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Shareholders bite Icahn

by David Marcus | Published June 6, 2012 at 2:57 PM

Shareholders usually sue target companies to force them to dismantle their takeover defenses so that shareholders may accept a hostile bid, but two Florida pension funds are doing the opposite in a suit brought in the Delaware Court of Chancery on Tuesday, June 5.

The Tamarac Firefighter Pension Trust Fund and the City of Miami General Employees' and Sanitation Employees' Retirement Trust are trying to prevent Carl Icahn from buying the 20% of CVR Energy Inc. that he doesn't already own in a so-called creeping takeover that would allow him to acquire the public float at a discount to what he paid for 65% of the company in a recent tender offer.

To that end, the plaintiffs are asking the Delaware Court of Chancery to force the CVR board to install a poison pill. Mark Lebovitch of Bernstein Litowitz Berger & Grossmann LLP in New York and Stuart Grant of Grant & Eisenhofer LLP in Wilmington, Del., are representing the plaintiffs.

Icahn disclosed a 14.5% stake in CVR in January and began pressuring the board to put the Sugar Land, Texas-based oil refiner up for sale. In February he launched a tender offer for CVR at $30 a share plus a contingent value right and announced he would run a proxy fight to gain control of CVR's board. The board installed a poison pill when Icahn disclosed his 14.5% stake but capitulated in April and lifted the pill. All of the board members except for CEO John Lipinski resigned and were replaced by Icahn appointees. Upon the May 18 completion of the tender offer, Icahn increased his stake in CVR to 80%.

The next week, according to the complaint, Icahn purchased a further 1.65 million CVR shares in the open market for an average of $27.59 each. If he increases his stake to 90%, he'll be able to take control of the company in a "short form" merger that does not require shareholder approval. Icahn could essentially name his price, though the remaining shareholders could seek appraisal in the Court of Chancery if they believe that price undervalues the company.

The plaintiffs claim that Icahn has violated his fiduciary duties as a controlling shareholder by trying to buy the company on the cheap and that the current board has violated its duties by failing to install a poison pill that would prevent Icahn from buying out the remaining public shareholders without negotiating with the board. In addition to asking the Court of Chancery to force the CVR board to install a pill, the shareholders seek to bar Icahn from making further purchases in the open market.

It's an unusual argument, but one that then-Delaware Court of Chancery Vice Chancellor Stephen Lamb found plausible in a 2009 shareholder suit, noted A. Thompson Bayliss, a partner at Abrams & Bayliss LLP in Wilmington. Shareholders of Landry's Restaurants Inc. sought to derail Tilman Fertitta's attempt to buy the 61% of the company that he didn't already own. In a footnote, Lamb acknowledged that a board does not have an absolute duty to install a pill to prevent a creeping takeover by a large shareholder but added that "the board's failure to employ a pill together with other suspicious conduct supports a reasonable inference at the motion to dismiss stage that the board violated its duty of loyalty in permitting the creeping takeover."

CVR announced on May 24 that it had hired Jefferies & Co. to run a 60-day sales process. The company said that Icahn Enterprises LP, Carl Icahn's investment vehicle, had agreed to support any offer of $35 a share or more but might take a lower bid. If CVR completes a sale for more than $30 a share before Aug. 18, 2013, holders of the contingent value rights issued in Icahn's tender offer would receive the difference between $30 and the sale price.

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Shareholders bite Icahn

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