Tag Archive: NACD Key Agreed Principles

NACD Insight & Analysis: Delaware Courts Reconfirm Poison Pills

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The poison pill is back in the news.

Formally known as a shareholder-rights plan, business news has been flush with reports of companies adopting the provision. Well-known companies—such as Barnes & Noble, Airgas and most recently Family Dollar Stores, Inc.—have recently implemented shareholder-rights plans in the face of takeover bids. While poison pills are often controversial and their use is strictly limited in Canada, Australia and the U.K., the Delaware Chancery Court recently upheld their use in the U.S., a decision reinforced by the Delaware Supreme Court. In the new environment of increased investor participation, directors may choose to revisit the implications of the poison pill.

The poison pill was created by Martin Lipton, a noted mergers and acquisitions lawyer with the business law firm of Wachtell, Lipton, Rosen, and Katz in the early 1980s. A response to activist investors gaining control of companies through either the proxy statement or share purchases, the poison pill earned its name from its impact—impairing both the company and the bidder. Following specific trigger events, such as a large equity acquisition by an entity, the shareholder-rights plan gives shareholders the right to buy additional stock at a discounted price. In the commonly used “flip-in” style, all shareholders, except the acquirer, can purchase additional discounted stock. The flood of equity purchases thus dilutes the purchasing power of the acquirer, but also devalues the current value of company stock.

Popular through the 1990s, many shareholder-rights plans were dismantled in the 2000s, likely the result of decreased M&A activity and shareholder pressure. When used in combination with a staggered board, these provisions can form an effective method of board entrenchment, a point of contention with shareholders. NACD’s Key Agreed Principle VIII: Protection Against Board Entrenchment, recommends that “governance structures and practices should encourage the board to refresh itself.” Many also view the decline of poison pills as the result of proxy advisory services’ recommendations. For instance, Institutional Shareholder Services recommended a “no” vote for companies that renewed an expiring pill that was not put to a shareholder vote within one year.

Why, then, the resurgence in use of poison pills? Many companies saw their market value decline as a result of the recent economic crisis, creating more opportunities for hostile takeovers. Now in the midst of a recovery, M&A activity has picked up as well. Directors have a fiduciary duty to provide the greatest possible shareholder value in a transaction. In the case that directors feel they are receiving an inadequate bid, a poison pill can provide the board with time to deliberate and negotiate a better offer for shareholders. In the case of Airgas, the Delaware Supreme Court upheld the use of a shareholder-rights plan as “a reasonable response to a threat posed by an inadequate offer.”


NACD Insight & Analysis for September 10, 2010

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As noted this week in national news headlines, the SEC has seen an uptick in fraud tips since the passing of the Dodd-Frank financial legislation. Previously, informants were rewarded with a maximum of 10 percent of sanctions. The new financial laws, however, raise this potential bounty to as much as 30 percent of the penalties paid to the SEC. The article notes that the new whistleblower reward program has the potential to create inefficiencies by inciting employees to report fraud directly to the government, rather than using the established channels within the organization.

To establish a healthy and productive corporate environment, directors must exemplify and encourage an ethical culture. According to the NACD Key Agreed Principles, “the tone of corporate culture is a key determinant of corporate success.” Governance practices that promote integrity and ethics are a feature of successful, sustainable organizations.

Signs* of a positive corporate culture include leaders who:

  • Provide employees access to information that is relevant to the strategic direction and performance of the company
  • Keep their promises and commitments
  • Make decisions openly
  • Accept responsibility for wrongdoing, and
  • Reward performance that supports transparency

*Findings from the Ethics Resource Center’s National Business Ethics Survey 2009, p. 22