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BEA's financial restatements key to warding off Icahn

Company needs to get financials in order if it hopes to keep its biggest shareholder from taking control of a possible buyout, legal experts say.

BEA Systems is under the gun to get its financial restatements in order before its largest shareholder, Carl Icahn, calls an annual shareholders meeting.

Without current audited financials, the San Jose, Calif.-based company can't solicit proxies for its four directors who are up for re-election; Icahn has no such constraints should he put forth his own slate of opposition candidates for the board seats. And without the ability to solicit proxies, BEA may be facing a deck stacked against it, legal experts say.

"Right now, BEA is in a tough position to respond to Icahn, because until it gets its financial statements completed and its annual report together, it won't be able to solicit proxies," said John Jenkins, an attorney with Calfee Halter & Griswold. "It may also face some challenges in communicating with shareholders."

Icahn is aiming to get BEA sold to the highest bidder and has previously said he is considering running an opposition slate of directors who, presumably, would be more in favor to taking such action. BEA recently rejected a $6.7 billion buyout offer from Oracle, saying its rival's $17 a share price undervalued the company. BEA said a price of $21 a share would be needed for any interested party to get a seat at its negotiating table. Oracle declined, withdrawing its offer on Sunday.

Icahn, meanwhile, is suing BEA. The lawsuit, filed in the Delaware Chancery Court late last week, asks the court to force BEA to hold an annual shareholders meeting. Under the law in Delaware, where BEA is incorporated, investors can ask the court to force a company to hold an annual shareholders meeting if more than 13 months have passed since the last one. In BEA's case, it has not held an annual meeting since July 2006.

Icahn is asking the court to allow him to call a shareholders meeting by November 30. But some legal experts say that's unlikely to happen so soon.

"I think November 30 is a pipe dream," said J. Travis Laster, an attorney with Abrams & Laster, which represented Vesta Insurance Group in a similar case before the Delaware courts. "You could theoretically get a trial by November 30, but I would be shocked if they could get a shareholders meeting by the end of the month."

Icahn did not return calls made to his office. A representative for BEA said the company does not comment on pending litigation.

Current financials crucial
If BEA does not have its financials current prior to the shareholders meeting, it cannot send out proxy cards asking shareholders to vote for its four candidates for the upcoming board seats. Icahn, however, would be able to send shareholders proxy cards that list his four candidates and not BEA's slate.

In the absence of current financials, BEA would be left with the hope that investors would physically show up to the annual meeting to cast their votes, because the ballots at the meeting would include all director candidates.

BEA would also have to rely on sympathetic shareholders, who could write the company a letter stating their candidate preferences and asking BEA to vote their shares for the incumbent directors at the annual meeting.

Under BEA's bylaws, directors are elected based on a plurality of votes.

BEA could level the playing field by issuing an annual report with audited financials. That would allow it to send out its own proxies with names of director candidates, call a shareholders meeting--and, more importantly, virtually make Icahn's suit moot.

"I expect BEA is working night and day to get their financials done," Laster said. "And if they can't get their financials done before the trial, I would imagine BEA would litigate vigorously and litigate for a date far enough out for them to get it done before the meeting."

Typically, the Delaware Chancery court will set an annual meeting date 30 to 45 days after the conclusion of a trial. In Laster's Vesta Insurance case, the judge set it at the "outer bounds of its discretion" to 90 days.

That was because Vesta, which had previously delayed its annual shareholders meeting as it waited to restate its 2004 earnings, thought it could get them current within 90 days. But as that deadline approached and Vesta realized it would not meet the deadline, the Chancery Court judge ordered the company to hold a shareholders meeting, even though it was not current with its financials.

"The shareholder meeting to elect directors is a cornerstone of Delaware corporate law," stated the judge in his order, siding with Newcastle Partners, a shareholder and plaintiff in the Vesta case.

And though Vesta had argued that to follow the judge's order would put it in conflict with the Securities and Exchange Commission's requirements that an annual report be filed before soliciting proxies, the Chancery Court had a different opinion.

"Vesta's reading of its communications with the SEC, however, is entirely too strong. The cited letter does not order Vesta to stop the annual meeting, or to take any other action inconsistent with this court's order. Rather, it merely asks for further explanation of how precisely Vesta's proposed action fits into the structure of the SEC regulations," the Chancery Court judge stated in reference to communications between the SEC and Vesta.

Vesta and BEA are not alone in facing Chancery Court litigation over delays in holding shareholders meetings due to restating financials.

"Over the past two or three years, there has been a flood of companies issuing restatements, due to Sarbanes-Oxley," Laster said. "The stock options backdating is just the latest issue that has caused restatements. The number of these kinds of (lawsuits) has gone from three to four a year to eight to ten."

In the case of Icahn, observers say, he is seeking to use a shareholders meeting as another tool to prompt the board to sell itself to the highest bidder.