Poison pill
Encyclopedia
A shareholder rights plan, colloquially known as a "poison pill", or simply "the 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 for directors to prevent takeover bidders from negotiating a price for sale of shares directly with shareholders, and instead forcing the bidder to negotiate with the board. Shareholder rights plans are unlawful without shareholder approval in many jurisdictions such as the United Kingdom
, frowned upon in others such as throughout the European Union
, and lawful if used "proportionately" in others, including Delaware
in the United States
.
The typical shareholder rights plan involves a scheme whereby shareholders will have the right to buy more shares at a discount if one shareholder buys a certain percentage of the company's shares. The plan could be triggered, for instance, when 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. The plan can be issued by the board as an "option
" or a "warrant
" attached to existing shares, and only be revoked at the discretion of the board of directors
. A shareholder who can reach a 20% threshold will potentially be a takeover bidder. If every other shareholder will be able to buy more shares at a discount, such purchases will dilute the bidder's interest, and the cost of the bid will rise substantially. Knowing that such plan could be called on, the bidder could be disinclined to the takeover of the corporation without the board's approval, and will first negotiate with the board so that the plan is revoked.
Shareholder rights plans, or poison pills, are controversial because they hinder an active market for corporate control
. Further, giving directors the power to deter takeovers puts directors in a position to enrich themselves, as they may effectively ask to be compensated for the price of consenting to a takeover.
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 wave of takeovers by corporate raid
ers such as Carl Icahn
. The term "poison pill" derives its original meaning from a poison pill physically carried by various spies
throughout history, a pill which was taken by the spies when they were discovered to eliminate the possibility of being interrogated by an enemy.
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. 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 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, Microsoft
originally made an unsolicited bid for Yahoo!
, but subsequently dropped the bid after Yahoo! CEO Jerry Yang threatened to make the takeover as difficult as possible unless Microsoft raised the price to US$37 per share. One Microsoft executive commented, "They are going to burn the furniture if we go hostile. They are going to destroy the place." Yahoo had had a shareholders rights plan in place since 2001. Analysts suggested that Microsoft's raised offer of $33 per share was already too expensive, and that Yang was not bargaining in good faith, which later led to several shareholder lawsuits and an aborted proxy fight from Carl Icahn
. Yahoo's stock price plunged after Microsoft withdrew the bid, and Jerry Yang faced a backlash from stockholders that eventually led to his resignation.
bids. Takeover bids are attempts by a bidder to obtain control of a target company, either by soliciting proxies
to get elected to the board or by acquiring a controlling block of shares and using the associated votes to get elected to the board. Once in control of the board, the bidder can manage the target. As discussed below, targets have various takeover defenses available, and several types of defense have been called "poison pills" because they harm not only the bidder, but the target (or its shareholders) as well. Currently, the most common type of takeover defense 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 defense.
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 15%). They dilute the percentage of the target owned by the bidder, and make 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.
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:
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), so potentially delaying a new board’s decision to sell a company.
upheld poison pills as a valid instrument of takeover defense in its 1985 decision in the Moran v. Household International, Inc. case. However, many jurisdictions other than the U.S. have held 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 Ltd.
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. More recently, Canadian regulators ruled against hostile bidder BHP during its 2010 attempted acquisition of rival mining company Potash Corp of Canada. Though regulators' reviews of the transaction were preliminary and indicated only that the proposed transaction was not likely to pass officially, many believe this came as a response to the public outcry from politicians and constituents against a hostile takeover by a foreign company.
In the United Kingdom, poison pills are not allowed under the 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
.
) 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.
In August 2008, Brett Favre
was traded from the Green Bay Packers
to the New York Jets
. The Jets would have had to surrender three first-round draft picks to Green Bay if they were to trade Favre to the Minnesota Vikings
, a division rival of the Packers. The deal ultimately backfired on the Packers, as Favre asked for (and was given) a release by the Jets the following year, leaving him free to sign with the archrival Vikings for the 2009 NFL season
.
The NFL's collective bargaining agreement has many poison pills, should either the players or owners, or both, allow it to reach its final year, including an increase in the requirement for unrestricted free agency from four seasons to six, the lack of a salary cap
, and restrictions on the ability of top teams to sign free agents. Because these terms would theoretically be disagreeable 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. Nevertheless, the NFLPA and NFL owners did not reach a new agreement before the end of the 2009–2010 season, and those poison pills went into effect.
