Shareholder rights plan
A shareholder rights plan, colloquially known as a "poison pill", is a type of defensive tactic used by a corporation's board of directors against a takeover.
In the field of mergers and acquisitions, shareholder rights plans were devised in the early 1980s as a way to prevent takeover bids by taking away a shareholder's right to negotiate a price for the sale of shares directly.
Typically, such a plan gives shareholders the right to buy more shares at a discount if one shareholder buys a certain percentage or more of the company's shares.[1] The plan could be triggered, for instance, if any one shareholder buys 20% of the company's shares, at which point every shareholder (except the one who possesses 20%) will have the right to buy a new issue of shares at a discount. If all other shareholders are able to buy more shares at a discount, such purchases would dilute the bidder's interest, and the cost of the bid would rise substantially. Knowing that such a plan could be activated, the bidder could be discouraged from taking over the corporation without the board's approval, and would first negotiate with the board in order to revoke the plan.[2]
The plan can be issued by the board of directors as an "option" or a "warrant" attached to existing shares, and only be revoked at the discretion of the board.
History
The poison pill was invented by
It was reported in 2001 that since 1997, for every company with a poison pill which successfully resisted a hostile takeover, there were 20 companies with poison pills that accepted takeover offers.[4] The trend since the early 2000s has been for shareholders to vote against poison pill authorization, since poison pills are designed to resist takeovers, whereas from the point of view of a shareholder, takeovers can be financially rewarding.
Some have argued that poison pills are detrimental to shareholder interests because they perpetuate existing management. For instance,
Poison pills saw a resurgence of popularity in 2020 as a result of the global coronavirus pandemic. As stock prices plummeted due to the pandemic, various companies turned to shareholder rights plans to defend against opportunistic takeover offers. In March 2020, 10 U.S. companies adopted new poison pills, setting a new record.[8]
The Twitter Board of Directors unanimously enacted a shareholder rights plan in 2022 following an unsolicited purchase offer from Elon Musk.[9][10]
Overview
In publicly held companies, there are various "poison pill" methods to deter
The goal of a shareholder rights plan is to force a bidder to negotiate with the target's board and not directly with the shareholders. The effects are twofold:[12]
- It gives management time to find competing offers that maximize the selling price.
- Several studies indicate that companies with poison pills (shareholder rights plans) have received higher takeover premiums than companies without poison pills. This results in increased shareholder value. The theory is that an increase in the negotiating power of the target is reflected in higher acquisition premiums.
Common types of poison pills
Preferred stock plan
The target issues a large number of new shares, often preferred shares, to existing shareholders. These new shares usually have severe redemption provisions, such as allowing them to be converted into a large number of common shares if a takeover occurs. This immediately dilutes the percentage of the target owned by the acquirer, and makes it more expensive to acquire 50% of the target's stock.
Flip-in
A "flip-in" permits shareholders, except for the acquirer, to purchase additional shares at a discount. This provides investors with instantaneous profits. Using this type of poison pill also dilutes shares held by the acquiring company, making the takeover attempt more expensive and more difficult.
Flip-over
A "flip-over" enables stockholders to purchase the acquirer's shares after the merger at a discounted rate. For example, a shareholder may gain the right to buy the stock of its acquirer, in subsequent mergers, at a two-for-one rate.
Back-end rights plan
Under this scenario, the target company re-phases all its employees' stock-option grants to ensure they immediately become vested if the company is taken over. Many employees can then exercise their options and then dump the stocks. With the release of the "golden handcuffs", many discontented employees may quit immediately after having cashed in their stock options. This poison pill is designed to create an exodus of talented employees, reducing the corporate value as a target. In many high-tech businesses, attrition of talented human resources may result in a diluted or empty shell being left behind for the new owner.
For instance, PeopleSoft guaranteed its customers in June 2003 that if it were acquired within two years, presumably by its rival Oracle, 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. While the acquisition ultimately prevailed, the hypothetical cost to Oracle was valued at as much as US$1.5 billion.[13]
Voting plan
In a voting plan, a company will charter preferred stock with superior voting rights over that of common shareholders. If an unfriendly bidder acquired a substantial quantity of the target firm's voting common stock, it then still would not be able to exercise control over its purchase. For example, ASARCO established a voting plan in which 99% of the company's common stock would only harness 16.5% of the total voting power.[14]
In addition to these pills, a "dead-hand" provision allows only the directors who introduce the poison pill to remove it (for a set period after they have been replaced), thus potentially delaying a new board's decision to sell a company.
Constraints and legal status
The legality of poison pills had been unclear when they were first put to use in the early 1980s. However, the Delaware Supreme Court upheld poison pills as a valid instrument of takeover defense in its 1985 decision in Moran v. Household International, Inc. However, many jurisdictions other than the U.S. have held the poison pill strategy as illegal, or place restraints on their use.
