Press Release: Poison pills can still work against hostile takeovers

NEW YORK, March 17, 2011 /PRNewswire/ -- Having been buffeted by sustained attacks by activists and proxy-voting advisors over the past years, shareholder rights agreements (also known as "poison pills") are no longer prevalent, but recent case law shows they can still be valuable anti-takeover devices, concludes the most recent installment of The Conference Board Director Notes series, Poison Pills in 2011.

The recent Air Products v. Airgas case shows that poison pills that are properly structured, adopted and administered can still protect companies from a hostile takeover if corporate boards review their companies' governance profile and address a number of specific issues.

"It will be interesting to watch for changes in poison pill activity taking place this proxy season, as companies react to the most recent developments in case law, hedge funds get back into the activism game, and M&A activity continues to grow," says Andrew L. Bab, a partner in Debevoise & Plimpton LLP's New York office and co-author of the report for The Conference Board.

The report, which can be accessed here, recommends board members:

  • Consider drafting shareholder rights plans so that they satisfy standards of acceptability set by the most influential proxy voting advisors such as the Institutional Shareholder Services guidelines but also take into account that:
    • As shown by the CSX Corp. v. The Children's Investment Fund Management case, investors may use certain types of derivative instruments to conceal their relative voting power. Boards should consider whether their rights plans should be drafted to include derivative positions when computing the level of stock ownership a person holds.
    • As shown in the Versata v. Selectica case, net operating losses ("NOLs") can be a valuable corporate asset when they can be claimed for U.S. tax purposes. Since tax law establishes that NOL cannot be claimed if the corporation undergoes an "ownership change" (defined by the Internal Revenue Code as when a holder of 5 percent or more of the company's stock increases its ownership level by more than 50 percent of the corporation's stock over a rolling three-year period), it may be appropriate to implement a poison pill with a trigger below 5 percent. ISS recommends that these poison pills should be evaluated on a case-by-case basis, and expire at the earlier of the pill's third year anniversary and the exhaustion of the NOLs.
  • Consider having management maintain a thoughtful business plan for the corporation. As shown in the Airgas case, keeping a sensible, regularly updated, business plan in place and making certain that the board understands and approves of the plan and its assumptions can be very important factors in defending against potential hostile takeovers.
  • Consider abstaining from certain defensive tactics, such as introducing supermajority voting requirements or disallowing action by written consent or limiting the ability to call special meetings, because they could cause the ire of ISS and attract activist shareholders.
  • Consider adopting advance notice bylaws so that directors can avail themselves of enough time to obtain the information necessary to make a rational business decision about the acquisition or merger offer they have received. Establishing an advance notice requirement may comply with directors' fiduciary obligations as it allows directors to avoid the pressure of a rushed business decision that could be detrimental to a long-term shareholder value creation strategy. As shown in the Nomad Acquisition Corp. v. Damon Corp. case in 1988, Delaware judges have deemed even a 60-day advance notice provision as valid.

"With this Director Notes, The Conference Board continues to respond to the need expressed by many of its member companies for education and guidance on how to address situations of shareholder activism," adds Matteo Tonello, Research Director of Corporate Leadership at The Conference Board, and director of the Directors Notes series. "The report fully embraces the principle that being proactive and forward looking is the best of all remedies."

To corroborate its research on a complex and multi-faceted phenomenon like shareholder activism, The Conference Board has drawn on a group of experts in several professional disciplines. The Expert Committee on Shareholder Activism was established in October 2009 and is composed as follows:

Andrew L. Bab --Partner, Debevoise & Plimpton LLP

Daniel H. Burch --Co-founder, CEO and Chairman, MacKenzie Partners

Paul Caminiti --Managing Director, Sard Verbinnen & Co.

Arthur B. Crozier --Co-chairman, Innisfree M&A Incorporated

David Drake --President, Georgeson, Inc.

Edward Ferris --Partner, Hedge Fund Solutions LLC

Joele Frank --Managing Partner, Joele Frank, Wilkinson Brimmer Katcher

Daniel Gagnier --Managing Director, Sard Verbinnen & Co.

Mark H. Harnett --President, MacKenzie Partners, Inc.

David A. Katz -- Corporate Partner, Wachtell, Lipton, Rosen & Katz

Alan M. Miller -- Co-Chairman, Innisfree M&A Incorporated

James C. Morphy -- Managing Partner, Sullivan & Cromwell

Justus O'Brien -- Partner, Egon Zehnder International Inc.

Damien J. Park (co-chair) -- President and CEO, Hedge Fund Solutions, LLC

Rachel L. Posner -- Senior Managing Director and General Counsel, Georgeson, Inc.

Jeffrey J. Rosen -- Partner, Debevoise & Plimpton LLP

Matthew Sherman -- Partner, Joele Frank, Wilkinson Brimmer Katcher

Matteo Tonello -- Research Director, Corporate Leadership, The Conference Board, Inc.

Marc R. Trevino -- Partner, Sullivan & Cromwell

Kim A. Van Der Zon -- Partner, Egon Zehnder International Inc.

Source: Poison Pills in 2011, Director Notes, Volume 3, No. 5, March 2011
The Conference Board

About Director Notes
Director Notes is a series of publications through which The Conference Board engages experts from several disciplines of corporate leadership in an open dialogue about topical issues of concern to member companies.

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The Governance Center Blog is The Conference Board blog for its Governance Center. It is meant to provide corporate directors with important information and analysis that helps them in the performance of their duties. In addition to staff written posts, guest contributors blog on a myriad of corporate governance issues, such as separation of CEO and chairman, shareholder proxy access and poison pills. To view the Governance Center blog -

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