Locking the Boardroom Door: What Can Georgia Courts Learn from Recent Delaware Poison Pill Decisions?
| Publication year | 2016 |
Locking the Boardroom Door: What Can Georgia Courts Learn from Recent Delaware Poison Pill Decisions?
Alan M. Long
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Public corporations have always been plagued by the threat of hostile takeovers.1 To curb such market volatility and preserve company leadership, directors have turned to certain defense mechanisms—perhaps the most notable being shareholder rights plans called "poison pills."2 These shareholder rights plans are flexible, easily adopted, and highly effective in deterring acquisitions, tender offers, and even proxy contests.3 Moreover, nearly every state has validated the use of poison pills, following the lead of the nation's corporate hub—Delaware. 4 However, the Delaware Court of Chancery recently drafted an opinion that perhaps
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extended this validity too far.5 The court upheld a unique poison pill with a 10% acquisition trigger that was enacted specifically in anticipation of a proxy contest and strategically designed to restrain only the ability of activist investors to purchase outstanding stock.6 Such director advocacy may lead down a slippery slope and raises the question of whether other states will continue to follow Delaware's poison pill jurisprudence—particularly Georgia, which has diverged from Delaware corporate law in the past.7
This Note addresses that question. First, Part I offers a general overview of poison pills, as well as an account of their legal development in Delaware and Georgia.8 Next, Part II discusses Third Point LLC v. Ruprecht9 —a recent Delaware Court of Chancery case that could have a significant impact on corporate takeover law.10 Further, Part II analyzes whether, if faced with a similar fact pattern, Georgia courts would follow the Court of Chancery's lead.11 Finally, Part III proposes that the court in Third Point went too far in its holding.12 Particularly, the Delaware Court of Chancery opened the door for threatened boardrooms to enact unique poison pills with exceedingly low triggers in the interest of protecting their positions as incumbent directors rather than promoting the interests of the corporation's shareholders.13 As such, courts, shareholders, and states like Georgia, which have become lost in an idea of boardroom protectionism, should deviate from Delaware jurisprudence and limit the use of such defense mechanisms.14
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A. Poison Pills Generally
The term "poison pill" was coined to describe controversial, defensive measures "adopted . . . in response to takeover attempts or in advance of possible takeover attempts"15 that, when triggered, are "poisonous to the raider."16
Company directors implement poison pills through a shareholder rights plan.17 When a board of directors elects to use a poison pill as a defensive measure, its members vote to create a preferred share plan.18 After approval, the plan is typically "recorded as a board resolution or in the company bylaws" and becomes effective immediately.19 The plan entitles each share of common stock to a "dividend of one right"; accordingly, a right attaches to each individual share and the two become inseparable.20 In turn, these rights become exercisable upon the occurrence of a predetermined triggering event—generally a potential merger or acquisition, tender offer, or the purchase of a certain percentage of the company's stock.21 "Once triggered, the [r]ights . . . detach from the shares and entitle all of the target company's shareholders . . . to acquire securities at a discount."22 The securities that stakeholders may
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purchase depend on the type of right exercised.23 Yet, no matter the right exercised, the result can be devastating to a hostile bidder.24
1. Poison Pill Variations
Basic poison pills can be broken down into five categories: flip-over, flip-in, back-end, convertible preferred stock, and voting provisions.25 Perhaps the most common poison pill category in rights plans are "flip-in" provisions, which allow current shareholders, other than the hostile bidder, to purchase newly issued stock at a discounted rate.26 This is effective because the surge in ownership, with the bidder precluded from purchasing the new stock, dilutes the acquirer's ownership.27 "Flip-over" provisions are also common. These provisions, often triggered by mergers, entitle rights holders to
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purchase the acquirer's stock at a substantial discount—typically at 50%.28 Flip-over provisions can significantly diminish an acquirer's capital assets because of this discount.29
In effect, flip-in and flip-over provisions serve as formidable deterrents.30 Indeed, when either provision is triggered, "shareholders will find that the rights are valuable and exercise them."31 As a result, the acquisition becomes exponentially more costly.32 Therefore, bidders are greatly discouraged from "accumulating the trigger level through purchase, tender, or the formation of formal voting agreements with other shareholders."33
