A reader writes:
After reading your post on poison pills, I am intrigued, have they been universally accepted? The flip over right seems especially troubling as I can not grant a right to you to purchase my neighbor's house for half price. As it seems this is what the target's board is attempting to do.
In Moran v. Household International, 500 A.2d 1346 (Del. 1985), the Delaware supreme court upheld a flip-over pill against challenges based on both the board’s authority and the board’s fiduciary duties. A key issue was whether DGCL section 157 authorized the flip-over pill. DGCL section 157 allows the corporation to issue rights, but does not facially authorize the issuance of rights for takeover defenses purposes. Worse yet, or so it seemed, section 157 only explicitly authorized rights "entitling the holders thereof to purchase from the corporation any shares of its capital stock." How could Household issue rights that purport to give its shareholders the right to buy shares of another corporation?
In Moran, the court analogized the Household pill to the anti-destruction provisions commonly found in convertible securities. Anti-destruction clauses are a common feature of convertible securities. They give holders of target company convertible securities the right to convert their securities into whatever securities the acquiring company is offering in exchange for target company common stock. Because anti-destruction provisions are valid, the court upheld the pill. For more detail, see my book Mergers and Acquisitions, which has a long chapter devoted to takeover defenses.
