February 24, 2011
Shareholders could reduce the toxicity of corporate boards’ use of a “poison pill”—a device designed to block shareholders from considering a takeover bid—if they could replace board majorities more quickly, writes Harvard Law School Professor Lucian Bebchuk LL.M. ’80 S.J.D. ’84 in an op-ed that appeared in the Feb. 24, 2011, edition of the Wall Street Journal.
William Chandler of Delaware's Court of Chancery ruled Feb. 15 that a corporate board may use a poison pill for as long as it deems it warranted.
“Despite the Delaware court's decision, investors still have recourse—because a poison pill is powerful only as long as the directors supporting it remain in place,” Bebchuk writes. “If … a company's shareholders could replace a majority of its board more quickly, the board's power to block a takeover bid would be correspondingly weakened.”
An Antidote for the Corporate Poison Pill
by Lucian Bebchuk
In a major decision issued last week, William Chandler of Delaware's Court of Chancery ruled that corporate boards may use a "poison pill"—a device designed to block shareholders from considering a takeover bid—for as long a period of time as the board deems warranted. Because Delaware law governs most U.S. publicly traded firms, the decision is important—and it represents a setback for investors and capital markets.
The ruling grew out of the epic battle between takeover target Airgas and bidder Air Products. Air Products made a takeover bid for Airgas in 2010, increased it several times, and kept it open until last week's decision. Airgas's directors argued that defeating the premium offer would prove, in the long run, to be in shareholders' interests. As the Chancery Court stressed, however, the directors based their opinion solely on information publicly available to shareholders. Why should shareholders, who have powerful incentives to get it right, not be permitted to make their own choice between selling and staying independent? …
Read the full op-ed on WSJ.com (subscription required) or on the Harvard Law School Forum on Corporate Governance and Financial Regulation site.