In the dynamic world of mergers and acquisitions (M&A), various strategies and tactics are employed to safeguard the interests of those involved. One of these strategies is the application of so-called poison pills, i.e., in those jurisdictions where they exist(Common Law), a sort of shareholder rights plans, of contractual construction and jurisprudential endorsement. We intend to address from the surface the concept of poison pills, their purpose and their impact on M&A transactions, while sharing some real examples in which a poison pill has been adopted (the last and most famous, in the case of Twitter, although it was not applied).
Poison pills are defensive mechanisms (understood in political terms) adopted bytarget companies in an allegedly hostile takeover. These measures usually grant existing shareholders certain rights or impose restrictions that make an acquisition more difficult or economically onerous (even burdensome) for the target. By activating them, Target can buy time to explore alternatives, negotiate better terms or encourage potential acquirers to engage in friendlier discussions. By imposing certain restrictions, poison pills give Target, for example, the ability to negotiate a higher price, which may ultimately maximize shareholder value.
In an aseptic example, with the most common case of poison pill in the United States (USA): Target has established that if -ceterisparibus- apotential acquirer intends to acquire more than 15%, the board of directors may automatically agree to a capital increase at a price so much lower than Target’s value, with delivery of those shares to the remaining shareholders (excluding, therefore, the potential acquirer), which would immediately dissuade the interested party from bidding for Target.
And, more specifically, the paradigmatic case of Airgas, which implemented a poison pill to resist a hostile takeover attempt by Air Products & Chemicals. The case went to the courts of the so-called State of Delaware, which found the poison pill to be reasonable to protect the interests of shareholders. This case highlighted the delicate balance that courts must strike when reviewing poison pills, also establishing a sort of control test over them.
Proponents of poison pills argue that their main virtue is to safeguard against unwanted takeover attempts, rather coercive in nature, giving Target an opportunity to respond. Poison pills would come to act as a protective shield over existing shareholders by preventing toppling practices and allowing boards to act in the best interests of Target and its shareholders.
Despite their apparent advantages, poison pills are not without criticism and concern in the corporate-legal arena. Critics argue that these provisions can entrench managers, hindering the will of shareholders and potentially stifling competition in the marketplace. Poison pills can discourage potential acquirers and slow down market dynamics by introducing uncertainties and additional costs. Moreover, it could be absurd for a board of directors to boycott a transaction (or promote another) of this type simply because it (does not) serve their personal interests, depriving shareholders of their decision-making power and of having a valid benchmark. It is well known that the interests of a company’s directors are not always aligned with those of its shareholders.
On a practical level, the legal framework surrounding poison pills varies from jurisdiction to jurisdiction, with the treatment (and name) given to them varying from country to country.
As opposed to the aforementioned scenario of acceptance in the U.S., on a case-by-case basis, in Spain (and the EU as a whole) -i.e., a system of Civil Law based on rules and less on jurisprudential constructs – given the regulatory current born with Directive 2004/25/EC, which has been developing over time until reaching its zenith with the pandemic RD-l 8/2020, the use of poison pills is not possible as described above, for the simple reason that these operations must go through the general meeting of shareholders, combining, in addition, other rights such as the pre-emptive subscription right, the neutralization rule, the fiduciary duty of the administrators and their obligation of loyalty in general and of passivity in particular in these cases, etc. However, like any rule, there is an exception (a sort of “Spanish” poison pill). This is the case of a listed Spanish company – today on everyone’s lips thanks to a famous American short-sheller – whose bylaws provide for a redemption option for a certain class of shares in the event of a takeover bid.
To circumvent the complexities surrounding poison pills and incorporate similar mechanisms, it is at least advisable for the legislator to update the legal framework governing M&A operations, which is generally developed by its own practice. This will help to mitigate abuses (generally on the part of the administrators), guaranteeing the interests of the shareholders, while maintaining market efficiency and healthy competition.
Until the right balance is struck to provide an M&A framework that is competitive with our environment, it will be key to have sufficiently imaginative legal advice to fill the regulatory and jurisprudential gaps within the regulatory framework.
For more information about the content of this article please contact Ignacio Arce.
This article was published in the Capital Privado magazine ( p. 46-47) of the newspaper El Economista on January 30, 2024.
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