It was thought that “Poison Pills” or shareholder rights plans as a takeover defense mechanism were going the way of high button shoes and buggy whips; however, that might not be the case as some companies have turned to them as a means to fend off would-be suitors. Shareholder rights plans are designed to thwart unfriendly acquirers by making it more costly for them to accumulate stock over a specified threshold without board approval. The trigger enables other shareholders to buy additional voting stock at a discounted price, in effect diluting the acquirer’s dominance.
A recent court case seems to attest to the validity of Poison Pills… In Air Products v. Airgas, issued on February 15, the Delaware Court of Chancery declined to order the Airgas board to redeem the poison pill and other defenses that were preventing Air Products from moving forward with its long-running hostile tender offer, despite the court’s finding that a majority of Airgas’ shares were held by merger arbitrageurs and others who would likely tender into Air Products’ offer.
In essence, the court found that “a board that has a good faith, reasonable basis to believe a bid is inadequate may block that bid using a poison pill, irrespective of stockholders’ desire to accept it.” Basically, the court found that, while a board cannot “just say no” to a tender offer, without doing anything more, a board can steadfastly “say no” if it is “acting in good faith, after reasonable investigation and in reliance on outside advisors” and can show that the tender offer poses a “legitimate threat to the corporate enterprise.” In such a situation, the board can force a bidder to proceed via the corporation’s electoral process and endeavor to elect a board majority that would redeem the pill and
allow the offer to proceed.
The decision reflects the flexibility afforded to, and the responsibility imposed on, a corporate board by Delaware law to manage and make decisions with respect to the corporation, and the continued effectiveness of a poison pill when used by a target board acting in a good faith belief that a tender offer price is inadequate.
Recently, we have seen a number of companies implementing shareholder rights plans. For example, Family Dollar Stores adopted a poison pill in an effort to fend off a takeover attempt by hedge fund Trian Group. Last year, retail giant J.C. Penney implemented a one-year plan after hedge fund manager William Ackman upped his stock stake in the retailer above 15%. Tenet Healthcare, St. Joe Company, and Satcon Technology number among the companies to have taken similar measures this year.
In years past, shareholder rights plans were viewed as long-term insurance policies against corporate raiders; however, today such plans are more commonly used as short-term stopgaps against a threat. As noted earlier, Poison Pills have been in decline over recent years due in large part to investor pressure to repeal them.
As with every debate there are two sides to consider. Having a shareholder rights plan in place affords management the opportunity to “tell its side of the story” by providing information regarding the value of the company to all shareholders, seek other buyers or negotiate for a higher price. However, adopting a shareholder rights plan can have negative repercussions and be harmful from a corporate reputation standpoint as such plans are viewed as attempts to entrench management.