The Activist Investor Blog
The Activist Investor Blog
Poison Pills: My, How They Have Grown
Previously we discussed the different share ownership levels that trigger various disclosure and regulatory obligations, such as when investors need to file a Schedule 13D (namely, when they own over 5% of a company’s shares). Among the most notorious and confusing thresholds is the one that triggers a shareholders rights plan, aka a poison pill.
That discussion, along with some recent developments in poison pill artistry and Marty Lipton’s reminiscence about how he started them, got us thinking about poison pills generally. They have morphed, with the cooperation of the Delaware courts, into a beast far beyond what even Marty might have intended back in 1985, when he defended one of the original poison pills.
❖Back then, they sought to protect corporations from unwanted (by management, at least) hostile buyers.
❖These days, they serve to limit any objectionable (again, to management) investor from owning a meaningful stake in the company.
Note that the development of poison pills entails, to a degree, the history of Delaware litigation between investors and management. Below we cite some of the major such cases, so apologies in advance for a bit of arcane and obscure legalese as part of the exposition.
Basic Mechanics Haven’t Changed
Corporations started to adopt poison pills since the late 1970s. They allow a company to dilute the holdings of an objectionable investor. The details have evolved over time, but they all work in this way.
The most recent major poison pill litigation, Air Products v. Airgas, which the Delaware Court of Chancellery decided last week, reminds us why poison pills have their peculiar structure (the opinion provides a detailed, if somewhat dry, history of poison pills). Delaware corporate law, and that of many other states, allows corporate directors to screen merger proposals, but not tender offers. So, a poison pill allows directors to “screen” tender offers, as well.
Originally, to reject a “structurally coercive tender offer”
Mesa Petroleum, run by one of the original hostile raiders, T. Boone Pickens, went after Unocal in 1985. Mesa put together a clever offer that rewarded early subscribers to the tender offer in cash, and later subscribers in junk bonds. Of course, investors rushed to take the cash. In one of its famous early cases, Delaware allowed Unocal to use a poison pill to dilute Mesa’s stake. Rather than actually have that happen (only one pill has ever been triggered, more in a moment), Mesa went away.
Later, to reject any unwanted tender offer
Encouraged by this success, corporations attempted to use poison pills in other situations. In the following years management implemented pills to thwart any kind of tender offer, not just “structurally coercive” ones. So, if the company thinks that an acquirer has offered merely an inadequate price, it can use a pill in the same way that Unocal did. A series of cases have reinforced this idea, including City Capital v. Interco, Paramount v. Time, and Unitrin v. American General. The Air Products v. Airgas decision from this past week further cements the rights of a Board of Directors to reject a tender offer based solely on directors’ view of a too-low price.
Now, limit investor shareholding for any reason
In recent years, poison pills have applied outside of a tender offer situation. In essence, they serve to limit what a given shareholder can own, or what a group of shareholders can do together. The most notable recent case to allow a company this sort of latitude is Yucaipa v. Riggio (the Barnes & Noble proxy fight). Based on that case, companies can use poison pills to threaten any investor that exceeds the trigger threshold, effectively limiting what a given investor can own without the company’s permission.
Quiz: What is the Only Company in the Past Twenty Years to Trigger Its Poison Pill?
Selectica, of course, under a takeover threat from Versata. Versata litigated the pill, and the case featured two other interesting elements: Delaware allowed a trigger of as low as 5%, and it allowed Selectica to use the poison pill to protect its net operating loss (NOL) tax asset.
What’s next?
The possibilities are endless. An inventive law firm has recommended that companies use a poison pill to close the ten-day period within which an investor has to report holdings above 5%. Compellant Technologies adopted one once Dell Computer announced a deal to acquire Compellant, probably to discourage competing bids.
Based on Delaware’s staunch defense of poison pills in most any context, investors will have to cope with them for the foreseeable future.
Tuesday, February 22, 2011