Academic journal article Journal of Corporation Law

Shareholder By-Law Amendments and the Poison Pill: The Market for Corporate Control and Economic Efficiency

Academic journal article Journal of Corporation Law

Shareholder By-Law Amendments and the Poison Pill: The Market for Corporate Control and Economic Efficiency

Article excerpt

I. INTRODUCTION

The poison pill represents one of the most potent defensive tactics in a board of directors' arsenal when responding to an attempted hostile takeover.1 In many instances, this tactic has effectively prevented a hostile takeover from occurring (and the resulting premium to shareholders being paid).2 Recently, institutional shareholders have begun the practice of proposing by-law amendments that either prohibit a corporation's board of directors from adopting a poison pill or force it to redeem a pill already in existence.3

These by-law amendment proposals raise significant questions about the appropriate allocation of corporate power between shareholders and directors.4 Do shareholders have the power to make such proposals? Alternatively, is the redemption of poison pills within the exclusive province of the board of directors?5 Where should the power reside?6 If shareholders do have the power to prevent directors from adopting poison pills, do they also have the power to force the redemption of a pill that is already in place?7

This Note begins by examining the historic tension between the powers of shareholders and boards of directors.8 It proceeds to discuss the recent heightening of this tension in the context of takeover defenses.9 Specifically, this Note examines the poison pill and its recent, important role in the historic struggle for corporate control between boards of directors and shareholders.10

Part III delves into the statutory framework regulating the conflict between shareholder and director power. It argues that the best reading of the Delaware statutes gives shareholders the power to propose and adopt by-laws relating to the adoption and redemption of poison pills. In addition, Part III examines formulations of the line between permissible and impermissible shareholder by-laws.

Part IV argues that, from an economic perspective, even in the absence of persuasive statutory authority on the subject, shareholders should have the power to propose and adopt by-laws that regulate the adoption and redemption of poison pills. Part IV argues that economic efficiency is enhanced when shareholders have the power to propose and adopt by-law amendments regarding the prohibition and redemption of poison pills.

II. NATURE AND DEVELOPMENT OF THE PROBLEM

The appropriate allocation of corporate power between shareholders and directors has long been the subject of debate.11 In the hostile tender offer context, this debate surfaces in the tension between the shareholders' right, as the residual owners of the corporation, to accept a premium for their shares and the role of the board of directors in running the company, including the power to respond to both real and potential threats to the corporate existence, such as hostile bidders.12 Indeed, the board of directors has a "fundamental duty and obligation to protect the corporate enterprise, which includes stockholders, from harm reasonably perceived, irrespective of its source."13 However, as the Delaware Supreme Court has aptly noted, the takeover context contains the "omnipresent specter" that a board will act in its own best interests.14 In other words, the Delaware Supreme Court has recognized the possibility that the board's real purpose in adopting defensive tactics may be entrenchment based upon board members' selfinterests, rather than the maximization of shareholder wealth. 15

A. An Introduction to Poison Pills

Both directors and shareholders have adopted various tactics over the years to improve the strength of their respective positions in the struggle for corporate power.16 Directors have adopted new defensive tactics to thwart hostile bidders, while shareholders have attempted to find ways around them.17 The most prominent of these tactics has been the poison pill.18 Although there are different varieties of poison pills that function in different ways, the following discussion represents the structure and operation of a typical poison pill. …

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