Moran v. Household International, Inc.

This decision approved the “rights plan” a/k/a “poison pill” invented by Martin Lipton. “Rights plan” may sound innocuous. But it completely transformed US takeover law and practice.The pill has only one goal: to deter the acquisition of a substantial block of shares by anyone not approved by the board. It does so by diluting, or rather threatening to dilute, the acquired block. If anyone “triggers” the pill by acquiring more than the threshold percentage of shares (usually 15%), the corporation issues additional shares to all other shareholders. The number of additional shares is generally chosen so as to reduce the acquirer’s stake by about half. Needless to say, that would be painful – arguably prohibitively painful – to any would-be acquirer.Question: How does the pill compare to DGCL 203 – what are their respective trigger conditions, and what are their consequences for the acquirer if triggered? (I recommend that you consult the simplified version of section 203 on simplifiedcodes.com. Note that section 203 was completely overhauled in 1988; the Moran opinion quotes the old version.)The pill ingeniously obscures this discriminatory mechanism in complicated warrants. The corporation declares a dividend of warrants to purchase additional stock or preferred stock. Initially, these warrants are neither tradeable nor exercisable. If anybody becomes an “acquiring person” by acquiring more than the threshold percentage, however, the warrants grant the right to buy corporate stock for prices below value. Of course, all shareholders will then rationally choose to exercise the warrant. So what is the point? The point is that by their terms, the warrants held by the acquiring person are automatically void.(The description of the pill in Moran may read slightly differently. The reason is that the industry standard pill has evolved since Moran. You can find a contemporary example here.)The pill is extraordinarily powerful. In the 30 years since Moran, only one bidder has dared triggering the pill, and that was one with a particularly low trigger of 5% (chosen to preserve a tax advantage). The exercise of the rights did not only dilute the acquirer but caused massive administrative problems (a lot of new stock had to be issued!), leading to a suspension of issuer stock from trading. The issuer, Selectica, also violated the listing rules. See here. What this shows is that the pill really is designed purely as a deterrent – it is intended never to be triggered. It’s MAD (Mutually Assured Destruction) intended to keep out the unwanted acquirer, nothing else.The upshot is that nowadays no Delaware corporation can be acquired unless the board agrees to sell. The pill has stopped not only hostile two-tier bids, but all hostile bids. To be sure, a would-be acquirer could attempt to replace a reluctant board through a proxy fight. But one proxy fight may not be enough, if and because the corporation has a staggered board in its charter (cf. Airgas below). In any event, the point is that board acquiescence is ultimately indispensable. The acceptance of the pill was thus a fundamental power shift from shareholders to boards in dealing with “hostile” offers (read: offers that the board doesn’t like).Perhaps understandably, the Moran court did not fully understand these implications. Or perhaps it didn’t want to? The SEC’s amicus brief certainly predicted as much. As it were, the Court gives mainly technical, statutory reasons for approving the pill. But as in Schnell, the Court could have brushed those aside since “[t]he answer to that contention, of course, is that inequitable action does not become permissible simply because it is legally possible.” Why didn’t it? Should it have?