Tuesday, May 26, 2009
The credit crisis has brought the issue of the poison put to fore. A "poison put" is a change of control provision in an indenture that prevents a debtor from having its board replaced as a consequence of a hostile acquisition without triggering a default event. NRG has been waving the potential of such a default as a reason for its shareholders not to tender into Exelon's hostile bid for control of NRG ("NRG: Exelon's board proposal would accelerate $8B in debt").
In April, the WSJ ran an article on the role of poison puts in slowing down the market for corporate control during the credit crisis. Whereas in better times, potential sellers with restrictive debt covenants. ("Poison puts undercut mergers"). Below is a discussion from the WSJ on the effect of "poison puts" on the M&A market.
The Delaware courts recently had a chance to weigh in on the validity of poison puts in the Amylin case. The opinion is here: Download Amylin-Poison Put. The core issue in the Amylin case was whether a board can, in effect, tie their own hands, as well as the hands of shareholders by leaving it to third party creditors to decide whether or not a hostile bidder is acceptable. If you'r familiar with the deadhand/slowhand poison pill cases, then it's hard to imagine a Delaware court deciding that a board may, consistent with its fiduciary duties, agree to poison put that effectively neuters shareholders' voting rights. In the Anylin case, creditors sued to enforce the covenant and prevent a new board that won a proxy contest from taking their seats on the board. Shareholders and the board opposed. The court ruled with the board. The effect of which is that poison puts must be read more generously and in a manner that does not have the effect of entrenching management and disenfranchising shareholders. There is a nice post on this decision on the Harvard Corporate Governance Blog (here).