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TIG Advisors LLC, an alternative investment fund manager, was pretty clear what it wanted last week in its opening attack on the sale of Zale Corp. to Signet Jewelers Limited: a higher purchase price than the $21 per share in the merger agreement. TIG is urging stockholders to sign its proxy card and vote “no” on the merger at Zale’s special meeting of shareholders currently scheduled for May 29.

However, TIG suggests an unusual idea for shareholders who are not sure they want to give up the bird in the hand of $21 per share, but would like to pressure Signet for a higher price: exploiting what TIG effectively views as a loophole in the merger agreement. TIG suggests these shareholders can postpone their decision until they can see whether Zale’s future results justify a higher price.

For shareholders who want to sit on the fence for now, TIG suggests they withhold their vote entirely and try to deprive the Zale meeting of a quorum. A quorum is the minimum number of shares which must be represented at a meeting to conduct official business. The required quorum for the Zale shareholders’ meeting is a majority of the outstanding shares. Until a majority of the shares are represented at the meeting, no shareholder action can be taken on the merger.

Under the terms of the merger agreement, “the Company may postpone or adjourn the Company Stockholder Meeting…for the absence of quorum.” And, as TIG points out in its preliminary proxy material “the parties negotiated the Merger Agreement to contemplate a late “end date” of Feb. 19, 2015 by which the transaction must be completed. An end date, also sometimes called a drop-dead date, is the date either party can terminate an agreement because the deal is taking too long and presumably is too hard to complete.

Seeing that relatively long time period until close as a loophole, TIG is essentially saying shareholders don’t need to give up the $21 per share being offered by Signet and can postpone the decision until they know more. (TIG even claims that this “put option” could be worth $4.50-6.38 per share based on certain assumptions using option valuation techniques.)

Depriving the Zale shareholder meeting of a quorum to keep shareholder’s options open is a clever idea, which exploits the relatively long period the parties gave themselves to complete the deal.

Unfortunately, the process TIG proposes–in which it is asking shareholders to vote “no” or not vote at all–may not work as a “put” as described in TIG’s proxy materials.

To understand why, consider a numerical example. Suppose 40% of the shares are present at the meeting to vote in favor of the merger. Also suppose half of the remainder sign TIG’s proxy card and vote, as recommended by TIG, against the merger. Assume the remaining shares follow TIG’s alternative idea of not having their shares represented at the meeting for quorum purposes.

There will be a quorum at the meeting (those voting yes and those voting no add up to 70%). The merger will be defeated at the meeting because the required vote for the merger is a majority of the outstanding. If only 40% of the shares were voted in favor, the merger would be defeated even though the quorum was met. The defeat of the merger at the meeting gives Signet an immediate right to terminate the merger agreement. Termination wouldn’t leave a “put option” for shareholders who tried but failed to deprive the meeting of a quorum. The $21 per share could be gone forever.

In discussing the substance of this column, a person close to TIG suggested that what would more likely happen if Zale did not have the majority vote to approve the merger is that it would put off the shareholder vote, rather than holding it, and decide with Signet what to do next. That course of events could possibly create an additional opportunity to vote on a deal.

Still, the only way the fence-sitters could be sure of depriving the meeting of a quorum (assuming a majority of shares do not vote in favor) is to have those who oppose the merger and those who favor TIG’s backup plan of wait and see to all support the quorum avoidance scheme.

For all these reasons, shareholders who want to try to ensure there is an opportunity to get $21 per share are going to have to vote yes on the merger at the Zale shareholder meeting.
