Citing Conflicts of Interest on Board, Demand Books and Records Under Delaware Law
NEW YORK, June 28 /PRNewswire/ -- JANA Partners LLC ("JANA") and S.A.C. Capital Advisors, LLC ("SAC") today called on the Board of Directors (the "Board") of TD Ameritrade Holding Corp. ("TD Ameritrade") (NASDAQ:AMTD) to empower its independent directors to lead the Board's discussions with industry peers regarding strategic combinations and to prevent directors designated by Toronto-Dominion Bank from playing a significant role in such discussions. In addition, funds managed by JANA and SAC, respectively, made a demand under Delaware law for books and records related to the Board's exploration of possible strategic transactions, including Toronto-Dominion's influence on this process.
The full text of today's letter to the Board and the demand for books and records under Delaware law sent to TD Ameritrade follow: Letter from SAC and JANA to TD Ameritrade Board: June 28, 2007
Board of Directors
TD Ameritrade Holding Corporation
4211 South 102nd Street
Omaha, Nebraska 68127
Attention: J. Joe Ricketts, Chairman and Joseph H. Moglia, CEO VIA FACSIMILE AND OVERNIGHT DELIVERY Gentlemen, JANA Partners LLC and S.A.C. Capital Advisors, LLC (collectively, "we" or "us") are encouraged that TD Ameritrade Holding Corporation ("TD Ameritrade" or the "Company") has had and expects to continue discussions with industry peers regarding strategic combinations. However, we believe that the Company's Board of Directors (the "Board") has still not taken adequate steps to address the conflicts of interest arising from the presence of directors appointed by Toronto-Dominion Bank ("Toronto-Dominion"). Specifically, we believe that Toronto-Dominion CEO and TD Ameritrade Board member W. Edmund Clark has been allowed to play a significant role in such discussions, which we believe undermines the integrity of the process given the clear conflicts between Toronto-Dominion's strategic interest in TD Ameritrade and the interests of all other stockholders.
The Board must remove Mr. Clark from this role and empower the independent directors to reach out to and lead discussions with potential strategic partners. Having reviewed the credentials of these independent directors and spoken to some of them regarding our views, we believe that they are highly qualified to pursue the path of greatest possible long-term value for all TD Ameritrade stockholders. Empowering these independent directors would also ensure that they are kept fully informed of developments regarding potential strategic partners.
We believe Toronto-Dominion's ongoing significant role in the Board's exploration of strategic transactions calls into serious question each director's fulfillment of his fiduciary obligations. So that we may learn more, respective affiliates of ours have sent the Company separately today a request under Delaware law for books and records related to the Board's exploration of strategic transactions, including Toronto-Dominion's influence on this process. We look forward to the Company's timely response.
Sincerely, /s/ Barry Rosenstein /s/ Steven A. Cohen
Barry Rosenstein Steven A. Cohen
JANA Partners LLC S.A.C. Capital Advisors, LLC
Managing Partner Chief Executive Officer Demand for Books and Records Under Delaware Law:
June 28, 2007 VIA FACSIMILE AND FEDERAL EXPRESS
TD Ameritrade Holding Corporation
4211 South 102nd Street
Omaha, Nebraska 68127
Attention: Ellen L.S. Koplow, Executive Vice President, General Counsel
and Secretary Re: Demand for Right to Inspect Books and Records Pursuant to Section 220
of the Delaware General Corporation Law Dear Ms. Koplow: JANA Master Fund, Ltd., a Cayman Islands exempted company ("JMF"), is the record owner of 1,000 shares of common stock, par value $0.01 per share (the "Common Stock"), of TD Ameritrade Holding Corporation, a Delaware corporation ("TD Ameritrade" or the "Company"). S.A.C. Capital Associates, LLC ("SAC" and, together with JMF, the "Record Holders" or "we"), an Anguillian limited liability company, is the record owner of another 1,000 shares of Common Stock.
