As Diego Della Valle builds his stake in Saks Inc., speculation continues to swirl that the department store chain could at some stage become the target of a takeover bid — if not from Della Valle, then from another suitor.
Not so fast.
Anyone wanting to engineer a takeover of Saks will find the retailer with a few anti-takeover defenses up its sleeve, but a suitor still could win over Saks’ board if the offer is high enough, legal experts agree.
Saks, formerly Saks Holdings Inc., is incorporated in Tennessee, a holdover from its September 1998 merger with Proffitt’s Inc. Tennessee anti-takeover statutes put the burden on the acquiring investor to disclose intention to the targeted company. Those statutes require either a filing of a statement regarding ownership of shares and offer intent or, in what is known as a freeze-out provision, mandate that an investor can’t do anything for five years after acquiring the shares.
That suggests that investors such as Della Valle and Carlos Slim Helú would face an uphill battle in a Saks takeover bid. In October, Della Valle, chairman and chief executive officer of Tod’s SpA, upped his stake in Saks to 19.1 percent, overtaking Mexican business magnate and financier Slim, who owns 16.1 percent of its stock. Neither has expressed an interest in acquiring the company.
Robert D. Tuke, a Tennessee attorney at Trauger & Tuke, points to Tyson Foods and Holly Farms, a case in which a federal district court determined that Holly Farms couldn’t enforce the Tennessee provisions to bar a takeover because the Tennessee statutes “violate the Commerce Clause of the U.S. Constitution” when applied to target corporations incorporated in states other than Tennessee. The decision was affirmed by a federal appellate court. Both Tyson and Holly were Delaware corporations.
The Commerce Clause gives Congress the right to regulate commerce with foreign nations and between states.
That suggests that Saks would have the upper hand in any legal battle.
However, Tuke said that despite a number of contested cases in federal court in which the targeted Tennessee corporation raised the anti-takeover defense, there’s never been a final decision on the merits. Federal courts typically grant an injunction, ruling that the statutes “inhibit commerce across the state for no purpose,” but then the parties agree to the merger or acquisition and the dispute goes away, he explained.
He believes a foreign entity could have a chance of winning a takeover battle for a Tennessee corporation. Tuke concluded, “At the end of the day, the [federal] courts will apply the Commerce Clause,” particularly if the foreign entity also does business in the U.S.
The statutes were enacted to give Tennessee corporations leverage within the state. In practice, that leverage usually results in the acquirer boosting the size of its offer, he said.
A banker familiar with Saks’ bank loan agreement also said there’s a change in the control provision that would require the immediate payment of the loan once a certain threshold is reached. A Saks regulatory filing of its quarterly report in September said it has a $500 million revolving credit facility that matures in November 2013, and as of the end of the reporting period on July 31, there were no “direct outstanding borrowings.”
James Decker, a banker at Morgan Joseph, didn’t think that would bar a takeover. “It’s a common provision in many bank loan agreements,” he said. “Most lenders, if they like the deal, are going to amend or waive that covenant.”
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