The Enduring Illegitimacy of the Poison Pill

Abstract

The poison pill is the ultimate defense against a hostile takeover. From management's perspective, it is almost too good to be true. Originally, the poison pill was seen as a way to guard against the worst of hostile takeover tactics. It has been successful; the poison pill has virtually eliminated these tactics from the repertoires of hostile bidders. However, the poison pill is extremely potent, capable of preventing all hostile takeovers, regardless of their underlying merit. Thus, the poison pill eventually became the means to employ a "just say no" defense of resisting hostile takeovers, regardless of the interests of shareholders. The consequences of the poison pill to corporate governance have been tremendous. By severely restricting the market for corporate control, the poison pill has rendered management significantly less accountable to shareholders.

This Article argues that the courts should view the poison pill defense with far greater skepticism than they have thus far. At the time the poison pill was first considered, corporate law did not authorize corporations to employ poison pills. Even now, Delaware corporate law, fairly interpreted, does not authorize the use of the poison pill against typical contemporary hostile offers. In short, the poison pill was originally, and remains to this day, an illegitimate defense mechanism. Ultimately, the goal of this Article is to demonstrate that the poison pill is an illegitimate defense tactic that allows management to entrench itself at the expense of shareholders. While it is probably too late to expect the courts to strike down the poison pill, either on ultra vires grounds or otherwise, it is never too late for the courts to re-examine their deferential treatment of poison pills. If courts were to apply fairly the standards of review that they themselves have developed, the mischief currently caused by the poison pill would be greatly diminished.

Keywords: poison pill, takeovers, corporate governance

JEL Classification: K22