We believe that the members (the "TD Board Designees") of TD Ameritrade's board of directors (the "Board") designated by the Company's largest stockholder, Toronto-Dominion Bank ("Toronto-Dominion"), pursuant to the Stockholders Agreement among TD Ameritrade, Toronto-Dominion and other stockholders of the Company dated June 22, 2005 (the "Stockholders Agreement"), have conflicts of interest that raise serious doubts regarding their ability to exercise independent judgment on behalf of all TD Ameritrade stockholders in accordance with their fiduciary duties under Delaware law. When evaluating potential strategic combinations and the strategic direction of the Company, which the Company has said it "regularly reviews",(1) we believe that the TD Board Designees are motivated to oppose a strategic combination that would deprive Toronto-Dominion of the strategic benefit of its investment even if that transaction would be in the best interests of TD Ameritrade and all of its stockholders generally. We believe that the Board has not instituted appropriate safeguards to protect the interests of all TD Ameritrade stockholders from these conflicts of interest, and that as a result a strategic transaction that would be in the best interests of all stockholders has been impeded. We also believe that the recent appointment by TD Ameritrade of a Chief Operating Officer who prior to his appointment was both an employee of Toronto-Dominion and a designee of Toronto-Dominion to the TD Ameritrade Board, and who is entitled to a significant payment should he not become the next CEO of TD Ameritrade, may have had a further chilling effect on a possible strategic combination and is ultimately likely to increase Toronto-Dominion's influence on the Board should he be appointed CEO given that the position is entitled to a Board seat under the Stockholders Agreement.
Conflicts of Interest.
Earnings Benefit. The first conflict of interest arises from the strategic value that Toronto-Dominion places upon its 39.9% interest in TD Ameritrade, specifically the earnings benefit to Toronto-Dominion provided by its stake in the Company. Toronto-Dominion, relying upon the equity method of accounting, is able to include in its income statement 44.9% of TD Ameritrade's earnings, which is equal to its 39.9% ownership stake in TD Ameritrade plus another 5% attributable to TD Ameritrade shares subject to the swap arrangement described below.(2) This earnings benefit is entirely unique to Toronto-Dominion and we believe makes a strategic combination undesirable to Toronto-Dominion even were such a combination to create the highest possible value for other TD Ameritrade stockholders through revenue and cost synergies. Given the relative market capitalizations of possible strategic partners such as Charles Schwab & Co., Inc. and E*Trade Financial Corp., such a transaction may result in Toronto-Dominion holding too little equity and having too little influence on the combined entity to qualify under the applicable accounting rules for favorable equity accounting treatment (unless special provision were made for Toronto-Dominion to retain a sizable equity stake or disproportionate influence).
Toronto-Dominion management has publicly discussed the importance of this earnings benefit to Toronto-Dominion. On a call with analysts held on May 24, 2007 (the "May 24, 2007 Analysts' Call"),(3) Toronto-Dominion President & CEO (and TD Ameritrade Board member) W. Edmund Clark, in discussing Toronto- Dominion's investment in TD Ameritrade, as well as its TD Banknorth division, stated that "Our focus is getting earnings growth," and noted that Toronto- Dominion had no concerns in this regard with respect to TD Ameritrade. Later in the same call, when asked why Toronto-Dominion retains its minority stake in TD Ameritrade despite the value of the Company to other parties, Mr. Clark responded "Probably because it's very valuable to me," and discussed the challenges that Toronto-Dominion faces as a Canadian bank in maintaining earnings growth and how its investment in TD Ameritrade helps it to address this problem. Mr. Clark continued: "[H]ow many Canadian banks can stand up and say: 'We have a top three
position in wealth management in the United States.'? Those are hard
spots to get. So, we you have an asset that's meeting your economic
