Are Dead Hand (and No Hand) Poison Pills Really Dead?

56 Pages Posted: 6 Jan 2010

See all articles by Peter V. Letsou

Peter V. Letsou

University of Memphis - Cecil C. Humphreys School of Law

Date Written: January 5, 2010

Abstract

Generally implemented by distributing rights to the corporation's shareholders to acquire new shares of common stock at below market prices, poison pills operate by threatening would-be acquirers with severe economic penalties should they proceed with acquisitions while the rights remain outstanding. Standard poison pills incorporate an escape valve, known as a redemption provision, which permits the target's board of directors to redeem the rights for a nominal purchase price until a person or group becomes the owner of the triggering percentage of the corporation's shares (typically 10% to 20%). This redemption power enables the corporation's managers to retain the power to sell the corporation, free from the debilitating effects of the rights, should they elect to do so. This redemption power, however, can also be used by hostile bidders who acquire control of the target's board of directors, through a proxy contest or otherwise, before acquiring the triggering percentage of the target's stock. Dead Hand and No Hand provisions are designed to prevent this route around poison pill rights, in the case of dead hand provisions, by restricting the power to redeem a poison pill to "continuing directors" and, in the case of no hand provisions, by limiting or eliminating the power of directors to redeem poison pill rights after a hostile bidder has acquired majority control of the target's board of directors. In Quickturn Design Systems v. Shapiro, the Delaware Supreme Court invalidated a no hand provision because, in the court's view, the no hand provision, once triggered, ousted the board of its fundamental power to negotiate the sale of the corporation. Most commentators assumed that the same logic invalidated dead hand provisions as well. This paper contends that this commonly held view of Quickturn is flawed primarily because the rationale offered by Quickturn, if extended beyond the facts of the case, would invalidate all poison pills, including those previously upheld by the Delaware courts. This is because all poison pills – even those without dead hand and no hand provisions – contain provisions that render the rights non-redeemable, thereby limiting the board's power to sell the corporation. Specifically, all poison pills become non-redeemable after a person or group acquires the specified triggering percentage of the target firm's stock. Accordingly, the paper contends that Quickturn should be read narrowly to invalidate no hand provisions, but not be extended to dead hand provisions which can be distinguished both in terms of their operation and in terms of their statutory basis.

Suggested Citation

Letsou, Peter V., Are Dead Hand (and No Hand) Poison Pills Really Dead? (January 5, 2010). University of Cincinnati Law Review, Vol. 68, No. 4, 2000, Available at SSRN: https://ssrn.com/abstract=1531912

Peter V. Letsou (Contact Author)

University of Memphis - Cecil C. Humphreys School of Law ( email )

One North Front Street
Memphis, TN 38103-2189
United States
901-678-4588 (Phone)

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