, 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 amendment
s, which kills the amendment if it has not been ratified
after seven years.
Corporation
A corporation is created under the laws of a state as a separate legal entity that has privileges and liabilities that are distinct from those of its members. There are many different forms of corporations, most of which are used to conduct business. Early corporations were established by charter...
's board of directors
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
against a takeover
Takeover
In business, a takeover is the purchase of one company by another . In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to the acquisition of a private company.- Friendly takeovers :Before a bidder makes an offer for another...
. In the field of mergers and acquisitions
Mergers and acquisitions
Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...
, shareholder rights plans were devised in the early 1980s as a way for directors to prevent takeover bidders from negotiating a price for sale of shares directly with shareholders, and instead forcing the bidder to negotiate with the board. Shareholder rights plans are unlawful without shareholder approval in many jurisdictions such as the United Kingdom
United Kingdom
The United Kingdom of Great Britain and Northern IrelandIn the United Kingdom and Dependencies, other languages have been officially recognised as legitimate autochthonous languages under the European Charter for Regional or Minority Languages...
, frowned upon in others such as throughout the European Union
European Union
The European Union is an economic and political union of 27 independent member states which are located primarily in Europe. The EU traces its origins from the European Coal and Steel Community and the European Economic Community , formed by six countries in 1958...
, and lawful if used "proportionately" in others, including Delaware
Delaware
Delaware is a U.S. state located on the Atlantic Coast in the Mid-Atlantic region of the United States. It is bordered to the south and west by Maryland, and to the north by Pennsylvania...
in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
.
The typical shareholder rights plan involves a scheme whereby shareholders will have the right to buy more shares at a discount if one shareholder buys a certain percentage of the company's shares. The plan could be triggered, for instance, when 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. The plan can be issued by the board as an "option
Option (finance)
In finance, an option is a derivative financial instrument that specifies a contract between two parties for a future transaction on an asset at a reference price. The buyer of the option gains the right, but not the obligation, to engage in that transaction, while the seller incurs the...
" or a "warrant
Warrant (finance)
In finance, a warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed exercise price until the expiry date....
" attached to existing shares, and only be revoked at the discretion of the board of directors
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
. A shareholder who can reach a 20% threshold will potentially be a takeover bidder. If every other shareholder will be able to buy more shares at a discount, such purchases will dilute the bidder's interest, and the cost of the bid will rise substantially. Knowing that such plan could be called on, the bidder could be disinclined to the takeover of the corporation without the board's approval, and will first negotiate with the board so that the plan is revoked.
Shareholder rights plans, or poison pills, are controversial because they hinder an active market for corporate control
Market for corporate control
The market for corporate control is a description of the role of equity markets in facilitating corporate takeovers first put forward in an article by HG Manne, ‘Mergers and the Market for Corporate Control’...
. Further, giving directors the power to deter takeovers puts directors in a position to enrich themselves, as they may effectively ask to be compensated for the price of consenting to a takeover.
History
The poison pill was invented by mergers and acquisitionsMergers and acquisitions
Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...
lawyer Martin Lipton
Martin Lipton
Martin Lipton is an American lawyer. He is a founding partner of the law firm of Wachtell, Lipton, Rosen & Katz specializing in advising major corporations on mergers and acquisitions and matters affecting corporate policy and strategy. He has written and lectured extensively on these subjects...
of Wachtell, Lipton, Rosen & Katz
Wachtell, Lipton, Rosen & Katz
Wachtell, Lipton, Rosen & Katz is a prominent law firm located in New York City. Herbert Wachtell, Martin Lipton, Leonard Rosen, and George Katz founded the firm in 1965. All four were graduates of New York University School of Law...
in 1982, as a response to tender-based hostile takeovers. Poison pills became popular during the early 1980s in response to the wave of takeovers by corporate raid
Corporate raid
A corporate raid is an American English business term for buying a large interest in a corporation and then using voting rights to enact measures directed at increasing the share value...
ers such as Carl Icahn
Carl Icahn
Carl Celian Icahn is an American business magnate and investor.-Biography:Icahn was raised in Far Rockaway, Queens, New York City, where he attended Far Rockaway High School. His father was a cantor, his mother was a schoolteacher...