cost of capital, that's growing every year." Industry observers have also confirmed that selling its TD Ameritrade stake would present potential issues for Toronto-Dominion. Citigroup analyst Shannon Cowherd in a report dated June 5, 2007, wrote that "In our view, selling their current 40% stake in TD Ameritrade would be a short term positive as TD would receive the proceeds. However, it would likely be negative in the long term as the sell reduces TD's exposure to the U.S. and management would have to determine how to effectively redeploy the capital."(4) Similarly, Blackmont Capital analyst Brad Smith in a report dated June 6, 2007 noted that a sale would put Toronto-Dominion's U.S. strategy "in limbo."(5) Potential Competitor to Other Strategic Partners. A second conflict of interest arises from Toronto-Dominion's role as a potential acquirer of the remaining equity of TD Ameritrade, making it a potential competitor of other possible strategic partners for the Company. This possibility is contemplated by the Stockholders Agreement which, in the event of third party discussions regarding a takeover proposal, requires the Company to offer to enter into parallel discussions with Toronto-Dominion and to consider corresponding proposals from Toronto-Dominion. In the past, when Toronto-Dominion held a significant equity stake in TD Banknorth and, separately, TD Waterhouse, it eventually acquired the remaining equity after significant declines in the stock price of these companies. Moreover, given the amount of goodwill that would be created in a transaction, and Toronto-Dominion's recent acquisition of TD Banknorth, Toronto-Dominion may, we believe, wish to deter third party interest in such a strategic transaction until it can improve its own capital position and be in a better position to acquire the outstanding equity of TD Ameritrade.
In addition, even if it does not wish to purchase all of the outstanding equity it does not already own, Toronto-Dominion may wish to increase its ownership stake in the future. While Toronto-Dominion is currently limited by the Stockholders Agreement to owning 39.9% of TD Ameritrade (unless it makes a bid for 100% of the equity it does not own), it is permitted to increase its ownership stake to 45% in January, 2009. Toronto-Dominion has indicated its desire to potentially do so by entering into an arrangement with Lillooet Limited, pursuant to which Toronto-Dominion hedged the price risk related to 27 million shares, or approximately 5%, of TD Ameritrade's Common Stock. According to Toronto-Dominion, this arrangement provides it with "price protection in the event that it decides to increase its beneficial ownership in TD Ameritrade in 2009."(6) Other Business Benefits. The third conflict of interest arises from the various business benefits Toronto-Dominion receives from maintaining its sizable investment in TD Ameritrade, which we believe could also be lost were TD Ameritrade to enter into a strategic transaction with a third party.
-- Toronto-Dominion has acknowledged the significant benefit it receives
from use of the "TD" name in TD Ameritrade's advertising, which helps
promote Toronto-Dominion's U.S. banking operations marketed under the
name "TD Banknorth". On the May 24, 2007 Analysts' Call, Mr. Clark
noted that another benefit of Toronto-Dominion's stake in TD
Ameritrade was that TD Ameritrade's "heavy advertising" in locations
where Toronto-Dominion's U.S. banking operations were found helped
build brand equity for these operations. -- TD Ameritrade and its subsidiaries are party to various agreements
with Toronto-Dominion and its subsidiaries that provide significant
benefits to Toronto-Dominion and that may be lost were TD Ameritrade
to enter into a strategic combination with a third party, particularly
a third party with its own banking capabilities such as E*Trade. One
significant example is Toronto-Dominion's money market deposit account
(MMDA) agreement with TD Ameritrade, pursuant to which Toronto-
Dominion earns significant fees by making available to clients of TD
Ameritrade money market deposit accounts as designated sweep vehicles
and TD Ameritrade provides marketing and support services with respect
to the MMDAs. The importance of this arrangement to Toronto-Dominion
was underscored on a Company conference call with analysts on December
12, 2006, when Desjardins Securities analyst Michael Goldberg noted
Toronto-Dominion's "particularly impressive" 10% growth in deposits
during the previous quarter, an increase of approximately CDN$8
billion, and asked, "Can you give us some color as to how you did
that? Nobody else is getting anywhere near that level of growth." In
response, Toronto-Dominion CFO Colleen Johnston replied, "Yes, that is
- about 7 billion of the increase relates to TD Ameritrade. And in
fact, the money market accounts, the sweep accounts that are now being
managed by our TD Waterhouse, USA Bank."(7) It is our understanding
that TD Ameritrade has not sought competitive bids from other parties
to provide such services, which we believe calls into question whether
this arrangement is truly in the best interests of TD Ameritrade.
