InBev & Anheuser-Busch; Litigation Skirmishing

July 11, 2008

Today the press reports that, after weeks of very public proposals and public posturing, InBev S.A. (Euronext: INB) has raised its offer from $65 to $70 per share for all of Anheuser-Busch Companies, Inc. (NYSE: BUD); that the parties are now negotiating a "friendly" deal; and that it could be announced as early as this weekend. Apparently the stockholders of AB haven't warmed to the board's and management's hostility to the initial $65 a share offer and would like to see this deal happen.

InBev's hand was undoubtedly strenghened by its proposal to conduct a consent solicitation of AB's shareholders requesting them to oust the current board and replace it with InBev's 13 nominees. This was made possible by AB's elimination of its classified board in April 2006 and Delaware's (AB is a Delaware corporation) GCL Sections 141(k), permitting the removal of a director or entire board, if the board is not classified, by the holders of a majority of the shares entitled to vote in the election of directors, and 228(a), permitting stockholder action by written consent unless otherwise provided in the certificate of incorporation (not bylaws).

When AB de-classified its board in 2006 it, in effect, grandfathered the existing directors so that, for example, the term of the 2006-elected directors
would run until the 2009 annual meeting. This raises the question of whether these (now numbering 5) directors can be removed without cause since the removal provision (Section 141(k)) does not permit removal without cause if the board is classified.

To clarify this question, InBev filed a declaratory judgment action in the Delaware Chancery Court on June 26, 2008 (no. 3857--VCP) (where a slew of shareholder suits have also been filed) seeking a declaration that the entire board of AB may be removed without cause. I have read InBev's brief in support of its motion for summary judgment on this question (InBev's in a hurry) and, not having the benefit of an opposition yet, conclude this is a close question. InBev (Sully and Young Conaway, local counsel) make a credible case for its position, but AB would undoubtedly argue that the stockholders, in declassifying the board and grandfathering the sitting directors, meant to continue classification to that extent, the stockholders' wishes should control, and therefore Section 141(k) is not available to InBev to remove the five 2006 directors this year. If a deal is struck, then this question will not be answered. And, even if InBev doesn't get its declaration, it can still seek removal and replacement of seven of the 13 current directors.

InBev's use of the removal-by-consent tactic to encourage negotiations may prompt Delaware issuers that do not prohibit action by shareholder consent and do not have classified boards to examine amending their certificates to do so or to classifying their boards (which also requires stockholder consent under GCL Section 141(d)).

AB also got into the litigation act with its action, filed July 7, 2008, the same day InBev filed its preliminary consent solicitation on Schedule 14A with the Commission, in federal district court in the Eastern District of Missouri (St. Louis). You didn't expect BUD to file in Delaware did you?

AB alleges proxy fraud under Rule 14a-9 and Section 14(a) of the Exchange Act. Its allegations focus on InBev's failure to disclose, in its many press releases, press leaks, published comments, and, incidentally, in its preliminary consent solication (filed that day with the SEC) the conditions to the $40 billion financing committment InBev touts as in hand to finance the deal with AB, and how it can make St. Louis the North American headquarters for the combined company, as InBev has been assuring everyone in Missouri that it will do, given that InBev operates in Cuba and an Amercan company can't do business in Cuba. Pretty clever.

The allegations strike me as a stretch, a real stretch. Yes the terms of any financing and the conditions to any financing for a deal would normally be disclosed in a M&A transaction under Regulation M-A, item 1007, but InBev's consent solicitation is seeking the approval of the AB stockholders not for an AB/InBev combination but for the removal of AB's current board and its replacement with InBev's nominees. These nominees are all independent of InBev, appear solid, and are committed to acting in the best interests of AB and its stockholders. So what's the relevance at this point of the conditions to InBev's financing or how InBev will separate its Cuban operations from the AB operations?

Merits aside, the Missouri action does operate as a place-holder for further disclosure claims against InBev, in what AB must believe is a friendlier forum, should a deal not be cut and further skirmishes take place between AB and InBev. And, when you think of it, what's several million dollars in attorney fees to gain a tactical advantage when you're talking about a $50 billion deal?