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'Poison Pill' Defense Faces Key Challenge in Delaware Court

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

The poison pill is a device so complicated that takeover veterans disagree whether it is a cure for hostile takeovers or a therapy worse than the disease; whether it discourages proxy contests or invites them, and whether it entrenches management comfortably against all assailants or forces them to consider all offers much more responsibly.

The brainchild of New York takeover lawyer Martin Lipton, the poison pill is the fastest-spreading takeover defense on the corporate scene. At least 13 public companies have installed it, according to the Investors Responsibility Research Council, a nonprofit shareholder-rights lobbying group. The IRRC estimates that at least 300 more corporations, many of which are undoubtedly awaiting the outcome of Moran's challenge, have the implicit authority in their bylaws to join the bandwagon without seeking shareholder permission.

The reason for this interest is obvious. A company board's exclusive right to cancel the poison pill gives directors virtually unassailable veto power over all offers, friendly and unfriendly, for their companies. How one views this power depends on how one assesses a board's discretion and its willingness to sacrifice self-interest for the good of the shareholders.

Raises Stakes Sharply

One key to the pill's potency is that it raises the stakes so high in a takeover that it is assumed that no would-be acquirers would be willing to execute a merger in order to test it in court. "No one has a way around it, and no one would risk the dilution (of stock) to test it," Moran says.

Were all the Household rights outstanding at the time of such a merger, the acquirer would have to pay an extra $6 billion for the company ($100 times 60 million, the number of Household shares). That is three times the company's entire market value of $1.8 billion.

As Delaware's chancery court found, the impact of this right on the capital of the acquirer "is immediate and devastating."

A bidder might try to acquire the rights to prevent them from being exercised later. But it is unlikely that a bidder could acquire all of them. Even if 5% remained outstanding, the dilution from those would be $300 million, pricing Household well beyond the willingness of any buyer to pay.

The pill's inventor, Lipton, appears uncomfortable with the more grandiose claims for the pill, perhaps because the more powerful it is thought to be, the more likely it is that a court will strike it down.

"It's been blown far out of proportion by exaggeration and nonsense," Lipton said in an interview. "The pill does not prevent takeovers. It does not discourage proxy fights. It simply increases the negotiating strength of the board of directors of target companies. It restores to a level playing field a situation where the raider has all the negotiating power."

Created as Antidote

Lipton says he created the pill as an antidote to what he considers a baleful development, the rise of the "two-tier, front-end-loaded, junk-bond, bust-up takeover." That is his description of the methods of today's corporate "raiders" such as T. Boone Pickens and Carl Icahn.

Pickens and Icahn, the argument goes, attack a company by offering shareholders a lush cash premium for a majority stake. They fund their early acquisitions by floating so-called junk bonds, high-yielding bonds that the rating companies consider extremely speculative. Once the shares flow in, they offer a much smaller premium, often in subordinated debt, for the balance. To pay off the acquisition's heavy debt, they break the company up and sell the pieces.

"The myth is that the takeover entrepreneur is going about the country doing good," Lipton says. "In fact, we're mortgaging our future. They say, 'We'll stop spending the assets on research and development and we'll devote all the revenues to repaying the debt that's necessary to buy the companies in the first place.' There'll be no new wells drilled, no plants built."

Lipton made this case to the Household board, but Moran contends that it was overwrought.

"There was sort of a blanket interpretation that anyone who might want to make a legitimate offer to the shareholders was a 'raider,' " he testified in chancery court. "In spite of all the characterization of the raiders and the bust-ups and the two-tiered offers, looking right through it, it was a plan that would preclude the shareholders from having an opportunity to receive and consider offers at a premium price without board approval."

Can Subvert Pill

There are some, however, who believe that any serious acquirer can subvert the poison pill simply by conditioning a bid on its withdrawal. Others argue that a poison pill can place more pressure on a board, not less, because its triggering can damage the issuing company in the long term.

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