Cubism: The Leonard A. Lauder Collection (The Met – Oct, 2014 to Feb 2015)
Module VI – Corporate Governance
Chapter 14
Shareholder Voting Rights
• What and how
Bar
exam
Corporate
practice
Law
profession
– Rights in fundamental transactions
• Voting rights
• Appraisal rights
– Compare: merger, sale of assets, tender offer
• Power to initiate
– Shareholder resolutions
– Bylaw amendments
– Removing directors / filling vacancies
• Protection of voting rights
Citizen of
world
Corporations:
A Contemporary Approach
– Blasius: board packing
– Quickturn: dead-hand/deferred poison pills
Chapter 14
Shareholder Voting Rights
Slide 2
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• Vote
–
–
–
–
Approve fundamental transactions
Elect directors (annually, special)
Remove directors / fill vacancies
Initiate action (bylaws, resolutions)
Shareholder selfprotection
• Sue
– Enforce fiduciary duties
(derivative)
– Protect rights (disclosure, voting,
appraisal, inspection)
• Sell
– Liquidity (except insider trading)
– Takeovers (tender offer)
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
Prof. Robert Thompson
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1.
2.
3.
4.
5.
6.
7.
10.
8.
9.
Fundamentals
–
–
Corporations and policy
–
–
–
–
–
–
Chapter 14
Shareholder Voting Rights
Organizational choices
Incorporation
Locating corporate authority
Corporate finance
–
–
Numeracy for corporate lawyers
Capital structure
Corporate externalities
–
–
–
Piercing corporate veil
Corporate environmental liability
Corporate criminal liability
Corporate governance
–
–
–
Shareholder voting
Shareholder information rights
Public shareholder activism
Fiduciary duties
–
–
–
–
–
–
Shareholder litigation
Board decision making
Board oversight
Director conflicts
Executive compensation
Corporate groups
Close
corporations
Stock trading
–
–
–
Planning
Securities markets
Oppression
Securities fraud class actions
Insider trading
Corporate deals
Sale of control
Antitakeover devices
Deal protection
Close corporations
–
–
Corporations:
A Contemporary Approach
Corporate federalism
Corporate social responsibility
Corporate political action
Corporate form
–
–
–
10.
Introduction to firm
Corporate basics
Planning
Oppression
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Shareholder voting rights
Substance (what SHs vote on)
Process (how SHs vote)
• Choose directors
• Meetings of shareholders
– Annual election
– Removal/replacement of
directors
– annual meeting
– special meeting
– Action by consent
• Approve fundamental changes
(usually after board initiation)
– Amendments to articles of
incorporation
– Mergers / sales of assets
– Dissolution
• Voting at meetings
–
–
–
–
quorum (purpose)
proxy (appointment of agent)
absolute vs. simple majority
supervision of voting
• Initiate and approve bylaw
changes
• Adopt resolutions
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
Slide 5
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What is a merger?
(statutory merger / triangular merger / sale of assets / tender offer)
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
Slide 6
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Acquisition
P Corp.
(acquiring
corporation)
T Inc.
(acquired
corporation)
Hypothetical
• Mgmt of P and T agree that P
will acquire T
• P will issue 40% of voting
shares as consideration
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
Slide 7
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Statutory merger
(MBCA)
P Corp.
(acquiring
corporation)
plan of merger
T Inc.
(acquired
corporation)
P board
T board
• approves merger
plan
• approves merger
plan
P shareholders
T shareholders
• Vote – Yes (if more
than 20% issuance)
• Vote – Yes
• Appraisal – Yes
(unless mkt out)
• Appraisal – No
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
Slide 8
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Before
P Corp.
(acquiring
corporation)
Statutory merger
(MBCA)
plan of merger
T Inc.
