poison pill workaround?
Hi,
I got a question regarding a take over defense called the poison pill (or formally shareholder right plan).
A poison pill allows the existing shareholders to buy new shares at a deep discount an the event if a take over and depending on the state and country needs only board approval or requires approval by existing shareholders.
My question:
If a poison pill is put in place and potential hostile buyer could still buy the company at the desired price if the shareholders agree to sell their existing shares at a discount.
Lets say the company is traiding at 100 € and in the case of a hostile takeover the company will trade at 50 € (taking into account the new shares - market cap has not changed). If a buyer where to offer shareholders 60 € per share (10 € control premium) then the effect if the poison pill would be mitigated.
It might be a bit more complicated then the above example because if the poison pill defines the control threshold at 20%, then the first 20% of shareholders would need to get 120 € - but the idea is the same.
Is my thinking correct ?
I assume not ;)
But why?
Thanks,
Chris
Why would the existing shareholders sell at such a steep discount to the market price? The idea behind the poison pill is that the existing shareholders can keep a hostile takeover at bay by controlling x % of the company by buying more discounted shares. It wouldn't make sense for them to sell those to a potential acquiring company for a steep discount under market price. The takeover company would still have to pay a premium to market price hypothetically.
Sorry my wording was not clear enough.
In case of a hostile take over the company will trade at 50 - meaning that the number of shares has doubles (each investor now holds 2 shares values at 50 each for every previous share valued at 100 - I know this is technically not entirely true because they can sell their purchasing right...)
So if the buyer offers 60 per share the shareholders would make a profit of 20 per original share held (= premium payed).
So hypothetically could a hostile buyer use this as a workaround for a poison pill?
Yes ofc. The objective of the poison pill is that the existing stockholders have the option to increase their holdings in order to maintain their ownership %. If they wanted to sell it doesn't really matter if there is a poison pill in place or not.
You do realise that in your scenario, the buyer is now offering EUR 60 for twice as many shares, i.e. EUR 120 on the original share count. If shareholders want to accept an offer, there is nothing that anyone can do about it. What a poison pill does is make that offer more expensive for a potential bidder.
Generally, the way a poison pill works is that it discriminates between the bidder and other shareholders, and significantly dilutes a potential bidder's shareholding via a deeply discounted rights issue or other variants. Typically, the ability to do a rights issue will be triggered by the bidder reaching some shareholding level (i.e. wasting the money they spent accumulating their initial shareholding).
From a practical point of view (since your numbers are in euros), regarding your hypothetical control threshold of 20%, there are very few European countries where you can treat shareholders differently in a public acquisition (i.e. pay some shareholders more than others), and it is effectively impossible in the UK.
Will a poison pill will also allow the buyer reaching the threshold to buy shares at a deep discount ?
So basically a poison pill will not work and not make it more expensive for the buyer if shareholders can be treated differently in an acquisition.
Correct?
Thanks
The opposite - the whole point is that every shareholder except the bidder gets to buy shares at a discount. e.g. let's say the bidder spent 100m acquiring a 20% stake before the poison pill got triggered, and they can't subscribe to a right issue and thus get diluted down to 5%, they've now just spent 100m on a 5% stake.
If you can't treat shareholders differently, then this isn't possible, and the bidder would be allowed to subscribe to the rights issue and maintain their stake.
Everything (or at least the conclusion) is incorrect.
Upon a hostile bidder reaching a pre-identified percentage (usually 20% of outstanding shares), the poison pill will become effective. At this time all shareholders, excluding the hostile bidder, have the right to purchase additional shares for a nominal sum.
After exercise, the hostile bidder (who initially had 20%+ in our example) will have less than 20%. Once he buys more shares and reaches the 20% threshold, the poison pill "reloads" and the shareholders, again excluding hostile bidder, will have the option to purchase more shares.
This scenario will continue until the target drains its authorized but unissued share balance, which is listed in the target's charter.
It doesn't matter if the bidder offers a premium -- upon hitting the relevant threshold the pill becomes effective, and post dilution the pill reloads.
Best, Ex V5 M&A Lawyer
Disclaimer: This is not legal advice. I am not your lawyer. This information should not be relied upon in any way for any purpose. Legal representation should be sought from an alternative source.
"Lets say the company is traiding at 100 € and in the case of a hostile takeover the company will trade at 50 € (taking into account the new shares - market cap has not changed). If a buyer where to offer shareholders 60 € per share (10 € control premium) then the effect if the poison pill would be mitigated."
I think what is confusing you is that the shares purchased aren't due to a split. It is an additional issue, so the market cap actually has changed, it's essentially a built-in first right of refusal for shareholders that is triggered when someone is attempting to purchase a controlling interest.
"From a practical point of view (since your numbers are in euros), regarding your hypothetical control threshold of 20%, there are very few European countries where you can treat shareholders differently in a public acquisition (i.e. pay some shareholders more than others), and it is effectively impossible in the UK."
Interesting. I know that HK requires that publicly traded entities treat all shareholders equally, hence no separate class of shares or poison pill like provisions. In fact Alibaba, the most coveted prospective tech IPO since facebook, has been in negotiation with the SEHK to find out ways around this requirement else it would list on the Nasdaq instead.
It is good to know that the same requirement also applies in most of Europe. I guess you can't do different classes of shares a la Facebook in the UK either?
Not 100% sure on this, but I don't think new issuers can issue multiple share classes (with different voting rights) in the UK if they are applying for a premium listing (i.e. eligible for inclusion in the FTSE). There may be some existing companies who have been allowed to keep dual-class structures if the voting rights are proportionate to the economic interest, but again, not sure of any specific precedents.
The UK is generally quite good on regulation, and it's most driven by the need to protect minority shareholders. EU is starting to come in line. Switzerland is not great (e.g. it is easier to de-list and squeeze any hold-outs if you fail to acquire 100% of a target via tender offer).
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