Corporate Governance at the Millennium: The Decline of the Poison Pill Antitakeover Defense
Hamline Law Review, Vol. 22, p. 703, 1999
46 Pages Posted: 8 Jul 2011
Date Written: January 1, 1999
As recently as twenty years ago, the ability and desire of corporate shareholders to mount a challenge over corporate governance 4 seemed unlikely. After all, shareholders were considered to be passive, impotent, and unconcerned with anything but the value of their investment.
Although shareholders of decades past were admittedly passive and powerless, today's shareholder activism is fueled largely by the institutional investor. In short, a shareholder revolution has occurred, highlighted by the ascendancy of the institutional investor. Accompanying the institutional investors' growth and concentration of share ownership is their desire and ability to participate meaningfully in governance issues. "An extraordinary ferment of activity in the field of corporate governance" has resulted.
The primary device standing in the path of unfettered monitoring of corporate management by these institutional shareholders and the market for corporate control has been the antitakeover mechanism known as the shareholder rights plan or "poison pill." So significant is this device in the defensive arsenal of publicly traded corporations that thousands of companies have adopted it, including some sixty-two percent of the S&P 500. In 1997 alone over 300 new shareholder rights plans were adopted.
Institutional investors have gone from expressing intense criticism of this device to challenging particular aspects of its operation, in addition to seeking mandatory removal of it from the arsenal of corporate defenses. The resolution of this issue is closely tied to the evolution of the nature and role of modern institutional investors and the role of hostile takeovers in the market for corporate control as a monitoring device upon management. Moreover, the intense controversy surrounding this corporate governance battle appears inevitable given the far-reaching economic and social impact of the modern corporation.
Although "the 1980s witnessed an unprecedented development in the law surrounding corporate governance," the 1990s have proven to be even more ground-breaking. The unveiling of the American Law Institute's Principles of Corporate Governance: Analysis and Recommendations (ALI Project) ranks among the major governance developments of this decade. Its fifteen-year gestation yielded an impressive treatise on corporate law and governance.
Part II of this Article will trace the historical development of corporate governance. Parts III, IV and V will highlight three crucial developments leading to the current governance landscape, namely, the expanded role of the board of directors in hostile takeover contests, the development of the poison pill as an antitakeover device, and the rise to power of the institutional investor. Part VI will explore the altered balance of power resulting from the recent successful legal challenges to the most significant provisions of the poison pill and its resulting detoxification in many circumstances. The active battle by institutional shareholders to force redemption of poison pills in individual companies is also examined. Part VII considers the future of corporate governance in this new context.
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