Inadequate Safeguards. The Board's fiduciary duties require that it take appropriate measures to address these conflicts of interest. We believe it has failed to do so. First, despite his role as CEO of Toronto-Dominion and his clear statement regarding Toronto-Dominion's strategic interest in retaining sizable ownership and influence in TD Ameritrade, we believe that Mr. Clark has played a significant role in at least some of the discussions with possible strategic partners that TD Ameritrade publicly described in the June 5th Response (defined below). Second, we believe that Mr. Clark has set conditions to a strategic combination involving TD Ameritrade, including maintaining certain levels of stock ownership and board representation for Toronto-Dominion in a combined entity, and that these conditions have served as an impediment to a strategic combination involving TD Ameritrade. While Toronto-Dominion is free to exercise its rights as a stockholder, it is inappropriate for conditions set by Toronto-Dominion to serve as a gating item to a recommendation by the Board of a strategic combination, especially given that the remaining approximately 60% majority of stockholders could approve such a transaction.
Our belief regarding conditions set by Toronto-Dominion is reinforced by commentary such as that of the BMO Capital Markets analyst who stated in a June 6, 2007 report that, "We believe that [Toronto-Dominion] will be supportive of a deal with other parties, under certain conditions. One issue that we believe would be meaningful for [Toronto-Dominion] is that it would not want to have a small stake in a bigger brokerage, if that meant it did not have a material say in the running of the broker.(8) Our belief is also consistent with Toronto-Dominion's past course of conduct, given that its representatives have in previous discussions regarding strategic combinations insisted upon certain levels of ownership and board representation as a condition to any strategic transaction. According to an article that appeared in the Financial Post when Toronto-Dominion began discussions with Ameritrade about a possible strategic combination with Toronto-Dominion subsidiary TD Waterhouse, "It is unclear how much control [Toronto-Dominion] would exert over the combined operations, but Ed Clark, TD's chief executive, has been reluctant to completely hand over the reins in the past ... Talks with rival E*Trade Financial last year fell apart over control issues -- such as how many seats TD would have on the board of the combined companies, sources say."(9) An article published on the same day in The Globe and Mail (Canada) reported that, "Charles Schwab Corp., the industry's largest player, has said publicly it would be interested in purchasing TD Waterhouse, but Mr. Clark seems reluctant to abandon the discount sector entirely. The TD CEO has said he would be willing to take less than 50 percent of a merged on-line broker, which would not necessarily mean ceding control."(10) (emphasis added).
Continued Failure to Address Conflicts. In a letter to the Board dated May 29, 2007, we set forth our concerns regarding the conflicts described above and our belief that the Board must address such conflicts through the creation of an independent committee free of improper influence by representatives or agents of Toronto-Dominion to evaluate and pursue potential strategic transactions for TD Ameritrade. The response issued by the Company in its June 5, 2007 8-K filing (the "June 5th Response") however, in which the Board's process for evaluating potential strategic combinations and conducting frequent discussions with industry peers regarding such transactions was described, demonstrates that the Board has failed to adequately address such conflicts.
The June 5th Response fails to address our concerns because it offers no comfort that the TD Board Designees or other affiliates, agents or representatives of Toronto-Dominion will not continue to have the ability to impose conditions on a strategic combination involving TD Ameritrade that are entirely unrelated to the best interests of TD Ameritrade and TD Ameritrade stockholders.
