Steven Davidoff Solomon writes for The New York Times, May 8, 2015
If etiquette counts in deal-making, Miss Manners would not be happy with Mylan’s heated attempt to fight off a $40 billion unsolicited bid by Teva Pharmaceutical Industries.
There are many types of defensive strategies a target can adopt in response to a hostile bidder.
A target can be conciliatory, stating that it would be willing to do a deal, but the price is not right, or otherwise put it up for sale to the highest bidder. Another approach is the “just say no” defense. The target will take the position that it is not willing to do a deal at any price.
There are also in-between approaches. A target might assert that it is willing to a do a deal but set a high price or raise antitrust concerns. In recent years, this last approach has been the most popular because it pays heed to shareholder interests while also setting up a good defense. Pay up if you want a deal, likely an amount that you can’t afford.
It was not unexpected that Mylan would react negatively to Teva’s approach. Neither company has ever gotten along particularly well.
But in terms of a negative response, Mylan’s is an 11 on a scale of one to 10.
The chief executive of Mylan is Heather Bresch, who has been with the company for 23 years, but the company was built by Robert J. Coury, who is chairman of Mylan’s board.
In a letter to Teva, Mr. Coury rejected the offer in the harshest terms, stating that Mylan would reject any offer that was not well above $100 a share. To boot, in saying that Mylan should not be “forced to take stock of a poorly performing troubled company in a combination that lacks industrial logic and is a terrible cultural fit,” Mr. Coury flatly rejected any Teva acquisition at any price.
This is not a “just say no” defense, it is a “when hell freezes over” approach.
Mr. Coury further justified this position by relying on Dutch law, which dictates that Mylan “act in the best interests of the company’s shareholders, employees, patients, customers, communities and other stakeholders”
At the same time, Mylan is pursuing its own hostile bid for the Irish-based Perrigo and has been pumping up a Perrigo acquisition while it is denigrating Teva. In a letter to Mylan shareholders, Mr. Coury and Ms. Bresch stated that Perrigo was a “compelling strategic fit” with Mylan that would again deliver “additional value to our shareholders and other stakeholders .”
Mylan is setting up a relatively simple strategy here. It is trying to convince its shareholders that there is not a binary decision between Perrigo and Teva. Instead, Mylan is asserting that it will never ever do a deal with Teva so shareholders should ignore this distraction and simply support the Perrigo offer, one they will have to vote on and approve.
The problem with this strategy is that it comes off as harsh. Instead of just setting a big price target for Teva that likely could not be met, Mylan is coming back with guns blazing, attacking Teva as a company. Teva, it contends, is simply the wrong partner no matter how much money is on the table.
This is a narrative that fits in with the idea that Mylan is a Dutch company and is therefore responsible not just to shareholders but to other stakeholders like employees. But this can also make Mylan executives look entrenched and simply out for themselves, playing into the view of corporate executives as overly driven by their egos.
Mylan is backing up its words with a stichting, a Dutch trust that has the ability to buy a controlling voting stake in Mylan to block a Teva bid.
So where does this leave the state of play?
Teva is likely to pursue an incremental approach. Mylan will start a tender offer for Perrigo.
It will get more interesting if Teva goes after the stichting and if it moves to replace Mylan’s directors.
If the stichting does act to take control of Mylan, it is likely to spur litigation both in the Netherlands and the United States. In the Netherlands, there is legal uncertainty over of how long the stichting can block a Teva bid. There is talk of two years, but frankly it could be shorter or longer. The Dutch courts have acted previously to limit a stichting’s vote on the grounds that it is impeding a real transaction. The question really is how much time Mylan can buy to complete a Perrigo acquisition, making itself too big to be acquired by Teva.
Also, the stichting transaction most likely violates Nasdaq market rules. In the United States, the issuance of 50 percent of a voting block to a third party would probably transgress Nasdaq’s rules on shareholder approval before change of control or issuing out more than 20 percent of the shares. The usual penalty for this is delisting from Nasdaq, which Mylan may not care about, but it will not buy it friends among its own shareholders.
Teva is likely to pair a legal strategy against the stichting with a push to replace the Mylan directors. This is a bit of an uphill battle for Teva.
In Pennsylvania, where Mylan was based before it reincorporated in the Netherlands in a tax-inversion deal, directors can be nominated by shareholders. This is not permitted in the Netherlands; shareholders cannot nominate Mylan’s directors.
All is not lost. Teva can call a meeting to remove all the directors if those holding more than 10 percent of the shares agree. If the meeting is called and more than two-third of those voting at the meeting representing more than 50 percent of the total shares agree, then Mylan’s directors can be removed.
What happens after that is unclear.
Mylan’s articles of association do not say what happens if all the directors are removed. Instead, the articles state that if all the directors are “absent or unable to act,” then the chairman, namely Mr. Coury, can replace them. But that would lead to the odd result of him being able to reappoint directors ad infinitum. The provision is vague enough that if Teva can jump these hoops and win a vote removing all the directors, there will be more litigation.
Finally, there is the issue of whether Myan is acting for shareholders by taking up such an aggressive defense. Mylan just left its biggest stakeholder, the United States, in a tax-inversion deal to bolster profits for shareholders.
But shareholders may not be happy by the company’s decision not to even consider an offer. Its shareholders include the hedge fund billionaire John Paulson, who owns 4.5 percent of the company.
According to people close to Mylan, the Netherlands was picked because its stakeholder statute was similar to the one in Pennsylvania, so shareholders should understand that the stakeholder idea is not new. This tactic as well as the ability of Mylan to use a stichting was disclosed when the company moved to the Netherlands in connection with the shareholder vote on the move.
Ninety-eight percent of Mylan’s shareholders approved the reincorporation to the Netherlands.
And yet, if you read through the Mylan disclosures for that vote, nowhere does Mylan directly state that shareholders can no longer nominate directors. The disclosure does state the possibility of a stichting being created, but not the reality that Mylan would adopt one, one month later. It is lawyer disclosure, which sort of discloses things, but not really what is going on.
Perhaps more important, 35 states have these types of stakeholder statutes, but there is no recorded instance that I know of where it has been used to frustrate a takeover. The reason is the director nomination potential. Directors who don’t respond to shareholder interests in the United States are replaced by shareholders.
This all adds up to tinder to incite a shareholder revolt. It may be that Mr. Coury is correct and Teva is not the right fit or the price is not right. But his heated rhetoric is not doing Mylan any good; instead, it is making Mylan look like it does not care about shareholders.
Here’s some free advice based on what happened so far: Mylan might want to take a hard look at its public relations strategy and think about what allowing its chairman to vent is really costing it. A stakeholder strategy may end up doing nothing more than creating a resentful shareholder base.
American shareholders, meanwhile, may want to think twice about letting another company go to the Netherlands.