Poison pill

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This article is about economics. For the literal meaning, see Suicide pill.

Poison pill is a term referring to any strategy, generally in business or politics, to increase the likelihood of negative results over positive ones for a party that attempts any kind of takeover. It derives from its original meaning of a literal poison pill carried by various spies throughout history, taken when discovered to eliminate the possibility of being interrogated for the enemy's gain.

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[edit] Public companies

In publicly held companies, various methods to avoid takeover bids are called "poison pills". Takeover bids are attempts by a bidder to obtain control of a target company, either by soliciting proxies in a proxy fight to get elected to the board or to acquire a controlling block of shares and use the associated votes to get elected to the board. Once in control of the target's board, the bidder can determine the target's management. As discussed more below, targets have various kinds of takeover defenses available, and several types of defense have been called "poison pills" because they not only harm the bidder but the target (or its shareholders) as well. Currently, the most common takeover defense known as a poison pill is a shareholder rights plan.

Because the board of directors of the company can redeem or otherwise eliminate a standard poison pill, it does not typically preclude a proxy fight or other takeover attempts not accompanied by an acquisition of a significant block of the company's stock. It can, however, prevent shareholders from entering into certain agreements that can assist in a proxy fight, such as an agreement to pay another shareholder's expenses. In combination with a staggered board of directors, however, a shareholder rights plan can be a potential defense.[1]

[edit] Shareholder rights plans

The target company issues rights to existing shareholders to acquire a large number of new securities, usually common stock or preferred stock. The new rights typically allow holders (other than a bidder) to convert the right into a large number of common shares if anyone acquires more than a set amount of the target's stock (typically 20-30%). This dilutes the percentage of the target owned by the bidder, and makes it more expensive to acquire control of the target. This form of poison pill is sometimes called a shareholder rights plan because it provides shareholders (other than the bidder) with rights to buy more stock in the event of a control acquisition.[2]

[edit] Other tactics

"Poison pill" is sometimes used more broadly to describe other types of takeover defenses that involve the target taking some action that harms both target and bidder, although the broad category of takeover defenses is more commonly known as "shark repellents" and includes the traditional shareholder rights plan poison pill. Other anti-takeover protections include:

  • The target adds to its charter a provision which gives the current shareholders the right to sell their shares to the acquirer at an increased price (usually 100% above recent average share price), if the acquirer's share of the company reaches a critical limit (usually one third). This kind of poison pill cannot stop a determined acquirer but ensures a high price for the company.
  • The target takes on large debts in an effort to make the debt load too high to be attractive - the acquirer would eventually have to pay the debts.
  • The company buys a number of smaller companies using a stock swap, diluting the value of the target's stock.
  • The target grants its employees stock options that immediately vest if the company is taken over. This is intended to give employees an incentive to continue working for the target company at least until a merger is completed instead of looking for a new job as soon as takeover discussions begin. However, with the release of the "golden handcuffs", many discontented employees may quit immediately after they've cashed in their stock options. This poison pill may create an exodus of talented employees. In many high-tech businesses, attrition of talented human resources often means an empty shell is left behind for the new owner.
  • Peoplesoft guaranteed its customers in June 2003 that if it were acquired within two years, presumably by its rival Oracle Corporation, and product support were reduced within four years, its customers would receive a refund of between two and five times the fees they had paid for their Peoplesoft software licenses. The hypothetical cost to Oracle was valued at as much as US$1.5 billion. The move was opposed by some Peoplesoft shareholders who believed the refund guarantee flagrantly opposed their interests as shareholders. Peoplesoft allowed the guarantee to expire in April 2004.
  • The practice of having staggered elections for the Board of Directors. For example, if a company had nine directors, then three directors would be up for re-election each year, with a three-year term. This would present a potential acquirer with the position of having a hostile board for at least a year after the first election. In some companies, certain percentages of the board (33%) may be enough to block key decisions (such as a full merger agreement or major asset sale), so an acquirer may not be able to close an acquisition for years after having purchased a majority of the target's stock.

[edit] History

The poison pill was invented by noted M&A lawyer Martin Lipton of Wachtell, Lipton, Rosen & Katz, in 1982, as a response to tender-based hostile takeovers. Poison pills became popular during the early 1980s, in response to the increasing trend of corporate raids by businessmen such as Carl Icahn. Although the legality of poison pills was unclear for some time, they were upheld as a valid instrument of Delaware corporate law by the Delaware Supreme Court in its November 1985 decision Moran v. Household International, Inc.

It was reported in 2001 that since 1997, for every company with a poison pill that successfully resisted a hostile takeover, there were 20 companies with poison pills that accepted takeover offers.[3] The trend since the early 2000s has been for shareholders to vote against poison pill authorization, since, despite the above statistic, poison pills are designed to resist takeovers, whereas from the point of view of a shareholder, takeovers can be financially rewarding.

[edit] Common types

[edit] Constraints and illegality

Many jurisdictions other than the U.S. view the poison pill strategy as illegal, or place restraints on their use.

