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'Poison Pill' Defense Faces Key Challenge in Delaware Court

April 14, 1985|MICHAEL A. HILTZIK | Times Staff Writer

NEW YORK — John A. Moran gives every indication of having been drawn reluctantly into a dirty fight. "We like to keep a low profile," he said recently in the sedate offices of Dyson-Kissner-Moran Corp., the little-known investment company he chairs.

That DKM relishes its privacy is evident from the absence of any identifying plaque on its front door. It also values its reputation as a company that never engages in hostile takeovers and offers quietly responsible advice to the many companies in which it holds significant interests.

But the outside world has a way of penetrating even the men's-club composure of companies such as DKM as surely as the clamor of traffic intrudes through the curtained windows of its conference room. At Household International, where DKM is the largest shareholder, John Moran had never voted against management in his four years on the board. That all changed Aug. 14. Now he finds himself shunned by his fellow directors and dropped from the management slate for reelection at next month's annual meeting.

The reason is that Moran is the plaintiff in a lawsuit that has one of the highest profiles of any corporate litigation now before a U.S. court.

The suit is now being heard on appeal by the Delaware Supreme Court, after an initial ruling in Household's favor by the state Court of Chancery. Moran filed suit to challenge Household's enactment in that Aug. 14 vote of a stock dividend known as a "poison pill."

Effective Ploy

The poison pill is a takeover defense so potent that some merger and acquisition professionals, including lawyers for the Securities and Exchange Commission, believe companies can use it to stop all hostile tender offers.

In its basic form, the poison pill is the issue of a dividend to shareholders consisting of a warrant, or right, to buy an additional share of common or preferred stock. The right may only be exercised in the case of a "triggering event"--typically the acquisition of 20% of the company's shares or voting rights or a tender offer for 30%.

Even then, the warrant is designed to discourage shareholders from exercising it. Household's warrant allows a shareholder to buy 1/100 of a preferred share with the same annual dividend, $1.75, as Household common--but is priced at $100 while Household common has not traded above $40 in the last 15 years.

Its real purpose emerges if and when an acquirer seeks to absorb Household in a merger, the presumed goal of any bidder planning a major tender offer. In that event, each warrant would give the Household shareholder the right to buy $200 worth of the acquirer's stock for $100--making the merger prohibitively expensive.

"I call them atomic bomb warrants because they really destroy everyone but the pilot," remarked Alan C. Greenberg, chairman of Bear, Stearns & Co. and a famously blunt observer of Wall Street shenanigans, in his testimony in the Delaware case. "Any prospective suitor would have to have his head examined to get involved with this."

Usurp Holders' Right

Moran sees the poison pill as a "very subtle" attempt by the management of Household--the Chicago-based parent of Household Finance Corp. and Von's Supermarkets, among other companies--"to usurp what I consider to be a fundamental shareholder right, the right to vote on an offer."

Responds Donald C. Clark, Household's chairman and chief executive: "John was outvoted on the merits of the plan. There are 15 responsible board members trying to do what's in the best interests of the shareholders, and one individual who suggests he knows better than the 15."

The passion that Moran's lawsuit has excited reflects the constantly seesawing balance between shareholder and management, bidder and target, that defines the universe of corporate takeovers.

The case is a battle over the loftiest principle of corporate America, the notion of shareholder democracy, fought by executives ascribing the basest personal motives to each others' actions. While Moran has suggested that the Household board and management created the pill to entrench themselves in office, Clark has been spreading the word that Moran had been planning a hostile takeover of the company behind the backs of the other directors. Moran denies this.

As the most substantive legal test of the poison pill--a state judge in Nevada and a federal judge in New York have upheld it without examining the legal issues--Moran's lawsuit is being closely watched by the corporate bar.

Has Other Uses

"If the (Delaware) Supreme Court upholds the chancery court," said Arthur Flesicher Jr., a New York takeover lawyer, "the only limit will be the breadth of a lawyer's imagination." The warrants in a poison pill can theoretically be devised to trigger anything from the forced divestiture of a company's subsidiary to mandated pay-outs of stock or other assets.

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