War Between RR Donnelley and Its Largest Bondholder, Chatham Asset Management, Escalates
The ongoing skirmish between R.R. Donnelley & Sons (RRD) and Chatham Asset Management, a Chatham, N.J.-based private investment firm — which manages funds that own 12.9% of outstanding common stock in North America's largest printing company, as well being its largest bondholder — is turning into a potential war over a "Poison Pill".
It began with initial back-and-forth letters exchanged publicly on Feb. 10 between Chatham (click here to read that letter) and Chicago-based RRD's board of directors (click here to read RRD's response), whereby Chatham urged them to immediately revoke or revise the provisions of the restrictive stockholder rights plan (Poison Pill) adopted by RRD on Aug. 28, 2019. Now, following what it deemed RRD's dismal Q4 and fiscal 2019 financial results and management's subsequent response, Chatham sent a followup letter on Feb. 28 threatening litigation, which appears below:
Mr. John C. Pope
Chair, Board of Directors
Mr. Daniel L. Knotts
President and CEO
Dear Messrs. Pope and Knotts:
As you are aware, we have repeatedly voiced to management and the board of directors of [RRD] our ongoing concern about certain policies and strategies relating to the company's financing plan (or lack thereof), which we view as value-destructive to the company's stakeholders.
Following the company's recent publication of its fourth quarter and annual results for the period ended Dec. 31, 2019, and the related conference call on Feb. 26, 2020 (click here to read transcript of earnings call), we were utterly disappointed by the lack of any coherent response by management to the valid concerns we have raised. Consequently, we determined to amend our prior regulatory filing on Schedule 13G, and commence reporting on Schedule 13D in order to maintain the maximum flexibility to effectuate necessary changes at the Company.
The company has previously adopted a current stockholder rights plan (the "Poison Pill"), which we view as both a breach of fiduciary duty and a new low in corporate governance. This Poison Pill, in the circumstances under which it was adopted, serves no purpose other than to entrench a severely underperforming board of directors, along with similarly underperforming, overcompensated management. Each appears desperately and rightly fearful of the company's investors taking any appropriate action to advocate for their replacement. In this circumstance, the Poison Pill is in direct opposition to the most basic and fundamental duties owed by a board of directors of a corporation to its owners.
Among its more noxious elements, the Poison Pill contains provisions that may be interpreted to cause investors who, like us, no longer make regulatory filings on Schedule 13G (i.e., who are no longer so-called "ordinary course institutional investors") to have tripped the Poison Pill threshold to the extent their beneficial ownership of the company's common stock exceeds 10%. The applicable threshold for all other investors is 20%.
The effect is that any such investors whose change in intent causes them no longer to qualify as "ordinary course institutional investors" are required to reduce their beneficial ownership position to below 10% within 30 days, or trigger the Poison Pill. Moreover, such provisions appear to apply to us notwithstanding that our affiliated funds have not purchased a single additional share since the company's precipitous and unlawful adoption of the Poison Pill on August 28, 2019.
We are no longer content to stand idly by, while hundreds of millions of dollars' worth of value for all of the company's stakeholders are blithely frittered away by a group of entrenched, inactive and incompetent leaders.
However, we are now faced with an untenable dilemma – sell our position below 10%, by no later than March 27, 2020, into a rapidly declining market that significantly undervalues the company's true worth, or alternatively, face the crippling effects of dilution under the Poison Pill. This all as a penalty for doing no more than to exercise our most basic and fundamental right as a stockholder – raising our voices, making our positions known, and preserving our core ability to advocate for certain vitally necessary changes at the company.
We therefore demand that the board of directors and management take swift and immediate action to revoke the Poison Pill; and if not that, to revise the above-referenced provisions that have such an unconscionable effect on investors in a position such as ours.
Please be advised that we are prepared to initiate appropriate litigation against you and the company if your response proves to be untimely or inadequate. We would view any such litigation as an unfortunate waste of our, your and the company's valuable time and resources, so we hope that you will not make it necessary for us to pursue that path to protect the legitimate interests of all stakeholders.
We look forward to your prompt response to these matters and, in any event, expect to hear back from you by no later than March 3, 2020.
Chatham Asset Management
R.R. Donnelley, in turn, issued this letter response on March 2:
Chatham Asset Management
Attention: Anthony Melchiorre, Managing Member
Dear Mr. Melchiorre:
We are in receipt of your letter dated February 28, 2020.
As was the case in August 2019 when the board of directors of R.R. Donnelley & Sons Company (RRD) adopted the company’s stockholder rights plan (the “Rights Plan”), to which you make reference in your letter, the board continues to believe that it is in the best interests of the company’s stockholders that no one person or group acquire undue influence or control through purchases of the company’s stock. The board will continue to make decisions concerning the need for a Rights Plan and other matters in the best interests of stockholders.
Regarding application of the Rights Plan to Chatham Asset Management (“Chatham”), we previously informed you on Feb. 10 that Chatham was misreading the Rights Plan. In particular, under the terms of the Rights Plan, Chatham was not an Ordinary Course Institutional Investor, and the recent commencement by Chatham of reporting on Schedule 13D does not give rise to the “untenable dilemma” referenced in your letter. We refer you specifically to Section 1(a) of the Rights Plan, where the terms Acquiring Person and Ordinary Course Institutional Investor are defined.
Because Chatham filed its Schedule 13G pursuant to Rule 13d-1(c) under the Securities Exchange Act of 1934, it was not an Ordinary Course Institutional Investor, and Chatham’s commencement of reporting on Schedule 13D does not affect Chatham’s ability to continue to qualify as an Exempt Person (as defined in Section 1(t) of the Rights Plan). If you have further questions regarding the operation of the Rights Plan, we will set up a call among counsel to again explain it.
We continue to be interested in engaging constructively with Chatham, and have sent multiple requests to do so, including two such requests on Feb. 27. We have yet to hear back from you regarding a meeting. Moreover, neither in your letters nor on your previous calls with us have you identified debt opportunities that we have not evaluated. In fact, we included several messages regarding our debt outstanding and future plans in our press release dated Feb. 25 and our conference call on Feb. 26, including the following:
- the company paid down $273 million in debt in 2019 bringing our total reduction since 2016 to $569 million;
- we have increased our availability under our credit facility to $634 million, which is the highest level of availability since October 2016;
- the availability under our credit facility is sufficient to retire all upcoming maturities in 2020 and 2021;
- we plan to continue to increase our capacity to pay down additional debt through positive cash flow, additional asset sales and potential business dispositions;
- during the fourth quarter and continuing into January, the company has reduced the effective interest rate on the Term Loan by entering into interest rate swap agreements with a notional value of $400 million;
- we will continue to evaluate opportunities to extend our capital structure and improve our cost of capital, maturity profile and execution costs; and
- the company re-affirmed that focusing on actions to reduce its debt outstanding is a top priority, which has also been stated in most quarterly conference calls and investor presentations regularly for the last three years.
As we have expressed multiple times, we have been and remain open to constructive dialogue, but must tell you that your letters containing erroneous descriptions of the Rights Plan, false statements about the Rights Plan’s implications for Chatham, and ignoring critical strategic steps taken by management and the board are not constructive.
Chairman of the Board
President and CEO
cc: Terry Peterson, EVP, CFO
In what's becoming a pattern of publicly held companies within the printing industry — as recently illustrated by HP's Poison Pill shareholder rights plan designed to thwart the M&A takeover attempt by Xerox; and the newly adopted stockholder rights agreement created by LSC Communications, which is facing an attempt by Sententia Group to nominate six new directors to serve on LSC's board — is now a standard boardroom tactic to defend hostile attacks.