18.8 Poison Pills, Shareholder Rights Plans 51112.4.3 and Volume II). Topping fees are a variation of cancellation fees in the
US.^30
18.8 Poison Pills, Shareholder Rights Plans
In the US, the poison pill is the target board’s default takeover defence. The use of
poison pills has significantly raised the bidder’s costs in hostile tender offers and
reduced the frequency of hostile bids. Virtually all bidders prefer to approach the
target management with a proposal to negotiate.^31 However, there is a fundamental
difference between US law and the laws of the Member States of the EU. US-type
poison pills would not necessarily work in the EU. What are US-type poison pills,
and why would they not work in the EU?
US-type poison pills. A modern US-type poison pill consists of a shareholder
rights plan combined with three additional elements: a “flip-in” element; a “flip-
over” element; and a redemption provision.^32 (a) When adopting the poison pill,
the corporation issues to its stockholders rights to purchase stock. The rights are
not exercisable until a triggering event. The triggering event is that someone ac-
quires a certain percentage of the firm’s voting shares. (b) If triggered, the rights
give each holder, other than the stockholder that triggered the pill, the right to pur-
chase shares of the issuing corporation (flip-in) or of the acquirer (flip-over) at a
deep discount to then market price. The pill’s flip-over feature is typically trig-
gered if, following the acquisition, the target is subsequently merged into the ac-
quirer or one of its affiliates.^33 (c) Pending their exercise, the rights may be re-
deemed for a nominal value by the board. The exercise price exceeds the original
market price (meaning that the rights are originally out of the money).^34
In Moran v Household International,^35 the Delaware Supreme Court upheld Household In-
ternational’s flip-over pill as reasonable under the Unocal standard (for Unocal, see section
17.2 and Volume I).^36 Such poison pills have sometimes been used even in other countries.
For example, in Stena Finance v Sea Containers,^37 the Supreme Court of Bermuda con-
(^30) Bainbridge SM, op cit, pp 180–181: “Instead of specifying the dollar amount to be paid
if the merger is not consummated, a topping fee requires that the target pay the defeated
offeror a percentage of the victorious bidder’s acquisition price. In either case, the fee
ordinarily falls in a range of 1 to 5% of the proposed acquisition price. Payment of the
fee is commonly triggered by the acquisition of a specified amount of target stock by a
third party.”
(^31) Betton S, Eckbo BE, Thorburn KS, Corporate Takeovers. In: Eckbo BE (ed), Handbook
of Corporate Finance: Empirical Corporate Finance, Volume 2. North-Hollande/Elsevier,
Handbooks in Finance Series (2008), Chapter 15.
(^32) See Bainbridge SM, op cit, p 316.
(^33) See ibid, p 317.
(^34) See Betton S, Eckbo BE, Thorburn KS, op cit.
(^35) Moran v. Household International, Inc., 500 A.2d 1346 (Del. 1985).
(^36) Unocal Corp. v. Mesa petroleum Co., 493 A.2d 946, 955 (Del. 1985).
(^37) Stena Finance BV v Sea Containers Ltd (1989) 39 WR 83 (Supreme Court of Bermuda).