When facing a hostile takeover attempt, target companies can resort to several different tactics to delay or defeat the unsolicited bid. The target board's most straightforward defense is to install a poison pill, which makes it prohibitively expensive for the hostile bidder to acquire the company without the participation of the board. If the members of the board are elected to staggered terms, a bidder must conduct two separate proxy contests to obtain majority representation on the board and cause the pill to be withdrawn.

Target companies have other defenses at their disposal as well, such as litigating against the bidder on any number of grounds that may be appropriate (for example, on a claim that the bidder's disclosures to the stockholders are inaccurate or misleading). In the rare instance, the target company can bring an action claiming a conflict of interest on the part of counsel for the bidder. This claim, if pressed successfully, can cause delay and expense for the bidder because it will need to engage new counsel to represent it in its takeover attempt.

The tactic has been attempted in certain high-profile situations before. In the Air Products and Chemicals, Inc./Airgas, Inc. takeover battle of 2010-2011, Airgas attempted to have Air Products' counsel, the law firm of Cravath, Swaine & Moore LLP, disqualified from representing Air Products because of Cravath's previous work for Airgas. The attempt was unsuccessful during the takeover battle (see Air Prod. and Chem., Inc. v. Airgas, Inc., C.A. No. 5249-CC (Del. Ch. Mar. 5, 2010)), although Airgas continued to press its breach of duty claims against Cravath even after Air Products ended its takeover attempt (see Airgas, Inc. v. Cravath, Swaine & Moore LLP, (E.D. Pa. Aug. 3, 2010)), and eventually won a settlement. The tactic was also used, successfully, in a closely followed Canadian takeover contest, in which books retailer Chapters Inc. persuaded an Ontario court to disqualify Davies, Ward & Beck LLP from acting as counsel for bidder Trilogy Retail Enterprises L.P. because of Davies' previous work for Chapters' predecessor companies (see Chapters Inc. v. Davies, Ward & Beck LLP, 2000 CarswellOnt 4900 (ON SC), aff'd, 2001 CarswellOnt 178 (ON CA)).

On June 9, 2015, pharmaceutical company Mylan, Inc., the subject of a takeover bid by Teva Pharmaceutical Industries, Ltd., obtained a recommendation from a Pennsylvania federal magistrate judge to disqualify the law firm of Kirkland & Ellis LLP from representing Teva (Mylan, Inc. v. Kirkland & Ellis LLP, (W.D. Pa. June 9, 2015)). The judge agreed with Mylan that Kirkland's previous work for Mylan was sufficiently related to the counsel it would be providing Teva that it would be a conflict of interest for Kirkland to continue with that representation. Although the ruling was a non-binding recommendation to the court, Teva has already announced that it will switch counsel and work with Sullivan & Cromwell LLP on its takeover bid.

As noted, public target companies have various tools at their disposal to defend against unwanted bids, stemming from both their organizational documents and the actions that they can take on offense against the bidder. For a discussion of takeover defenses available to public target companies, see Practice Note, Defending Against Hostile Takeovers. For an in-depth discussion of poison pills, see Practice Note, Poison Pills: Defending Against Takeovers/Stockholder Activism and Protecting NOLs. A discussion of the Mylan decision as an illustration of the conflict-of-interest tactic follows.

The plaintiffs Mylan, Inc. and several affiliated companies filed a complaint against Kirkland on May 1, 2015, alleging that Kirkland was in violation of both its fiduciary duties to the Mylan companies and the Pennsylvania Rules of Professional Conduct, by virtue of its representation of competitor Teva in the latter's unsolicited attempt to acquire Mylan N.V., the Mylan companies' parent holding company. The plaintiffs highlighted numerous examples of confidential information shared with Kirkland during the period of Kirkland's ongoing legal representation of Mylan. According to Mylan, pharmaceutical products for which Kirkland represented Mylan approximated $4 billion in total market revenue in 2014. Mylan had also provided Kirkland with detailed prospective financial forecasts for a not-yet-launched product.

Kirkland's representation of Mylan began in 2013, after coming to agreement on an engagement letter on January 9 of that year. At the time of the engagement letter, Mylan was aware that Kirkland had long served as counsel for Teva in a variety of subject matter areas, including regulatory matters and products liability litigation, some of which were matters in which Teva's interests were directly adverse to Mylan. Kirkland had also represented Teva on significant corporate matters, as when it acted as lead counsel in connection with Teva's $6.8 billion acquisition in 2011 of Cephalon, Inc.

