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Apr 01, 2014

Poison pill draws renewed scrutiny

The use of anti-takeover measures to impede unsolicited M&A bids has declined considerably in recent years as the push for shareholder rights has strengthened. Now it’s in the spotlight again thanks to a court case in Delaware and the debate over an academic paper by two Ivy League law professors.

Last week, Dan Loeb filed a lawsuit in the Delaware Chancery Court against Sotheby’s, charging the auction house with inappropriate use of a poison pill to prevent Loeb’s hedge fund, Third Point, from increasing its stake in order to be able to nominate three directors to the Sotheby’s board.

Loeb was trying to increase Third Point’s stake in Sotheby’s from 9.6 percent to 20 percent and said the auction house’s use of a poison pill ‘illegitimately tilts the playing field in the board’s favor,’ as reported by MarketWatch. He has also called for CEO William F Ruprecht to step down in recent months.

‘The reason why the board at Sotheby’s adopted the pill was to inhibit [Loeb’s] ability to buy more shares, not because they were afraid he would attempt an unsolicited offer for the company, but rather that that would give him a leg up on posing directors,’ the chairman of a proxy solicitation firm told Corporate Secretary. ‘He has slated [three director nominations] and filed preliminary proxy materials.’

Bruce Goldfarb, president and CEO of Okapi Partners, a rival proxy solicitation firm, sees Sotheby’s invoking of its poison pill against Loeb as part of a bigger debate among shareholders. ‘It’s a concern in general to the investor community that there are different standards for different investors, that there are investors who could own up to 20 percent without triggering the pill,’ such as passive institutional investors that own shares solely through an index fund, he says. ‘That’s a difficult sell to investors. Even investors who understand there are times when having a pill can be warranted may have difficulty with different triggers [for different kinds of investors].’

Charles Elson, director of the Weinberg Center for Corporate Governance at the University of Delaware’s business school, says ‘the pill has been critiqued in academe when used to simply prevent a large holder from increasing his ownership stake,’ which is not its intended purpose. The point is to prevent the takeover of a company at an improper price, he adds.

Professors Lucian Bebchuk of Harvard and Robert Jackson of Columbia have recently taken the academic debate over the poison pill to a new level with a paper to be published by the Columbia Law Review this fall that questions its constitutionality. Their paper argues that state-law poison pill rules currently impose tighter restrictions on tender offers than those that federal courts have viewed as preempted by the Williams Act, a federal law passed in 1968 that defines rules for acquisitions and tender offers.

Law firm Wachtell Lipton, which is credited with creating the poison pill, has attacked the paper, asserting the Williams Act was a narrow law that ‘regulates only the process of tender offers,’ not their content.

The chairman of the first proxy solicitation firm views the Bebchuk/Jackson-Wachtell debate as a sideshow, with all eyes now focused on the Delaware Court. Whether the ruling is a game changer ‘will depend very much on the grounds that the Court strikes it down on, if [it does],’ he says. ‘Only once they see the decision can people decide what are the appropriate times and places to put in a pill.’

David Bogoslaw

Associate Editor and Online features producer for Corporate Secretary