Monday, March 21, 2011

The Conference Board on "Poison Pills in 2011"

Throughout the past decade, the number of corporations with poison pills in effect has dropped from over 2,200 in 2001 to less than 900 at the start of 2011. This trend is largely due to the emergence of activist investors and proxy advisory firms. While the legal validity of poison pills has been reinforced by recent Delaware cases in 2010 and 2011, public companies are nevertheless more vulnerable than ever to corporate governance activism.

The Conference Board has released a report, written by Andrew Bab and Sean Neenan from the law firm Debevoise & Plimpton, that details these cases and advises companies as to how they should respond to the changing legal and corporate governance environment. Below is a summary of The Conference Board's report.

Versata v. Selectica
Versata challenged Selectica's implementation of a poison pill with an unusually low trigger of 4.99%. Selectica had created the pill in order to protect its $160 million worth of net operating loss carryforwards (NOLs)--an asset that would be impaired if the company were to experience an "ownership change", as defined by Section 382 of the Internal Revenue Code. In one instance, "ownership change" is said to occur if more than half of a company's outstanding shares changes hands between 5%+ owners in a rolling three-year period.

Aiming to "bring accountability" and "expose… illegal behavior", Versata intentionally bought over 4.99% of Selectica. The NOL poison pill was triggered and reloaded--in the process, Versata's ownership fell to 3.3%.

Decision: The Delaware Supreme Court approves Selectica's NOL poison pill on October 2010.

For more on the case, click on our previous blog post here.

eBay v. Newmark (Craigslist)
Craigslist implemented a poison pill with a 15% trigger in order to protect its corporate culture, which was concerned with the community over profit-maximization. eBay challenged Craigslist on the grounds that the company breached its fiduciary duty.

Decision: The Delaware Court of Chancery rescinds the poison pill on September 2010 for failing to meet Unocal standard.

Yucaipa v. Riggio
Ronald Burkle of Yucaipa challenged Barnes and Noble's (BKS) implementation of a poison pill with a 20% trigger, arguing that the defense was both unreasonable and prejudice given Riggio's ~30% ownership. BKS argued that it had created the poison pill in response to a perceived threat of a takeover from Burkle.

Decision: The Delaware Court of Chancery approves the poison pill on August 11, 2010.

For more on the case, click on our previous blog post here.

Air Products v. Airgas, Inc.
Air Products (APD) had made several friendly and hostile bids for its competitor, Airgas (ARG). APD ran a successful proxy contest that not only got 3 representatives elected to ARG's, but also moved ARG's annual shareholder's meeting earlier in the year to January through a shareholder-approved bylaw amendment. The January bylaw amendment was later reversed by The Delaware Supreme Court. APD then challenged its competitor's poison pill implementation in a case that would become a landmark decision.

Decision: The Delaware Court of Chancery approves ARG's poison pill on February 15, 2011. The Court argues that the poison pill was a response to "substantive coercion" by an acquirer whose "inadequate" hostile bid posed a considerable risk to a target company. The Court also argued that APD still had a reasonable chance of winning another proxy contest.

Defining Beneficial Ownership
With the proliferation of stealth acquisitions and derivative ownership, a more specific definition of beneficial ownership becomes increasingly relevant. As of now, most poison pills do not have derivative-driven language.

ISS Changes Vote Recommendations Pertaining to Poison Pills
Although Delaware court decisions continue to primarily strengthen the validity of poison pills, proxy advisory firms have acted in the opposite direction. More specifically, ISS has changed its voting guidelines to become more stringent in handling poison pill issues:

In response to the changing legal and corporate governance environment, The Conference Board recommends that corporate boards consider…

- implementing a shareholder rights plan that meets the standards of most proxy advisors;
- establishing a more expansive definition of beneficial ownership that includes a calculation of derivative positions;
- not creating an NOL poison pill that exceeds "the earlier of the pills' third year anniversary and the exhaustion of the NOLs";
- maintaining a business plan that is regularly updated;
- "abstaining from certain defensive tactics… [that] could cause the ire of ISS and attract activist shareholders"; and
- adopting advance notice bylaws.

For a copy of the report, click here.

Posted by David Schatz

All images extracted from the referenced Conference Board report.