The engagement letter contained a conflict-waiver clause that stipulated that Kirkland may represent other entities or persons who are adverse to Mylan "on matters that are not related to" the legal services that Kirkland has rendered or will render to Mylan. Kirkland's draft of the clause initially used the phrase "not substantially related," but Mylan pushed back and the word "substantially" was dropped. Kirkland never shared with Mylan its understanding that under the terms of the engagement letter, it would be permitted to undertake representation in an adverse acquisition of the Mylan corporate group.

Teva approached Kirkland in early April to ask about an engagement on a takeover bid for Mylan N.V., the ultimate parent company of the Mylan entities. Kirkland ran a conflict check and confirmed that it had never represented Mylan N.V. However, Mylan N.V. had only been formed on February 27, 2015, little over a month earlier, in connection with an inversion transaction with Abbott Laboratories, Inc. Mylan, Inc., the former parent company, was reorganized in the inversion as an indirect wholly owned subsidiary of Mylan N.V., but continued to be the principal parent operating company in the Mylan corporate chain.

Satisfied with its conflict check, Kirkland decided to represent Teva in the hostile takeover bid. Kirkland set up an ethical screen between the lawyers who had worked on Mylan litigation and those slated to be part of the Teva takeover team, and according to Kirkland, no confidential Mylan information passed to lawyers working for Teva. In its April 21, 2015, letter to Mylan N.V., Teva identified Kirkland as its legal counsel in connection with its proposed transaction. Kirkland had not previously informed Mylan that it intended to represent Teva in the takeover attempt and had not then sought a waiver from Mylan permitting it to represent Teva.

Kirkland argued that its representation of Teva was permissible for three main reasons:

If the court were to reject these arguments, it would not disqualify Kirkland before also analyzing whether:

The magistrate judge on the court rejected Kirkland's arguments and recommended disqualification of Kirkland. Using somewhat severe language, the court called the contention that the addition of a holding company relieved Kirkland of its fiduciary duties to the Mylan companies "disquieting." Teva, the court added, was not only attempting to acquire "the bag" (the holding company) but "the contents" (Mylan Inc. and its subsidiaries).

The court held that the conflicts waiver did not constitute informed consent on Mylan's part. The court held that if Kirkland intended to retain a right to act as an advocate against Mylan in such a fundamental way, it was incumbent upon it to make certain that its client knew and agreed to such an arrangement.

The court also rejected the argument that the ethical wall could allow Kirkland to represent an adverse party, calling the wall "immaterial to the analysis." The court explained that ethical walls cannot turn related matters into unrelated matters.

Having found that Kirkland's representation of Teva was in violation of the governing ethical rules and not permitted by the terms of the engagement letter, the court also analyzed the balance of equities. The court first took note of Pennsylvania Supreme Court precedent that has expressly recognized that a law firm's representation of an adverse interest gives rise to the sort of injury that is appropriately remedied by injunction. In response, Kirkland countered that it would suffer irreparable harm if the injunction were granted because:

The court rejected these arguments as well. Citing relevant precedent, the court held that mere economic loss such as a temporary loss of income does not constitute irreparable injury. The court added that any harm to Kirkland's reputation would be a result of Kirkland's own conduct, not the injunction itself.

The court also weighed the effect of an injunction on Teva. Here the court was more sympathetic, noting Kirkland's credentials and expertise, the presently unique relationship between individual partners of Kirkland and Teva executives, the complexity and sophistication of the issues at play, the limited availability of other firms to provide comparable services, and the costs to Teva to now bring in other counsel on a highly time-sensitive matter. However, the court also held Teva somewhat at fault for causing the conflict to arise in the first place, stating that "there has been no clear showing that Teva is an innocent party in the occasioning of these unfortunate and unethical circumstances." The court also ruled that Kirkland had not introduced evidence either that its services were irreplaceable (as opposed to preferred) or that the short delay in bringing substitute counsel up to speed would likely cause Teva's takeover attempt to fail.

The court also held that the public interests favor grant of the injunction. The court saw little discernible public interest at stake in who will prevail in the hostile takeover battle between Teva and Mylan or in whether Teva has recourse to its preferred takeover counsel. To the extent that the public interest is concerned, the court held that it would favor enforcement of ethical rules and contractual undertakings.

Although Teva has already changed its representation on the takeover matter, Kirkland has announced that it file an objection with the court's chief judge. According to the magistrate judge's ruling, Kirkland has 14 days to file an objection. Mylan would then have 14 days to file a response.