Monday, March 30, 2009
Finally, a shark swallows a poison pill
You know how nobody has used nuclear weapons since the American monopoly evaporated because they were just too horrible to contemplate? Well, the same has been true for "poison pills," the quarter-century old technique for deterring hostile takeovers. Until now (pdf):
Stockholder rights plans, commonly referred to as “poison pills,” were developed more than 25 years ago to fend off opportunistic "hostile" offers and other abusive takeover transactions. Poison pills traditionally have been designed to deter unauthorized share accumulations by imposing substantial dilution upon any stockholder who acquires shares in excess of a specified ownership threshold (typically 10 percent–20 percent) without prior board approval, rendering the unauthorized share acquisition prohibitively costly. More recently, rights plans with a lower trigger threshold of 4.99 percent have been deployed to protect a corporation's net operating loss carry forwards, commonly referred to as “NOLs,” against the threat that changes in share ownership could inadvertently limit the corporation's ability to use the NOLs to reduce future income taxes. Until the end of 2008, the risk of economic dilution created by the poison pill had its intended deterrent effect. No stockholder had ever swallowed a modern poison pill,1 and the mechanics of a poison pill trigger were purely an academic exercise.
This is no longer the case. In December 2008, Versata Enterprises, Inc. and certain affiliates triggered an NOL poison pill adopted by Selectica, Inc. in what appears to have been a calculated effort by Versata to obtain leverage in an unrelated business dispute. Selectica's board used its poison pill to dilute Versata's position (exercising the feature that allows the board to exchange rights held by stockholders other than Versata for common stock on a one-for-one basis). Due to uncertainty regarding the issuance and ownership of Selectica shares following the rights exchange, trading in Selectica's common stock was suspended for more than four weeks while the important “back-office” mechanics to implement the exchange were developed and implemented by Selectica and its advisers. In addition, the case of Selectica, Inc. v. Versata Enterprises, Inc. pending in the Delaware Court of Chancery presents for the first time the question of the validity of the NOL poison pill and the board's decisions to use the poison pill against Versata. These events provide lessons applicable to all forms of rights plans.
A frothy brew of corporate tax, corporation law, securities law, M&A tactics and, in this case, vicious anti-competitive behavior! To the many corporate and tax lawyers who read this blog: Are you not entertained?
Given the effectiveness of poison pills in deterring hostile takeovers, it should not surprise us that the first "swallow" was to knock out a competitor rather than to buy it. It is hard to imagine anything more distracting to the target's finance team than actually having to execute the provisions of a pill. That must have hurt!
Blogging for the general TigerHawk audience will return in short order.
7 Comments:
By 
Who Struck John, at
Mon Mar 30, 09:54:00 PM:
So the poison pill was actually a self-paralysis pill. Who knew?
By Escort81, at
Mon Mar 30, 10:44:00 PM:
Would there possibly be a separate civil suit alleging tortious interference?
By 
, at
Mon Mar 30, 11:46:00 PM:
Crap: I'm totally entertained. Does this mean I have to come out of retirement?
By Purple Avenger, at
Mon Mar 30, 11:54:00 PM:
The law of unintended consequences totally rules ;->
By , at
Tue Mar 31, 01:56:00 AM:
While the ostenstible purpose of poison pills was to protect against "abusive takeover transactions", the real purpose of poison pills was to protect incumbent management from a robust market in corporate control.
By Kurt, at
Tue Mar 31, 12:15:00 PM:
That sounds like a good explanation to me, randian. But what do I know. I'm more or less a general reader who first learned about poison pills a decade ago when I had a job analyzing proxies for a research service for institutional investors.
By , at
Wed Apr 01, 04:54:00 PM:
Hell, I've always thought that a poison pill was oppressive of the purchasing shareholder, a breach of the fairness fiduciary duty owed to all, since some are favoured while one is not, and a conflict of interest, since the deadbeats who will get defenestrated are making the decision. Unfortunately, the last gets papered over to some extent by the 'business decision' doctrine, but of course, it is not a *business* decision which is being made, but a distinctly different one.
To my mind, poison pills should be illegal. Why *should* one group of shareholders be able to deny another party the right to buy any and all available shares of a *public* corporation....Stated that way, doesn't a poison pill start ta sorta kinda fail the Sherman Act smell test??