2. Overcoming Poison Pills
The only way around a poison pill is to have it removed, and most are retractable.34 With this in mind, there are three recognized ways to remove a poison pill: (1) negotiate with the target company to retract the pill,35 (2) appeal to the court by asserting that company
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leadership has breached its fiduciary duty,36 or (3) wage a proxy contest to displace the incumbent board so that new directors may remove the pill.37 A proxy contest, however, is generally "the only real option available to most hostile bidders" and warrants further discussion.38
A proxy contest is a fight for control of a company. More specifically, it is a direct appeal to voting shareholders governed by SEC regulations.39 The purpose of the proxy contest is to provide shareholders with enough information about the dissident investors and surrounding context so that they can vote for leadership that best represents the company's interests.40 Despite their popularity in the 1950s and 1960s, however, proxy contests became sparse moving into the final quarter of the twentieth century.41 Then, beginning in the early 1990s in response to the growing number of companies that adopted antitakeover provisions, proxy contests reemerged as a tool for activist shareholders eager to remove unwanted executives.42 As a result, corporate executives scrambled for a way to defend their positions.
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3. Dead Hand Provisions
Though basic poison pills are useful for preventing hostile takeovers, historically, when faced with a proxy contest, they did little to ensure a company's board members retained their positions.43 Thus, boards began adopting continuing director provisions to stay in power.44 These provisions, commonly referred to as "dead hand provisions," restrict the ability to redeem rights under a share plan, essentially the poison pill, by only permitting the old board to do so and not a new board of directors.45 Therefore, even if a new board assumes power, its predecessors can activate the pill, diluting the recently acquired holdings and making the displacement infeasible or impossible. 46 This gives the board formidable leverage when negotiating, often allowing it to fend off proxy fights.47 Indeed, dead hand provisions have evolved into powerful and controversial weapons, becoming perhaps the only "absolute 'show stoppers' in the takeover market."48
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B. The Development of Poison Pills in the Law
The poison pill has played a dynamic role in the progression of corporate takeover jurisprudence "[s]ince making its legal debut in 1985 . . . ."49 During that year, the poison pill made an appearance in two Delaware cases: Unocal Corp. v. Mesa Petroleum Co.50 and Moran v. Household International, Inc.51 In Unocal, the Delaware Supreme Court addressed whether boards of directors faced with takeover threats should be protected under the business judgment rule by introducing a standard of review.52 Specifically, the court laid out what became a two-prong test: (1) "a reasonableness test, which is satisfied by a demonstration that the board of directors had reasonable grounds for believing that a danger to corporate policy and effectiveness existed,"53 and (2) a "proportionality test, which is satisfied by a demonstration that the board of directors' defensive response was reasonable in relation to the threat posed."54 If the court is convinced both prongs are satisfied, the business judgment rule applies, and the court will presume the board's actions are valid.
Five months after Unocal, the Delaware Supreme Court went further and validated poison pills as "legitimate exercise[s] of business judgment."55 In Moran v. Household International, Inc., the
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court upheld a rights plan that contained a flip-over provision triggered after either the announcement of a tender offer for 30% of corporate shares or in response to an individual entity or group acquiring 20% of corporate shares.56 Two disgruntled investors attempted to abrogate the plan, alleging abuse of discretion.57 The court, however, concluded that the board had acted within its fiduciary authority when adopting the plan even though the board enacted the pill absent an immediate threat.58 The court also found "the inherent powers of the Board conferred by 8 Del.C. § 141(a), concerning the management of the corporation's 'business and affairs'[,] . . . provid[ed] the Board additional authority upon which to enact the Rights Plan."59 Moreover, in applying the Unocal standard, the court determined that the board's decision benefited from the business judgment rule.60
The Delaware Supreme Court has stood firmly behind its earlier decisions, repeatedly affirming the Moran holding and reiterating that instituting poison pills is a legitimate exercise of a board's discretionary power.61 However...
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