On May 13 local time, musk tweeted that the acquisition of twitter was temporarily suspended and he would wait for more details to prove that the spam and false accounts on twitter were less than 5%. However, he soon added under this tweet that "we will still be committed to the acquisition". As soon as the news came out, Twitter's share price fell sharply on the same day, closing down 9.67% to close at $40.72, much lower than Musk's previous purchase price of $54.2 per share.
This is the latest round of Musk's acquisition of twitter in the past month.
On April 14, musk, who already holds 9.1% of twitter, made a takeover offer for twitter at a valuation of $43 billion.
The next day, twitter announced that it would implement a one-year shareholder rights plan (poison pill) to deal with Musk's acquisition plan.
The implementation of the poison pill plan forced musk to obtain the consent of Twitter's board of directors before he could implement his acquisition plan. Under such pressure, we speculated that musk had in-depth negotiations with the twitter board of directors and raised the offer, and finally the twitter board of directors agreed to Musk's revised acquisition plan.
With the launch of the poison pill program and Musk's increased offer, twitter announced on April 25 that it would accept Musk's latest $44 billion takeover offer. To be sure, the reason why the final purchase price increased by as much as $1 billion is largely due to the poison pill plan.
Since its inception, the poison pill program has gradually been regarded as the most convenient and effective anti takeover measure, and has changed the governance environment of American companies. As the twitter acquisition case shows, a company's board of directors can immediately implement the poison pill plan as a counter measure when it is aware of the acquisition threat. Such countermeasures can not only resist the M & a proposal that the board of Directors considers the price is low, so as to increase the bargaining chips of the board of directors, but also resist the investors that the board of directors does not support, making it difficult for them to obtain the control of the company.
In this process, many enterprises, including Chinese enterprises, have realized that by implementing the poison pill plan, they can achieve corresponding purposes in M & a price negotiation and company control disputes.
This paper will introduce the application and related disputes of poison pill plan: considering the large number of overseas structures in Chinese multinational enterprises, poison pill plan will play a more and more important role in the strategy of Chinese enterprises, and the resulting disputes will continue to emerge.
01
Origin of poison pill
The poison pill program originated in the 1980s. At that time, Wall Street giants led by Milken implemented a large number of highly leveraged capital mergers and acquisitions. In order to deal with these "barbarians at the door", anti takeover measures represented by the poison pill plan came into being. Since the board of directors of the company has the right to implement the poison pill plan without the approval of the shareholders' meeting, this tool has been welcomed by the management of large companies as soon as it came out.
After the Delaware Chancery Court confirmed the legitimacy of the poison pill program in 1985, a large number of American companies implemented the poison pill program. According to a 2002 study by institutional shareholder service, more than 60% of S & P 500 listed companies have implemented the poison pill program.
The poison pill plan implemented by twitter includes preferred stock purchase right, flip in right and flip over right. Among them, the inverted poison pill allows the company to issue additional shares to shareholders other than the acquirer at a preferential price when the acquirer's shareholding reaches a certain proportion, so as to significantly dilute the acquirer's shareholding ratio and voting rights, which is considered to be the core of the modern poison pill plan. Since the inverted poison pill set by twitter triggers a shareholding ratio of 15%, once musk acquires another 5.9% of the shares without the consent of the twitter board of directors, shareholders other than musk can purchase additional twitter shares at a price significantly lower than the market price and purchase 9 new shares per share. This means that if all shareholders exercise their rights, Musk's shareholding ratio will be diluted from 15% to 2%. Preferred stock purchase right poison pill and eversion poison pill also realize the equity dilution of the acquiring shareholders by issuing additional shares at a discount to ordinary shareholders other than the acquirer through a similar mechanism.
No matter what type of poison pill is, its core is to treat the acquiring shareholders differently. When specific conditions are met, the shares of the acquiring shareholders will be diluted by increasing the shares of other shareholders. The specific conditions here are generally set as the acquisition of shareholders' shares reaches a certain proportion of the total shares, and the poison pill can be triggered.
