Mirage protected by state’s corporation-friendly laws

David Strow

Thursday, March 2, 2000 | 11:23 a.m.

Mirage debt

Credit rating agency Standard & Poor's said Wednesday it may downgrade the debt of Mirage Resorts Inc., citing uncertainty over how an acquisition of the company would be financed.

S&P placed Mirage Resorts on its CreditWatch list with negative implications. The company currently carries a corporate credit rating of "BBB," which is considered investment grade.

S&P said its action "recognizes the potential for the firm to merge with a lower-rated company, as well as the uncertainty regarding the manner in which a proposed transaction would be financed."

Separately, S&P reaffirmed its "BBB-minus" corporate credit rating on Mirage Resorts suitor MGM Grand Inc. The agency reflects S&P's expectation "that the company will finance any proposed transaction in a manner consistent with the current ratings."

Last week, rating agency Duff & Phelps also announced it is considering a downgrade of Mirage Resorts' debt, saying it did not believe MGM Grand could maintain an investment-grade rating on the debt if it acquired Mirage Resorts. The combined company would carry about $7 billion in debt, Duff & Phelps said.

MGM Grand Inc. has said it is committed to acquiring Mirage Resorts Inc. in a "friendly" deal.

But should the Las Vegas casino operator fail to convince Mirage Resorts to go along -- and decide to go ahead anyway -- it would face some of the most stringent hostile takeover roadblocks in the nation.

Nevada's corporate laws are among the carrots that make it attractive for a company to incorporate in Nevada. Whether they benefit the shareholders of these companies is hotly disputed.

"There's all kinds of legal whiskers attached (to Nevada law), all kinds of anti-takeover stuff," said Dave Ehlers, chairman of Las Vegas Investment Advisors. "The anti-takeover material is often contrary to the interests of shareholders."

But a Reno attorney who helped draft several of these provisions insists the laws are there to protect shareholders as well as corporate insiders.

"It gives companies a little more power to resist a well-heeled takeover artist," said John Fowler, chair of the executive committee of the State Bar of Nevada's business law section. "When these fights are fought, the stockholders come out richer for the board having the additional defenses in court, the additional strategic moves they can make during the battle."

In the case of Mirage Resorts, the board's willingness to fight would probably be tied closely to the opinion of Chairman Steve Wynn, whose influence over company directors has been criticized. In 1996, Chief Executive magazine branded the Mirage Resorts board one of the 10 worst in the nation, noting the board was "dominated by a high-profile CEO who utterly overshadows his hardly independent board."

Particular items of concern noted by the magazine included the presence of two former employees on the board, as well as an investment banker who does business with Mirage Resorts and Wynn's wife Elaine. The magazine also took issue with Mirage Resorts' executive compensation decisions, which are based upon the recommendations of Wynn, and are "based on his subjective evaluation of each officers' (including his own) contribution to the company" rather than the company's financial performance.

This language was repeated in Mirage Resorts' most recent proxy statement, filed in February.

Mirage Resorts' board enacted one of the most common anti-takeover provisions Tuesday, adopting a measure called a "poison pill" -- a move that indicates Wynn and the Mirage Resorts board are wary of a hostile bid.

These provisions, allowed in many states, are designed to raise the cost of a hostile takeover to such levels that no bidder could afford to simply buy up a company's stock on the market over the board's recalcitrance.

A poison pill comes in the form of rights to purchase shares that are distributed to shareholders. When a shareholder accumulates a set amount of shares -- in Mirage Resorts' case, 10 percent -- the rights activate. The Mirage Resorts rights would give shareholders the right to purchase large blocks of new shares at one-half the current market price. The only shareholder that would not be allowed to purchase the discounted shares would be the rival company pursuing Mirage Resorts.

The effect -- the hostile party's position in the company is tremendously diluted, and the cost of pulling off a takeover rises by billions of dollars. The board has the option of buying these rights back for 1 cent each, removing the pill for a friendly buyer.

The fact Mirage Resorts implemented this provision while the company is in play could lead to legal action against Mirage, said Bill Eadington, director of the Institute for the Study of Gambling and Commercial Gaming at the University of Nevada-Reno.

"(Shareholders) may believe ... that their best interests are served by having the stock go to the highest bidder," Eadington said. "That kind of poison pill precludes that kind of war. They could argue the value of the shares is undermined by the action of the board."

Nevada law also contains two more provisions that would make a hostile takeover even more difficult.

