Shareholder rights plan

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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.

Corporation Separate legal entity that has been incorporated through a legislative or registration process established through legislation

A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity and recognized as such in law for certain purposes. Early incorporated entities were established by charter. Most jurisdictions now allow the creation of new corporations through registration.

Board of directors Board composed of directors

A board of directors is a group of people who jointly supervise the activities of an organization, which can be either a for-profit business, nonprofit organization, or a government agency. Such a board's powers, duties, and responsibilities are determined by government regulations and the organization's own constitution and bylaws. These authorities may specify the number of members of the board, how they are to be chosen, and how often they are to meet.

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.

Contents

In the field of mergers and acquisitions, shareholder rights plans were devised in the early 1980s as a way 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.

Mergers and acquisitions transactions in which the ownership of companies, other business organizations or their operating units are transferred or combined

Mergers and acquisitions (M&A) are transactions in which the ownership of companies, other business organizations, or their operating units are transferred or consolidated with other entities. As an aspect of strategic management, M&A can allow enterprises to grow or downsize, and change the nature of their business or competitive position.

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. 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 every other shareholder is 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 disinclined to take over the corporation without the board's approval, and would first negotiate with the board in order to revoke the plan. [1]

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.

Option (finance) Right to buy or sell a certain thing at a later date at an agreed price

In finance, an option is a contract which gives the buyer the right, but not the obligation, to buy or sell an underlying asset or instrument at a specified strike price prior to or on a specified date, depending on the form of the option. The strike price may be set by reference to the spot price of the underlying security or commodity on the day an option is taken out, or it may be fixed at a discount or at a premium. The seller has the corresponding obligation to fulfill the transaction – to sell or buy – if the buyer (owner) "exercises" the option. An option that conveys to the owner the right to buy at a specific price is referred to as a call; an option that conveys the right of the owner to sell at a specific price is referred to as a put. Both are commonly traded, but the call option is more frequently discussed.

Warrant (finance) security that entitles the holder to buy stock

In finance, a warrant is a security that entitles the holder to buy the underlying stock of the issuing company at a fixed price called exercise price until the expiry date.

History

The poison pill was invented by mergers and acquisitions lawyer Martin Lipton of Wachtell, Lipton, Rosen & Katz in 1982, as a response to tender-based hostile takeovers. [2] Poison pills became popular during the early 1980s in response to the wave of takeovers by corporate raiders 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.

Martin Lipton is an American lawyer, a founding partner of the law firm of Wachtell, Lipton, Rosen & Katz specializing in advising on mergers and acquisitions and matters affecting corporate policy and strategy. From 1958–1978 he taught courses on Federal Regulation of Securities and Corporation Law as a Lecturer and Adjunct Professor of Law at New York University School of Law.

Wachtell, Lipton, Rosen & Katz

Wachtell, Lipton, Rosen & Katz is a law firm which operates out of a single office in New York City. The firm is known for business law, regularly handling the largest and most complex transactions. The firm is also noted for having the highest revenue per lawyer and profit per partner of any law firm in the United States.

In business, a corporate raid is the process of buying a large stake in a corporation and then using shareholder voting rights to require the company to undertake novel measures designed to increase the share value, generally in opposition to the desires and practices of the corporation's current management. The measures might include replacing top executives, downsizing operations, or liquidating the company.

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. [3] 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, 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 has had a shareholders rights plan in place since 2001. [4] 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. [5] [6] 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 takeover 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. [7]

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: [8]

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 a 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. [9]

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. [10]

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.

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 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.

United Kingdom

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.

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:

Shareholder input

An increasing 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. [12]

See also

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In corporate finance, a tender offer is a type of public takeover bid. The tender offer is a public, open offer or invitation by a prospective acquirer to all stockholders of a publicly traded corporation to tender their stock for sale at a specified price during a specified time, subject to the tendering of a minimum and maximum number of shares. In a tender offer, the bidder contacts shareholders directly; the directors of the company may or may not have endorsed the tender offer proposal.

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In business, the flip-in is one of the five main types of poison pill defenses against corporate takeovers.

A 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. If an unfriendly bidder acquired a substantial quantity of the target firm's voting common stock, it 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.

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Xstrata company

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In finance a share class is classification of for a type of share in company stock that has different levels of voting rights. For example, a company might create two classes of shares class A share and a class B share where the class A shares have less rights than class B shareholders. This may be done to maintain control of a company by a group of shareholders or to make a company more difficult to take over.

References

Notes

  1. 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.
  2. Harvard Business School, Case Study 9-496-037, page 5
  3. Poison Pill Popping - CFO Magazine - October 2001 Issue - CFO.com
  4. "Yahoo weighs up options". Financial Times . Retrieved 2008-02-03.
  5. "Microsoft Withdraws Proposal to Acquire Yahoo!". Microsoft . Retrieved 2008-05-03.Cite web requires |website= (help)
  6. Lohr, Steve (2008-05-05). "Microsoft's Failed Yahoo Bid Risks Online Growth". New York Times . Retrieved 2008-05-06.
  7. See Bebchuk, Lucian; Coates, John C.; Subramanian, Guhan (2002). "The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy" (PDF). Stanford Law Review . Stanford Law Review. 54 (5): 887–951. doi:10.2307/1229689. JSTOR   1229689.
  8. Fundamentals of Corporate Finance (6th ed.), Editions McGraw-Hill Ryerson, §23: Mergers and Acquisitions
  9. at 16:10, John Leyden 11 Nov 2003. "Oracle chokes on PeopleSoft's poison pill". www.theregister.co.uk. Retrieved 2019-08-20.
  10. Paul H. Malatesta (University of Washington) and Ralph A. Walking (Ohio State University), "Poison Pill Securities: Stockholder Wealth, Profitability, and Ownership Structure," Journal of Financial Economics, Vol. 20, January/March 1988, p. 355.
  11. "SharkRepellent.net - Home". www.sharkrepellent.net. Retrieved 2019-07-05.
  12. Laide, John. "Shareholder Input on Poison Pills". SharkRepellent.net.Cite web requires |website= (help)

Bibliography

Articles

  • LA Bebchuk, JC Coates and G Subramanian, "The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy" (2002) 54(5) Stanford Law Review pp. 887–951. JSTOR   1229689.
  • M Kahan, "How I Learned to Stop Worrying and Love the Pill: Adaptive Responses to Takeover Law"(2002) 69 University of Chicago Law Review 871

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"