The Poison Pill (XI. Mergers and Tender Offers)

Moran v. Household Finance (Del. 1985)

§ F: HH BoD unilaterally adopted P-pill, not in response to current threat, but to future threats § H: Pill passes Unocal · Distinguishing factor: ward off future threats. Doesn't lose BJR protection—more appropriate to apply now b/c pre-planning measures reduce risk that management will fail to exercise proper BJ w/ an actual threat

o Quickturn v. Shapiro (Del. 1998) (Unredeemable Pills)

§ F: Slow Hand Pill: provides that no new board may redeem the pill until 6 months pass § H: Invalidated on 141(a) theory b/c it ties the hands of BoD · Can be OK if charter authorizes this type of departure from §141(a)

o Paramount Communications v. Time (Del. 1989) (Pills Under Unocal/Unitrin)

§ Issue: Can the board "just say no" to redemption under Unocal? § H: Yes, not preclusive and was reasonable b/c the BoD had a business plan it was pursuing and wanted to protect "culture" of firm · Under 141(a), the BoD has the power to set the time frame for the business plan. · The BoD's duty is to manage long term results, no duty to maximize short term gains § Academic Clap-Back: If the board can just say no, a hostile offer always leads to a proxy contest · There should be a per se Unocal rule that refusal to redeem the pill is unreasonable if the offeror gains a third of the board after the first meeting (since classified boards usually have 3 classes elected once every three years)

o Air Products and Chemicals v. Airgas (Del. Ch. 2011)(Pills Under Unocal/Unitrin)

§ Issue: Is AG's refusal to redeem the pill a Unocal/Unitrin violation? · Preclusive or Coercive? o H: Not preclusive so long as a control shift at some point in the future is realistically attainable as of the time the board says no § Realistic Attainment = more than a mere mathematical possibility § Here, AP can call a special meeting to remove pill or wait until second annual meeting · Range of Reasonableness o H: This is reasonable § There's a route to removing the board AND the directors nominated by the hostile also voted not to redeem § Not a case where offeror's hands were tied b/c AP could have run nominees pledged to accept its offer instead of independent ones

Poison pill AKA SH Rights Plan AKA Rights Plan

o the BoD creates rights that are distributed or distributable to the SHs. Under the rights, upon occurrence of certain events, SHs other than a TO bidder or prospective bidder have the right to purchase stock in the corp at a deep discount. Potential exercise would dramatically dilute the value of the target stock, it's a deterrent to making a bid (hostile tender offer) in the first place

Mechanics of Adoption Step 1 of 5

§ (1) Management uses charter's blank-check provision of authorized but unissued stock (Del §151) to create a new class of stock and rights to purchase them (Del §157) · Right is to buy 1/100 shares of a new class of preferred stock

In Poison Pill, Offeror Must Either:

§ (1) close on TO so as to purchase almost 100% of stock to mitigate effects of poison; (2) cut a deal w/ management; or (3) condition closing of offer on pill redemption by management, then when management refuses to redeem, run a proxy contest to replace management

Mechanics of Adoption Step 2 of 5

§ (2) The "rights" are distributed to existing SHs via dividend but are not yet exercisable. They lie with the stock, passing to a new purchaser when the stock is sold. · New preferred stock is authorized but not issued

Mechanics of Adoption Step 3 of 5

§ (3) The rights cannot be exercised until a "trigger" goes off. When the trigger goes off, the rights "detach and become exercisable" Typical triggers include: · Anybody buys 20%, acquires the right to vote 20%, or a holding block owning 20% forms · Any TO for 20% or more

Mechanics of Adoption Step 4 of 5

§ (4) Once trigger goes off, holder of the right gets "flip-over" and "flip-in" rights that are options that dilute the equity interests of the attacker · Flip-Over: All SH who have not tendered have right to buy offeror's stock at a deep discount. Take merger counterparty as its charter creates it o Doesn't mean much b/c hostile offeror could set up an Asub, means there will be a flip-in as well. · Flip-In: All SH of T who have not tendered have a right to buy T's stock at a deep discount in a subsequent merger of T and company controlled by offeror o Essentially dilutes bidder's proportionate interest in the stock of the target by 50%

Mechanics of Adoption Step 5 of 5

§ (5) Redemption: The pill is redeemable by the board for a nominal amount pursuant to broad permissions for stock redemptions in Del §160(a)

o Carmody v. Toll Brothers (Del. Ch. 1998) (Unredeemable Pills)

§ F: Dead Hand Pill: redeemable only by the incumbents who adopted the pill or their designated successors § H: Dead Hand Pills are disallowed under three theories · (1) Interferes with 141(a) grant of power to board to manage business · (2) Blasius: the dead hand interferes w/ the franchise without a compelling justification o In activist cases, a 10% pill has passed Blasius on the theory that the activist can still put its case to the SH via voting · (3) Unocal/Unitrin: "precludes" SH's right to receive TOs

Delaware Acceptance: What Happens Now?

§ Pre-pills, hostile offeror could just get 51% and gain control of the board · Now, offeror will never close a TO where pill is unredeemed, unless it wants 100% of the stock (and even here they want redemption b/c holdouts) · Hostile offeror now needs to go through the target's boardroom since only the T board can redeem the pill § A hostile offeror always publicly demands that the target board redeems the pill · T board usually refuses, and creates a Unocal/Unitrin question o Is the refusal to redeem the pill a breach of FD by using a preclusive/coercive device that is a disproportionate response to the threat? § An incumbent management that really wants to create value for its SHs can use a pill to make a hostile offeror raise its bid · Can use redemption of pill as a negotiating device § When the T board refuses to redeem, offeror will start a proxy contest · "Vote for me and SHs will get TO price." But, with a classified board, the offeror won't be able to control even if it wins. · If the hostile slate wins, incumbents usually throw in the towel

Availability

· As long as corp has a "blank-check" provision w/ unissued shares, it can mint a pill whenever it wants... even if TO already in progress

§ HF Proxy Contests

· Flip-in does not require a merger event; usually an acquisition of 15%/20% by any person or group will trigger it

§ Duration

· Pills have an expiration date but BoD can easily extend or mint a new pill