. The term "poison pill" derives its original meaning from a poison pill physically carried by various spies
Espionage
Espionage or spying involves an individual obtaining information that is considered secret or confidential without the permission of the holder of the information. Espionage is inherently clandestine, lest the legitimate holder of the information change plans or take other countermeasures once it...
throughout history, a pill which was taken by the spies when they were discovered to eliminate the possibility of being interrogated by an enemy.
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. 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 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, Microsoft
Microsoft
Microsoft Corporation is an American public multinational corporation headquartered in Redmond, Washington, USA that develops, manufactures, licenses, and supports a wide range of products and services predominantly related to computing through its various product divisions...
originally made an unsolicited bid for Yahoo!
Yahoo!
Yahoo! Inc. is an American multinational internet corporation headquartered in Sunnyvale, California, United States. The company is perhaps best known for its web portal, search engine , Yahoo! Directory, Yahoo! Mail, Yahoo! News, Yahoo! Groups, Yahoo! Answers, advertising, online mapping ,...
, but subsequently dropped the bid after Yahoo! CEO Jerry Yang threatened to make the takeover as difficult as possible unless Microsoft raised the price to US$37 per share. One Microsoft executive commented, "They are going to burn the furniture if we go hostile. They are going to destroy the place." Yahoo had had a shareholders rights plan in place since 2001. Analysts suggested that Microsoft's raised offer of $33 per share was already too expensive, and that Yang was not bargaining in good faith, which later led to several shareholder lawsuits and an aborted proxy fight from Carl Icahn
Carl Icahn
Carl Celian Icahn is an American business magnate and investor.-Biography:Icahn was raised in Far Rockaway, Queens, New York City, where he attended Far Rockaway High School. His father was a cantor, his mother was a schoolteacher...
. Yahoo's stock price plunged after Microsoft withdrew the bid, and Jerry Yang faced a backlash from stockholders that eventually led to his resignation.
Overview
In publicly-held companies, "poison pills" refer to various methods to deter takeoverTakeover
In business, a takeover is the purchase of one company by another . In the UK, the term refers to the acquisition of a public company whose shares are listed on a stock exchange, in contrast to the acquisition of a private company.- Friendly takeovers :Before a bidder makes an offer for another...
bids. Takeover bids are attempts by a bidder to obtain control of a target company, either by soliciting proxies
Proxy fight
A proxy fight or proxy battle is an event that may occur when a corporation's stockholders develop opposition to some aspect of the corporate governance, often focusing on directorial and management positions. Corporate activists may attempt to persuade shareholders to use their proxy votes A proxy...
to get elected to the board or by acquiring a controlling block of shares and using the associated votes to get elected to the board. Once in control of the board, the bidder can manage the target. As discussed below, targets have various takeover defenses available, and several types of defense have been called "poison pills" because they harm not only the bidder, but the target (or its shareholders) as well. Currently, the most common type of takeover defense is a shareholder rights plan.
Because the board of directors
Board of directors
A board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
of the company can redeem or otherwise eliminate a standard poison pill, it does not typically preclude a proxy fight
Proxy fight
A proxy fight or proxy battle is an event that may occur when a corporation's stockholders develop opposition to some aspect of the corporate governance, often focusing on directorial and management positions. Corporate activists may attempt to persuade shareholders to use their proxy votes A proxy...
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
Staggered Board of Directors
A staggered board of directors or classified board is a prominent practice in US corporate law governing the board of directors of a company, corporation, or other organization in which only a fraction of the members of the board of directors is elected each time instead of en masse...
, however, a shareholder rights plan can be a defense.
Shareholder rights plans
The target company issues rights to existing shareholders to acquire a large number of new securities, usually common stockCommon stock
Common stock is a form of corporate equity ownership, a type of security. It is called "common" to distinguish it from preferred stock. In the event of bankruptcy, common stock investors receive their funds after preferred stock holders, bondholders, creditors, etc...
or preferred stock
Preferred stock
Preferred stock, also called preferred shares, preference shares, or simply preferreds, is a special equity security that has properties of both an equity and a debt instrument and is generally considered a hybrid instrument...
. 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 15%). They dilute the percentage of the target owned by the bidder, and make 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.
