USA Today publisher Gannett Co.'s (GCI) - Get Report move to couple its $864 million hostile bid to acquire Tribune Publishing (TPUB) with a "just vote no" campaign against the media company's directors is an unusual and rarely employed strategy but one that could encourage a shareholder lawsuit and help drive a deal.
Specifically, on Monday Gannett hiked its hostile offer to buy Tribune Publishing to $864 million, up from a $815 million bid made last month. The move comes after Gannett on May 2nd launched a "just vote no" campaign urging shareholders to oppose Tribune Publishing's eight incumbent director candidates as part of an effort to bolster its unsolicited bid.
The vote, which is scheduled to take place at Tribune Publishing's June 2 annual meeting, will have no binding impact on its management or board. However, a large negative vote against Tribune Publishing's directors would send a strong message that shareholders want the two sides to engage in discussions about a combination. The effort could also backfire - a weak vote of opposition would show the opposite is true.
In addition, the vote is intended, in part, to target Tribune Publishing's non-executive chairman, Michael Ferro. According to Gannett, Tribune issued common shares to Ferro at a price of $8.50 a share, a discount of $0.50 from Tribune Publishing's closing price on Feb. 3, the day prior to the announcement of the investment. Ferro holds a 16.5% stake in Tribune Publishing through Merrick Media LLC, an investment firm that he oversees.
Tribune describes the private placement transaction to Merrick Media as a deal that brought "growth capital" to Tribune Publishing to help it invest in digital initiatives as part of an effort to transform Tribune "for the benefit of all investors."
However, Widener University Delaware Law School Professor Lawrence Hamermesh said that if he were a shareholder lawyer the Ferro share purchase is something he would take a look at - particularly if a majority of shareholders oppose Tribune Publishing directors and the media company doesn't engage with Gannett in discussions. He said shareholders could raise concerns about the accumulation, in particular if Gannett had made private indications that it was interested in buying Tribune Publishing during the time-frame when Ferro accumulated the stake.
"It sounds like a fiduciary duty claim where the current stockholder would say that the issuance was done for defensive purposes at an unfairly low price," Hamermesh said.
However, Hamermesh said that an overwhelming negative vote against incumbent directors at Tribune Publishing, which is incorporated in Delaware, that isn't followed up by deal discussions wouldn't in itself be enough to launch a shareholder lawsuit.
"A large negative vote might be instructive to directors, particularly independent directors, about whether they should move to engage with Gannett," Hamermesh said. "But Tribune Publishing directors are not obliged to listen to the vote and can follow the business judgment rule about whether to pursue being acquired by a hostile bidder or not."
A much stronger strategy would have been for Gannett to nominate its own slate of directors to replace Tribune Publishing's board, all of which is up for election every year. However, Gannett, busy with its acquisition of Journal Media Group, may have have been preoccupied as the Feb. 26 deadline to nominate directors for Tribune Publishing's 2016 annual meeting came and went. Gannett completed that deal last month.
In addition, a "just vote no" campaign against incumbent directors at a target company coupled with a hostile bid has only been employed a few times over the past decade, and while every situation is unique the results suggest Gannett may have some difficulty.
A study by FactSet, notes that there really have been only four comparable scenarios of companies using a "just vote no" tactic to force the board to consider an offer over the past decade, and the bidders didn't have much success.
In 2009, Canadian fertilizer maker Agrium (AGU) launched a "just vote no" campaign against CF Industries directors after its board rejected their hostile bid. The three CF Industries directors up for election were re-elected overwhelmingly with roughly 75% of the vote supporting them, according to FactSet. Agrium later pursued CF Industries again but they withdrew their efforts after CF Industries agreed to combine with Terra Industries.
In 2010, CryoLife Inc, proposed to acquire Medafor for $2 a share, an offer that was rejected. After that CryoLife launched a withhold vote campaign against five Medafor directors up for election. However, FactSet reports that 95% of votes cast went to company nominees, with roughly 70% of votes cast overall.
In 2011, Landry's Restaurants launched a hostile bid to acquire McCormick & Schmick's Seafood Restaurants for $9.25 a share. Landry's quickly followed up its tender offer with a "just vote no" campaign against McCormick directors as part of an effort to support its bid and prevent a quorum - a majority of the shares outstanding from being present at the annual meeting. The gaol was to try and block the seafood restaurant from conducting any business at the meeting. However, according to FactSet, very few shareholders backed their effort and the annual meeting took place. Nevertheless, by July, Landry's terminated its tender offer and signed a confidentiality agreement with McCormick. By 2012, Landry's struck a deal to buy McCormick for $132 million.
In 2010, activist Biglari Holdings launched a hostile bid at Fremont Michigan InsuraCorp. Inc. The activist fund managed by Sardar Biglari withdrew its offer and launched a withhold vote campaign that didn't do well, with votes opposing directors ranging from 17% to 19%, with Biglari's own 9.9% stake constituting at least 85% of the votes against, according to FactSet. Biglari later launched a traditional proxy fight but the company agreed to be acquired by a third party.