Takeovers Research Papers - Academia.edu (original) (raw)

The spread of the Covid-19 pandemic and the related containment measures have immediately affected the market: namely, through a significant decrease of the stock price of the largest listed companies, sometimes resulting in a real collapse.
It is not easy to predict how this crisis will evolve. Meanwhile, the present is already posing some remarkable challenges to the legal systems, by putting legal strategies and judicial standards to the test. Every jurisdiction is currently subject to unexpected and unexplored tensions; and the field of corporate law is no exception.
US takeover defenses and especially shareholder rights plans, colloquially known as «poison pills», are an example of this. During the first months of the crisis, a large number of public companies have suddenly adopted poison pills. The increase is exponential: since March 2020, at least 45 large companies have announced the adoption of shareholder rights plans. It is a remarkable figure, if we consider that only 25 among the S&P 500s featured active poison pills at the end of 2019.
This fact comes as no surprise. A general relationship between poison pills and times of crisis has already been proven. The current crisis clearly makes the case for such a relationship. In fact, the recent decrease of the stock price has left many corporations exposed to hostile takeovers: raiders could exploit a stock price which is not reflecting the actual value of the company. What’s more, shareholders might be induced to accept an unfair price. Because of the crisis, they might be experiencing a liquidity shortage and might be keen to accept an unfair bid, selling the shares at a low price.
Therefore, shielding the shareholders from this potential risk (by adopting a poison pill) could be a “natural” reaction of the boards. In this light, the decision might look sound and reasonable. Nevertheless, the conflict underlying the poison pills remains: under the guise of protecting shareholders, directors might deploy defensive tactics only to secure their position, whilst there is no actual risk of exploitation for stockholders. As a result, this kind of defensive measure would simply discourage bidders and correspondingly deprive shareholders of the potential advantages of a bid.
After the «takeover waves» of the 80s and 90s, Delaware courts – followed by other jurisdictions – found the balance between these two conflicting interests through a judicial standard based on the existence of the «threat» to the company and the «reasonableness» of the related reaction (under the form of a defensive tactic). In other words, the adoption of a poison pill without a threat or as an unreasonable reaction to it would result in a breach of directors’ fiduciary duties.
Unsurprisingly, the standard significantly affected the decisions on this defensive measure. In addition, the growing importance of proxy advisors and their general opposition to most defensive tactics made this practice rather unpopular and doomed it to a progressive oblivion.
In the face of the recent return of the poison pills, some questions arise: first of all, whether the adoption is justified and effective as a protection during the crisis; or the crisis is just an excuse for opportunistic decisions and for securing directors’ positions to the detriment of stockholders. On one hand, the long-lasting debate on the ability of takeovers to serve as an effective monitoring device and ultimately to increase the shareholder value has never died down. Skeptics point out that the setting and assumptions in this context are mainly fallacious. On the other, we reckon that in the weeks after the adoption of the new poison pills, the share price of those companies rose. This could be a mere mean-reverting effect. But we must also consider that these novel “crisis” pills feature some peculiar characteristics: they have a short duration and are mostly subject to shareholders’ approval.
Proxy advisors stay vigilant; but they seem to be not against it in principle. Nevertheless, the fundamental question remains whether the standard adopted by Delaware courts is suitable to curb abuses and speculations while protecting legitimate behaviours. We contend that the extraordinary context we are experiencing could well be considered as a threat under Delaware’s standard; but the reasonableness must be carefully assessed by examining the grounds for the adoption of the pill and its specific features – such as duration, triggering threshold and shareholders’ power to approve or disable it.