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:
- It gives management time to find competing offers that maximizes 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 stockPreferred stockPreferred stock, also called preferred shares, preference shares, or simply preferreds, is a special equity security that has properties of both an equity and a debt instrument and is generally considered a hybrid instrument...
plan - FlipoverFlipoverA flip-over is one of five types of poison pills in which current shareholders of a targeted firm will have the option to purchase discounted stock after the potential takeover. Introduced in late 1984 and adopted by many firms, the strategy gave a common stock dividend in the form of rights to...
rights plan - Ownership flip-inFlip-inIn business, the flip-in is one of the five main types of poison pill defenses against corporate takeovers.The flip-in is a provision in the target company's corporate charter or bylaws. The provision gives current shareholders of a targeted company, other than the hostile acquirer, rights to...
plan - Back-end rights plan
- Voting planVoting planA voting plan or voting rights plan is one of five main types of poison pills that a target firm can issue against hostile takeover attempts. These plans are implemented when a company charters preferred stock with superior voting rights to common shareholders...
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), so 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 CourtDelaware Supreme Court
The Supreme Court of Delaware is the sole appellate court in the United States' state of Delaware. Because Delaware is a popular haven for corporations, the Court has developed a worldwide reputation as a respected source of corporate law decisions, particularly in the area of mergers and...
upheld poison pills as a valid instrument of takeover defense in its 1985 decision in the Moran v. Household International, Inc. case. However, many jurisdictions other than the U.S. have held 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
White knight (business)
In business, a white knight, or "friendly investor," may be a corporation or a person that intends to help another firm. There are many types of white knights...
can be found. A notable Canadian case before the securities regulators in 2006 involved the poison pill of Falconbridge Ltd.
Falconbridge Ltd.
Falconbridge Limited was a Toronto, Ontario-based natural resources company with operations in 18 countries, involved in the exploration, mining, processing, and marketing of metal and mineral products, including nickel, copper, cobalt, and platinum. It was listed on the TSX and NYSE , and had...
which at the time was the subject of a friendly bid from Inco and a hostile bid from Xstrata
Xstrata
Xstrata plc is a global mining company headquartered in Zug, Switzerland and with its registered office in London, United Kingdom. It is a major producer of coal , copper, nickel, primary vanadium and zinc and the world's largest producer of ferrochrome...
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
Ontario Securities Commission
The Ontario Securities Commission is a regulatory agency which administers and enforces securities legislation in the Canadian province of Ontario...
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. More recently, Canadian regulators ruled against hostile bidder BHP during its 2010 attempted acquisition of rival mining company Potash Corp of Canada. Though regulators' reviews of the transaction were preliminary and indicated only that the proposed transaction was not likely to pass officially, many believe this came as a response to the public outcry from politicians and constituents against a hostile takeover by a foreign company.
In the United Kingdom, poison pills are not allowed under the 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
AWG plc
AWG plc was a British holding company which is parent to Anglian Water. It was previously listed on the London Stock Exchange and was a member of the FTSE 250 Index but it is now owned by the Osprey consortium...
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
London Stock Exchange
The London Stock Exchange is a stock exchange located in the City of London within the United Kingdom. , the Exchange had a market capitalisation of US$3.7495 trillion, making it the fourth-largest stock exchange in the world by this measurement...
itself is another example of a company that has seen significant stakebuilding by a hostile suitor, in this case the NASDAQ
NASDAQ
The NASDAQ Stock Market, also known as the NASDAQ, is an American stock exchange. "NASDAQ" originally stood for "National Association of Securities Dealers Automated Quotations". It is the second-largest stock exchange by market capitalization in the world, after the New York Stock Exchange. As of...
. 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
European Commission
The European Commission is the executive body of the European Union. The body is responsible for proposing legislation, implementing decisions, upholding the Union's treaties and the general day-to-day running of the Union....
. Stakebuilding is commonplace in many continental takeover battles such as Scania AB
Scania AB
Scania Aktiebolag , commonly referred to as Scania AB or just Scania, is a major Swedish automotive industry manufacturer of commercial vehicles - specifically heavy trucks and buses...
. 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
E.ON
E.ON AG, marketed with an interpunct as E•ON, is the holding company of the world's largest investor-owned energy service provider based in Düsseldorf, Germany. The name comes from the Greek word aeon which means eternity....
of Germany made a hostile bid for Endesa
Endesa (Spain)
Endesa, S.A. is the largest electric utility company in Spain. The firm, a majority-owned subsidiary of the Italian utility company Enel, has 10 million customers in Spain, with domestic annual generation of over 97,600 GWh from nuclear, fossil-fueled, hydroelectric, and renewable resource power...
and France's threats to punish any potential acquiror of Groupe Danone
Groupe Danone
Groupe Danone is a French food-products multinational corporation based in the 9th arrondissement of Paris. It claims world leadership in fresh dairy products, marketed under the corporate name, and also in bottled water...
