Toward a Constitutional Review of the Poison Pill

Abstract

We argue that the state-law rules governing poison pills are vulnerable to challenges based on preemption by the Williams Act. Such challenges, we show, could well have a major impact on the corporate-law landscape.

The Williams Act established a federal regime regulating unsolicited tender offers, but states subsequently developed a body of state antitakeover laws that impose additional impediments to such offers. In a series of well-known cases during the 1970s and 1980s, the federal courts, including the Supreme Court, held some of these state antitakeover laws preempted by the Williams Act. To date, however, federal courts and commentators have paid little attention to the possibility that the state-law rules authorizing the use of poison pills — the most powerful impediment to outside buyers of shares — are also preempted.

Our study examines this subject and concludes that there is a substantial basis for questioning the continued validity of current state-law rules authorizing the use of poison pills. The Essay shows that these rules now impose tighter restrictions on unsolicited offers than those once imposed by state antitakeover regulations that the federal courts invalidated on preemption grounds. Preemption challenges to these poison-pill rules could well result in their invalidation by the federal courts.

Finally, we discuss how state lawmakers could revise poison-pill rules to make them more likely to survive a federal preemption challenge. This could be done, we show, by imposing substantial limits on the length of time during which a poison pill can be used to block tender offers. Whether preemption challenges lead to invalidation of existing poison-pill state rules or to their substantial modification, such challenges could well reshape the market for corporate control.

Keywords: Corporate governance, Mergers and acquisitions, takeovers, tender offers, antitakeover defenses, poison pill, Williams Act, preemption, state antitakeover statutes

JEL Classification: D21, G32, G34, G35, G38, K22