Canada
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
United Kingdom
In the United Kingdom, poison pills are not allowed under the
Takeover law is still evolving in continental Europe, as individual countries slowly fall in line with requirements mandated by the
Other takeover defenses
Poison pill is sometimes used more broadly to describe other types of takeover defenses that involve the target taking some action. Although the broad category of takeover defenses (more commonly known as "shark repellents") includes the traditional shareholder rights plan poison pill. Other anti-takeover protections include:
- Limitations on the ability to call special meetings or take action by written consent.
- Supermajority vote requirements to approve mergers.
- Supermajority vote requirements to remove directors.
- 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.
- Classified boards with 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. As of December 31, 2008, 47.05% of the companies in the S&P Super 1500 had a classified board.[15] As of March 31, 2020, 27.1% of the companies in the S&P Super 1500 had a classified board.[16]
A minuscule number of companies are giving shareholders a say on poison pills. As of June 15, 2009, 21 companies that had adopted or extended a poison pill had publicly disclosed they plan to put the poison pill to a shareholder vote within a year. That was up from 2008's full year total of 18, and was the largest number ever reported since the early 1980s, when the pill was invented.[17]
Effect
This section needs expansion with: more examples of effects. You can help by adding to it. (August 2023) |
While there is some evidence that takeover protections allow managers to negotiate a higher purchase price, overall, they reduce firm productivity.[18][19]
See also
- Green mail
References
Notes
- ^ Institute, Corporate Finance. "Poison Pill". Corporate Finance Institute. Archived from the original on 2022-07-02. Retrieved 2022-07-12.
- ^ For a description of a standard rights plan, see Wachtell, Lipton, Rosen & Katz, The Share Purchase Rights Plan in Ronald J. Gilson & Bernard S. Black, The Law and Finance of Corporate Acquisitions (2d ed. Supp. 1999) at 10-18.
- ^ Harvard Business School, Case Study 9-496-037, page 5
- ^ "Poison Pill Popping - CFO Magazine - October 2001 Issue - CFO.com". Archived from the original on 2004-11-30. Retrieved 2004-09-14.
- ^ "Yahoo weighs up options". Financial Times. Retrieved 2008-02-03.
- ^ "Microsoft Withdraws Proposal to Acquire Yahoo!". Microsoft. Archived from the original on 2008-05-05. Retrieved 2008-05-03.
- New York Times. Archivedfrom the original on 2009-04-15. Retrieved 2008-05-06.
- ^ Herbst-Bayliss, Svea (March 25, 2020). "Coronavirus-stricken U.S. companies pop poison pills". Reuters. Archived from the original on April 1, 2020. Retrieved April 16, 2020.
- ^ Soon, Weilun (19 April 2022). "Twitter's board detailed its poison-pill defense against Elon Musk and 'unfair takeover tactics'". Insider. Archived from the original on 19 April 2022. Retrieved 19 April 2022.
- ^ "001-36164 Twitter Inc" (PDF). UNITED STATES SECURITIES AND EXCHANGE COMMISSION. Archived (PDF) from the original on 18 April 2022. Retrieved 19 April 2022.
- (PDF) from the original on 2018-06-02. Retrieved 2019-08-29.
- ^ Fundamentals of Corporate Finance (6th ed.), Editions McGraw-Hill Ryerson, §23: Mergers and Acquisitions
- ^ at 16:10, John Leyden 11 Nov 2003. "Oracle chokes on PeopleSoft's poison pill". www.theregister.co.uk. Archived from the original on 2017-11-14. Retrieved 2019-08-20.
{{cite web}}
: CS1 maint: numeric names: authors list (link) - .
- ^ "SharkRepellent.net - Home". www.sharkrepellent.net. Archived from the original on 2019-09-08. Retrieved 2019-07-05.
- ^ "Merger Agreements, Corporate Governance, IPOs, High Yield Debt Covenants, Spin Offs". Deal Point Data. Archived from the original on 2022-12-04. Retrieved 2022-11-27.
- ^ Laide, John. "Shareholder Input on Poison Pills". SharkRepellent.net. Archived from the original on 2011-07-24. Retrieved 2009-06-24.
- (PDF) from the original on 2020-12-23. Retrieved 2020-12-23.
- .
Bibliography
Articles
- Bebchuk, Lucian Arye; Coates, John C.; Subramanian, Guhan (2002). "The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy" (PDF). Stanford Law Review. 54 (5): 887–951. JSTOR 1229689.
- Kahan, Marcel; Rock, Edward B. (2002). "How I Learned to Stop Worrying and Love the Pill: Adaptive Responses to Takeover Law". The University of Chicago Law Review. 69 (3): 871–915. ProQuest 214800991.
Books
- Wachtell, Lipton, Rosen & Katz, The Share Purchase Rights Plan in Ronald J. Gilson & Bernard S. Black, "The Law and Finance of Corporate Acquisitions" (2d ed. Supp. 1999)
- Ross, Westerfield, Jordan & Roberts, Fundamentals of Corporate Finance (6th ed. McGraw-Hill Ryerson) §23: "Mergers and Acquisitions"