.
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 debtDebtA debt is an obligation owed by one party to a second party, the creditor; usually this refers to assets granted by the creditor to the debtor, but the term can also be used metaphorically to cover moral obligations and other interactions not based on economic value.A debt is created when a...
s 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 swapStock swapA stock swap, also known as a share swap, is a business takeover or acquisition in which the acquiring company uses its own stock to pay for the acquired company. Each shareholder of the newly acquired company receives a certain number of shares of the acquiring company's stock for each share of...
, 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 handcuffsGolden handcuffsGolden handcuffs are a system of financial incentives designed to keep an employee from leaving the company. These can include employee stock options that will not vest for several years but are more often contractual obligations to give back lucrative bonuses or other compensation if the employee...
", 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 resourcesHuman resourcesHuman resources is a term used to describe the individuals who make up the workforce of an organization, although it is also applied in labor economics to, for example, business sectors or even whole nations...
often means an empty shellShell (corporation)A shell corporation is a company which serves as a vehicle for business transactions without itself having any significant assets or operations. Shell corporations are not in themselves illegal and have legitimate business purposes. However, they are a main component of the underground economy,...
is left behind for the new owner. - PeoplesoftPeopleSoftPeopleSoft, Inc. was a company that provided Human Resource Management Systems , Financial Management Solutions , Supply Chain and customer relationship management software, as well as software solutions for manufacturing, enterprise performance management, and student administration to large...
guaranteed its customers in June 2003 that if it were acquired within two years, presumably by its rival Oracle CorporationOracle CorporationOracle Corporation is an American multinational computer technology corporation that specializes in developing and marketing hardware systems and enterprise software products – particularly database management systems...
, 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. Peoplesoft allowed the guarantee to expire in April 2004. If PeopleSoft had not prepared itself by adopting effective takeover defenses, it is unclear if Oracle would have significantly raised its original bid of $16 per share. The increased bid provided an additional $4.1 billion for PeopleSoft's shareholders.
- Classified boards with staggered elections for the board of directorsBoard of directorsA board of directors is a body of elected or appointed members who jointly oversee the activities of a company or organization. Other names include board of governors, board of managers, board of regents, board of trustees, and board of visitors...
. 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.
Shareholder input
More companies are giving shareholders a say on poison pills. According to FactSet SharkRepellent data, so far this year, 21 companies that adopted or extended a poison pill have publicly disclosed they plan to put the poison pill to a shareholder vote within a year. That's already more than 2008's full year total of 18 and in fact is the most in any year since the first poison pill was adopted in the early 1980s.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 refusalRight of first refusal
Right of first refusal is a contractual right that gives its holder the option to enter a business transaction with the owner of something, according to specified terms, before the owner is entitled to enter into that transaction with a third party...
) 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
Minnesota Vikings
The Minnesota Vikings are a professional American football team based in Minneapolis, Minnesota. The Vikings joined the National Football League as an expansion team in 1960...
offered Steve Hutchinson, an offensive guard with the Seattle Seahawks
Seattle Seahawks
The Seattle Seahawks are a professional American football team based in Seattle, Washington. They are currently members of the Western Division of the National Football Conference in the National Football League . The team joined the NFL in 1976 as an expansion team...
, 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
Wide receiver
A wide receiver is an offensive position in American and Canadian football, and is the key player in most of the passing plays. Only players in the backfield or the ends on the line are eligible to catch a forward pass. The two players who begin play at the ends of the offensive line are eligible...
Nate Burleson
Nate Burleson
Nathaniel Burleson is an American football player, who currently plays wide receiver for the Detroit Lions of the National Football League . Burleson played college football for the University of Nevada Wolf Pack, and was drafted by the Minnesota Vikings in the third round of the 2003 NFL...
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.
In August 2008, Brett Favre
Brett Favre
Brett Lorenzo Favre is a former American football quarterback who spent the majority of his career with the Green Bay Packers of the National Football League . He was a 20-year veteran of the NFL, having played quarterback for the Atlanta Falcons , Green Bay Packers , New York Jets and Minnesota...
was traded from the Green Bay Packers
Green Bay Packers
The Green Bay Packers are an American football team based in Green Bay, Wisconsin. They are members of the North Division of the National Football Conference in the National Football League . The Packers are the current NFL champions...
to the New York Jets
New York Jets
The New York Jets are a professional football team headquartered in Florham Park, New Jersey, representing the New York metropolitan area. The team is a member of the Eastern Division of the American Football Conference in the National Football League...
