For many years, especially in the 1980’s and 90’s, takeover bids by activist investors significantly spurred the number of mergers and acquisitions taking place in corporate America. In response, corporate boards began to employ “poison pills” – or provisions to deter or at least make costly – attempts to wrest control of a corporation from its governing majority. One example of a poison pill measure that was utiized is a corporate bylaw which requires that, if an investor buys more than a specified percentage of the company’s stock, the company would then issue enough stock to the existing shareholders to effectively dilute the effect of the new investor’s purchase.
As mergers and acquisitions dwindled in number after the financial crisis in 2008, these corporate rules became less important to members of corporate boards seeking to maintain control of their companies. Some legal scholars considered this to be a refreshing trend. As activist hedge fund investors have outperformed traditional hedge funds since 2009, corporate boards have taken notice.
According to a recent article in The Economist, corporate boards are now using poison pill provisions in their bylaws not to ward off an outside takeover. Instead such rules have forced some accommodations among existing boards of directors and outside investors. As an example, Bill Ackman of Pershing Square which mounted a takeover of the botox anti-wrinkle company, Allergan, secured an agreement from Allergan that its board would not trigger a poison pill rule that would stop Pershing Square from joining other shareholders to support a call for special election of directors. Under the agreement, Pershing Square would not be able to use its interest – which is just less than the ten percent floor at which the poison pill is triggered – to topple management but it could start to replace directors and influence corporate decisions over the long term.
Meanwhile, the influential Delaware Court of Chancery which hears cases from a high percentage of American companies as many companies incorporate in that state, recently upheld a two-tiered poison pill structure in Third Point LLC v. Ruprecht, et al., C.A. No. 9469-VCP (Del.Ch. May 2, 2014). As this corporate structure appears to have protected, at least for now, Sotheby’s from an outside takover bid, the judicial foundation for these types of rules are not necessarily eroding.
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