Posted by Carl Icahn June 13, 2008 : 8:30 PM
The poison pill prevents any shareholder, or a group of shareholders acting in concert, from owning more than a certain percentage of a company by allowing all other shareholders to purchase shares at a lower price in the event one chooses to cross the ownership line (typically 15%) without prior permission from the company. This effectively kills the value of their investment – hence the name, "poison pill." Public companies refer to a poison pill as a "shareholder rights plan." Does anyone else find that amusing? If anything, it undermines shareholder rights rather than supporting them.
Initially approved by the Delaware court in 1985 under Moran vs. Household International, over 1,500 American companies have a poison pill, and it can be put in place and removed by the directors as they please whenever they please without a shareholder vote. Typically directors feel comfortable in knowing that no single shareholder or group of shareholders will have more than 15% of the vote during a proxy fight.
To show how ridiculous the pill is, consider this analogy. If you are one of several partners that own a horse and the horse does well, and you agree to purchase another partners interest, would you allow the trainer to threaten to punish you by diluting your partnership interest to almost no value if you dare to do this? It sounds absurd but this is what happens in corporate America.
A poison pill creates an unmitigated ban on acquiring more than a certain percentage of stock. A purchaser who desires to buy and the seller who wishes to sell are simply out of luck. Board members should not be allowed to hide behind a poison pill indefinitely.
In other countries, poison pills operate through a more rational system.
In Canada, shareholders are generally given the opportunity to determine whether they would like to accept an offer on their company irrespective of the existence of a poison pill. Specifically, a poison pill is allowed to remain outstanding long enough to permit the target company to seek a better offer from the bidder or a third party but after a certain period of time (usually between 45 and 60 days), regulators will strike down the poison pill and allow the shareholders to decide whether to sell their shares. In addition, in the United Kingdom, director's fiduciary duties generally require compelling justification for any action that would frustrate the liquidity of shares making the adoption of poison pills without shareholder approval difficult, if not impossible. As a result, poison pills and other defensive tactics that frustrate the liquidity of shares are poorly received by both regulators and investors and are rarely employed in the United Kingdom.
There is a myriad of solutions that could be legislatively enacted short of absolute prohibition on poison pills. These solutions should create a balance between the rights of shareholders to buy and sell shares and the desire of management to have meaningful input in a change of control situation. Two propositions:
- After the commencement of a tender offer, the board members would have 90 days to explain to shareholders why it’s inadvisable to tender their shares or to present to shareholders an alternative proposal. After 90 days the poison pill would not apply to purchases in that tender offer.
- If, in an any and all tender offer, the bidder would end up with more than 50% of the company’s stock, the poison pill would not apply to purchases in that tender offer.