The battle has begun.
Charter Communications has 13 nominees to replace the entire Time Warner Cable board. It’s a bold move, and it highlights that Charter is willing to push Time Warner Cable hard for a deal. Because of the way the company has put forth its defense, however, there may be little room for Time Warner Cable to negotiate with Charter. Get ready for a long, drawn-out proxy contest.
Time Warner Cable’s defense is  that Charter is trying to underpay for the company. But the defense is also based on a legal point. Even if Charter elects all 13 directors, it still does not mean that Time Warner Cable will be sold to Charter.
The reason is that the 13 director nominees are independent and not affiliated with Charter. This is a result of the requirements of Delaware law. Any director on the Time Warner Cable board is obligated to look after the best interests of Time Warner Cable’s shareholders. Once in office these new directors would have to independently evaluate the Charter offer with Time Warner Cable’s interests in mind. To deal with this issue, Charter was effectively required to nominate independent directors. These Charter nominees are independent for Delaware law purposes, but may be more predisposed to favor Charter, who, after all, did nominate them.
Time Warner Cable is relying heavily on this legal nuance to protect it. The Time Warner Cable board has said it was open to a deal at $160 a share, but presumably not below this amount. As I wrote in a previous column, Time Warner Cable appears to be hoping for a repeat of Air Products’ failed hostile offer for Airgas. In that contest, Air Products succeeded in electing three new directors to the Airgas board, who promptly sided with the old Airgas board in determining that Air Products offer was too low. By putting a $160 per share number out, Time Warner Cable’s board is effectively trying to warn off Charter by invoking the same possibility.
But this time is different. Charter is seeking not to influence the old board, but replace it.
Will Charter succeed? The instances of where an entire board has been thrown out are few. Proxy advisory services like Institutional Shareholders Services and Glass Lewis are also prone to recommend against a full takeover of a target’s board, instead preferring to recommend that shareholders elect only a few directors to send a message to the target board to consider the offer in a more friendly light.
Still, Charter probably nominated a full slate instead of only a minority of directors to deal with the Airgas issue. In doing so, Charter is putting the entire question to Time Warner Cable’s shareholders. In other words, Charter is asking Time Warner Cable shareholders to elect an entirely new board if you want a deal to happen, since you know half measures, as in the case of Airgas, may not work.
Of course, as the dynamics of the contest move forward, Charter is almost certainly hoping that if the Time Warner Cable board sees this dynamic unfolding, the board will come to the negotiating table. But Time Warner Cable has been adamant that it is open to a price of $160 per share. After such a statement, it is hard to see the its board going lower.
Time Warner Cable will no doubt fiddle with the meeting date, pushing it back as far as possible in order to gain time. Last year, they held the meeting on May 17, but under Delaware law they have 13 months to hold the next meeting and can probably fight this issue out in court to gain a few more weeks. Other maneuvers are possible, such as trying to find another bidder.
In the absence of another bidder, Time Warner Cable is left arguing that the price here is not high enough, and in any event, the new board would have to honor the old board’s rationale and abide by it.
It seems like a good defense, even though it has locked Time Warner Cable into a stance where it can’t really negotiate with Charter. Unfortunately, there is a flaw here. If Charter succeeds, then these new directors can redo the old board’s analysis. Again Time Warner Cable is hoping that this will be hard to do given its prior work.
Perhaps there is another option. In Carl C. Icahn’s battle for CVR Energy, the CVR board opposed his  offer. They ultimately, however,  allowed the tender offer to proceed, recommending that shareholders not accept the offer, but letting shareholders decide. Mr.Icahn subsequently took control of CVR Energy. If the new board was elected, this may be one way they get around this legal problem.
It all means that Charter is going to push hard for a majority of the Time Warner Cable board to be unseated, while the board has left itself little wriggle room to negotiate. Unless Time Warner Cable can find another bidder or come up with another plan, it appears like this is a proxy contest that may go the distance. This leaves the next step up to Time Warner Cable’s shareholders and whether they find Charter’s offer attractive. But even if Charter elects all of its directors, wins, it still means that the new independent directors of Time Warner Cable will have to decide whether to do a deal.
