Delaware Chancery Court Upholds Poison Pill, Yet Again

May 5, 2014


On May 2, 2014, the Court of Chancery of the State of Delaware again upheld the shareholder rights plan, or “poison pill,” as a defense in Third Point LLC v. William F. Ruprecht, et al., and Sotheby’s. The case was surprising for the fact that yet another insurgent or hostile bidder sought to challenge the poison pill, but was unsurprising in its outcome.

Since Moran v. Household International, Inc. in 1985, the Delaware courts have consistently upheld the use by publicly traded companies of the poison pill as a defensive measure (so long as it did not contain a “dead hand” or similar feature). While Moran has remained settled law in Delaware for almost three decades, hostile bidders have nevertheless sought to mount challenges to the poison pill, most notably in Air Products & Chemicals, Inc. v. Airgas, Inc. in 2011 and Versata Enterprises, Inc. v. Selectica in 2010. And insurgents or activist shareholders have similarly brought challenges, most recently in Yucaipa American Alliance Fund II v. Riggio in 2009. All of these challenges have been rejected by the Delaware courts.

The Delaware Chancery Court similarly rejected the challenge in Sotheby’s when it denied the plaintiff’s motion to enjoin Sotheby’s annual stockholder meeting. The principal claim in Sotheby’s was that the poison pill, which contained a bifurcated trigger percentage consisting of a 10% trigger for an insurgent or hostile bidder, and a 20% trigger for a passive investor filing on Schedule 13G, was discriminatory to such an extent that the Sotheby’s board of directors breached its fiduciary duties under Unocal Corp. v. Mesa Petroleum Co. (and the sub-analysis of Blasius Industries, Inc. v. Atlas within the Unocal analysis). The court held that such a poison pill was a reasonable and proportionate response by the Sotheby’s board in response to a legally cognizable threat to corporate policy and effectiveness, and was not preclusive or coercive under Unocal. The court further held that the primary purpose of the poison pill was not to interfere with the stockholder franchise under Blasius.

The result in Sotheby’s was not unexpected. That is due, in part, to the fact that it has been almost 30 years since the Moran decision and the validity of the poison pill in Delaware, together with the fact that the U.S. securities laws themselves already make the rational distinction between “control” acquisitions of stock, resulting in the filing of a Schedule 13D, and “passive” acquisitions of stock, resulting in the filing of a Schedule 13G.

While the poison pill defense has been somewhat curtailed over the last decade by the actions of the proxy advisory services (resulting in many companies now preparing an “on the shelf” poison pill that is ready to be implemented in response to a threat), the decision in Sotheby’s is a reaffirmation that the poison pill defense is alive and well for Delaware companies.

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