DealLawyers.com Blog

In a recent post for the CLS Blue Sky Blog, S&C’s Olivier Baum and Harvard Prof Guhan Subramanian discussed data on redemption mechanisms in shareholder rights plans based on 130 poison pills adopted by US companies from January 1, 2020 to March 31, 2023 (excluding NOL pills). Specifically, they considered the frequency and utility of the two main ways to structure the redemption provision:

Trip-Wire Feature: If the poison pill implements a “trip wire” concept, the rights granted thereunder are triggered if, and can no longer be redeemed by the board once, the acquirer exceeds the triggering threshold set in the shareholder rights plan.

Last-Look Feature: If the poison pill implements a “last look” concept, the board of the target company has a “last look” for a certain period after the poison pill has been triggered to decide whether to redeem the rights granted thereunder. If the board redeems the rights, the pill is thereby “defused,” and the bidder can continue buying shares of the target company.

The pills were almost evenly split between the two approaches, with the trip-wire feature being slightly more common. Supporting its claim with data that pills drafted by firms ranked Band 1, 2 or 3 in Corporate/M&A by Chambers tend to include the trip-wire feature, the blog argues that having a last-look feature diminishes the deterrent effect of a pill for the following reasons:

[T]he company installing a poison pill wants to be perceived as willing to dilute any bidder that acquires shares in excess of the threshold set in the shareholder rights agreement. However, if a bidder triggers a poison pill nonetheless, the company is likely to have multiple reasons for not wanting to follow through with the dilution. First, and as we show in our paper, only one-third of U.S. public companies have a sufficient number of authorized shares to effectuate a full exercise of a flip-in feature. Second, the triggering of a poison pill and the exercise of the flip-in feature result in the company receiving billions of dollars in cash on the balance sheet, which generally is way more than a company is reasonably able to use to finance its business. Third, if a bidder were to present an attractive offer contingent upon a redemption of a poison pill with a last-look feature, the board would have to comply with the fiduciary duties it owes to all shareholders and consider these alternatives.

If the board were to conclude that the offer is in the interest of all shareholders, it would have to negotiate with the bidder on the terms of a merger – however, not from a position of strength but rather a position of weakness due to (i) its failure to follow through with its threat to dilute the bidder, and (ii) the clock of – typically – 10 business days ticking until the board must decide on the redemption of a pill with a last-look feature.

All these points that may disincentivize a company’s board to follow through with the threatened dilution can be avoided under the trip-wire structure: In the case of a poison pill with a trip-wire feature, the responsibility for whether or not the dilution will be effected rests solely with the bidder’s decision (not) to trigger the poison pill. As the target company’s board has no possibility to “pull back” if and when the pill is triggered, it can effectively commit to the threatened dilution, thereby increasing the potency of such threat and thus enhancing its leverage and bargaining power.

For companies with on-the-shelf poison pills with a last-look feature, stow this away as something to discuss and consider for your next regular review. And, while on the topic of poison pills, there are a few being challenged in Delaware, as reported by Bloomberg, and we’ll be tracking how those cases play out.

– Meredith Ervine