Pills, Polls, and Professors Redux
31 Pages Posted: 11 Mar 2012
Date Written: March 9, 2012
September of this year will mark the twentieth anniversary of the publication of my memorandum recommending that companies adopt the poison pill, which I invented in the summer of 1982 to deal with the takeover abuses that emerged in the 1970s and had become endemic by the end of the decade. The pill prevents a hostile tender offer from being consummated unless and until the board of directors of the target redeems the pill. The pill does not prevent a proxy fight to remove and replace a board of directors that refuses to redeem the pill. It was and is a fundamental aspect of the pill that a proxy fight is the only way in which a raider can override a well-founded decision of the board to reject and block a takeover bid. Now Professor Lucian Bebchuk urges, in his brilliantly presented Article, that basic state corporation law be changed to allow a raider to demand a shareholder referendum whenever a board refuses to redeem a pill. This proposal is one of several that have been advanced over the years to deny the board of a target the ability to craft a strategy to protect corporate interests in the context of a hostile takeover bid. In a rough chronological sequence, the pro-takeover, anti-board-of-directors arguments have been:
(1) The law should deny the board the power to be anything but passive in the face of a takeover bid. (2) The law should deny the board the power to frustrate the takeover bid, but permit the board to advise the shareholders as to fairness and to seek a higher bid. (3) The pill is illegal. (4) A pill should require shareholder approval before it is effective. (5) Shareholders can initiate and adopt a bylaw amendment that forces redemption of the pill and precludes adoption of a pill. (6) Given that at least Delaware will probably hold that the shareholder bylaw overruling the pill is not legal, shareholders should initiate and adopt bylaw amendments that do not directly overrule the pill, but make a takeover easier and takeover defense more difficult. (7) Professor Bebchuk's proposal to change the law to permit a bidder-initiated referendum to remove the pill and all other takeover defenses, which would be binding on all the shareholders if it received the support of a majority of the outstanding shares of the target.
This Commentary discusses the development of the law - primarily Delaware law - governing takeovers, and against that background, rebuts Professor Bebchuk's referendum proposal. In a way, this Commentary is the culmination of my efforts over a twenty-year period in courts, legislatures, and academic publications to counter those who would hang a permanent "For Sale" sign on all public companies. I have sought to preserve the ability of the board of directors of a target of a hostile takeover bid to control the target's destiny and, on a properly informed basis, to conclude that the corporation remain independent. I have never been able to understand the persistent refusal of those academics who would hang a "For Sale" sign on public corporations to recognize: (i) that there are very significant costs to corporations in being managed as if they are continuously for sale; and (ii) that there is simply no evidence at all that the damage, if any, that the anti-pill academics attribute to the pill is greater than those costs.
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