Poison Pills June 12, 1997February 3, 2017 One of my favorite New Yorker cartoons pictures a fearsome looking secretary sitting at a desk — don’t mess with this old battle-ax — and one executive rounding the corner, confiding to a visitor: “Miss Kessler is our poison pill here at Tolan, Merle & Fender.” If you’re not sure what a poison pill is, read on. From Debra Lavoy: “I own a bunch of stock in a company which made this announcement. Can you tell me what it means? Thanks.” The announcement (which you should feel free to skim): XXXX today declared a dividend distribution of one Preferred Share Purchase Right on each outstanding share of its common stock. Each Right will entitle shareholders to buy one one-thousandth of a share of newly created Series A Junior Participating Preferred Stock of the Company at an exercise price of $125.00. The Rights will be exercisable if a person or group hereafter becomes the beneficial owner of 15% or more of the Common Stock of the Company or announces a tender or exchange offer for 15% or more of the Common Stock. The Board of Directors will be entitled to redeem the Rights at one cent per Right at any time before any such person hereafter becomes the beneficial owner of 15% or more of the outstanding Common Stock. The Rights are not being distributed in response to any specific effort to acquire the Company. The Rights are designed to assure that all shareholders of the Company receive fair and equal treatment in the event of any proposed takeover of the Company and to guard against two-tier or partial tender offers, open market accumulations and other tactics designed to gain control of the Company without paying all shareholders a fair price. If a person hereafter becomes the beneficial owner of 15% or more of the outstanding Common Stock of the Company, each Right will entitle its holder to purchase, at the Right’s exercise price, a number of shares of Common Stock having a market value of twice the Right’s exercise price. Rights held by the 15% holder will become void and will not be so exercisable. If the Company is acquired in a merger or other business combination transaction after a person becomes the beneficial owner of 15% or more of the Company’s Common Stock, each Right will entitle its holder to purchase, at the Right’s then-current exercise price, a number of the acquiring company’s common shares having at that time of twice the Right’s exercise price. The dividend distribution will be payable to shareholders of record on June 3, 1997. The Rights will expire in ten years. The Rights distribution is not taxable to shareholders. So what does this mean? The short answer is that it’s a “poison pill,” designed to make it impractical for someone to pay you a bunch of money for your shares — much as they might want to, and much as you’d like to take it — if the company management doesn’t want to be taken over. It’s called a poison pill because if the acquirer did swallow your company, the mechanism described in the pill would be activated and make it a most unattractive meal. A longer and more balanced answer, courtesy of a friend who is much better at this stuff than me, is that “poison pills force an acquirer to go through the Board of Directors in order to make the acquisition, instead of making a 51% acquisition of the Company, and perhaps giving the remaining 49% (usually the small investors) some junk paper to complete the acquisition once they’ve attained control. The pill forces the offer through the Board, so they can decide whether all shareholders will be treated fairly. The form of the pill has been determined by the case law surrounding the Time Warner and other deals in Delaware. [Once upon a time, Time Warner was offered $200 a share, if memory serves, when the stock was more like 80. Shareholders were dying to get their hands on that $200, but the directors, in their wisdom, “protected” them from this. You might think directors shouldn’t be allowed to act this way, but when you are incorporated in Delaware, as a great many public companies are, directors can do almost anything. The lawsuits over that particular incident helped lawyers refine the language of the poison pill.] It theoretically enables the Board to consider the full value of the Company over a ten-year period, and force an acquirer to pay up for that value. “The truth is, these pills can have two effects. In the case of a Time Warner, they are used to entrench incompetent and venal management. In the case of a new, high-tech company, they can be effective in preventing a Milkenesque takeover by a bogus shell company. The trouble is, the investor cannot tell which it is in the case of her Company (if the lawyers have done their jobs correctly). In the case of heavily talent-driven enterprises, where the talent could leave in an instant, these pills are generally redundant. No one would attempt a hostile takeover of Netscape a year ago and throw out Barksdale and Andreesen. Today, with the product line more established, they might consider it (I doubt it, but it gives you a feeling for the range of consideration). In the case of a Time Warner, or a GM, you can easily see that the players in the executive suite have a lot less to do with the Company’s success. In these cases, the pills are designed to keep the G-IVs [$25 million private jets] flying. “Without knowing the Company adopting the pill, its insider shareholdings and its business model and stage of development, it is hard to judge whether the pill is one designed to keep Beluga on the plates in the corporate dining room or one designed to protect minority shareholders in an attempted 51% takeover by an underfinanced and inferior entity. Clever, eh? Some of this concern is legitimate, fueled by the junk-led takeover attempts of the 80’s. Cash offers were made to 51% of the shareholders (generally institutions who knew where there certificates were, and tendered on time), and then some Chinese paper with an investment banking opinion was given to the remaining shareholders, once the new group had control. The remaining shareholders were generally small investors, who didn’t read The Wall Street Journal, or have a Bloomberg. This gave Management a great excuse to execute pills to protect themselves, while appearing to protect small shareholders. In some cases it is true, in some not. It is just hard to prove. “The complicated preferred [described in this poison pill] is just a way of justifying a valuation of the target’s value in ten years time. The valuation needs to be re-set each year, and generally is, by the Board. No shareholder vote is required. Many of the big state pension funds, like Calpers, oppose these pills.” * OH NO, MR. CHO! So I pass by Mr. Cho’s Sushi-To-Go last night, thinking I might tell him about his mention in yesterday’s comment, and to my horror see a “For Rent” sign in his window. Say it ain’t so, Mr. Cho! It was only the day before that I had trotted out of his place with 18 of the most delicious eel, tuna and salmon sushi, with no hint of disaster looming. But, yes, it seems that from all that fish slicing and rice twisting, this lovely sweet man has developed severe carpal tunnel syndrome and has to close up shop. I am bereft. And of course I feel a little silly recommending a place on the very day its “going out of business” sign appears. But maybe if enough of us stop by with good wishes, he will get well soon and come back. I hope so, Mr. Cho. Tomorrow: It’s a Bird, It’s a Plane — It’s Lunch!