OC/TO/DM Flashcards
What is a “poison pill”?
PROCEDURE: The board of directors of a target corporation issues poison pills as a stock dividend, distributed equally among all common stockholders. No shareholder approval is required; all that’s necessary is that the authority to approve a poison pill must be in the articles before it’s issued (although the language used can be very broad; language empowering the board of directors “to issue such stock, or stock with such rights, privileges, and preferences as the board of directors believes appropriate,” is good enough).
How do you determine if a poison pill (used by management to fend off a hostile takeover) is valid?
You determine if it’s protected by the business judgment rule. For Delaware corporations (which most hostile takeover cases involve since most public companies are Delaware corporations), ask these questions, in order:
1. Did target company initiate the bidding? If yes, go to #4. If no, go to #2.
2. Did target company, in response to a bid, abandon its long-term strategy and make a choice reluting in the break-up of the company instead? If yes, go to #4. If no, go to #3.
3. Did the directors approve the defensive act because it ws necessary in order to entice a new bidder or secure an increased bid from a current bidder? If yes, go to #4. If no, the defensive maneuver is invalid: the directors must instead act as “auctioneers” to secure the best offer for the target company shareholder.
4. The defensive maneuver is valid as long as the directors prove they acted in good faith and the defensive maneuver is reasonable in relation to the threat the takeover poses.
NOTE: Numbers 1-2 are known as the “Revlon” standard, because this test comes from Revlon V. MacAndrews & Forbes Holdings (DE 1986). Number 4 comes from Unocal V. Mesa Petroleum (DE 1985).
Queen Victoria is chairman of the board of a publishing conglomerate, Not Amused Publications, Inc., which is publicly held. Albert Prince owns Hanover Press and has long wanted to get his hands on a Not Amused subsidiary, Orb & Scepter Press, which is widely considered to be one of Not Amused’s crown jewels. After first trying (unsuccessfully) to convince Queen Victoria to merge Not Amused with one of his companies, Albert launches a tender offer to Not Amused’s common shareholders. In an effort to fend off the attack, Queen Victoria and the Not Amused board voted to sell Orb & Scepter Press to Empire Press, another publisher. Should the Not Amused board be very concerned as to whether Orb & Scepter constitutes “substantially all” of Not Amuse ‘s assets?
Yes – if Orb & Scepter does constitute “substantially all” of the company’s assets, the defensive maneuver – called a “lock up” – will fail.
A “lock up” is a type of post-offer defensive maneuver. Targe management votes to sell (or option) to someone other than the bidder a valuable asset, or “crown jewel,” critical to the corporation in the bidder’s eyes. That’s the case here; the reason Albert wants Not Amused is largely motivated by his desire for Orb & Scepter Press. Presumably, if Orb & Scepter is gone, Albert will rescind his tender offer, which is just what Victoria and her board want. However, it’s absolutely key that a lock-up not require a shareholder vote. If Orb & Scepter does constitute substantially all of Not Amused’s assets, its sale would require a shareholder vote. That means the lock-up would fail, since, during a bidding war, shareholders won’t accept a lock-up, desiring instead a bidding war for their shares that will get them the best price.
RELATED ISSUE: As in all defensive maneuvers, target management is vulnerable to the possibility of breaching their fiduciary duties to the corporation. When management hurriedly sells assets like this, it’s very likely that they’re more motivated by their desire to keep their jobs than to pursue the best course for the company and its shareholders. In these facts, you aren’t given anything to suggest that Not Amused has any motivation other than protecting management in selling Orb & Scepter. If that’s the case, shareholders would have a state-based fiduciary breach claim against management.
Old McDonald. Ince. runs a large, successful goose farm. One of Old Mcdonald’s most prized asset is a goose that lays golden eggs. Mother Goose farms launches a tender offer to Old McDonald’s common shareholders, offering $25 a share (the stock’s market price is $20 a share). Old McDonald management knows Mother Goose will totally revamp management, booting many of them from their jobs. Management therefore seeks out Goose McNugget, Inc, a rival goose farming conglomerate. Goose McNugget promises to maintain management if it is successful in a tender offer to Old McDonald’s shareholders, offering $30 a share. What is the defensive maneuver called?
It’s called a “White Knight”; that is, target management seeks out another bidder, which is called the “white knight,” who’ll acquire the target on terms management believes are better for the target and its stockholders. Note that, as long as the rival really is better for the corporation and its shareholders, the maneuver is legal. However, if its only feature is that it saves management jobs, and it isn’t the best option for the company and/or shareholders, target management will be open to a lawsuit by shareholders claiming breach of fiduciary duty.
