Opinion ID: 1934995
Heading Depth: 1
Heading Rank: 43

Heading: Proxy Contest Appears Viable

Text: The assumptions and conclusions American General sets forth in this appeal for a different purpose are particularly probative with regard to the effect of the institutional holdings in Unitrin's stock. American General's two predicate assumptions are a 90% stockholder turnout in a proxy contest and a bidder with 14.9% holdings, i.e., the maximum the bidder could own to avoid triggering the poison pill and the Supermajority Vote provision. American General also calculated the votes available to the Board or the bidder with and without the Repurchase Program: Assuming no Repurchase [Program], the [shareholder directors] would hold 23%, the percentage collectively held by the [directors] and the bidder would be 37.9%, and the percentage of additional votes available to either side would be 52.1%. Assuming the Repurchase [Program] is fully consummated, the [shareholder directors] would hold 28%, the percentage collectively held by the bidder and the [directors] would be 42.9%, and the percentage of additional votes available to either side would be 47.1%. American General then applied these assumptions to reach conclusions regarding the votes needed for the 14.9% stockholder bidder to prevail: first, in an election of directors; and second, in the subsequent vote on a merger. With regard to the election of directors, American General made the following calculations: Assume 90% stockholder turnout. To elect directors, a plurality must be obtained; assuming no abstentions and only two competing slates, one must obtain the votes of 45.1% of the shares. The percentage of additional votes the bidder needs to win is: 45.1% - 14.9% (maximum the bidder could own and avoid the poison pill, § 203 and supermajority) = 30.2%. A merger requires approval of a majority of outstanding shares, 8 Del.C. § 251, not just a plurality. In that regard, American General made the following calculations: Assume 90% stockholder turnout. To approve a merger, one must obtain the favorable vote of 50.1% of the shares. The percentage of additional votes the bidder needs to win is 50.1% - 14.9% = 35.2%. Consequently, to prevail in a proxy contest with a 90% turnout, the percentage of additional shareholder votes a 14.9% shareholder bidder needs to prevail is 30.2% for directors and 35.2% in a subsequent merger. The record reflects that institutional investors held 42% of Unitrin's stock and 20 institutions held 33% of the stock. Thus, American General's own assumptions and calculations in the record support the Unitrin Board's argument that it is hard to imagine a company more readily susceptible to a proxy contest concerning a pure issue of dollars. [33] The conclusion of the Court of Chancery that the Repurchase Program would make a proxy contest for Unitrin a theoretical possibility that American General could not realistically pursue may be erroneous and appears to be inconsistent with its own earlier determination that the repurchase program strengthens the position of the Board of Directors to defend against a hostile bidder, but will not deprive the public stockholders of the `power to influence corporate direction through the ballot.' Even a complete implementation of the Repurchase Program, in combination with the pre-existing Supermajority Vote provision, would not appear to have a preclusive effect upon American General's ability successfully to marshall enough shareholder votes to win a proxy contest. Accord Shamrock Holdings, Inc. v. Polaroid Corp., Del.Ch., 559 A.2d 278 (1989). A proper understanding of the record reflects that American General or any other 14.9% shareholder bidder could apparently win a proxy contest with a 90% turnout. The key variable in a proxy contest would be the merit of American General's issues, not the size of its stockholdings. Moran v. Household Int'l, Inc., Del.Supr., 500 A.2d 1346, 1355 (1985). If American General presented an attractive price as the cornerstone of a proxy contest, it could prevail, irrespective of whether the shareholder directors' absolute voting power was 23% or 28%. In that regard, the following passage from the Court of Chancery's Opinion is poignant: Harold Hook, the Chairman of American General, admitted in his deposition that the repurchase program is not a show stopper because the directors that own stock will act in their own best interest if the price is high enough. (Hook Dep. at 86-87). Fayez Sarofim, one of the Unitrin directors that holds a substantial number of shares, testified that `everything has a price parameter.' Consequently, a proxy contest apparently remained a viable alternative for American General to pursue notwithstanding Unitrin's poison pill, Supermajority Vote provision, and a fully implemented Repurchase Program.