(acquired
corporation)
After
P. Corp.
(surviving corporation)
assets + liabilities
of both P and T
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
Slide 9
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Shareholder rights
P (surviving corporation)
T (acquired corporation
Vote
Appraisal
Vote
Appraisal
MBCA (rev)
Y
N
Y
Y*
MBCA (pre-99)
Y
Y
Y
Y
DGCL
Y
Y*
Y
Y*
MBCA (rev)
Y
N
Y
Y*
MBCA (pre-99)
N
N
Y
Y
DGCL
N
N
Y
Y*
MBCA (rev)
Y
N
Y
Y*
MBCA (pre-99)
N
N
Y
Y
DGCL
N
N
Y
N
Statutory merger
Triangular merger
Sale of assets
* Unless “market out” exception applies
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
Slide 10
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Triangular merger
(MBCA)
P Corp.
(acquiring corporation)
T Inc.
(acquired corporation)
100% owner
Merger Sub Inc.
(acquisition vehicle)
P creates Merger Sub
T board
• capitalized with P shares
• approves merger plan
MS board & MS Shs (P)
approve
T shareholders
• Vote – Yes
P shareholders
• Appraisal – Yes (unless
“market out” exception)
• Vote – Yes (more than
20% issuance)
• Appraisal – No
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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Before
Triangular merger
(MBCA)
P Corp.
(acquiring corporation)
T Inc.
(acquired corporation)
100% owner
Merger Sub Inc.
(acquisition vehicle)
After
P Corp.
(acquiring corporation)
100% owner
T Inc.
(surviving corporation
- reverse merger)
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
Slide 12
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Shareholder rights
P (surviving corporation)
T (acquired corporation
Vote
Appraisal
Vote
Appraisal
MBCA (rev)
Y
N
Y
Y*
MBCA (pre-99)
Y
Y
Y
Y
DGCL
Y
Y*
Y
Y*
MBCA (rev)
Y
N
Y
Y*
MBCA (pre-99)
N
N
Y
Y
DGCL
N
N
Y
Y*
MBCA (rev)
Y
N
Y
Y*
MBCA (pre-99)
N
N
Y
Y
DGCL
N
N
Y
N
Statutory merger
Triangular merger
Sale of assets
* Unless “market out” exception applies
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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Sale of Assets
(MBCA)
consideration
T Inc.
(acquired corporation)
P Corp.
(acquiring corporation)
assets + liabilities
P agrees to buy T assets for P
shares (maybe assume
liabilities)
T agrees to sell T assets for P
shares (maybe transfer
liabilities)
•
•
approved by P board
approved by T board
P shareholders
T shareholders
• Vote – Yes (if more than 20%
issuance)
• Vote – Yes
• Appraisal – Yes (subject to
“market out” exception)
• Appraisal – No
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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Before
Sale of Assets
(MBCA)
consideration
P Corp.
(acquiring corporation)
T Inc.
(acquired corporation)
assets + liabilities
After
P Corp.
(acquiring corporation)
T Inc. dissolved
T shareholders receive
P shares as consideration
Assets + liabilities
of P and T
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
Slide 15
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Shareholder rights
P (surviving corporation)
T (acquired corporation
Vote
Appraisal
Vote
Appraisal
MBCA (rev)
Y
N
Y
Y*
MBCA (pre-99)
Y
Y
Y
Y
DGCL
Y
Y*
Y
Y*
MBCA (rev)
Y
N
Y
Y*
MBCA (pre-99)
N
N
Y
Y
DGCL
N
N
Y
Y*
MBCA (rev)
Y
N
Y
Y*
MBCA (pre-99)
N
N
Y
Y
DGCL
N
N
Y
N
Statutory merger
Triangular merger
Sale of assets
* Unless “market out” exception applies
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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Compare shareholder rights …
(P acquires T with 40% of its stock)
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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Shareholder rights
P (surviving corporation)
T (acquired corporation
Vote
Appraisal
Vote
Appraisal
MBCA (rev)
Y
N
Y
Y*
MBCA (pre-99)
Y
Y
Y
Y
DGCL
Y
Y*
Y
Y*
MBCA (rev)
Y
N
Y
Y*
MBCA (pre-99)
N
N
Y
Y
DGCL
N
N
Y
Y*
MBCA (rev)
Y
N
Y
Y*
MBCA (pre-99)
N
N
Y
Y
DGCL
N
N
Y
N
Statutory merger
Triangular merger
Sale of assets
* Unless “market out” exception applies
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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Tender Offer
T
shareholders
Board
T Inc.
