Toxic shock syndrome

The phrase "poison put" may be a misnomer, but it does provide a handy label for a significant impediment to M&A activity. The term refers to provisions in high-yield bonds that allow holders to demand payment at par or a small premium in the event of a "change of control" as defined under the terms of the debt indentures. Similar provisions in bank credit facilities define such an event as a default that the company must cure by renegotiating the terms or repaying the entire loan. The most obvious change in control, of course, is a sale of the company, and lawyers say they spend considerable time trying to structure around that aspect of the definition.

Another common definition of "change in control" has come into play at Amylin Pharmaceuticals Inc. Carl Icahn and Eastbourne Capital Management LLC are running separate five-member slates of directors for election to the company's 12-member board. If both win, there's the possibility that the current board would not have approved a majority of its successors, which would trigger change-in-control provisions in $700 million of convertible notes Amylin issued in 2007 and in its credit facility.

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The company has tried to avert such an outcome by saying it would authorize any of the dissident candidates elected by shareholders, thus excluding them from the applicable provision of the notes. The noteholders have opposed that gambit, leading to a May 4 hearing before Vice Chancellor Stephen Lamb of Delaware's Court of Chancery. He did not set a timetable for a decision. The judge may hold another hearing on May 11 if Amylin and its credit-lending group, led by Bank of America Corp., don't reach an agreement.

By seizing on the phrase "poison put," Icahn claims that Amylin is using its debt covenants to fend off activist advances. Nonsense, says Charles Nathan, a partner at Latham & Watkins LLP. "This isn't about takeover defenses," says Nathan, who's not involved in Amylin. "It's a concept that the leveraged-finance market has insisted upon going back to the 1980s. You can't find a leveraged-finance bond or bank loan that doesn't contain a change-in-control provision."

Amylin's situation may well be a first, he says. Since dissident shareholders usually seek a minority of board seats by running "short slates," they rarely raise the possibility of a change in control. The issue arose in Amylin only because two dissidents are each running their own short slates. Such cases may become more common in a few years, "when proxy access will be a reality and you have directors elected through proxy access plus a proxy contest on top of that," Nathan says, but they will remain rare.

More importantly, the provisions are chilling M&A. In normal debt markets, it's easy enough for a buyer to redeem a seller's bonds at par and renegotiate the seller's bank debt. But that hasn't been the case since last September. Instead, lawyers are combing through credit and indenture agreements to avoid triggering change-in-control provisions, whose definitions vary. In addition to changes in board composition such as the one at issue in Amylin, Nathan says ownership changes that would trigger such a provision range from 40% to 60% of outstanding stock.

Live Nation Inc. and Ticketmaster Entertainment Inc. faced the issue in their merger, announced Feb. 10. Both have outstanding leveraged-finance bonds and bank debt, but their merger triggers only the bank debt at Live Nation, which Nathan helped represent. Since the deal provides Ticketmaster shareholders a majority of the shares in the combined entity, it avoids tripping the put in Ticketmaster's bonds. The parties hinged the merger on Ticketmaster's ability to obtain a waiver of the change-in-control clauses in its credit facility. Such a provision gives the banks negotiating leverage, but that's unavoidable, given the terms of almost all credit facilities. (The banks granted the waiver on May 12.)

Dealing with noteholders raises similar issues. Minh Van Ngo of Cravath, Swaine & Moore LLP says that in situations with a few dominant noteholders, the best tactic may be "to have pre-discussions with significant noteholders. It almost becomes like a prepackaged bankruptcy; if you take it to the ultimate extreme, it becomes buying the notes beforehand." But, he adds, the problem is "a three-way game of chicken" that many merging companies have yet to resolve.

David Marcus is a senior writer at Corporate Control Alert.

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