Ramius, Datascope, blank checks

The hedge fund Ramius Capital seeks to put two new faces on the board of directors of Datascope, a medical device manufacturer based in Montvale, New Jersey. Stockholders will vote on these two seats at a December 20 meeting.

Datascope has conducted a series of internal investigations this year and five of the company's top executives have left. It is natural to suspect that the former led to the latter, that "where there's smoke...." And if there isn't any fire, there's been a considerable waste of money in calling out the bucket brigade -- Datascope spent$1.7 million on legal expenses relating to those investigations.

Ramius said in a statement that it hopes the "election contest will send a strong message to the remaining incumbent directors that stockholders are not satisfied with the company's corporate governance and management."

Such troubles might in some circumstances put a company "in play" as a takeover target. But Datascope has the sort of "poison pill" provision I discussed here last week, and that is part of what Ramius objects to in their own proxy campaign. It also entrenches itself through other means, notably through the ability of the Datascope board to issue "Blank Check" preferred stock. This is, like poison pills, a fairly common means of entrenching the incumbents against the threat of acquisition, and a proxy fight is useful as a means of lowering these barriers, empowering a potential acquirer.

I believe this is the first time I've used that phrase "blank check" in this still-new blog. The idea is that a board allowed to make such issuances by its charter or by-laws can issue such stock to a friendly party or "white knight" in the event that a black-suited knight, an unfriendly acquirer, appears. Depending on the conversion rights that go with the preferred stock, it can have the effect of diluting the acquirer's holdings, making the acquisition more expensive and/or less attractive.

Boards commonly argue that the authority to issue such "blank check" stock is good for the company because of the increased flexibility it gives the board in the pursuit of financing. But fiduciaries are wary of it.

On the website of American Century Investment Management, for example, you'll find an explanation of that asset management firm's proxy voting policies that includes the following:

"Generally, the Adviser will vote against blank check preferred stock. However, the Adviser may vote in favor of blank check preferred if the proxy statement discloses that such stock is limited to use for a specific, proper corporate objective as a financing instrument."

Datascope's board has seven members, so even if both the dissident nominees are elected -- and they express such wariness in boardroom deliberations -- they may well end up being a minority voice in such matters. Still, I suppose that the issuance of blank check stock by a 5 to 2 vote might itself serve as a red flag.