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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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