-- There is nothing to suggest that the "standing mergers and
acquisitions committee" (the "M&A Committee") described in the June
5th Response, which includes a TD Board Designee, has the necessary
independence or authority to pursue a strategic combination free of
improper influence from Toronto-Dominion. -- Even if the M&A Committee were free of Toronto-Dominion's influence,
stockholders have been given no indication that, when the committee
gives its recommendation to the Board, the TD Board Designees would
recuse themselves from deliberations about whether to accept or reject
these recommendations.
Finally, TD Ameritrade also announced in the June 5th Response that Toronto-Dominion executive Fredric J. Tomczyk would be leaving Toronto- Dominion to join TD Ameritrade, apparently as a successor-in-waiting to Chief Executive Officer Joseph H. Moglia given that, as disclosed in the June 5th Response, Mr. Tomczyk is entitled to substantial additional compensation in the event that Mr. Moglia vacates this position and Mr. Tomczyk is not appointed to fill the vacancy. We believe that this arrangement with Mr. Tomczyk chills the environment for a potential strategic combination by placing another individual with strong ties to Toronto-Dominion in a pivotal position and creating successor issues in the event of a strategic combination. In addition, given that Mr. Tomczyk at the same time resigned from the TD Ameritrade Board (presumably to be replaced by another TD Board Designee), his eventual ascension to CEO (which position is entitled to a Board seat under the Stockholders Agreement) would effectively shift the balance on the Board from five members out of twelve with strong ties to Toronto-Dominion to six out of twelve, effectively giving Toronto-Dominion a blocking position on the Board.
Demand. Accordingly, pursuant to Section 220 of the Delaware General Corporate Law (the "DGCL"), as the record owners of the shares of Common Stock stated above, the Record Holders hereby demand that they and their respective attorneys, representatives and agents be given, during regular business hours, the opportunity to inspect the following books and records of the Company and to make copies or extracts therefrom: -- All books and records (including emails and documents in electronic
form) considered, reviewed, presented to or generated by or for the
Board, or any committee or subcommittee of the Board (including the
M&A Committee), or any member thereof in such capacity (the foregoing,
collectively, the "Board Parties"), including drafts of such
documents, referring to or discussing any potential strategic
combination or similar transaction involving the Company since July 1,
2006 ("Strategic Transactions"), including, but not limited to: i. Analyses prepared internally by or for any Board Party of any
potential Strategic Transaction;
ii. Third party analyses of any potential Strategic Transaction
prepared by financial advisors or strategic consultants;
iii. Minutes of all meetings of the Board Parties (including all
written consents in lieu thereof) reflecting, referring to or
discussing any potential Strategic Transaction;
iv. All notes and documents, in any form, considered, reviewed,
presented to or generated by or for any Board Party reflecting,
referring to, discussing or constituting any of the above
analyses; and
v. All records, agreements, reports, notes, writings, correspondence
or the like since July 1, 2006, reflecting, referring to,
discussing or constituting any transactions, services, payments
or agreements between the Company and any of its affiliates and
Toronto-Dominion and any of its affiliates, including but not
limited to Toronto-Dominion's money market deposit account (MMDA)
agreement with TD Ameritrade.
-- All books and records (including emails and documents in electronic
form) reflecting, referring to, discussing or constituting the
authorization and powers of the M&A Committee. -- All books and records (including emails and documents in electronic
form) reflecting, referring to or discussing the participation of any
TD Board Designee or employee or other representative of Toronto-
Dominion in communications with the representatives of any third party
regarding potential Strategic Transactions involving the Company. -- All books and records (including emails and documents in electronic
form) reflecting, referring to or discussing the hiring of Fredric J. Tomczyk as Chief Operating Officer of TD Ameritrade and the entry by
the Company into Mr. Tomczyk's employment agreement, including
consideration given to the costs and benefits of providing severance
benefits to Mr. Tomczyk in the event of his departure if he is not
appointed Chief Executive Officer of TD Ameritrade when the current
Chief Executive Officer ceases to hold the office, including
discussions regarding whether such benefits were necessary to secure
Mr. Tomczyk's employment.
