by Matteo Tonello for The Conference Board, published by The Harvard Law School Forum, April 3rd, 2011.
Having been buffeted by sustained attacks from activists and proxy voting advisors in past years, the shareholder rights agreement is no longer as prevalent as it once was—a phenomenon that has been documented by many corporate governance observers like The Conference Board. However, the most recent case law confirms the validity of poison pills that are properly structured, adopted, and administered. This report discusses these new trends and provides guidance to boards considering whether to adopt a pill and how to formulate its terms.
Despite the continued decline in the number of outstanding poison pills maintained by U.S. public companies, Delaware courts in several cases in 2010 and early 2011 have steadfastly confirmed the continuing legal vitality of pills that are properly structured, adopted, and administered. The most recent of these cases demonstrates howpowerful a poison pill can be when working in tandem with a classified board: Air Products withdrew its 16-month long hostile pursuit of Airgas promptly after the Delaware Court of Chancery upheld Airgas’ combined defenses. It is interesting, therefore, that fewer and fewer companies are maintaining classified boards; companies may find that without them, the effectiveness of their poison pills will be significantly reduced.
Two novel uses of poison pills were tested in the Delaware courts in 2010. In one case, a poison pill established to protect a company’s net operating loss carryforwards (NOLs) emerged unscathed, while another pill, implemented to protect the company’s unique corporate culture, did not survive scrutiny. (continue reading… )