Companies resisting overtures through the pursuit of poison pill provisions risk destroying value in the company, while exposing themselves to potential shareholder action.
That is the word from Clive O’Connell, partner at Goldberg Segalla Global, who tells Bermuda:Re that introducing such mechanisms in order to ward off potential suitors can represent a calculated risk.
“By doing so you run the risk of destroying value in the company, exposing yourself to shareholder action and possibly even D&O claims associated with the provision”.
It remains a strong defensive mechanism to maintain the status quo however, one that will give management time to highlight the value of the company’s existing strategic approach, as it looks to sustain its existing position. “The risk is some shareholders might not see it that way.”
The more commonly used ‘flip-in poison pill’ allows existing shareholders to buy more shares at a discount, enabling those that support the board to build up their share volume and voting rights, making the acquirers task of acquiring the company that much more difficult, explains O’Connell.
The less common ‘flip-over poison pill’ allows shareholders to buy the merged company’s shares at a discount after a merger, making the deal less attractive to the acquirer.
Poison pill provisions are not universally accepted as a valid means to fend off unwanted overtures and O’Connell says that acquirers on occasion go to court to oblige the company to set aside any poison pill provision.
The potential acquirer can also look to persuade other shareholders that such a provision is not within their best interests, particularly if they can make a case regarding the value of a combined entity.
The potential acquired can respond in its turn “by persuading shareholders not to sell, or seeking a white knight to outbid the aggressive purchaser”, says O’Connell. Others may want to become acquirers themselves.
Goldberg Segalla, M&A, insurance