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Developments in Takeover Defenses

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Posted by Charles M. Nathan, Latham & Watkins LLP, on Thursday, October 23, 2008
Editor's Note: This post is from Charles M. Nathan of Latham & Watkins LLP.

As discussed in our recent Webcast on Developments in Takeover Defenses, Latham & Watkins LLP has prepared a new model of advance notice bylaw provisions that have been updated and modernized, not only to address the issues raised in the recent decisions in JANA Master Fund, Ltd. v. CNET Networks, Inc. and Levitt Corp. v. Office Depot, but also to address significant related problems posed by activist investors’ frequent use of undisclosed derivative securities and/or “wolf pack” tactics as weapons in threatened or actual proxy contests. We have also included provisions that establish more robust and protective procedures for shareholders to call special meetings or act by written consent. The text of our model advance notice bylaw provisions is now available on our Web site here.

The evolving forms of equity ownership in U.S. publicly traded companies, the recent Delaware decisions refusing to apply ambiguously drafted advance notice bylaws and recent strategies deployed by activist and other “event driven” investors, have caused many U.S. publicly traded companies to reexamine their advance notice bylaw provisions to, among other things, assess whether the required procedures and disclosures adequately address the interests of the corporation and its shareholders. In particular:

• The attributes of equity ownership in U.S. publicly traded companies has expanded dramatically due to the proliferation of derivative, swap and other transactions now available in the marketplace. For example, “total return equity swaps” allow an investor to create the economic equivalent of ownership of common stock without ever acquiring ownership of the security itself. Historically, investors have taken the position that these economic relationships do not confer beneficial ownership of the underlying equity under the federal securities laws and, for that reason, are not required to be disclosed. Conversely, investors also now have the ability to use derivatives to establish record ownership and thus the right to vote the shares without any exposure to economic ownership. This can be achieved, for example, by purchasing shares and simultaneously entering into offsetting put and call options or more simply by “borrowing” shares just prior to the record date for a shareholders’ meeting and returning the borrowed shares shortly thereafter, a strategy often called “record date capture.”

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