Poison Pill Endorsements

Note: Shareholders are generally not given an opportunity to "opt in" or to "opt out" of state laws regarding poison pill endorsements.

In endorsing poison pills, state statutes give their seal of approval to the use of poison pills should they be challenged in court. Poison pills permit shareholders, other than the potential acquirer, to purchase shares in either the target or surviving company at a price below market value. The purchases dilute the voting power and value of the acquirer's shares.

Absent statutory endorsements, companies must rely on court precedents to legitimize poison pills. Most courts have accepted them, though there have been exceptions. Delaware, for example, has an extensive body of case law on defensive tactics. Because legal precedents, such as Moran vs. Household International, Inc. (1985), uphold the indefinite use of pills in Delaware, a statutory pill endorsement is unnecessary.

Some state endorsements include more cautious language than others. In New York and North Carolina, for example, poison pill endorsements include language emphasizing that the use of a shareholder rights plan is subject to judicial review, and that such review will ensure that shareholder interests are considered.

If poison pills are properly used to guard against two-tiered coercive tender offers, they can help net a higher tender price for shareholders. If, however, pills are used to thwart legitimate bids, they only serve to entrench management. In either case, shareholders should be permitted to vote every two or three years on the redemption of a pill.

In practice, poison pills are adopted and, in most cases extended, without shareholder support. As a result, legislative endorsements of pills designed to inhibit court challenges rob shareholders of the only remaining recourse they have in challenging a board's abusive employment of a pill. Pill endorsements, at the very least, should allow for judicial review.