Steven Davidoff Solomon writes for The New York Times, June 23, 2015
Hostile takeover wars are unnerving for companies and investors alike in any industry. But the multi-front war involving the generic drug makers Teva Pharmaceutical Industries and Mylan is even more daunting.
And in this war, the fate of Mylan’s rebuffed bid for Perrigo from earlier this year also hangs in the balance. A closer examination of this skirmish is an interesting lesson on how takeovers are becoming a matter of eat or be eaten as major industries consolidate into a handful of players.
Mylan is about to hold a shareholder vote on its proposed hostile bid for Perrigo. Mylan, which had been incorporated in Pittsburgh, moved to the Netherlands as part of a controversial merger inversion deal. Under Dutch law, Mylan shareholders have to approve any significant acquisition. The Perrigo deal, valued at about $33 billion, certainly qualifies.
In the meantime, Teva Pharmaceuticals has not let up on its hostile pursuit of Mylan, after bidding $40 billion for its competitor. The same Mylan shareholders who will vote on the Perrigo deal may instead want Mylan to be acquired by Teva.
As a result, the Mylan vote on Perrigo is really a shareholder referendum on Teva’s proposal to buy Mylan.
Mylan is fully aware of this. On Friday, Mylan filed its preliminary proxy statement for this meeting.
The date of the meeting on the Perrigo vote is not yet set, but it could be in August or September. Once a date is set, we will see Mylan and Teva truly slug it out in public, hoping to influence shareholders on the Perrigo vote.
As with many hostile takeovers, there are the standard arguments you will hear for and against any deal. Mylan will argue that Teva’s hostile offer is only an attempt to disrupt the Perrigo bid. And even if Teva wins, it will be only out to “strip and flip” Mylan for valuable assets and product lines.
Teva will argue it is all about building shareholder value and Mylan’s board is only looking out for itself and not its shareholders.
Lather, rinse, repeat.
The outcome of the Perrigo vote could chart Mylan’s future. If Mylan wins over its shareholders, then it will aggressively pursue Perrigo and continue to vigorously resist Teva’s hostile bid.
If it has the backing of its shareholders, it will most likely succeed on both fronts. Indeed, Teva has stated that it will walk away if Mylan wins this vote.
If Mylan loses, then it is much more likely to be forced to the table into negotiations with Teva to reach a friendly deal. And Teva is readying its strategy if Mylan loses the Perrigo vote, girding not just for its chance to sway Mylan shareholders but also for any possible legal battle.
Among its maneuvers: Teva said last week that it had acquired 4.61 percent of Mylan. Hostile bidders acquire stakes in companies all the time, but in this case, 4.61 percent is a magical number.
As I wrote in a previous column, as part of its move to the Netherlands, Mylan set up a fairly standard Dutch takeover defense known as a stichting, or a trust that can serve as a protector, allowing its trustees to act if the trust sees the need to block a takeover.
Under Dutch law, for Teva to bring action challenging Mylan moves or any defenses that Mylan’s stichting may take, Teva must own at least the equivalent to 4.6 percent of its shares.
With that threshold met, Teva can now bring suit in the Enterprise Chamber of the Amsterdam Court of Appeal, a specialized business court known for capably handling these types of disputes.
The ability to bring litigation also clears Teva to formally start its hostile offer for Mylan. Teva’s bid will probably have several conditions including Teva’s slate of directors being appointed if the bid is completed.
Teva’s bid will probably be announced as part of a campaign to vote “no” to the Perrigo transaction, with Teva trying to keep the “moral high ground” by arguing that it is fighting for Mylan shareholder rights. Teva will most likely push the Mylan board into standing down so it does not appear to be opposing the will of its shareholders.
For its part, Mylan will try to delay Teva’s entreaties by asking for more information. Or it could simply refuse to respond to any formal unsolicited offer.
There is precedent in the Dutch law allowing for the board to hold off on deciding on a big transaction for up to six months. Mylan will most likely rely on this, arguing that it needs the time for the Perrigo deal and to decide other matters of strategy.
In addition, expect the stichting, or the Dutch trust, to act if and when Teva announces a formal bid. In such a case, the stichting would probably exercise its option to acquire 50 percent of Mylan’s voting power and block Teva’s bid as a threat to Mylan and its stakeholders.
Teva could act to challenge these actions immediately, but more likely it would wait until the outcome of the Perrigo vote.
Both Mylan and Teva declined to comment on what their moves would be in the Dutch court.
If Mylan loses the vote and doesn’t immediately negotiate with Teva, then it will quickly find itself backed into a corner.
Under Mylan’s organizational documents, 10 percent of Myan’s shareholders can call a general meeting to remove the Mylan board. Teva already owns 4.61 percent and the hedge fund Paulson & Company holds about the same, so this threshold might be easily met.
Still, calling such a meeting is not simple. Teva, along with any combination of shareholders adding up to 10 percent, must first make a request to the Mylan board that a meeting be called.
If Mylan’s board did not act within six weeks, then Teva would have to go to the Dutch court to obtain an order for a meeting, probably delaying the process for a few weeks.
But if such a meeting is called, Teva will seek to remove the Mylan directors. The quirk here is that Mylan’s articles of association can be interpreted to read that the directors who are thrown out are the ones who select their replacements. This is rather crazy because it means that the old directors can merely reselect themselves, even though shareholders have removed them. This continuing director provision is almost certain to be challenged by Teva in court. Teva would also argue that Mylan’s board was acting contrary to its duties to Mylan shareholders and the company.
If brought to a Dutch court, the core battle will be over this director reappointment right, as well as Mylan’s unwillingness to engage in merger talks. The court’s decision could either provide Teva with the grounds to pursue a deal or force it to walk away. There is very little precedent on this, so it is hard to predict who will win.
Meanwhile, if Mylan’s Dutch trust acts to forestall a bid, Teva is most likely to add legal claims questioning the trust’s efficacy. As I’ve written before, there is precedent for limiting a stichting’s actions, including in the Rodamco North America case.
However, there are also plenty of cases where the actions of a stichting have been validated. It probably all comes down to whether the court believes that Teva poses a valid threat and how long the stichting can act — something that we just don’t know.
There is also the possibility of American regulators intervening. Last week, the Nasdaq issued a no comment about whether the structure of the Dutch trust violated the exchange’s rules. Subsequently, a representative of Nasdaq, Joe Christinat, said that “this matter is under review by our general counsel’s office.”
As these various issues are sorted out, Mylan — probably more than it imagined when the company left the United States only about a year ago — will face some major challenges. It will be interesting to see how this plays out in what is shaping up to be a record year for deal making as industries with big players actively consolidate.
Steven Davidoff Solomon is a professor of law at the University of California, Berkeley. His columns can be found at nytimes.com/dealbook. Follow @stevendavidoff on Twitter.