. The Jets would have had to surrender three first-round draft picks to Green Bay if they were to trade Favre to the Minnesota Vikings
Minnesota Vikings
The Minnesota Vikings are a professional American football team based in Minneapolis, Minnesota. The Vikings joined the National Football League as an expansion team in 1960...
, a division rival of the Packers. The deal ultimately backfired on the Packers, as Favre asked for (and was given) a release by the Jets the following year, leaving him free to sign with the archrival Vikings for the 2009 NFL season
2009 NFL season
The 2009 NFL season was the 90th regular season of the National Football League.The preseason started with the Pro Football Hall of Fame Game on August 9, 2009, and the regular season began September 10. The season ended with Super Bowl XLIV, the league's championship game, on February 7, 2010 at...
.
The NFL's collective bargaining agreement has many poison pills, should either the players or owners, or both, allow it to reach its final year, including an increase in the requirement for unrestricted free agency from four seasons to six, the lack of a salary cap
Salary cap
In professional sports, a salary cap is a cartel agreement between teams that places a limit on the amount of money that can be spent on player salaries. The limit exists as a per-player limit or a total limit for the team's roster, or both...
, and restrictions on the ability of top teams to sign free agents. Because these terms would theoretically be disagreeable 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. Nevertheless, the NFLPA and NFL owners did not reach a new agreement before the end of the 2009–2010 season, and those poison pills went into effect.
Politics
A poison pill may also be used in politicsPolitics
Politics is a process by which groups of people make collective decisions. The term is generally applied to the art or science of running governmental or state affairs, including behavior within civil governments, but also applies to institutions, fields, and special interest groups such as the...
, such as attaching an amendment
Bill (proposed law)
A bill is a proposed law under consideration by a legislature. A bill does not become law until it is passed by the legislature and, in most cases, approved by the executive. Once a bill has been enacted into law, it is called an act or a statute....
so distasteful to a bill
Bill (proposed law)
A bill is a proposed law under consideration by a legislature. A bill does not become law until it is passed by the legislature and, in most cases, approved by the executive. Once a bill has been enacted into law, it is called an act or a statute....
that even the bill's supporters are forced to vote against it. This manipulative
Psychological manipulation
Psychological manipulation is a type of social influence that aims to change the perception or behavior of others through underhanded, deceptive, or even abusive tactics. By advancing the interests of the manipulator, often at the other's expense, such methods could be considered exploitative,...
tactic may be intended to simply kill the bill, or to create a no-win situation
No-win situation
A no-win situation, also called a "lose-lose" situation, is one where a person has choices, but no choice leads to a net gain. For example, if an executioner offers the condemned the choice of dying by being hanged, shot, or poisoned, since all choices lead to death, the condemned is in a no-win...
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
Wrecking amendment
In legislative debate, a wrecking amendment is an amendment made by a legislator who disagrees with the principles of a bill and who seeks to make it useless rather than directly opposing the bill by simply voting...
".
In the U.S.
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
, it may also refer to a stipulation
Stipulation
In the law of the United States, a stipulation is an agreement made between opposing parties prior to a pending hearing or trial. For example, both parties might stipulate to certain facts, and therefore not have to argue those facts in court. After the stipulation is entered into, it is...
often attached to constitutional amendment
Constitutional amendment
A constitutional amendment is a formal change to the text of the written constitution of a nation or state.Most constitutions require that amendments cannot be enacted unless they have passed a special procedure that is more stringent than that required of ordinary legislation...
s, which kills the amendment if it has not been ratified
Ratification
Ratification is a principal's approval of an act of its agent where the agent lacked authority to legally bind the principal. The term applies to private contract law, international treaties, and constitutionals in federations such as the United States and Canada.- Private law :In contract law, the...
after seven years.
Public finance
In a democratic system, fiscal or budgetary policies that are designed by an incumbent administration to make things more difficult for the next administration have been referred to as fiscal poison pills.External links
- SharkRepellent The definitive source for poison pill and takeover defense information.
- Institute of Mergers, Acquisitions and Alliances (MANDA) M&A An academic research institute on mergers & acquisitions, incl. takeover battles & poison pills