Poison pills have been in the
news a lot lately, what with high profile companies employing controversial
strategies to get ahead and making headlines in the process. But is using the
poison pill to dissuade corporate takeovers a legal approach? We’re talking
about an internal anti-takeover business strategy here, not arsenic after all,
but still, the strategy has definitely sparked controversy as major
corporations head to court over poison pill feuds.
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| Dan Loeb is in a legal battle over Sotheby's poison poll strategy. Image: Shutterstock |
According to the Free Online
Law Dictionary, a poison pill by definition is “a defensive strategy based on
issuing special stock that is used to deter aggressors in corporate takeover
attempts.” These kinds of takeovers are also known as “corporate raiding,” and
involve hostile mergers intended to acquire a corporation. Despite their
popularity, poison pill defenses are still considered to be somewhat
controversial; one of the first cases brought to trial took place back in 1985
with Moran v. Household International,
Inc. in Delaware.
Today, two major cases have
been forcing big corporations as well as legal experts to take another look at
the poison pill strategy. Ron Burkle is fighting back against Barnes & Noble
Inc.’s poison pill strategy in
Delaware, where the 1985 landmark poison pill case took place. Hedge fund manager Dan Loeb is also fighting against a poison pill strategy
implemented by Sotheby’s, which Loeb’s Third Point has a significant stake in.
According to The New York Times Dealbook contributor
Steven Davidoff, “When we look back
20 years from now, the lawsuit by Daniel S. Loeb and his Third Point hedge fund
against Sotheby’s may well be the tipping point in how far companies can go to
defend themselves against shareholder activists,” of the way that the poison
pill strategy is being put under scrutiny in court.
From a legal standpoint,
Delaware courts uphold that a poison pill is a valid response to a hostile
corporate takeover. In the case of Ron Burkle and Barnes & Noble, judge Leo
E. Strine sided with Barnes & Noble, allowing their defense strategy to
prevail. Sotheby’s has stated that it adopted the poison pill strategy for similar
reasons, but to fight shareholder activism against investors like Loeb. The
hearing on the case will be held at the end of April.
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