M & A Law Prof Blog

Editor: Brian JM Quinn
Boston College Law School

Friday, June 21, 2024

The dead hand pill is back

Still thinking about the implications of new § 122(18). One thing, if you ever wanted a dead hand poison pill - made illegal by Carmody v. Toll Brothers (1998) - well that's now possible.  The dead hand pill purported restrict the right to redeem a poison pill to continuing directors only. If a hostile acquirer were successful in replacing the board via a proxy contest, then the new board members would lack the power to redeem the pill.

Poison Pill basics for those new to the audience: Remember that a poison pill is made up of two important documents. First, there is the Shareholder Rights Plan (think of this as a stockholder agreement) and the other is the Certificate of Designations, which lays out the powers of the preferred stock. The preferred stock is just the catalyst to make the poison pill magic happen, it doesn't actually do anything or even get issued.  The Rights initially permit the shareholder to buy preferred stock but at a price that's out of the money. Upon a triggering event, the Rights convert in the right to purchase new common stock at a discount to the current market price, an in the money option. In the event a hostile acquirer passes a threshold number of shares, the pill would trigger and existing shareholders other than the hostile acquirer can buy common stock of the company at a discount thereby severely diluting the acquirer. Think Sisyphus.  At any point in time, the board can redeem the Rights and make them go away. This obviously creates an incentive for the acquirer to reach a friendly deal with the target board rather than trigger the rights. Or, the acquirer could pursue a proxy contest to replace the target board with new board members more friendly to the acquirer. Having won a proxy contest the new board could then safely redeem the Rights Agreement and permit the hostile offer to move forward.  OK? Still with me?

In Toll Brothers, VC Jacobs - on a motion to dismiss - held that since the Rights that were the fulcrum for the dead hand pill could not be redeemed pursuant to the terms of the Rights Agreement by any board other than the directors who had initially adopted the pill (or at least by the directors who were continuing from the original board following a successful proxy contest) that the Rights Agreement ran afoul of § 141(a) and (d) was therefore invalid. 

OK, so fast forward to 2024. Now that § 122(18) has passed and § 141(a) no longer sits atop the statutory hill, one can imagine writing an amendment to the Shareholder Rights Agreement that designates a shareholder or shareholders (who happen to be current directors) as responsible for pulling the pill. The board covenants not to redeem the pill under the Rights Agreement unless the director/shareholder agrees. So, even if the director (or directors) are replaced in a proxy contest, their dead hands will still float around the boardroom preventing the new board from pulling the pill in a manner that the new board believes is consistent with its fiduciary duties. 

Good times like these - brought to you be the CLC of the Delaware State Bar Association and the Delaware General Assembly.





Delaware | Permalink


Post a comment