Philosophy

Today is as fine a day as any for a broad statement about the glasses through which I view the world of proxy ballots, boardroom disputes, mergers and acquisitions, friendly or hostile -- the whole world of corporate control.

My view is simply that the shareholders of its company are the owners thereof, not in any overly-sophisticated, qualified, legalistic sense. But in the common sense plain-English meaning of ownership. Proxy fights are good things simply because they help remind the company management, their employees, of who they work for.

Managements tend to entrench themselves, to seek safety behind various procedural barriers. They like "staggered boards," for example. In this gambit, the shareholders are allowed to vote in or out only one-third of the boards at any one meeting. They justify this by talk of preserving continuity and experience, etc. But the empirical research shows that shareholders don't benefit from that continuity in any way that would show up in, say, the value of a company's stock.

http://www.researchmatters.harvard.edu/story.php?article_id=592

When challenged on their responsiveness to their shareholders, or lack thereof, incumbent boards and their apologists, the advocates of entrenchment, or of what one scholar calls "directorial primacy," like to say that if shareholders aren't happy with how the company is run, they can always sell the stock. They shouldn't have to, though, That's the point. They're owners, not renters.

If you live in a home with a leaky roof and you don't like it, you can move. The owner can then either fix the roof or find another tenant who'll tolerate the leak. Even if its your home, you might of course decide that fixing it is too much trouble, in which case you can sell.

But you, as owner of equity, also have the option of hiring a contractor who'll fix the roof. And if your contractor proves dilatory in doing this job, of firing him and hiring another.

What's a Poison Pill?

The term is employed so often in debates over corporate governance that we ought to be outfront here about just what it means.

A "poison pill" is a plan that increases the value of what existing shareholders are holding, when a potential acquirer accumulates more than a set amount of the equity.

Typically, such a by-law will provide that if one investor acquires more than, say, 10% of the company's equity, each of the other non-acquiring shareholders acquire the right to buy new stock at bargain prices. This dilutes the potential acquirer's holding, and requires that the acquirer pay more than it otherwise would in order to gain control of its target.

Company managements typically call them "shareholder rights plan," because that sounds better. Their effect upon most of the shareholders accorded these rights is probably negative, because if they deter potential acquirers from actually making such a move and passing the threshold they by definition lower the market demand for the stock.

Here's the URL for academic discussion of some of the issues that these provisions raise under Delaware law: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=659322

Sometimes the term "poison pill" is used more broadly for a range of anti-takeover measures. But I'll try to keep to the narrow, and thus the usefully specific, meaning of the term in my postings here. (Other measures with similar goals have equally colorful nicknames, like "shark repellent.")