Torys on Mergers and Acquisitions (2011-2)

The Status of Poison Pills in the United States and Canada
By Daniel P. Raglan, Andrew Gray and James C. Tory

Recent Delaware Development

On February 15, 2011, in Air Products v. Airgas, the Delaware Court of Chancery upheld a “poison pill” strategy that U.S. companies have for decades used to thwart hostile takeover attempts.

The Court was asked to redeem a poison pill that had for the past 16 months effectively blocked a $5.8 billion, $70 per share, all-cash, fully financed hostile bid from Air Products & Chemicals Inc. The target board’s resistance was based solely on its belief that the offered price was inadequate (the board wanted $78 per share) and that merger arbitrageurs (who held a majority of the target’s stock) might be willing to tender into the “inadequate” offer.

The Court declined to order a redemption of the poison pill, and Air Products withdrew its bid shortly after the ruling.

Who Decides? Stockholders or the Board?
Delaware

The Court recognized that the case brought to the fore one of the most basic questions animating all corporate law – namely, the allocation of power between directors and stockholders. More specifically, in the context of a hostile tender offer, who gets to decide when and if the corporation is for sale?

The Court reaffirmed that a board can block a hostile tender offer by using a poison pill (and thereby forcing a bidder to try to wage a proxy war to replace the board) if (i) it acts in good faith, (ii) after reasonable investigation and reliance on the advice of outside directors, (iii) and is able to articulate a legitimate threat to the corporate enterprise. The Court found that the target board had been able to articulate a legitimate threat (the allegedly inadequate price, coupled with the fact that a majority of the stockholders would likely tender into that inadequate offer) and had taken defensive measures (such as employment of the poison pill) that fell within a range of reasonable responses that were proportionate to the threat.

In Delaware, the Court observed, the power to defeat an “inadequate” hostile tender offer ultimately lies with the board of directors, not with stockholders. However, despite strong support in Delaware jurisprudence for the poison pill, this defence continues to attract the ire of proxy advisory firms, with the result that only 153 of S&P 500 companies had a poison pill in effect at the end of 2009.

Canada

While developments over the past 18 months initially introduced some uncertainty, the traditional position in Canadian law has been reconfirmed and is very different from Delaware law in three respects.

First, the question whether a poison pill can continue to be deployed in the face of a hostile bid is dealt with by securities regulators as a matter of securities regulatory law, not in court as a matter of corporate law concerning the division of powers between shareholders and directors, and the fiduciary duties of directors.

Second, it is a fundamental precept of Canadian securities regulatory law that it is shareholders, not directors, who make the takeover bid decision. Thus target directors cannot, as they did in Airgas, preempt shareholder access to a hostile bid on the basis that the directors consider the bid to be inadequate.

Finally, poison pills in Canada are tolerated for a limited time only, and only as a means to buy time for the target board to seek out value-maximizing alternatives to the hostile bid. Thus the price for deploying a pill in the face of a hostile bid is a recognition by the target’s board of directors that its role has changed from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company – what are otherwise known as “Revlon duties” under Delaware law.

To discuss these issues, please contact the authors.

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