April 15, 2016
By Mark Terry, BioSpace.com Breaking News Staff
A simmering power struggle between Newark, Calif.-based Depomed , a specialty pharmaceutical company, and New York-based Starboard Value, an activist hedge fund, just went into full boil. And the case has some major implications for companies.
Under California rules of incorporation, shareholders of 10 percent of the company can call a special meeting to replace directors. Other states, most notably Delaware, require 25 percent of shares.
Currently, Starboard Value owns 10 percent of Depomed shares. Starboard is not particularly happy about how Depomed is run, particularly after a failed hostile takeover attempt by Horizon Pharma in 2015.
In a regulatory filing last week, Depomed indicated that at its annual meeting in May it would propose moving its incorporation to Delaware, presumably to make a hostile takeover more difficult, although the company stated its primary reason was “the prominence and predictability of Delaware corporate law.”
Of course, it would also make it more difficult for Starboard to dump the board, as well.
Yesterday, Depomed tersely announced that it was canceling the reincorporation plans. “Depomed determined that to proceed with this proposal is not in the best interests of the Company and its shareholders as it would result in a costly and distracting proxy contest at a time when the Company is focused on growing its business and driving shareholder value.”
Starboard today made a statement accusing Depomed of intentionally trying to change its corporate status to protect its board, and essentially lying about why it had changed its mind. “We remain highly concerned by Depomed’s continued apparent willingness to mislead shareholders about its true intentions with regard to the Reincorporation Proposal. To be abundantly clear, the Reincorporation Proposal was an attempt by the Depomed Board to further suppress shareholder rights under the guise of a benign Delaware reincorporation. … To insinuate that the reason it withdrew the Reincorporation Proposal was to avoid a proxy contest is completely disingenuous.”
Starboard then called for a complete change of the Depomed board.
It’s worth pointing out that this appears to be something Starboard does fairly regularly. In 2014, Starboard succeeded in tossing out the board at Darden Restaurants Inc., which owns the Olive Garden chain of restaurants. It is currently trying to replace Yahoo’s board of directors.
Regardless of the outcome of this battle for control between Depomed and Starboard, there are broader implications. The U.S. Securities and Exchange Commission (SEC) requires that issues brought to shareholders are “unbundled.” As Ronald Barusch wrote in The Wall Street Journal earlier this week, “That means that if a single corporate action involves several different substantive changes, each one needs a shareholders vote. Under the unbundling policy, the SEC could ask Depomed to separately seek approval for the increase in the threshold for shareholders to call a meeting and for the elimination of the right to call a meeting to replace directors—in addition to asking them to bless the move.”
It’s something the SEC has applied inconsistently because apparently there is a lot of maneuvering room regarding interpretation. And, in fact, Depomed was trying to get the measures approved in a bundle.
Barusch wrote, “But with Starboard’s complaints shining a spotlight on the governance changes, in my view, the SEC is likely to push for separate votes. That would turn a boring proposal on an arcane question of incorporation into a vote on fundamental governance issues. And in the current environment, with activists ascendant, it seems unlikely shareholders will vote to limit their rights.”
Depomed is currently trading for $16.21. Shares traded on July 21 for $33.28, dropped to $15.50 on Sept. 29, and hit a low of $12.99 on Mar. 21, 2016.