(target)
P Corp.
(bidder)
P board approves offer
T board has no role
P shareholders
T shareholders
• Vote – No (unless dilutive
issuance or amend
articles to authorize
shares)
• Vote – No (each individual
shareholder decides /
coercion risk)
• Appraisal – No
Corporations:
A Contemporary Approach
• Appraisal – No (take offer or
risk becoming minority)
Chapter 14
Shareholder Voting Rights
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Tender Offer
Before
T
shareholders
P Corp.
(bidder)
Board
T Inc.
(target)
After
How get rid of minority?
Corporations:
A Contemporary Approach
T Shs
(minority)
P
(majority)
Chapter 14
Shareholder Voting Rights
Board
T Inc.
(target)
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Two-step takeover
1st step
(tender offer)
T
shareholders
P Corp.
(bidder)
Board
T Inc.
(target)
P
(majority)
2nd
step
(merger)
P Corp.
(bidder)
Corporations:
A Contemporary Approach
merger
Chapter 14
Shareholder Voting Rights
T Shs
(minority)
Board
T Inc.
(target)
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Pop quiz –
shareholder voting rights
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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1. Shareholders do vote on:
a. Fundamental changes in
business
b. Mergers
c. Sales of important corporate
assets
2. Shareholders do not vote on:
a. Acquisition by another
corporation
b. Amendment of bylaws
c. Parent-sub merger (when
parent owns 90%+ of sub)
3. Shareholders get appraisal:
a. When they receive publiclytraded stock in a merger
b. In court proceeding paid by
company
c. For “fair market value” of their
shares
4. Shareholder meeting requires:
a. Notice to shareholders (10-60
days before meeting)
b. Statement of purpose of meeting
(both annual/special meetings)
c. A quorum from beginning to end
of the meeting
5. At annual meeting:
a. All directors are elected
b. Only directors are elected where
seat is contested
c. Only some directors are elected
(up to five classes)
6. Shareholders can:
a. Amend bylaws, even
if inconsistent with articles
b. Approve non-binding resolutions
c. Remove directors only for cause
and fill vacancies
Answers: 1-b / 2-c / 3-b / 4-a / 5-a / 6-b
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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Shareholders’ power to initiate ...
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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Auer v. Dressel
Power to initiate
(NY 1954)
CA, Inc. v. AFSCME
•
(Del. 2008)
•
Campbell v. Loew’s
•
(Del. Ch. 1957)
•
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
Shareholder
resolutions
Remove directors (for
cause)
Fill board vacancies
(after removal)
Amend bylaws
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Auer v. Dressel
(NY Court of Appeals 1954)
Majority shareholders were upset after a
palace coup. They wanted to get rid of
the incumbent majority, put in a new
board, and reinstate the former
president Auer. They ask for a special
shareholders' meeting where
shareholders would vote to -• remove 4 directors for cause and
replace them with a new slate
• amend the bylaws and articles so
board vacancies are filled only by
shareholders
• endorse Auer's presidency and
demand his reinstatement
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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NY Court of Appeals:
Removal power: "... stockholders who are empowered to elect
directors have the inherent power to remove them for
cause. [service of specific charges, adequate notice and full
opportunity of meeting the accusations] .... [Provision in articles
that authorizes board to fill vacancies is not] an abdication by
the stockholders of their own traditional, inherent power to
remove their own directors.
