It’s not uncommon for one or a few investors to acquire a large stake in a publicly-traded company in order to either force through or interfere with a proposed merger/acquisition. These investors can, on the one hand, engage in “vote no” campaigns, which can lead to large pay-outs (in the form of better terms for the deal) as well as temporary increases in the stock price of the company, but it can also prevent otherwise beneficial and profitable deals from occurring.Today some companies are requiring potential targets to adopt “poison pills” in order to prevent such hold-ups. Case in point: Dell, which insisted that Compellant Technologies implement a poison pill provision before entering into a merger agreement with the company.
There are limits on the legal efficacy awarded to these provisions. Latham & Watkins recently issued a client alert highlighting the generally recognized legal limits of poison pill provisions under Delaware state law by reviewing several recent cases.The limits are centered around the existence of a reasonable threat and whether the challenged provision was a proportional response that did not sacrifice the exercise of the franchise by stockholders.One solution that exists to satisfy the last provision (exercise of the franchise) is to require stockholder approval before a poison pill provision kicks in (known as a “chewable pill”).
On the other hand, potential buyers can also acquire a large stake in a company in order to force acceptance of its offer through a stockholder vote.In a case decided this past week, Air Products and Chemicals, Inc. v. In Re Airgas, Inc., the Delaware Court of Chancery upheld Airgas’ poison pill provision, which effectively ended Air Product’s hostile takeover attempt. The case may have been largely the result of the strategy employed by the target (Airgas), which did not use the strategy of “just say no” to the hostile takeover, but rather stated that the takeover bid was inadequate and named a target price (that would have left shareholders with a tidy profit) at which a takeover would be accepted. This strategy may have dissuaded the Chancery Court from concluding that shareholders were being deprived of their franchise in this process.
Some have argued that the case still leaves open a major strategy that would call poison pill provisions into question. The idea is that a hostile bidder may propose a leveraged recapitalization, which would effectively increase their stake and enable it to gain a majority stake. Unlike simply forcing a takeover bid to a stockholder vote, which some argue can be perceived as substantive coercion of stockholders (due to the potential for misrepresentation of the effects of the takeover bid), a leveraged recapitalization may not lend itself to such an interpretation and thus would not be a “reasonable threat” that would justify a poison pill provision from kicking in. This is, however, an unsettled area of law that will undoubtedly come before the Delaware courts in the future.