Before Richard Schulze can acquire and turn around Best Buy, he needs to come to terms with the State of Minnesota.
Mr. Schulze is the founder and owner of 20 percent of Minnesota-based Best Buy. On Monday, he went public with a proposal to acquire Best Buy from $24 to $26 a share in cash.
Mr. Schulze likely announced his bid to force the Best Buy board into considering a deal, but there's another strategic reason for this announcement.
Minnesotans, famous for their niceness, don't seem to like hostile takeovers very much. The state has adopted some of the stricter antitakeover laws in the country.
Mr. Schulze's letter was clearly aimed at addressing the problem he confronts from one of these statutes, the Minnesota business combination act, which is adopted word-for-word in the company's certificate of incorporation.
The business combination act requires that a:
public corporation may not engage in any business combination. . . . with, any interested shareholder of [Best Buy] or any affiliate or associate of the interested shareholder for a period of four years following the interested shareholder's share acquisition date unless the business combination or the acquisition of shares made by the interested shareholder on the interested shareholder's share acquisition date is approved before . . . . prior to the interested shareholder's becoming an interested shareholder on the share acquisition date. . .
An interested shareholder is a shareholder who owns 10 percent or more of the company. The share acquisition date is the first date that the interested shareholder exceeds this amount.
This statute is quite strict. It means that before any person can acquire 10 percent or more of Best Buy, the acquisition must be approved by a committee of disinterested directors. If the approval is not obtained before the threshold is passed, then the acquirer has to wait four years to squeeze out the remaining shareholders.
Compare this with Delaware's business combination statute, which applies only to shareholders who acquire 15 percent or more of the company and requires a wait of only three years. Even thereafter, the acquirer can still squeeze out the minority shareholders by obtaining a 66.66 percent vote of the outstanding voting stock that is not owned by the interested stockholder.
Mr. Schulze has held his 20 percent interest long enough so that the four-year period wouldn't apply, but this statute would ordinarily require him to obtain approval to acquire even one more share. The banks will want Mr. Schulze and his partners to gain approval to acquire the company before they will agree to billions in financing, meaning that any acquisition is impossible if this statute applies.
In truth, this is not such a problem, since Mr. Schulze really can't acquire additional shares of Best Buy without the board's approval anyway because the board can just adopt a poison pill to prevent this. Instead, Mr. Schulze is trying to push the board into a friendly deal and get any necessary approval under Minnesota's antitakeover statutes.
But the real problem is a quirk in the business combination statute. Once Mr. Schulze takes on a partner to bid for Best Buy, the partner will be deemed part of a new group of interested shareholders. This sets off application of the business combination statute and the four-year waiting period.
The consequence is that Mr. Schulze can't make any arrangements with partners until the board approves. Otherwise, he and his partners will be effectively barred from acquiring Best Buy for four years. And because the statute is broadly worded as to what constitutes a partnership, Mr. Schulze really can't have more than preliminary talks with partners or he risks activating the statute.
But it appears that the Best Buy board is hesitant to allow him to arrange such par tnerships.
The Minnesota business combination statute provides Mr. Schulze some help to push the issue. Now that Mr. Schulze has announced his proposal, the law requires the board to form an independent committee of disinterested directors to consider the offer and make a decision within 30 days. By putting forth even this highly conditional proposal, Mr. Schulze has set the clock ticking.
But again, Minnesota law works against Mr. Shulze. In Minnesota, companies are not required to sell to the highest bidder. Instead, boards can choose to “consider the interests of the corporation's employees, customers, suppliers, and creditors, the economy of the state and nation, community and societal considerations, and the long-term as well as short-term interests of the corporation and its shareholders including the possibility that these interests may be best served by the continued independence of the corporation.â€
This legal standard provides the board su bstantial leeway to not only pick the buyer but to decide not to sell because of a variety of reasons, including perhaps the leverage that Mr. Schulze may put on the corporation and the employee cuts it may bring.
So what comes next? Well, the board of independent directors has a tough decision. Since the board really holds the cards, it may just say no, but the it may just allow him to speak to his partners without further addressing the offer. To not do so may make the board seem recalcitrant, and it doesn't tie the board to any sale decision anyway.
Thereafter, Mr. Schulze would have to come through with a firm offer. Right now, his financing is not secure. Instead, Mr. Schulze's financial adviser, Credit Suisse, has issued a “highly confident†letter.
Such a letter is a relic from the 1980s, when banks refused to commit to risky financing, Michael Milken and Drexel Burnham would step in to say that while a commitment was not forthcoming, the ba nk was highly confident it could raise the money. But that doesn't mean financing is certain or even that there is a contractual obligation to provide financing. (In Mr. Schulze's defense, he is not likely to have signed a commitment letter anyway at this stage because it would have cost him too much in fees.)
Mr. Schulze will still not only have to arrange financing but persuade a private equity partner to help him buy this struggling company. It's not the easiest feat in the world in this market, and it may be yet another reason why the Best Buy board is hesitant to let him pursue what may be an errant chase.
Steven M. Davidoff, writing as The Deal Professor, is a commentator for DealBook on the world of mergers and acquisitions.