Amend bylaws: "Since these particular stockholders have the
right ... to remove [directors] on proven charges, [they can]
amend the bylaws to elect the successors of such directors as
shall be removed ...
Resolution: "The stockholders by expressing their approval of Mr.
Auer's conduct as president and their demand that he be put
back in that office, will not be able directly to effect that change
in officers, but there is nothing invalid in their so expressing
themselves
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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Auer v. Dressel
Power to initiate
(NY 1954)
CA, Inc. v. AFSCME
•
(Del. 2008)
•
Campbell v. Loew’s
(Del. Ch. 1957)
•
•
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
Shareholder
resolutions
Remove directors (for
cause)
Fill board vacancies
(after removal)
Amend bylaws
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Reimbursement
of expenses?
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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DGCL
§ 102. Articles.
(b) …. The certificate may contain ….”
(1) Any provision …. Limiting and regulating the powers of …. the
directors
§ 109. Bylaws.
(a) … The power to adopt, amend or repeal bylaws shall be in the
stockholders entitled to vote ….
(b) The bylaws may contain any provision, not inconsistent with law or
with the certificate of incorporation, relating to the business of the
corporation, the conduct of its affairs, and its rights or powers or the
rights or powers of its stockholders, directors, officers or employees.
§ 141. Board of directors…
(a) The business and affairs of every corporation organized under this
chapter shall be managed by or under the direction of a board of
directors, except as may be otherwise provided in … its certificate of
incorporation.
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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Justice Jack Jacobs (standing right):
Proper subject: Implicit in CA's
argument is the premise that any
bylaw that in any respect might be
viewed as limiting or restricting the
power of the board of directors
automatically falls outside the scope
of permissible bylaws. That simply
cannot be.
Fiduciary duties: As presently drafted,
the Bylaw would afford CA's directors
full discretion to determine what
amount of reimbursement is
appropriate, because the directors
would be obligated to grant only the
“reasonable” expenses of a successful
short slate.
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
Delaware Supreme Court
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Auer v. Dressel
Power to initiate
(NY 1954)
•
CA, Inc v. AFSCME
(Del 2006)
•
Campbell v. Loew’s
•
(Del. Ch. 1957)
Corporations:
A Contemporary Approach
•
Chapter 14
Shareholder Voting Rights
Shareholder
resolutions
Remove directors (for
cause)
Fill board vacancies
(after removal)
Amend bylaws
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Campbell v. Loew's, Inc.
(Del Ch. 1957)
Two minority factions in a public
corporation (Vogels and
Tomlinsons) vie for control of
the board. The Vogel faction
has control of corporate
management and calls a
shareholders' meeting to:
• amend the bylaws to increase
# of directors
• remove 2 Tomlinson-faction
directors.
• fill director vacancies with
Vogel-faction directors
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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Delaware Chancery Court:
• Fill vacancies. "stockholders have the
inherent right between annual meetings to fill
newly created directorships"
• Remove directors. "stockholders do have
[inherent] power to remove directors for cause
... even where there is a provision for
cumulative voting"
– Process of removal. "there must be ...
notice of charges .... opportunity to defend
charges"
– Opportunity to be heard. "opportunity
must be provided such directors to
present their defense to stockholders [in
company proxy mailing]"
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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Delaware Chancery Court:
Meaning of “for cause”:
[A] charge that the directors desired to take over control
of the corporation is not a reason for their
ouster. Standing alone, its is a perfectly legitimate
objective which is a part of the very fabric of corporate
existence. Nor is lack of cooperation a legally
sufficient basis for removal for cause.
The next charge is that these directors, in effect,
engaged in a calculated plan of harassment to the
detriment of the corporation. Certainly a director may
examine books, ask questions, etc., but a point can
be reached when his actions exceed the call of duty
and become deliberately obstructive. ... The charges
in this area ... are legally sufficient to justify the
stockholders in voting to remove such directors.
