In brief

  • The US Delaware Court of Chancery recently considered a case where a target board repeatedly invoked its shareholder rights plan (poison pill) to fend off a hostile cash bid.
  • The court reinforced the existing US view that the use of a shareholder rights plan is a valid takeover defence citing that, among other things, ‘inadequate price [is] a valid threat to corporate policy and effectiveness’ and ‘selection of timeframe for achievement of corporate goals … may not be delegated [by a target company board] to shareholders’.
  • This is in stark contrast to the Takeovers Panel’s policy on frustrating action, which is based on the policy that target shareholders rather than the target’s board should determine the outcome of takeover bids.  

Shareholder rights plans/poison pills

Shareholder rights plans (sometimes known as ‘poison pills’) are a form of takeover defence commonly used in the US. A shareholder rights plan typically gives existing shareholders of a target company (excluding the bidder) the right to buy shares in the target at a discount, diluting the interest of the bidder and raising the cost of the bid.

A shareholder rights plan usually needs shareholder approval to be adopted, but once in place, provides the board with discretion as to whether and when the plan will be used. This generally forces a bidder to negotiate with the board of the target company and gives the target time to seek out competing bidders.

Shareholder rights plans have recently been employed against Australian companies making offshore acquisitions, notably in relation to BHP Billiton’s bid for Canada’s Potash Corp and Equinox Mineral’s bid for Toronto listed Lundin Mining Corp.

Background

The recent US Delaware case concerned a bid by Air Products & Chemicals Inc for Airgas Inc.

Air Products spent the better part of a year pursuing a cash takeover of Airgas. Despite Air Products steadily increasing its offer price from US$60 per share to US$70 per share, the board of Airgas unanimously maintained that Airgas was worth US$78 per share and resisted the takeover by relying on its shareholder rights plan.

While defensive tactics are not unusual in US takeovers, the Air Products situation was notable for:

  • the length of time that the Airgas directors resisted Air Products takeover
  • the fact that the resistance was to a fully financed cash bid, and
  • the fact that three Air Products nominees appointed to the Airgas board during the bid ultimately supported the Airgas board’s resistance to the bid.

Findings of the Delaware Court of Chancery

Air Products challenged the use by Airgas of its shareholder rights plan. This required the court to consider the ‘fundamental question’ of ‘who gets to decide when and if the corporation is for sale?’ Ultimately, it held that:

the answer must be that the power to defeat an inadequate hostile tender offer ultimately lies with the board of directors.

When reaching its decision, the court noted the following key considerations:

  • longstanding Delaware Supreme Court precedent validated the use of a shareholder rights plan as a takeover defence
  • resistance to a takeover bid by target directors, including the exercise of a shareholder rights plan, must be justifiable under the ‘Unocal’ standard, ie the directors must show:

that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed, and demonstrate that their defensive response was reasonable in relation to the threat posed

  • the Airgas board of directors met the standard in Unocal, as evidenced by engaging three independent financial advisors, each of whom concluded that the price offered by Air Products was clearly inadequate, and
  • strong Delaware Supreme Court precedent recognised ‘inadequate price as a valid threat to corporate policy and effectiveness’ and also ‘made clear that the selection of a time frame for achievement of corporate goals . . . may not be delegated to the stockholders’.

On that basis, the court concluded that the Airgas board of directors met the test set out under Unocal by identifying inadequate bid price as a legally recognised threat to Airgas and proving that its actions in defending the bid by relying on the shareholder rights plan fell within a range of reasonable responses proportionate to that threat.

Contrast to the Takeovers Panel’s policy on frustrating actions

The decision in Air Products demonstrates the contrast between the Delaware and Australian positions on when, if at all, target shareholders must be given the opportunity to consider a takeover bid.

The US approach is premised on the idea that it is inappropriate for target directors to delegate decisions relating to a company’s future, including those relating to a takeover response, to shareholders.

In contrast, the Australian approach, contained in the Takeovers Panel’s policy on frustrating action in Guidance Note 12, provides that shareholders should decide on actions that:

  • interfere with the reasonable and equal opportunity of the shareholders to participate in a change of control proposal, or
  • inhibit the acquisition of control over their voting shares taking place in an efficient, competitive and informed market.

While the line in each jurisdiction is clear in relation to actions that are destructive to a bidder and target shareholders (ie in both Australia and Delaware, a proposal to sell ‘crown jewels’ as a response to a hostile takeover bid would not be defensible), drawing the line on when and if shareholders should be given the opportunity to consider a takeover bid is still a difficult balancing exercise.