Next Step Is Hazy in Battle Over the Poison Pill
March 31, 2011, 6:53 pm
NEW ORLEANS — A mergers and acquisitions panel at the Tulane Corporate Law Institute focused on the future of the poison pill takeover defense on Thursday after Airgas won its battle against its hostile bidder, Air Products and Chemicals. That future is hazy.
The debate centered on whether the Airgas decision was rightly decided in Delaware Chancery Court and also on how the case would be applied in the future.
Given that the panel included four expert New York takeover lawyers, it was not surprising that they largely thought the decision was a good one. Message to Tulane conference organizers: It might help to have a diversity of voices next year, perhaps a plaintiffs’ lawyer.
The one possible dissenter on the panel appeared to be the most important one, Vice Chancellor Leo E. Strine, Jr. of the Delaware court. While he avoided the question of whether the case was rightly decided by his colleague, Chancellor William B. Chandler III, he did say it was still an open question in Delaware. This is because the Airgas case was decided in the lower court, not the higher Delaware Supreme Court and 1980s precedent might still allow a court to rule the other way.
Despite Vice Chancellor Strine’s musings, the rest of the panel appeared skeptical that Airgas did not reflect the current will of the Delaware Supreme Court or that it would be anything other than controlling precedent for the next hostile bid. The general consensus is that after Airgas, the Delaware courts would be unwilling to order a poison pill redeemed.
In this light, there was a discussion about how to circumvent the Airgas decision. The main route discussed was the election of directors to a board by a hostile bidder.
But if a target company has a staggered board, like Airgas does, a bidder can only elect one-third of the target’s directors in any given year. In such a circumstance, the issue discussed was whether directors elected by a bidder to a target board could be directed to endorse the hostile bid. Vice Chancellor Strine was adamant that he believed such directors did not have a fiduciary duty to maintain a poison pill. But he did not speak to the bigger issue of whether these new directors could be required by shareholders electing them to endorse the hostile bid. The end result is that the issue of how to circumvent a poison pill and staggered board remains an open question, particularly the scope of latitude directors elected by a bidder to a staggered board.
In other words, there was no clarity about what the market or case law would look like other than agreement that the Airgas decision had strengthened the hands of targets.
The discussion then turned to go-shop agreements, which allow a target company to seek a higher bidder after it agrees to a deal. All in all, the panel was fairly skeptical of go-shops and their increasing use in both private equity and strategic deals. Robert Spatt of Simpson Thacher & Bartlett discussed the increasing use of go-shops by strategic bidders, in addition to those in private equity deals. According to Mr. Spatt, there were seven deals with a go-shop agreements in the past year, and two were jumped. He questioned the use of these mechanisms in strategic deals, saying this may upset what is a carefully negotiated match.
In contrast, in a private equity deal, the target may not care about its suitor as much. Antonio Weiss, the head of mergers and acquisitions at Lazard, noted that size was one of the more important things in the effectiveness of go-shops, with such agreements being more effective with smaller targets, depending the availability of financing.
Vice Chancellor Strine stressed that corporate boards should have a policy in place before they were caught in a deal with management involvement in the bidding group. He emphasized that a go-shop agreement in such a situation was not a cure-all for mistakes made in the sale process. In other words, in cases like Del Monte Foods and J. Crew, the simple presence of a go-shop did not cure prior defects in the sale process.
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