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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Pop quiz –
shareholder initiation powers
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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1. Shareholders have power:
a. To require board to reinstate
president
b. To request board that
president be reinstated
c. Only to elect new board
4. Under a shareholder-passed bylaw
to reimburse proxy expenses:
a. Board must be able to refuse, inc
unreasonable expenses
b. Board is bound by bylaw
c. Board can amend bylaw
2. Shareholders have power:
a. To remove director for cause
b. Regardless of articles, to
remove D without cause
c. Only to give opinion on board
removing D
5. Removal of directors under DGCL:
a. Must be only for cause
b. Can be without cause, if allowed
in articles (opt-in)
c. Can be without cause, unless
articles disallow (opt-out)
3. Shareholders have power to
amend bylaws:
a. On any matter board could
amend
b. On procedural matters that
don’t interfere with board
c. Only if specifically allowed in
articles
6. To remove director in PHC:
a. Directors must be able to
present “defense” at meeting
b. Directors must have access to
proxy statement
c. Cannot be done, shareholders
must wait for next election
Answers: 1-b / 2-a / 3-b / 4-a / 5-c / 6-b
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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Board responses to
shareholder initiatives …
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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Limits on board
Fiduciary duties
(constraints)
Limits on power
(ultra vires)
• During insurgency,
interfere w/ SH voting
• Amend bylaws
– Blasius: only when
“compelling
justifications”
– CA v AFSCME:
Shareholders can
amend bylaws
• Adopt poison pills
• Adopt “shark
repellents”
– BJR: if approved by
shareholders
– Heightened duty: Board
as negotiator for
shareholders
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
– Quickturn: Directors
must retain
independent
judgment
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Blasius Indus v.
Atlas Corp
(Del Ch 1988)
Incumbent
board
1
8
2
9
3
4
5
6
7
10 11 12 13 14 15
Insurgent
(Blasius)
(amend bylaws)
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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Standard of review
Atlas's board acted –
Judicial review
• Consistent with Sh-approved
staggered board – precisely to
prevent “siren’s call”
• Without conflicting interest -their board positions not
jeopardized by Blasius boardpacking plan
• In good faith -- they were
motivated to protect the
shareholders from the threat
of impractical, dangerous
recapitalization program
– BJR deference?
Corporations:
A Contemporary Approach
• Board not exercising control
over operations
• Inapplicable when
manipulates franchise
– Per se prohibition?
• Board should have role
• Board may sometimes know
better than shareholders
– Heightened review?
Chapter 14
Shareholder Voting Rights
• Compelling justifications
• Protect deal already done
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Corporate democracy
“The shareholder franchise is the
ideological underpinning upon which
the legitimacy of directorial power
rests.
“Action designed principally to
interfere with the effectiveness of a
vote inevitably involves a conflict
between the board a shareholder
majority. ....
“The theory of our corporation law
confers power upon directors as the
agents of the shareholder; it does not
create Platonic masters.
Chancellor William T. Allen
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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Board power over SH voting …
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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Quickturn Design Systems v. Shapiro
(Del. 1998)
Mentor
Shareholders
Board
Quickturn
Corporations:
A Contemporary Approach
Bidder initiates two-step
takeover
(1) Proxy contest - replace board
(which will redeem “rights”)
(2) Tender offer
• 50% premium, 20% below
high
• Same price in back-end
merger
Chapter 14
Shareholder Voting Rights
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Quickturn Design Systems v. Shapiro
(Del. 1998)
Mentor
Shareholders
Quickturn board responds
• Amend bylaws: Shareholder-called
meeting delayed 90-100 days
• Amend poison pill:
Board
Quickturn
Corporations:
A Contemporary Approach
– Delete “dead hand” feature
– Add “deferred redemption” (new
Directors cannot redeem for 6 mos)
Chapter 14
Shareholder Voting Rights
Slide 46
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Poison Pill
1st trigger: Bidder
acquires or makes TO for
specified percentage
(such as 10%) – board
has window in which to
“redeem” rights
2nd trigger: If rights not
redeemed and Bidder
undertakes back-end
transaction, rights allow
holder to buy “discounted
securities” of Bidder
Creation: Board adopts
“poison pill” plan – Shs
receive rights to buy
securities “out of the
money” (rights attach to
and trade with stock)
Corporations:
A Contemporary Approach
Effect: To avoid buying
target shares that carry
“financial poison,” Bidder
must negotiate with board
(or replace board) to
have rights redeemed.
