuable when a company or industry hits a rough patch.

Bottom line: business is a series of tough judgment calls. When to run a struggling or over leveraged business in the ordinary course, versus when to pursue a restructuring, is one of the toughest judgment calls there is. You will be disappointing equity holders and dashing expectations to push the restructuring button – but it may be the necessary step to maximize the value of the business for creditors, business partners, employees and maybe even existing shareholders. And get specialized help if you need it.

2010: 30 Lions Gate and MGM to merge? Or, strategies for avoiding a corporate raider

Why this follow up post took so long:

Updates to my last related blog post on Lions Gate:

1. Carl Icahn now owns 31.8% of Lions Gate’s shares. He has an open offer outstanding to buy shares at $7.00 until June 30. Given that the stock closed today at $7.26 he is unlikely to pick up any more shares that haven’t already been tendered. After June 30 he can buy shares in the open market.

2. Icahn has stated that he will wage a proxy fight after June 30.

3. When Icahn’s ownership position rose above 20% Lions Gate’s loan provisions were triggered (terms under which its banks could have called due related debt). The banks raised the change of control threshold to 50% after talks with management.

4. Lions Gate is now rumored to be in merger talks with MGM. At a 31% ownership stake Icahn can likely scuttle any such plan. Given the public information about both companies it’s hard to believe that a Lions Gate/MGM transaction is possible at this time (Icahn’s ownership percentage; MGM’s debt). But never say never…a well funded partner could bid the price up so high that Icahn would be better off taking a profit and tendering his own Lions Gate shares.

5. While Icahn hasn’t won yet his ownership stake causes real problems for Lions Gate management. What no one but Icahn knows for sure is his ultimate goal. Obviously he wants to make a profit. Does he want to actually own Lions Gate? We’ll find out.

6. As far as avoiding a corporate raider – keep watching Lions Gate. They’re clearly listening to strategic advisors and deciding to fight and not fold. Declaring that the price isn’t high enough is a permissible way of saying no and the stock price jumping above the tender offer price makes the argument very defensible. But the jump also indicates that certain traders are expecting Icahn to bid (or buy in the open market) higher. Selling the company or merging with another is another (effective) strategy.

7. I’ll continue posting updates. Thoughts or comments?

One more photo. Where was I?

2010.27 Mark Cuban declares that he’ll tender his Lionsgate shares to Carl Icahn; or, the perils of activist investors

For anyone following Carl Icahn’s attempt to acquire control of Lionsgate, Cuban’s announcement increases the pressure on Lionsgate management. Indeed, today management mailed a letter to shareholders touting the company’s achievements and urging investors not to tender their shares to Icahn. The letter points out that throughout the course of 2010 their business results have been on an upswing. They declare Icahn’s $7.00 share offer inadequate.

In April, when Cuban bought his shares, his intent seemed unclear. Cuban has a history with Icahn and as an investor in media-related industries. In 1998 Icahn nominated Cuban for a Yahoo board seat. In 2008, Cuban was on the investor’s proxy slate to seize control of Yahoo’s board. However, Cuban also sold Broadcast.com to Yahoo; and owns movie theater chain Landmark Theatres and film distributor Magnolia Pictures. His long involvement and interest in these industries is well established aside from any relationship he has with Icahn.

Icahn’s offer? Until Wednesday June 16, Lionsgate shareholders can tender their shares to him at $7.00 per share, up from Icahn’s previous offer of $6.00 per share (closing price today was $6.97). For a ten-day period after that he’ll keep the offer open. His current stake is almost 19%; Cuban owns 5.3% rising to just over 7% should 2,000,000 other shares be put to him; about 4% of outstanding shares have already been tendered to Icahn. Once Icahn owns 20%, a default under the terms of Lionsgate’s $340 million revolving credit facility with JPMorgan Chase will be triggered. The bank can provide a waiver; Icahn has offered to provide a bridge loan.

If Icahn’s holdings exceed 33% the top five Lionsgate executives will get a $16 million (change of control) payout. Icahn will also be able to veto any major acquisition. Icahn has said he’ll wage a proxy battle to take over the company’s board.

Separately, MHR Fund Management LLC holds 19.75% of the company’s stock and has joined with other shareholders (who collectively, including MHR, hold 34% of the stock) to support Lionsgate management against Icahn. Interestingly, MHR president and co-founder Mark Rachesky used to work for Icahn. The two claim to still be friendly though they obviously don’t agree with respect to Lionsgate.

Icahn needs the votes of 50% of the shares to win his upcoming proxy battle. That doesn’t mean he needs to own 50% of the company, but he needs to convince other shareholders that he has a better plan to maximize value. He has said he’ll replace management.

What does this all mean? First, activist investors can cause problems; this reality can be potentially worse in the public company context but we’ve also dealt with minority shareholders who can scuttle a transaction involving a private company. Indeed, sometimes just dragging your feet with respect to approving a fundraising or M&A deal is enough to kill it. Second, how your corporate and other documents are drafted matters. Watching the Icahn/Lionsgate saga unfold we can all note how Icahn targets his actions to Lionsgate’s corporate documents and debt terms. He was willing to turn to the courts to invalidate their poison pill. Watch the terms you adopt very carefully and – if you’re public – hire an investment bank and lawyer to evaluate your poison pill or other takeover defense options (before you need to). Three, investment banking can be full of drama and even exciting. But hostile takeovers remain the deal exception and not the rule – though they are much written about. Hostile takeovers are generally limited to those public companies that are large enough to justify the related legal and banking costs. But even for a private company, fights among shareholders can be costly and distracting to management (so plan such issues as succession ahead of time). Fourth, relationships matter. Many of the parties involved in this fight have long histories together. Their related insights help shape actions and responses.

It also means Cuban is no dummy. He bought his shares for prices between $5.95 and $6.27 per share in March and April, so he is making a decent trading profit by tending to Icahn.

Should Icahn win his battle for Lionsgate or should management continue to try and execute their business plan?

I commend Lionsgate management for showing strong financial results despite a very public and distracting takeover battle. I’ll post an update later as events continue to unfold.

To learn more about Hadley Partners go to www.hadleypartners.com. Email me at jones@hadleypartners.com should you have any comments (or comment below).



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