With the recently-approved low 4.99% trigger NOL poison pill (as well as the rise in shareholder activism and media buzz surrounding it), it is important to highlight the historical and legal background surrounding this controversial anti-takeover defense.
Marty Lipton, co-founder of corporate law firm Wachtell, Lipton, Rosen & Katz, provided TheDeal TV a commentary on why he invented the poison pill. Lipton explains, "It was the age of the corporate raider. By the early 1980s, we had reached a whole new plateau of hostile takeovers… I kept probing to find something that would be useful not in preventing hostile takeovers, but in giving the board of directors of a target company an opportunity to level the playing field and have time to make a rational business judgment decision as to how to deal with a takeover".
Landmark Decisions
Cheff v. Mathes (Del. 1964) - Sanctioned greenmail by affirming the director's right to use the business judgment rule and make good faith calls to refute charges of conflicts of interest. (Short Summary).
Unocal v. Mesa Petroleum Co. (Del. 1985) - Held that takeover defenses were only legally sound when they evidence a proportionate and reasonable response to threat(s) to corporate policy. Courts would apply this test, as opposed to the business judgment rule when reviewing corporate defenses. (Short Summary).
Moran v. Household International, Inc. (Del. 1985) - Upheld the poison pill as a legal corporate defense.
Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. (Del. 1986). - Held that the fiduciary obligation of a board when faced with inevitable asset stripping or a sale is to maximize immediate shareholder value by securing the highest price available. That is, boards' fiduciary responsibility shifts from being "defenders of the corporate bastion to [being] auctioneers". Accordingly, corporate actions will be judicially reviewed by reasonableness, as opposed to the business judgment rule. (Short Summary).
Paramount Communications, Inc. v. Time, Inc. (Del. 1989) - Held that the Revlon test must be applied before the Unocal test. (Short Summary).
Unitrin, Inc. v. American General Corp. (Del. 1995) - Held that in applying the Unocal test, courts must first determine whether the defense is preclusive or coercive toward shareholders before determining the defense's reasonableness. (Short Summary).
Selectica, Inc. v. Versata Enterprises, Inc. (Del. 2010) - Upheld the use of a poison pill with an unusually low trigger of 4.99% to defend corporate NOLs. (Short Summary).
Posted by David Schatz
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