Chapter 14
Shareholder Voting Rights
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TITLE 8
Corporations
CHAPTER 1. GENERAL CORPORATION LAW
Subchapter IV. Directors and Officers
§ 141. Board of directors; powers …
(a) The business and affairs of every corporation organized
under this chapter shall be managed by or under the direction of
a board of directors, except as may be otherwise provided in this
chapter or in its certificate of incorporation.
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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Delaware Supreme Court:
One of the most basic tenets of Delaware
corporate law is that the board of
directors has the ultimate responsibility
for managing the business and affairs of
the corporation.
While the DRP limits the board’s authority in
only one respect, suspension of rights
plan, it restricts board’s power to
negotiate sale of the corporation.
No defensive measure can be sustained
which would require a new board of
directors to breach its fiduciary duty.
Justice Randy Holland
Quickturn Design Systems v. Shapiro
(Del. 1998)
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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Pop quiz –
board interference with voting
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
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1. Boards do not have power:
a. To amend bylaws
b. To fill vacancies on board
c. To disenfranchise
shareholders
2. When interfering with SH
insurgency, directors must:
a. Have compelling justifications
b. Not oppose the insurgency
c. Offer a rational purpose (BJR)
3. A staggered board:
a. Must be in the corporate
bylaws
b. Reflects that shareholders
want director permanence
c. Can be circumvented by
“removal without cause”
4. A poison pill:
a. Forces bidders to negotiate with
the board
b. Is invalid, since it undermines
shareholder liquidity rights
c. Is valid, only if approved by
shareholders
5. A deferred-redemption pill:
a. Can be redeemed at any time
b. Can be redeemed only by “old”
directors
c. Can be redeemed by “new”
directors after a wait
6. A deferred-redemption pill is invalid
because it:
a. Violates fiduciary duties
b. Disempowers directors
c. Is not authorized in articles
Answers: 1-c / 2-a / 3-b / 4-a / 5-c / 6-b
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
Slide 51
of 59
The end
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
Slide 52
of 59
Note on poison pills
Creation. The board issues one right for each common
share outstanding. When issued, the rights are
essentially worthless, entitling a shareholder to buy
preferred stock at prices far in excess of current
market value—that is, stock “out of the money.”
First trigger. The real impact of the rights arises if any
acquirer buys at least 20 percent (or makes a tender
offer for at least 30 percent) of the company’s shares.
After this first trigger, the board has ten days to
redeem the rights for a nominal amount (such as 10
cents per share). If the target fails to take this antidote,
the rights became poison upon any further action by
the acquirer.
Second trigger. Any back-end transaction with the tainted
acquirer (such as a merger, sale of assets, or other
self-dealing arrangement) activates a second trigger in
which the target must swallow the plan’s poison. The
poison? Upon the second trigger, each right becomes
exercisable permitting the holder to purchase $200
worth of the acquirer’s or the target’s securities
(depending on the structure of the back-end
transaction) for $100. (A “flip-in” plan entitles the
holder to buy discounted target securities and sensibly
excludes the tainted acquirer from participating; a “flipover” plan entitles the holder to buy discounted
acquirer securities.)
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
Shareholders
Board
issues
rights
Corporation
Slide 53
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Note on poison pills
Creation. The board issues one right for each common
share outstanding. When issued, the rights are
essentially worthless, entitling a shareholder to buy
preferred stock at prices far in excess of current
market value—that is, stock “out of the money.”