The first is the "controlled shares" provision, first implemented in Nevada in 1987.

This provision is triggered when a shareholder acquires more than 20 percent of a company, and is triggered again at the 33 percent and 50 percent levels. When a shareholder reaches these levels, the law dictates that the rest of the company's shareholders must vote on whether the acquiring shareholder will be allowed to vote.

That means that a company could acquire a majority of a company's stock, yet still have no voice in naming directors or approving the sale of the company. A company's board can opt out of this provision within 10 days of a shareholder passing the trigger levels.

"What it does is turn a takeover attempt into a proxy fight," Fowler said. "Both sides mail proxies like mad, saying, 'Bless my right to vote these shares.'

"If (MGM officials) are after Wynn's head and all of his board, (Mirage Resorts) isn't going to be passing any resolutions sneaking out of the controlled shares act."

The second provision, known as the "business combination" statute, is just as onerous to a hostile takeover bid.

Under this law, a company can acquire a majority of another company's shares. But unless it receives the blessing of the board, it cannot force the other shareholders to cash in for three years, unless it agrees to pay a massive premium for the remaining shares. As a result, the merger can't be consummated until the 3-year period expires.

"If Wynn controls a hefty chunk ... they can't cash him out forcefully," Fowler said. "It really puts a cramp into the plans of a potential takeover artist ... and gives a lot of protection to the Mirage."

Disgruntled shareholders and a hostile hopeful do have one avenue to overcome these provisions -- a ruling from the bench.

Under Nevada law, directors of a company have a fiduciary duty to look out for the best interests of shareholders. However, the law does not specifically define what constitutes a breach of that duty, leaving translation to a judge.

"You could sue the board for breach of fiduciary duty for not blessing the merger," Fowler said. "You might get an order of the court to bless the merger, or even damages against the directors."

Still, Nevada makes this process more difficult and uncertain than other states. Delaware, another corporation-friendly state, has a specific court to deal with business matters. Other states, such as Arizona and California, have corporation commissions.

But Nevada has no body that specifically oversees corporate matters, leaving any battle over the propriety of takeover maneuvers to the bench, where outcomes are far more difficult to predict.

Another favored method of seizing control of a company -- overthrowing sitting directors during a proxy vote and replacing them with takeover-friendly appointees -- is more difficult in Nevada.

Where some states require companies to put directors to a move all at once, Nevada allows "staggered terms" -- meaning directors are elected at different intervals. At Mirage Resorts, just three of Mirage's seven directors will be up for re-election at this month's shareholders meeting. Wynn, as chairman, will not be up for re-election until 2001.

Nevada also allows a two-thirds vote margin for director removal; many states require only a simple majority.

If a hostile suitor can overcome these hurdles, the offer must then pass under the critical eye of the Nevada gaming regulatory system.

Hostile takeovers are something that Nevada gaming regulators don't want to see, since they can disrupt the financial health of the license holder, said Steve DuCharme, chairman of the Nevada Gaming Control Board.

"Generally, the emerging or surviving companies are less viable on a going-forward basis," DuCharme said.

Still, that doesn't mean regulators will automatically veto a license application because it is a hostile attempt, he said.

"We have seen them in the past," DuCharme said. "We try to neutralize the fact that it's hostile and look at the licensing criteria issues, such as suitability and financial viability."

Nevada law requires any takeover of a licensed company to be approved by the Nevada Gaming Commission before taking place. This process can take up to 60 days -- time that a hostile takeover hopeful often can't afford.

The issue can become a political one, gaming experts say, since the commission is comprised entirely of political appointees. Observers say this would favor Wynn in a takeover battle, given his tremendous political connections.

"They are appointed by the governor, so they're more of a political body than the Control Board," Eadington said. "That complicates matters if (Mirage Resorts) calls in its political chips."

The last time the commission addressed a hostile takeover of this magnitude was during Hilton Hotels Corp.'s 1997 hostile takeover bid on ITT Corp. ITT had proposed splitting into three companies to defend against the takeover.

After a long hearing, the commission voted 3-2 to delay approval of ITT's plan, saying it wanted to wait for a judge's ruling. U.S. District Court Judge Philip Pro rejected the move shortly afterward.

Shortly afterwards, ITT found a "white knight" in Starwood Lodging Trust, which eventually acquired the company for $82 per share -- $27 higher than Hilton's first hostile bid.

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