US corporate poison pills give boards power over who owns the business
Thursday 28 Apr 2022 Author: Martin Gamble

The world’s richest man, Elon Musk seems to have prevailed in his $43 billion takeover of Twitter (TWTR:NASDAQ).

Initially though the Twitter board looked to prevent him from gaining ‘creeping’ control of the company by adopting a poison pill strategy which was popularised in the 1980s.

The aim was to stop Musk from increasing his stake by purchasing more shares in the open market. By doing so Musk could effectively have gained control of the company without paying a ‘control premium’.

How would this defence tactic have worked? Also known as a ‘shareholder rights plan’, it aims to dilute an aggressor’s shareholding.

If Musk breached 15% of Twitter’s share capital, the board was threatening to offer existing shareholders an opportunity to buy new shares at a discount to the prevailing price. The new shares would have greater voting rights.

The extra shares issued, which Musk would not have been allowed to purchase, would have increased the total number of shares in issue and reduced Musk’s percentage holding in Twitter. This would in theory would have made it prohibitively expensive for him to increase his stake.

In 2012 activist investor Carl Icahn purchased just under 10% of streaming content provider Netflix (NFLX:NASDAQ). The board immediately adopted the poison pill strategy which Icahn denounced as poor corporate governance.

A FAIRER SYSTEM

Poison pill tactics are not allowed under UK stock exchange rules which are designed to prevent ‘frustrating actions’. The idea is to give power to shareholders rather than a company’s directors.

UK boards must make arguments to convince shareholders not to accept offers from interested parties. Arguably, this is a fairer system because it puts owner’s rights above those of company directors.

The potential downside is it makes UK firms more vulnerable to opportunistic bids which might look attractive in the short term but can undervalue the long-term potential of a business.

However, the UK government protects companies of strategic interest from takeover via a blocking ‘golden share’. This protects BAE Systems (BA.), Rolls Royce (RR.) and some of Babcock International’s (BAB) dockyard assets.

In the Netherlands companies can defend themselves from hostile takeovers by creating a foundation or stichting.

This body issues preferred shares which are priced below the ordinary shares but have greater voting rights. Historically this structure has protected many family-controlled businesses.

In 2015, for example, Dutch pharmaceutical company Mylan (which merged with a division of Pfizer (PFE:NYSE) to create Viatris (VTRS:NASDAQ) in 2020) used this mechanism to fend off an attempted takeover by Israeli rival Teva (TEVA:TASE).

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