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3 Int'l Fin. L. Rev. 10 (1984)
Marty Lipton's Poison Pill

handle is hein.journals/intfinr3 and id is 202 raw text is: MERGERS & ACQUISITIONS Marty Lipton's poison pill Chase deKay Wilson No company feels safe from a hostile tender offer, but how far should the board of the target company go to defend their position without referring to the stockholders? The spate of hostile take-over battles in the United States has led corporations to turn to their lawyers for the fool-proof defence. The issue of convertible preferred stock is one way in which a US company may defeat a hostile takeover attempt. It is colloquially known as the poison pill and Martin (Marty) Lipton, co-founder of New York's Wachtell, Lipton, Rosen & Katz, is credited with its development. The poison pill is controversial. Wachtell, Lipton, a relatively small New York firm which has acquired an outstanding reputation in bankruptcy and merger work, is the only firm which advocates it use. Others are less enthusiastic. At best, the critics say, the issue of convertible preferred stock is only one of many ways in which a target company's board of directors may gain the power and position from which to bargain in a hostile tender. At worst, it enables the directors to entrench themselves and prevent the company from being sold. The most serious criticism is that in issuing the poison pill, the board prevents the shareholders from deciding for themselves whether the company should be sold. However, even the critics admit that it can work. As one investment banker/lawyer conmented, 'It's not a panacea, but I'm not prepared to say that it cannot work or that it should be outlawed. Like other M&A tactics it is sometimes thought to be beyond the boundaries of fair play. You have to present it to your clients as something they can do, but at the same time you have to point out its negative effects. It may burden another friendly bidder, and may also create very bad public relations'. Lipton defends the poison pill as a method of protecting stockholders from the ill effects of the different kinds of ploy that are common in today's M&A battles - especially the two-tier, front-end-loaded tactic. In this case, a bidder does not have to tender for all of the out- standing common stock of the company: it can bid for a small but controlling percentage and choose whether to purchase the minority shares later. If the bidder does decide to purchase the other shares, there is no guarantee that it will offer as high a price for them as it did to get the controlling block. This in turn can prompt a stampede to sell to the bidder. Shareholders may fear that if they wait, they risk not being able to sell their shares at all or have to sell them at a lower price. The scheme, claims Lipton, also protects the target company from partial offers by raiders which do not intend a second step until they can raise finance by using the assets and credit of the target. Lipton claims that the poison pill is designed to protect those stockholders who wish to retain their equity interest in the company. 'There's nothing poisonous about it. What it does is enable a minority shareholder of a company that has been acquired to maintain an equity investment, and protects him from being frozen out'. How it works Having decided that the bidder's offer is not accept- able, the target board issues to the stockholders a tax-free dividend in the form of convertible preferred stock. Each stock converts into a larger number of common shares. In response to an unsolicited tender offer by Brown-Forman in 1983, the Lenox Company issued convertible preferred stock to its shareholders. Each preferred stock holding would convert into 40 shares of common stock. Although the cash dividend on the original outstanding common stock is reduced, there is a dividend on the preferred stock that is usually large enough to result in the shareholder receiving greater cash payments than he did before the preferred stock was issued. This creates an incentive for the holder to refuse a tender. The poison is contained in the stock's flip-over provision. The flip-over is activated as soon as the bidder's acquisitions reach a 'control threshold' - ie, a International Financial Law Review May 1984

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