First trigger. The real impact of the rights arises if any
acquirer buys at least 20 percent (or makes a tender
offer for at least 30 percent) of the company’s shares.
After this first trigger, the board has ten days to
redeem the rights for a nominal amount (such as 10
cents per share). If the target fails to take this antidote,
the rights became poison upon any further action by
the acquirer.
Second trigger. Any back-end transaction with the tainted
acquirer (such as a merger, sale of assets, or other
self-dealing arrangement) activates a second trigger in
which the target must swallow the plan’s poison. The
poison? Upon the second trigger, each right becomes
exercisable permitting the holder to purchase $200
worth of the acquirer’s or the target’s securities
(depending on the structure of the back-end
transaction) for $100. (A “flip-in” plan entitles the
holder to buy discounted target securities and sensibly
excludes the tainted acquirer from participating; a “flipover” plan entitles the holder to buy discounted
acquirer securities.)
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
Bidder
1st trigger
Shareholders
Board can
redeem rights
(or become poison)
Corporation
Slide 54
of 59
Note on poison pills
Creation. The board issues one right for each common
share outstanding. When issued, the rights are
essentially worthless, entitling a shareholder to buy
preferred stock at prices far in excess of current
market value—that is, stock “out of the money.”
First trigger. The real impact of the rights arises if any
acquirer buys at least 20 percent (or makes a tender
offer for at least 30 percent) of the company’s shares.
After this first trigger, the board has ten days to
redeem the rights for a nominal amount (such as 10
cents per share). If the target fails to take this antidote,
the rights became poison upon any further action by
the acquirer.
Second trigger. Any back-end transaction with the tainted
acquirer (such as a merger, sale of assets, or other
self-dealing arrangement) activates a second trigger in
which the target must swallow the plan’s poison. The
poison? Upon the second trigger, each right becomes
exercisable permitting the holder to purchase $200
worth of the acquirer’s or the target’s securities
(depending on the structure of the back-end
transaction) for $100. (A “flip-in” plan entitles the
holder to buy discounted target securities and sensibly
excludes the tainted acquirer from participating; a “flipover” plan entitles the holder to buy discounted
acquirer securities.)
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
Bidder
2nd trigger
Shareholders
(rights holders)
Shareholders can
exercise rights
(if bidder uses control)
Corporation
Slide 55
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Note on poison pills
Bidder
Effect. The purpose of this potentially devastating financial
dilution is to force any bidder, before beginning a
hostile takeover, to negotiate with the board--which
holds the redemption antidote. Such plans, which
have become a favorite antitakeover tactic, have been
adopted by a majority of large public companies.
Avoidance. One method to avoid a poison pill is for the
bidder to seek first to replace the incumbent board in a
voting contest, so the new board can then cancel the
plan or redeem the rights and pave the way for the
bidder’s tender offer. Another, still uncertain, option is
for the shareholders to adopt a bylaw amendment that
prevents the board from adopting a poison pill without
shareholder approval.
Shareholders
Rights
Board
Corporation
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
Slide 56
of 59
Note on poison pills
Bidder
Effect. The purpose of this potentially devastating financial
dilution is to force any bidder, before beginning a
hostile takeover, to negotiate with the board--which
holds the redemption antidote. Such plans, which
have become a favorite antitakeover tactic, have been
adopted by a majority of large public companies.
Avoidance. One method to avoid a poison pill is for the
bidder to seek first to replace the incumbent board in a
voting contest, so the new board can then cancel the
plan or redeem the rights and pave the way for the
bidder’s tender offer. Another, still uncertain, option is
for the shareholders to adopt a bylaw amendment that
prevents the board from adopting a poison pill without
shareholder approval.
Shareholders
Replace
Rights
Board
Corporation
Corporations:
A Contemporary Approach
Chapter 14
Shareholder Voting Rights
Slide 57
of 59