{"id":2992,"date":"2011-01-17T21:07:51","date_gmt":"2011-01-18T04:07:51","guid":{"rendered":"http:\/\/www.jasonapollovoss.local\/?p=2992"},"modified":"2018-08-15T20:47:10","modified_gmt":"2018-08-16T00:47:10","slug":"poison-pill-plans-are-bad-for-shareholders","status":"publish","type":"post","link":"https:\/\/jasonapollovoss.com\/web\/2011\/01\/17\/poison-pill-plans-are-bad-for-shareholders\/","title":{"rendered":"Poison Pill Plans Are Bad for Shareholders"},"content":{"rendered":"

One of the recurring themes of this blog has been criticisms of capitalism as practiced by corporate America<\/a>.\u00a0 I have specifically called for a reformation of corporate culture in the United States multiple times.\u00a0 One of the most egregious excesses of the corporation is the nearly unanimous use of “poison pill” plans by companies.\u00a0 Unfortunately, most of the general public, and most investors, don’t have a clue as to what poison pill plans are.\u00a0 Here is a brief overview of this devilish destroyer of shareholder value.<\/span><\/p>\n

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1.\u00a0 Poison pill plans were almost universally adopted by boards of directors without ever putting these plans to a shareholder vote.\u00a0 Instead, modifications were made to corporate “articles of incorporation.”\u00a0 That is, by a single vote that cannot be rescinded, these plans were put into place.<\/span><\/p>\n

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2.\u00a0 The poison pill plans were widely adopted in the 1980s when the business climate was one of the “corporate raider.”\u00a0 These folks were simply looking to buy low, sell high by buying under performing companies, making them more efficient, and then reselling them.\u00a0 The environment in the 1980s was one of hostility toward these folks.\u00a0 And in that environment poison pill plans were implemented nearly universally.<\/span><\/p>\n

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3.\u00a0 To ward off a “hostile” takeover is the goal of poison pill plans.\u00a0 Typically these plans only go into effect when two conditions are met.\u00a0 The first, is that the potential acquirer of a business must negotiate directly with the board of directors of a company to avoid the poison pill plan going into effect automatically.\u00a0 The second condition is that barring an acquirer dealing with the board directly, if the acquirer attempts to buy a controlling interest in the business, typically > 20%, then the pill plan goes into effect.<\/span><\/p>\n

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4.\u00a0 There are two types of poison pill plans…<\/span><\/p>\n

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The first is known as a “flip in.”\u00a0 In this situation, when an acquirer crosses a threshold percentage amount of ownership of a target company then current shareholders (except the acquirer) are often automatically issued more shares in the business and at deeply discounted prices.\u00a0 This is typically done in some fixed proportion.\u00a0 So if the flip in poison pill is triggered, current shareholders may receive the right to purchase 0.4 new shares for every share they already own.\u00a0 In other words, the takeover price is increased because the total number of shares outstanding increases dramatically, massively diluting the percentage ownership of the acquirer.<\/span><\/p>\n

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The second type is known as a “flip over.”\u00a0 In this situation current stockholders are given the ability to purchase discounted shares in the successor company.\u00a0 That is, if the acquisition is completed then current shareholders can purchase shares in the new company.\u00a0 The effect is the same as with a flip in poison pill plan.<\/span><\/p>\n

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5.\u00a0 The goal of the pill plan is to make the cost of an unwanted takeover prohibitive.<\/span><\/p>\n

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So what is the effect of a poison pill plan on the actual owners of the business; i.e. the shareholders; i.e. you and me?\u00a0 The argument by corporations for 30+ years has been that poison pill plans benefit shareholders by increasing the amount of money in shareholder pockets when “hostile” bids are made.<\/span><\/p>\n

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Overlooked is the fact that poison pill plans allow poorly run businesses to hide from responsibly running a business.\u00a0 For the surest protection against a poison pill plan is a well run business that results in a naturally high stock price that makes a takeover impossible.\u00a0 You see, takeovers only work because the prospective acquirer sees additional value that can be squeezed out from the business.\u00a0 Ultimately, a better run business means a higher share price for shareholders.\u00a0 But poison pill plans mean that the corrective force provided by the threat of a “hostile” takeover is removed.\u00a0 So there is no outside market force enforcing efficiency on the business.<\/span><\/p>\n

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Put bluntly, poison pill plans are anti-capitalistic.\u00a0 They predominately benefit board members and their management teams by ensuring that they can run a business for their own benefit to the detriment of shareholders.\u00a0 Disgusting.<\/span><\/p>\n

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Which brings me to the most important news of the new year, and one of the most important pieces of news in the last 30 years.\u00a0 Yes, really.\u00a0 Air Products & Chemicals launched a “hostile” bid for a rival business, Airgas.\u00a0 The bid triggered Airgas’s poison pill plan which Air Products & Chemicals is fighting in a Delaware court.\u00a0 Most importantly, a Delaware judge will be issuing a ruling in the next several weeks.\u00a0 This is important because most U.S. businesses are incorporated in Delaware because that state’s laws strongly favor corporations.\u00a0 So a change in the legality of the poison pill plan in Delaware will affect almost every important U.S. business.<\/span><\/p>\n

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Let’s hope that the Delaware judge recognizes the absurdity of poison pill plans and rejects their continued legality.<\/span><\/p>\n

 <\/p>\n

Jason<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

One of the recurring themes of this blog has been criticisms of capitalism as practiced by corporate America.\u00a0 I have specifically called for a reformation of corporate culture in the United States multiple times.\u00a0 One of the most egregious excesses of the corporation is the nearly unanimous use of “poison pill” plans by companies.\u00a0 Unfortunately, […]<\/p>\n","protected":false},"author":2,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_et_pb_use_builder":"","_et_pb_old_content":"","_et_gb_content_width":"","footnotes":""},"categories":[3],"tags":[],"class_list":["post-2992","post","type-post","status-publish","format-standard","hentry","category-the-blog"],"_links":{"self":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/2992","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/comments?post=2992"}],"version-history":[{"count":0,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/posts\/2992\/revisions"}],"wp:attachment":[{"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/media?parent=2992"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/categories?post=2992"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/jasonapollovoss.com\/web\/wp-json\/wp\/v2\/tags?post=2992"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}