Edelman & Thomas on Poison Pills

Selectica Resets the Trigger on the Poison Pill: Where Should the Delaware Courts Go Next?, by Paul H. Edelman, Vanderbilt Law School, and Randall S. Thomas, Vanderbilt Law School; European Corporate Governance Institute (ECGI), was recently posted on SSRN.  Here is the abstract:

Since their invention in 1982, shareholder rights plans have been the subject of intense controversy. Rights plans, or as they are known more pejoratively “poison pills,” enable a target board to “poison” a takeover attempt by making it prohibitively expensive for a bidder to acquire more than a certain percentage of the target company’s stock (until recently 15-20%). Not surprisingly, some commentators view rights plans as an inappropriate means of shifting power from shareholders to the board of directors.

In this Article, we critically examine Delaware law on the use of shareholder rights plans and propose a new approach to assessing these plans. This new approach is particularly important given the Delaware Supreme Court’s recent decision in Versata Enterprises v. Selectica Inc. (5 A.3d 586 (Del. 2010)), which upheld a novel form of the poison pill with a only a 5% trigger level and created substantial confusion for future courts and commentators in the process.

To bring clarity to this area, we provide courts with a new, consistent, and transparent methodology for evaluating whether a rights plan, or for that matter any defensive tactic, is “preclusive” of shareholders’ ability to wage a proxy contest and is therefore invalid under Delaware law. Specifically, we argue that courts should stop using ad hoc techniques for deciding preclusion and should instead adopt a weighted voting model to make this determination. Such a model will allow courts to transparently consider all of the key parameters that affect the outcome of corporate elections, including the type of bidder, the type of contest, and the differences in voting recommendations that result from these variations. We provide such a model and put it to the test. Specifically, we apply a weighted voting model to illustrate the effect lower trigger levels will have on dissidents’ chances of winning proxy contests. We further demonstrate the effect a classified board, an ESOP, or a white-squire defense will have on these contests. In each case, the model provides a level of consistency and transparency that has never existed in this area of the law.