Steven Davidoff Solomon writes for The New York Times, June 11, 2015
These days, the pharmaceutical company Mylan is both the hunter and the hunted. The question is whether Mylan’s defense against a takeover attempt will run afoul of United States market rules and whether those rules will be enforced.
Mylan is pursuing a hostile takeover of Perrigo, the Irish pharmaceutical company. At the same time, Teva Pharmaceutical Industries, an Israeli company, has started its own hostile offer for Mylan, one that Mylan has furiously resisted.
Mylan recently left the United States to reincorporate in the Netherlands in a tax inversion deal. That move allowed it to take advantage of certain Dutch takeover defenses. In the end, though, Mylan may find that the United States market rules will hamper its resistance to Teva’s hostile offer.
“Resistance” is probably an understatement. The executive chairman of Mylan, Robert J. Coury, wrote that company officials “do not wish to make Teva’s problems Mylan’s problems,” asserting that any combination of Mylan and Teva was off the table.
A hostile takeover bid is an emotional event under any circumstances. But this one is complicated by Mylan’s relocation to the Netherlands. As part of this move, Mylan set up a fairly standard Dutch takeover defense known as a stichting.
A stichting is a Dutch trust that was most prominently used during World War II to shield assets from Germany. Now, it protects companies from hostile takeovers.
The defense works like this: A Dutch company issues preferred shares to the stichting trust. The entity, ostensibly, has its own independent board that is separate from the company. If the stichting sees a danger to the company, it can exercise the shares and take control of the company. The trust thus serves as a protector, allowing its trustees to act if it sees the need to block a takeover.
In Mylan’s case, the company has issued a call option, giving the trust the right to acquire up to 50 percent of Mylan’s shares at an exercise price of 1 euro cent a share.
The stichting is a powerful defense tool. But whether the structure can halt a hostile offer permanently is unknown.
In other deals, stichtings have acted to block takeovers, but one view is that the defense should be used only for a limited duration to protect a company from untoward actions like asset stripping. If a determined bidder like Teva challenges the stichting, it may succeed in limiting the trust’s actions.
Mylan’s stichting entity doesn’t seem to be helping its cause by issuing statements like this one:
“The stichting expresses its concern about Teva’s intentions related to this (intended) acquisition, among others in light of the Mylan shareholders’ meeting to obtain shareholder approval for its transaction with Perrigo Company PLC, which Mylan announced will be held early in the third quarter of this year.”
Putting aside the weirdness of the trust referring to itself in the third person, the statement comes off as biased toward Mylan’s management and the Perrigo bid. It does not seem to be issued by a group of trustees that is supposed to look out for the best interests of the company.
Although Dutch rules may limit the stichting’s actions, the bigger issue with the structure may be whether it runs afoul of American regulations.
Under Nasdaq and New York Stock Exchange rules, companies that are listed on exchanges in the United States cannot just issue shares. Instead, limits are placed on share issues to protect shareholders from companies issuing hugely dilutive amounts of stock.
Mylan is listed on the Nasdaq, which has a “20 percent rule,” meaning that shareholder approval is required for any share issue that is more than 20 percent of the voting power of the company.
Nasdaq also has a “change of control rule,” which requires that any issue or potential issue of securities that would result in a change of control of the company must be preapproved by shareholders.
The mere creation of the Dutch stichting most likely sets off a shareholder vote under both rules. The rules require that Mylan’s shareholders must preapprove the issue of the shares to the stichting. Note also that the change of control rule talks about the “potential issuance” of securities, so it has arguably already been set off.
And yet there has been no vote by Mylan shareholders related to the creation of the stichting.
In a statement on Thursday, Mylan said: “As is the case with any transaction involving a share issuance by a listed company, Nasdaq has reviewed the grant of the call option agreement to the foundation and any related issuance of preferred shares and confirmed to Mylan that they comply with all of Nasdaq’s rules.”
In previous instances, Nasdaq has taken a strict view of the rules. In 2010, Nasdaq refused to allow an exception to the voting requirements to permit a bank to issue a 39.9 percent stake in the company to a potential acquirer. The bank claimed that it was exempt because it qualified under a “financial viability” exemption, which allows the shareholder vote to be forgone if the vote would jeopardize the financial health of the company.
Nasdaq refused to grant the waiver, stating that because there was no question that the company would “survive financially” if the transaction were delayed long enough to hold the vote, then the vote was required.
One defense Mylan could offer is that shareholders have already ratified the transaction by approving the reincorporation in the Netherlands. Indeed, 98 percent of Mylan’s shareholders who voted approved the reincorporation.
However, Mylan’s proxy statement for that transaction speaks only of the potential formation of a stichting (the trust was set up on April 3, only a few days before Mylan’s hostile bid for Perrigo). There was no specific vote of shareholders on the stichting, which is presumably what Nasdaq rules require. Indeed, there are federal rules about bundling proposals in proxies, and they would almost certainly require a separate vote on the creation of the Dutch trust. For example, Apple’s recent attempt to put together a number of proposals in its certificate was struck down on this basis.
This is a real issue for Nasdaq. Its rules were put in place to protect shareholders from these type of dilutive action. If Mylan’s issue is allowed, then American companies could arguably shed the shareholder rights plan, an attempt to discourage hostile takeovers known as the poison-pill defense, in favor of a stichting structure in the Netherlands.
And if the vote to move to the Netherlands was sufficient to cover the formation of a stichting, then the Nasdaq rules are arguably a farce because any company could claim that all of the pages of disclosure included in a proxy materials were made available to shareholders — even if the Dutch trust was only a possibility and the vote was related to a different matter. And there is nothing Dutch about the trust structure. An American company could simply set up its own stichting in connection with a merger with another American company. Assuming the state courts found it appropriate, the Nasdaq rules would not prevent this occurrence.
These types of arguments tend to be overwrought, but the concern is real. The stock exchange rules are limited in their protection of shareholders; however, dilution of shares is so important that both exchanges have rules on it.
A spokesman for Nasdaq refused to comment on the Mylan situation, saying it was a regulatory issue. But he did state that the exchange’s “rules are enforced based on facts and circumstances and based on S.E.C. oversight.” The spokesman also had no comment on the issue of bundling proposals.
This type of “no comment” comment seems a bit off. Without any idea about how Nasdaq will react, Mylan shareholders are left adrift. So we wait to find out what Nasdaq will do.
If Nasdaq does find that the rules were violated, then things get interesting. The penalty for failure to follow exchange rules is delisting. If Mylan were to be delisted, it would be embarrassing but not fatal. The real issue would be if the Netherlands acted.
In the United States, the Delaware courts, which rule on much corporate litigation, have generally refused to find that a company’s breach of exchange rules is grounds for a shareholder lawsuit, absent misdeeds such as misleading or incorrect disclosure.
The question is whether the Dutch courts – more specifically the District Court of Amsterdam — would force Mylan to live up to the stock exchange rules. It seems a bit of a stretch, but perhaps the Dutch courts are more protective of shareholders than those in Delaware. It is not out of the realm of possibility.
And so the question is really what the Nasdaq does. Will the Nasdaq stand up for its rules, or let Mylan cast American shareholders aside?
An earlier version of this column misstated the entity that had issued a statement related to Teva’s hostile takeover bid for Mylan. It was Mylan’s stichting, or a Dutch trust entity, that had issued a statement expressing concern about Teva’s intentions; the statement was not issued by Mylan itself.