Delaware Court’s Poison Pill Ruling is Bad for Shareholder Value

Back in January I wrote about poison pill plans – one of the biggest destroyers of shareholder value.  These nasty little board of directors tools are designed to prevent so-called “hostile” takeovers.  Instead what they do is prevent most bids for acquiring a business by making the cost of an acquisition artificially high.  Put in place back in the early 1980s by most of corporate America, poison pill plans effectively destroyed corporate “raiding.”

My preference as a shareholder is for there to be lots of bidders for my shares and those willing to pay a premium for those shares.  But if the price of me making that bid is made higher with the artificial mechanism of a poison pill plan, I just don’t make a bid for another business.

Fortunately, the legality of poison pill plans was finally called into question in a case that sat before the most important business court in the world, the Delaware Chancery Court.  The case was brought by Air Products and Chemicals against the board of directors of the company it was trying to acquire, Airgas.

Unfortunately, the judge ruling in the case upheld the legality of Poison Pill plans yesterday.  This is an extremely disappointing result.  When news that the Chancery Court was to review the case broke I called this story, “…the most important news of the new year, and one of the most important pieces of [business] news in the last 30 years.”  The reason is very simple, poison pill plans prevent the owners of a business (i.e. shareholders) from receiving full value for their shares.  Bids of these kinds are usually made by other businesses who have new ideas for how to unlock value in the target company.  But that usually means firing the management of the target company.  Those firing can’t take place if a poison pill plan is in place.

In fact, minutes after the ruling by the Delaware Chancery Court Air Products and Chemicals withdrew its bid for Airgas.  Air Products and Chemicals had bid $70 for Airgas, whose shares have been trading around $63.  In after hours trading, Airgas shares fell to around $60 per share.

If I am a shareholder of Airgas I would have loved to have an 11.0% boost to the value of my shares.  But now that opportunity is gone because of the poison pill plan being upheld by the Delaware Chancery.  Instead, in its place, my shares have now fallen in value by ~5.0%.  So in total I have lost around 16%.  So for whose benefit is the poison pill plan?

The argument by Airgas’ board is that the company was worth $78 per share.  Yet, if that were the case why wasn’t the board doing something to raise the stock price to that level?  The board could have approved a stock buyback program.  If it was short on cash it could have increased its share of debt on the balance sheet, used the proceeds from that debt to purchase shares in the open market.  For gosh sakes they could have actively tried to find a suitor who thought the business was worth $78 per share.

Folks, its subtle decisions like this that destroy the beating heart of capitalism – alias free enterprise – on a daily basis.

Jason