On2 Acquisition Vote Meeting Adjourned

[Editor's note: several hours after this article was published, On2 announced that the December 23 special meeting re-adjournment will only cover one topic: shareholders in attendance will be asked to approve or reject a proposal to further adjourn the special meeting to an unspecified later date. The date, time and location of the further adjourned special meeting will be announced shortly after the vote is taken on the adjournment proposal.]

Everyone seems to have an opinion about the proposed Google acquisition of On2 Technologies, including the companies involved as well as numerous shareholder groups and individuals. In recent weeks, as Google attempts to acquire its first public company, the number of official announcements from On2 has increased markedly, as have the countering published opinions of members of the arbitrage community and what some call a group of dissident shareholders.

"On2 will hold a special meeting of stockholders on December 18, 2009 to vote upon the proposed merger," a December 7 On2 press release stated, "which requires approval by the holders of a majority of On2's outstanding shares of Common Stock."

Against that backdrop, On2 has announced the adjournment of its December 18 vote by shareholders to approve the merger with Google. The company's press release said that its shareholders had chosen to adjourn the meeting until December 23, 2009, but it is uncertain whether this was a vote by the majority of shareholders or just shareholders present at the special meeting.

Why was the meeting adjourned? According to On2, the company does not have enough votes to approve the merger.

While the shareholders who have voted prior to and including December 18 have voted in favor of the merger proposal, "the merger proposal requires the affirmative vote of a majority of the issued and outstanding shares of On2's common stock, as opposed to just a majority of those shares voted."

At the heart of the issue surrounding the vote, then, is the need for the majority of shares outstanding to vote in favor of the merger.

"Since a large number of On2's stockholders have not yet voted, including many retail investors," said Matthew Frost, interim chief executive officer of On2, "we believe it is appropriate to adjourn the meeting and extend the voting deadline in order to give these investors a chance to vote."

Prior to the December 18 meeting, a Financial Times article addressed the issue of "dissident" shareholders who are challenging On2's management and board about the shareholder value of the merger.

"A dissident shareholder group claims it has about 55m of the 170m shares ready to support its opposition to the Google deal," wrote John Dizard last month in FT.com's Last Word column. "There is no independent way to verify the weight of the dissidents, and the company’s general counsel says the 55m shares number 'bears no relation to reality.' We’ll see who’s right on December 18."

"The dissidents believe the company should have solicited competitive bids," wrote Dizard, adding that management and directors of On2 hold just over 3.5% of outstanding stock, "almost all came from awarded options, not purchased shares. . . Maybe competitive bids for valuable assets are not useful or necessary. Who is to say, apart from the shareholders? But the On2 deal might have been less controversial if the board had included directors who bought substantial numbers of shares with their own cash in the open market."

What is not clear, now that the special meeting has been adjourned and re-scheduled for December 23, is what On2's management and board will do if the required affirmative shares do not materialize at the December 23 meeting.

It is also unclear if some of the non-voting retail investors are waiting to see whether a better offer might come along, although On2 is reminding those shareholders who have not already voted that the price has already been set.

"As previously announced," the company stated in its press release, "the exchange ratio for the proposed merger has been set at 0.0010. As such, the exchange ratio will remain fixed regardless of when the proposed merger is completed."

The exchange ratio mentioned is at the key to some of the contrarian opinions being published.

When the August 5, 2009 announcement of the intent by On2 and Google to enter into a merger agreement in which Google would acquire On2, each outstanding share of On2 Common Stock would be converted into $0.60 worth of Google Class A Common Stock. On December 16, two days prior to the initial special meeting, Google and On2 announced the exact share-to-share exchange ratio.

"The fraction of a share of Google Class A Common Stock to be issued for each share of On2 Common Stock in connection with Google's proposed acquisition of On2, will be $0.0010." a joint press release stated. "The exchange ratio was determined by dividing $0.60 per share by the trading price, which is defined in the merger agreement as the volume weighted average trading price of a share of Google Class A Common Stock based on the sales price of every share of Google Class A Common Stock traded during the 20 trading-day period ending on and including the second trading day prior to the date of the special meeting of On2's stockholders to consider and vote on the proposed merger."

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