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With Europe's uniform M&A proposal defeated at the hands of the Germans, takeover rules in individual countries are perhaps more important than ever. It took nearly three years for the battle for Gucci to subside, over Lebanese food and LVMH champagne at the paris offices of the white-knight's counsel. But it's likely that the innovative defenses and the rulings from Dutch courts will serve as tea leaves to pour over for some time to come.

The Players
Who represented whom in the three-way battle. Skadden and Wachtell are across the table again in a takeover reminiscent of the good old days in the U.S. of A.

Gucci: Red-Letter Dates

The New Unocal?
How a Dutch ruling reflects a Delaware icon.

A Lock-Up in Limbo
Tyson Foods has been in takeover battles before. In the classic battle for Holly Farms, the target's lock-up got frowns from the court, but no one appealed. And Tyson was flummoxed.

Los LBOs
The competition for LBOs in Europe and the U.K. could hardly be more cruel. The game is certainly similar to its American version, but there are differences of which the wise should be aware.

Committment letter
Senior facilities term sheet

The global deals and the merger firm's mergers

How Gucci Resembles Unocal

The most striking element of the Gucci decision was the extent to which the application of a "reasonableness" standard by the Enterprise Chamber yielded the functional equivalent of the Unocal standard set in Delaware. Although this was not developed in the part of the decision relating to the ESOP, this was particularly evident in the decision relating to the issuance of shares to PPR.

In the seminal Unocal case, the Delaware Supreme Court established a proportionality review for defensive actions undertaken by directors. In order for directors to enjoy the benefits of the business judgment rule, this test requires directors to prove that defensive actions were taken because they reasonably perceived a threat to the corporation (or its shareholders) and that their response was proportionate to the threat. This test was further developed in Unitrin, Inc. v. American General Corp., which involved the board's use of a rights plan and stock purchase program in response to a hostile takeover bid. The court split the proportionality review into two parts consisting of (i) a determination of whether the challenged defensive action is "draconian" such that it precludes or coerces shareholder choice, and (ii) an evaluation as to whether the board's actions, if not draconian, fall within a range of reasonableness.

The Unocal test was analogous to the Enterprise Chamber's analysis in determining whether to grant a remedy with respect to the issuance of stock to PPR. The Dutch court began with the premise that Gucci was free to take "acceptable" measures to prevent unwelcome shareholders from acquiring control subject to the requirements of "reasonableness and fairness." The first prong of the Unocal test was effectively incorporated in the court's analysis when it found that the Gucci board perceived a threat in the form of the accumulation by LVMH that would allow a competitor to obtain a significant influence on the board. [The threat posed by an acquiror who can buy control "on the cheap" is a recognized threat under Delaware law. See Paramount Communications, Inc. v. Time, Inc., 571 A.2d 1140, at 1153 ("[D]irectors may consider, when evaluating the threat posed by a takeover bid, the 'inadequacy of the price offered, nature and timing of the offer, questions of illegality, the impact on "constituencies" other than shareholders, the risk of nonconsummation and the quality of securities being offered in the exchange.'" (citing Unocal, 493 A.2d at 955)).]

The second part of the test was reflected by the Enterprise Chamber's finding that the defensive measure taken by Gucci was not unreasonable. In support of this conclusion, the Dutch court cited several reasons. First, the court held that the agreement with PPR was not preclusive or a serious hindrance to the offer, because LVMH, despite the issuance to PPR, was still in a position to obtain a majority of the outstanding shares when taking into account the shares it already owned. This is reminiscent of the "draconian" test enunciated in Unitrin. [Note that this argument was made in Time, 571 A.2d at 1155 ("The Chancellor noted that the revised agreement and its accompanying safety devices did not preclude Paramount from making an offer for the combined Time-Warner company.... Thus, the response was proportionate.").]

Second, while PPR acquired a measure of control, the agreement between Gucci and PPR was distinguishable from LVMH's efforts because PPR agreed to a non-compete and a standstill including an agreement not to interfere with the management of Gucci. Finally, the Dutch court also noted that LVMH should have had a reasonable expectation that defensive actions might be taken by Gucci because the articles of Gucci permitted the issuance of shares without any requirement to provide preemptive rights.

While the issuance of shares to an ESOP has been considered by Delaware and other U.S. courts, the Unocal analysis was not explicitly used to reach the court's decision in the two most noted decisions dealing with ESOPs. In Shamrock Holdings Inc. v. Polaroid Corp., the court upheld the issuance of shares to an ESOP based upon an "entire fairness" test rather than the Unocal test. The Unocal test was not used because the directors had not considered the applicable threat because they did not believe their action was defensive in nature. In NCR Corporation v. American Telephone and Telegraph, the court invalidated an ESOP under Maryland's "primary purpose" test because the primary purpose of the ESOP was to entrench management by frustrating AT&T's bid. The court, however, concluded that the creation of the ESOP would also be invalid under the Unocal test because the board did not establish why the AT&T bid represented a threat and acted unreasonably by failing to inform itself. While not decided on technical matters, as was the ESOP decision in Gucci, the court did raise a question as to whether the shares issued to the ESOP were properly paid for under Maryland law because a promissory note was used.

[The NCR issuance was highly preclusive. AT&T needed to obtain an 80 percent affirmative vote of the outstanding common stock in order to remove the board. Because the board and management held two percent of the outstanding common stock and NCR issued approximately eight percent of the outstanding common stock to the ESOP, roughly half of the votes necessary to forestall AT&T's effort were "locked." Moreover, because NCR shareholders who did not vote would effectively be treated as having voted against AT&T, if shareholders representing more than 10 percent of the outstanding shares had failed to vote (which is typical), then NCR would have been virtually assured of success.]

Although the Gucci decision invites useful comparison with Unocal and its progeny, the facts as they arose in that case would be unlikely to arise in the U.S. The prevalence of rights plans in the U.S. (or the ease with which they can be adopted) would have deterred the type of accumulation program undertaken by LVMH. Indeed, unlike Gucci, most Dutch companies have some form of "protective devices" incorporated in their articles of association that restrict the acquisition of shares, voting rights, or control by third parties. For that matter, many other European countries (i.e., U.K., France, Italy) require a mandatory bid for all shares when a specified portion (e.g., 30 percent) of the outstanding is acquired. In addition, a share issuance by a U.S. company of the magnitude contemplated by Gucci would have required shareholder approval under the rules of the applicable stock exchanges.

-- John Finley, Simpson Thacher & Bartlett


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