Elan Finds Creative ‘Poison Pill’ to Defend Against a Hostile Bid

Elan’s fervent efforts to fight off Royalty Pharma’s $6.4 billion hostile bid are driven by the simple fact that it is relatively defenseless. Blame Ireland.

Elan, a developer of drugs and drug-delivery systems, is an Irish company and its stock is listed in Ireland. This means that while it has American depositary receipts listed in the United States, its primary regulator is the Irish Takeover Panel, which administers the Irish takeover code.

It also means that any bid for Elan is going to play out quite differently than one for a company in the United States. The main reason is that the states where American companies are organized freely allow companies to adopt takeover defenses, like a poison pill.

But Ireland, like Britain, takes a different approach. Takeover defenses are generally prohibited. Instead, companies are exposed to a hostile takeover and are forced to fight these bids by lobbying shareholders directly.

Faced with this difficulty, Elan has had to get creative in order to challenge Royalty Pharma’s bid, which the pharmaceutical company says “significantly undervalues Elan.”
Elan first fought a short-term battle to try to highlight what it called “misrepresentations” by Royalty Pharma concerning its plans for Elan. The basic issue here is that the American federal securities laws require bidders making tender offers to disclose their plans for the company once the tender offer is completed. The Irish Takeover Rules contains similar disclosure requirements in connection with a shareholder vote.

Note that even though Elan is an Irish company, because it has A.D.R.’s listed in the United States, the Williams Act regulating tender offers and its anti-fraud provisions still apply to Royalty Pharma’s offer.

Elan sued in Irish and United States courts, saying that because Royalty Pharma was bidding only for 50 percent plus one shares, Royalty had failed to make sufficient disclosure about what it would do if it did not acquire all of Elan and Elan was still publicly traded with a minority stub.

In the last week, Elan was able to get judges in two continents to agree with its position. In Ireland, the Irish High Court enjoined Royalty Pharma from distributing a proxy statement in opposition to Elan’s acquisition proposals until a corrective disclosure had been made about Royalty Pharma’s plans for Elan. Similarly in the United States, a federal judge in the United States District Court for the Southern District of New York enjoined Royalty Pharma from closing its tender offer until similar disclosure had been made.

This is a minor victory for Elan. In both cases, Royalty Pharma will just make additional disclosure and be on its way. So there is really nothing of significant consequence to this courtroom skirmish, though it does highlight the potential that a significant minority of Elan’s shares could still remain outstanding after Royalty Pharma’s acquisition.
It also points out that Royalty Pharma is willing to proceed even if it has to have a minority stub left with Elan’s shareholders if it doesn’t reach the 90 percent threshold to summarily squeeze out all outstanding shares. Eventually, Royalty would be able to get there by replacing Elan’s directors and subsequent attempts, but that may take time.

Elan’s main defense has been instead to make what others have called “poison pill” acquisitions, or deals that, in essence, act like a poison pill to make the company more expensive and thereby discouraging a hostile takeover.

In May, Elan announced that it would pay $1 billion for a 21 percent stake in a royalty stream related to four respiratory treatments held by the biotech firm Theravance in partnership with GlaxoSmithKline. Elan also announced that it had agreed to acquire AOP Orphan, an Austrian company that focuses on rare diseases, for $340 million. A third deal was the $40 million acquisition of a 48 percent ownership interest in NewBridge Pharmaceuticals, a Dubai-based specialty therapeutics company. Elan has also announced that it would spin off its anti-amyloid treatment to a newly created company, Speranza Therapeutics, which would be 18 percent owned by Elan.

To top off, Elan has proposed a $200 million share buyback and the issuance of $800 million in new debt.

The Theravance acquisition is particularly controversial. In a note to clients, the Sanford C. Bernstein analyst Ronny Gal calculated that Elan had severely overpaid for the drugs, stating that it was “tough to see how the assets acquired, risk discounted, would command such a value.” Mr. Gal added that the “purchase acts as ‘poison pill’ by adding assets Royalty Pharma may not want to buy.”

All of these acquisitions and movements are being portrayed by Royalty Pharma as an attempt to halt its bid by making it too expensive and foolhardy to acquire a changed Elan.

In the United States though, there would be little Royalty Pharma could do to counter the purchases. Delaware, where most public companies are incorporated, does not require that companies take a shareholder vote for a cash acquisition. Royalty Pharma would be stuck.

However, in Ireland, significant acquisitions are required to be approved by shareholders. Thus shareholders will be voting on June 17 on the Theravance, AOP Orphan and NewBridge transactions. They will also be voting on the share buyback.

In the United States, much hay has also been made about the fact that Elan did not negotiate a fiduciary clause out, which would allow the board to change its recommendation to shareholders. But this seems to be a battle over nothing, because in the United States, the Elan board wouldn’t have even had to hold a shareholder vote. Moreover, it is hard to see the Irish Takeover Panel allowing this recommendation change provision to stand if there were facts that required Elan to change its recommendation.
The vote has turned into a referendum on the Royalty Pharma bid with the parties battling back and forth.

Institutional Shareholder Services has recommended that shareholder vote against all four proposals, stating “In aggregate, the inconsistent management of cash return to shareholders, the time frame over which the Theravance, AOP Orphan and NewBridge transactions were negotiated, and the lack of a fiduciary out in the Theravance transaction, don’t readily support a conclusion that this was a coherent process designed to create shareholder value.” In other words, I.S.S. agrees that this looks like an attempt at a quasi-poison pill.

Meanwhile, Royalty Pharma has specifically conditioned its buyout offer for Elan on all of the proposals being voted down by Elan’s shareholders. Royalty Pharma has also stated it will not waive these conditions.

Knowing the vote is so important, Elan has also taken steps that may benefit the company. Elan initially advised A.D.R. holders that the record date for this meeting would be on June 13, but later changed to a May 23 record date for A.D.R. holders, and June 15 for holders of Irish shares to qualify to vote on June 17.

Elan is the rare foreign company where a significant percentage of its shares, about 87 percent, are held in the United States via its A.D.R. program. Complaints have been made to the Securities and Exchange Commission and New York Stock Exchange over the change in the vote dates. But neither of these are likely to act because the federal proxy rules do not apply to foreign companies.

Citigroup is Elan’s adviser but is also the A.D.R. depositary. Citigroup has shut down conversion of A.D.R.’s into ordinary shares to block A.D.R. holders that bought after May 23 from converting their A.D.R.’s into Irish shares so that they can vote on the deal. Nice.

So, we are having something that we seldom have in the United States. Shareholders will get to decide if a takeover happens on a fairly expedited basis because Royalty Pharma announced its offer in February. The only thing is that this June 17 vote is not about is the offer itself. Chalk it up to this being Ireland.