In Canada, almost all shareholders rights plans are "chewable", meaning they contain a permitted bid concept such that a bidder who is willing to conform to the requirements of a permitted bid can acquire the company by take-over bid without triggering a flip-in event. Shareholder rights plans in Canada are also weakened by the ability of a hostile acquirer to petition the provincial securities regulators to have the company's pill overturned. Generally the courts will overturn the pill to allow shareholders to decide whether they want to tender to a bid for the company. However, the company may be allowed to maintain it for long enough to run an auction to see if a white knight can be found. A notable Canadian case before the securities regulators in 2006 involved the poison pill of Falconbridge Limited which at the time was the subject of a friendly bid from Inco and a hostile bid from Xstrata plc, which was a 20% shareholder of Falconbridge. Xstrata applied to have Falconbridge's pill invalidated, citing among other things that the Falconbridge had had its pill in place without shareholder approval for more than nine months and that the pill stood in the way of Falconbridge shareholders accepting Xstrata's all cash offer for Falconbridge shares. Despite similar facts with previous cases in which securities regulators had promptly taken down pills, the Ontario Securities Commission ruled that Falconbridge's pill could remain in place for a further limited period as it had the effect of sustaining the auction for Falconbridge by preventing Xstrata increasing its ownership and potentially obtaining a blocking position that would prevent other bidders from obtaining 100% of the shares.

In Great Britain, poison pills are not allowed under Takeover Panel rules. The rights of public shareholders are protected by the Panel on a case-by-case, principles-based regulatory regime. One disadvantage of the Panel's prohibition of poison pills is that it allows bidding wars to be won by hostile bidders who buy shares of their target in the marketplace during "raids". Raids have helped bidders win targets such as BAA plc and AWG plc when other bidders were considering emerging at higher prices. If these companies had poison pills, they could have prevented the raids by threatening to dilute the positions of their hostile suitors if they exceeded the statutory levels (often 10% of the outstanding shares) in the rights plan. The London Stock Exchange itself is another example of a company that has seen significant stakebuilding by a hostile suitor, in this case the NASDAQ. The LSE's ultimate fate is currently up in the air, but NASDAQ's stake is sufficiently large that it is essentially impossible for a third party bidder to make a successful offer to acquire the LSE.

Takeover law is still evolving in continental Europe, as individual countries slowly fall in line with requirements mandated by the European Commission. Stakebuilding is commonplace in many continental takeover battles such as Scania AB. Formal poison pills are quite rare in continental Europe, but national governments hold golden shares in many "strategic" companies such as telecom monopolies and energy companies. Governments have also served as "poison pills" by threatening potential suitors with negative regulatory developments if they pursue the takeover. Examples of this include Spain's adoption of new rules for the ownership of energy companies after E.ON of Germany made a hostile bid for Endesa and France's threats to punish any potential acquiror of Groupe Danone.

[edit] Sports

In professional sports, a poison pill is a component of a contract, which one team offers a player, that makes it difficult or impossible for another team (which has the right of first refusal) to match. While it can often refer to a salary structure or clause that would affect all teams equally, it has taken on a new specific meaning of a clause that has unbalanced impact. For example, in March 2006, the Minnesota Vikings offered Steve Hutchinson, an offensive guard with the Seattle Seahawks, a seven-year, $49 million contract of which $16 million was guaranteed. This contract offer had two poison pills in it. One was the salary structure, which would require the team to pay $13 million in the first year of the contract. That salary structure would apply to both teams equally, as the Seahawks would also have to pay $13 million in the first contract year, were they to match the offer. The second was a clause that required Hutchinson to be the highest paid player on the offensive line, or else the entire contract would be guaranteed. Since the Seahawks had another offensive lineman, Walter Jones, with a higher salary and the Vikings did not, this clause would have required the Seahawks to guarantee $49 million, and it effectively eliminated the Seahawks' opportunity to match the contract offer.

In the wake of this contract offer, similar clauses have appeared in other contract offers, including a contract offered to Vikings wide receiver Nate Burleson by the Seahawks, which, with irony fully intended, was structured as a seven year, $49 million deal. The contract given to Burleson had two vengeful poison pill clauses in response to the contract offered to Hutchinson. Firstly, it stipulated that if Burleson were to play five or more games in the state of Minnesota during any single season over the life of the contract, the entire $49 million would become guaranteed. Secondly, if Burleson were to earn more per year on average than all of his team's running backs combined, the $49 million would be guaranteed. Since the Vikings play half of their games at home in Minnesota, and their running backs combined earned less per year than the $7 million in Burleson's contract, Minnesota was unable to match it.

The NFL's collective bargaining agreement has had many poison pills, should either the players or owners decided to pull out. These include increasing the minimum years before joining free agency from 4 to 6, uncapped seasons, and a restructure of the draft. Since these would be unacceptable to both sides, it effectively aims to make sure that should the agreement be broken it would be in the best interests of both sides to agree to new terms.

[edit] Politics

Main article: Wrecking amendment

A poison pill may also be used in politics, such as attaching an amendment so distasteful to a bill that even the bill's supporters are forced to vote against it. This manipulative tactic may be intended to simply kill the bill, or to create a no-win situation for the bill's supporters, so that the bill's opponents can accuse them of voting for something bad no matter what. This is known as a "wrecking amendment".

In the U.S., it may also refer to a stipulation often attached to constitutional amendments, which kills the amendment if it has not been ratified after seven years.

[edit] See also

[edit] References

  1. ^ See Lucian Bebchuk, John C. Coates IV and Guhan Subramanian, The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy, 54 Stan. L. Rev. 887 (2002).
  2. ^ For a description of a standard rights plan, see Wachtell, Lipton, Rosen & Katz, The Share Purchase Rights Plan, reprinted in Ronald J. Gilson & Bernard S. Black, The Law and Finance of Corporate Acquisitions (2d ed. Supp. 1999) at 10-18.
  3. ^ Poison Pill Popping - CFO Magazine - October 2001 Issue - CFO.com

[edit] External links