Securities Law Section



Message from the Chair

Section Chair: 


 
Charles Niemeier
Williams & Connolly LLP
Washington, D.C.

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The Federal Bar Association - Securities Law Section is a proud sponsor of the virtual museum and archive of the history of financial regulation at www.sechistorical.org. While the museum is free and accessible to everyone at all times, the Section will highlight specific material and information within the museum on securities law issues in the coming months, providing current and prospective Section members with unique insight and context.

Classic spy movies share many tropes from tuxedoed secret agents to thrilling car chases. But there is one more grisly than the rest, the poison pill. In the movies, the hero finally tracks down the villain, who, before he can say a word, ingests the pill and takes his secrets to the grave.

In the high-stakes world of mergers and acquisitions, the “poison pill” has a less grim role as a defense against an unwanted bidder’s efforts to seize control of a company from incumbent management. In this context, the poison pill was first used in 1982, during the era of hostile takeovers, by Martin Lipton, a prominent lawyer at New York law firm Wachtell, Lipton, Rosen & Katz. The most common type of poison pill is a “shareholder rights plan” which gives stockholders the ability to buy more shares at a discounted rate if one shareholder acquires a threshold percentage of the company’s shares. For example, a poison pill might be activated if any one shareholder obtained 30 percent of a company’s shares. At this point, every other shareholder would have the right to buy new shares at a discounted rate, thereby diluting the initial shareholder’s purchase.

Poison pills were controversial from the start. In 1984, questions about their validity came to a head when the board of Household International voted to adopt a shareholder rights plan to ward off future takeover bids. John Moran, a member of Household’s board and also the chairman of Household’s largest shareholder, Dyson-Kissner-Moran Corporation, filed suit in the Delaware Court of Chancery to invalidate Household’s pill. Using the two-pronged Unocal test, developed by the Delaware Supreme Court in Unocal Corp. v. Mesa Petroleum Co., the Court of Chancery upheld Household’s shareholder rights plan. When Moran appealed, the Delaware Supreme Court affirmed the Court of Chancery’s ruling. Moran v. Household International thereby established the validity of poison pills as a defensive measure against takeovers.

In the years since Moran, poison pills have remained effective boardroom tools in such forms as preferred stock plans, flip-ins, flip-overs, and voting plans. But rather than taking corporate secrets to the grave, these poison pills, so long as they stand up to the Unocal test, permit the companies that use them to live on, safe from the threat of hostile raiders

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