As PR scraps go, it’s hard to top Access Holdings Management Co. LLC’s fight against Tuckamore Capital Management Inc.’s management-led, private equity-backed buyout. We have seen private e-mails released, a libel lawsuit and a complaint filed with the Ontario Securities Commission, all chronicled by press releases filled with accusation and innuendo.PETER POWER/The Globe and Mail
In the fog of proxy-war propaganda, it's important not to confuse a winning public relations strategy with a winning legal one.
As PR scraps go, it's hard to top Access Holdings Management Co. LLC's fight against Tuckamore Capital Management Inc.'s management-led, private equity-backed buyout. We have seen private e-mails released, a libel lawsuit and a complaint filed with the Ontario Securities Commission, all chronicled by press releases filled with accusation and innuendo. For all that, it doesn't seem like Access has many victorious legal arguments.
Yet Tuckamore's shares are trading above the offer price, suggesting the market believes Access is very close to carrying the shareholder vote on the transaction or extracting concessions from Tuckamore. Access is using the law as a PR weapon to win a proxy fight, not a court case.
Earlier this spring, members of Tuckamore's management team along with Birch Hill Equity Partners made a bid for Tuckamore at $0.75 a share. Access, owner of less than 1 per cent of Tuckamore at the time, objected to both the price and the process and is now staging a proxy fight to change Tuckamore's board and veto the transaction.
Access claims Tuckamore erred in signing the deal before receiving an independent valuation and for agreeing to pay Birch Hill a break fee if it backed out of the transaction or if the board changed its recommendation to shareholders. Access views the break fee as unreasonably high compared with the equity value of Tuckamore. Access suggests those factors put Tuckamore's board in a position where it was impossible to change its mind. Access is also upset that Tuckamore did not canvass the market for other potential buyers.
Two members of Tuckamore's independent committee – convened to evaluate the deal – are also board members of Newport Private Wealth, Tuckamore's largest shareholder, and serve to personally benefit from the sale of their shares. And Tuckamore sold Newport to its current partners. And the two companies share an address. It's no wonder that Access suggests that the companies are a little too close.
Reading Access's press releases, it's difficult not to come away with the impression Access thinks that Tuckamore's board hasn't exactly been compliant with its fiduciary duties. But asserting that in a press release is far from proving it, and tellingly, Access hasn't sued Tuckamore's board for violating its fiduciary duties. Instead, it's filed a complaint with the OSC, asking the regulator to use its public interest jurisdiction to end what it perceives as abusive practices on the part of Tuckamore.
Why? Fiduciary duty violations are difficult to prove. Directors owe shareholders two duties: the duty of care and the duty of loyalty. The duty of care is simply that directors must take care and use their business judgment to make decisions that are in the best interest of the company. The duty of loyalty requires the directors put the corporation's interests ahead of their own.
Courts evaluate duty of care claims based on a "business judgment" standard. Courts defer to the expertise of boards, only asking whether a judgment is reasonable and carefully considered, not whether the board's decision was the right one. The policy intuition behind this is fairly straightforward; we don't want courts second-guessing private business. Similarly, boards can inculcate themselves against duty of care violations by relying on third parties for advice and removing interested parties from decision making. It's no coincidence that Tuckamore's press releases emphasize the board's business judgment and the use of independent committees.
Viewed through a business judgment lens, Tuckamore's haste in entering into the Birch Hill transaction looks justifiable. The board was afraid of losing a well-priced offer that would capitalize the company. Similarly, while the break fee looks high on an equity basis, for a highly indebted company such as Tuckamore, the enterprise value of the company – which includes both equity and debt – is the better metric. Though there is no precedent for this in Canada, U.S. law allows highly leveraged companies to measure break fees on an enterprise basis. In all, it looks like a defensible use of the board's business judgment. Tuckamore's use of a fairness opinion, even with the independent valuation coming after signing, seems like a defensible compromise if the board feared losing a good deal.
Similarly, Tuckamore's board formed an independent committee, excluded the interested directors from voting on the transaction, and procured a fairness opinion prior to signing the arrangement agreement, all moves that insulate the board against a duty of loyalty violation.
This helps to explain why Access has complained to the OSC and not to the courts. The OSC can exercise "public interest" jurisdiction where a transaction is abusive of capital markets. That allows the OSC to step in where there has been malfeasance but not illegality.
Still, Access's prospects in front of the OSC are uncertain. Showing abuse of capital markets requires something worse than unfairness.
To Access, whether these arguments are winners is less important than the fact that they make Tuckamore look bad. Access's goal isn't to show that Tuckamore's legal arguments are flawed; it's to persuade shareholders that they should reject the deal.
In M&A, like in war and politics, the battle on the merits is often not as important as the battle for hearts and minds.