The Record Holders demand that all modifications, additions or deletions to any and all information referred to above, as well as all such information that comes into existence after the date hereof, be immediately furnished as such modifications, additions, deletions and information become available to the Company or its agents or representatives.
To the extent required by applicable law, the Record Holders will bear the reasonable copying costs incurred by the Company and any other costs required by Delaware law in connection with the production of the information demanded.
Please be advised that the foregoing requests have been made in good faith for the proper purpose of enabling the Record Holders to investigate whether any members of the Board have breached their respective fiduciary duties under the applicable provisions of Delaware law, by, among other things, (i) failing to take actions in the best interests of the Company's stockholders, and (ii) failing to ensure that the TD Board Designees recuse themselves from the evaluation of Strategic Transactions in light of their significant conflicts of interest.
The Record Holders hereby designate and authorize Steven Wolosky of Olshan Grundman Frome Rosenzweig & Wolosky LLP and any other persons designated by him, acting singly or in any combination, to conduct the inspection and copying herein requested. It is requested that the information identified above be made available to the designated parties no later than July 9th, 2007. Pursuant to Section 220 of the DGCL, if you do not reply to this demand within five (5) business days, or refuse to permit the requested inspection, we have the right to apply to the Delaware Court of Chancery for an order to compel inspection.
Please advise Mr. Wolosky, at (212)451-2333, as promptly as practicable, when and where the items requested above will be made available. If the Company contends that this demand is incomplete or is otherwise deficient in any respect, please notify the Record Holders immediately in writing addressed to Mr. Wolosky as their representative for purposes of this request, at Olshan Grundman Frome Rosenzweig & Wolosky LLP, Park Avenue Tower, 65 East 55th Street, New York, New York 10022, facsimile 212-451-2222, setting forth the facts that the Company contends support its position and specifying any additional information believed to be required. In the absence of such prompt notice, the Record Holders will assume that the Company agrees that this demand complies in all respects with the requirements of the DGCL. The Record Holders reserve the right to withdraw or modify this demand at any time.
Very truly yours, JANA MASTER FUND, LTD. By: JANA Partners LLC, its Investment Manager By: /s/ Charles Penner
Name: Charles Penner
Title: Authorized Person S.A.C. CAPITAL ASSOCIATES, LLC By: /s/ Peter A. Nussbaum
Name: Peter A. Nussbaum
Title: Authorized Person [Notarizations omitted] (1) TD Ameritrade Form 8-K, filed June 5, 2007. (2) Toronto-Dominion Bank 2006 Annual Report to Shareholders. The
percentage is based upon Toronto-Dominion's 39.9% stake in TD
Ameritrade plus another 5% attributable to the hedging arrangement
with Lillooet Limited described herein. (3) Transcript, TD Bank Financial Group Q2 2007 Earnings Conference Call,
May 24, 2007, available at http://www.td.com/investor/earnings.jsp
(4) Shannon Cowherd, "Pressure to Sell Stake in TD Ameritrade or Buy
Remaining", Citigroup Global Markets Equity Research, June 5, 2007. (5) "TD Ameritrade Shares Advance as Jana, SAC push merger", Bloomberg
News, Bradley Keoun, June 6, 2007. (6) Toronto-Dominion Bank 2006 Annual Report to Shareholders. (7) Toronto-Dominion Bank definitive 14A filing, December 12, 2006. (8) Ian de Verteuil, "The Banker Gets Asked 'Deal or No Deal?'", BMO
Capital Markets Research Comment, June 6, 2007. (9) Barbara Schechter, "Ameritrade in talks for Waterhouse: Success of
TD Bank deal may turn on degree of control of merger brokerage",
National Post's Financial Post & FP Investing, June 1, 2005. (10) Sinclair Stewart, "E*Trade to join merger bidding?", The Globe and
Mail (Canada), June 1, 2005. DATASOURCE: JANA Partners LLC CONTACT: JANA Partners LLC, +1-212-692-7696 Web site: http://www.td.com/investor/earnings.jsp
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