Ramblings & ephemera

The history of the Poison Pill

From Len Costa “The Perfect Pill” (Legal Affairs: March/April 2005):

THE MODERN HISTORY OF MERGERS AND ACQUISITIONS divides neatly into two eras marked by a landmark ruling of the Delaware Supreme Court in 1985. Before then, financiers like T. Boone Pickens and Carl Icahn regularly struck terror in the hearts of corporate boards. If these dealmakers wanted to take over a company in a hostile maneuver, break it into pieces, and then spin those pieces off for a profit, it was difficult to stop them. But after a decision by the Delaware court, directors regained control of their companies’ destinies.

The directors’ trump card is a controversial innovation technically called a preferred share purchase rights plan but nicknamed the “poison pill.” Its legality was affirmed unequivocally for the first time in the Delaware ruling of Moran v. Household International. By the unanimous vote of a three-judge panel, the court held that a company could threaten to flood the market with newly issued shares if a hostile suitor started buying up lots of its stock, thus diluting the suitor’s existing holdings and rendering the acquisition prohibitively expensive. …

Still, both sides agree that the poison pill is an ingenious creation. “As a matter of lawyering, it’s absolutely brilliant,” said Stanford University law professor Ronald Gilson, a longstanding critic who nonetheless considers the poison pill to be the most significant piece of corporate legal artistry in the 20th century. …

If a hostile bidder acquires more than a preset share of the target company’s stock, typically 10 to 15 percent, all shareholders-except, crucially, the hostile bidder-can exercise a right to purchase additional stock at a 50 percent discount, thus massively diluting the suitor’s equity stake in the takeover target.

Comments are closed.