August 8, 2007
The Japanese Poison Pill (Redux)
The Wall Street Journal is reporting that the Japanese Supreme Court has upheld a landmark lower-court ruling affirming the use of a poison pill defense by Bull-Dog Sauce Co. The lower court had held that Bull Dog, a Japenese condiment maker, could employ the defense to fend off an unsolicited offer to be acquired from Steel Partners Japan Strategic Fund (Offshore) LP, a U.S. fund. Steel Partners is offering Yen 1,700 per share, a 25.8% premium to Bull Dogs's 12-month average closing share price. Steel Partners is one of the best-known takeover funds in Japan and is seen as a symbol of shareholder activism in that country.
Steel Partners had sued Bull-Dog alleging that the poison pill was discriminatory and therefore in violation of Japanese law. On June 24, 2007, 80% of Bull Dog's shareholders had voted to approve the issuance of stock acquisition rights underlying the poison pill at its annual general meeting of shareholders. Both the lower court and the Supreme Court apparently relied heavily on this vote to find that the poison pill was not discriminatory because the company's shareholders had approved it. According to the Journal:
Bull-Dog's defensive scheme gives all shareholders three equity warrants for each Bull-Dog share they own. But the firm bars Steel Partners from exercising its warrants, instead granting it 396 yen ($3.33) for each warrant -- a 2.3 billion yen ($19.3 million) payout for Steel Partners -- but making it impossible for the U.S. fund to take control of the Japanese company.
A prior Journal report also calculated that the poison pill will dilute the fund's holdings to less than 3% from more than 10% if exercised. Bull-Dog is now scheduled to redeem the warrants on Aug. 9. This is a clear loss for Steel Partners. But, as I stated in an earlier post on the lower court ruling:
The decision is a bit of a surprise since in at least two other cases the Japanese courts had invalidated the use of a poison pill. But the big difference here appears to be the shareholder vote. Poison pills are often decried as denying shareholders the right to make their own decisions concerning a sale of their company. Yet in this instance there was a vote which overwhelmingly validated use of this mechanism. And Bull Dog's pill is a relatively mild one providing for limited dilutive effect. The case can therefore be distinguished on these grounds and likely confined to justifying the use of a pill to fend off unsolicited bids in Japan in those instances where shareholders overwhelmingly oppose the transaction.
For U.S. purposes, the decision also highlights a more democratic use of the pill. One where shareholders get a say on its use to deter unsolicited offers. This is a path which many activists in the United States have called for. And it is one which permits shareholders a say in the important takeover decision, one they are today often deprived of. For more, see Ronald J. Gilson, The Poison Pill in Japan: The Missing Infrastructure.
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