Such a mechanism obviously means an infringement on the interests of diluted shareholders. It also means that the poison pill plan will not only prevent external acquisitions by diluting existing equity, but also lead to adverse consequences such as hindering the free flow of capital and endangering corporate governance. Therefore, since its inception, the poison pill plan has triggered a series of lawsuits by diluted shareholders. Because many American companies set up their headquarters in Delaware for various reasons, most of these disputes occur in the Delaware court system.
02
Consensus and dispute
Since 1985, Delaware courts have followed the judgment criteria of Unocal v. mesa case when trying cases related to the poison pill plan, that is, they conditionally recognize that the board of directors can take such measures to reduce some shareholders' rights and interests when performing corporate governance responsibilities, and "strengthen the review" of the board of directors' decisions such as implementing the poison pill plan. To pass this review, the poison pill plan must be proposed by the board of directors to deal with an external threat, and the plan must be reasonable and good faith, that is, it is effective and appropriate relative to the threat it targets.
In 2011, air products & amp; In the case of chemicals, Inc. v. Airgas, the Delaware court of equity once again made it clear that the power to implement the poison pill plan was in the hands of the board of directors, not shareholders or the board of shareholders. If the board of Directors believes that the offer price of the acquisition offer is too low for reasonable reasons, it can implement the poison pill plan according to its fiduciary obligations.
In a series of cases involving the poison pill plan, although the Delaware Court adopted the standard of "strengthening review", it still adhered to its consistent board centrism, gave the board of directors the power to surpass the shareholders' meeting, and rarely found the poison pill plan invalid. Based on this attitude of the Delaware court and taking into account the relevant provisions of twitter, it can be expected that even if musk decides to file a lawsuit against Twitter's poison pill plan, the final result is likely to be unfavorable to musk.
In this regard, the board's use of the poison pill plan to prevent the company from being acquired at a low price, or the use of the poison pill plan to raise the price in M & A transactions, has been widely recognized for many years.
On the other hand, the poison pill plan is highly controversial in some cases, mainly when the board of directors uses the poison pill plan to prevent specific investors from gaining control of the company, including the board of directors supporting the original investors appointed by the board of directors and opposing the entry of new investors, as well as the board of directors supporting specific investors in the face of different mergers and acquisitions, Even when radical investors challenge the board of directors (for example, propose to replace the board of directors due to the wrong development strategy, low work efficiency, and even for the sake of serving private interests and filling private pockets), and launch the poison pill plan in order to protect the status of the board of directors.
Under these circumstances, it is questioned whether the board of directors still adopts the poison pill plan based on the overall interests. If the board of directors does not serve the overall interests of the company, but only the interests of individual investors or the board of directors, its decisions will no longer be supported and protected by law.
This problem is particularly significant when new investors may replace the board of directors: under the Delaware company law system, one of the most fundamental rights of corporate shareholders is to elect directors. If the board of directors claims that the threat it faces is that new investors may mistakenly replace the board of directors and change the company's strategic decisions after accumulating control, and these replacement and changes will have an adverse impact on the company's value, It is undoubtedly an infringement of the basic rights of shareholders, so it can not be supported by the court. Even Leo Strine, one of the most staunch supporters of the poison pill plan and former chief justice of the Delaware Supreme Court, once made it clear in his judgment that "it is no reason to argue that directors know better than shareholders who should serve on the board of directors."
However, the board found a better reason in some decisions of the Delaware Court: the control premium. In the cases of Yucaipa American alliance Fund II, L.P. v. Riggio and third point LLC v. Ruprecht, the Delaware court held that when a group of investors may obtain the voting rights sufficient to control the company, the interests of minority shareholders may be infringed, because this group of investors can slowly acquire equity without paying the control premium that should be paid for acquiring control, After obtaining the control right, the board of directors can manipulate the resolutions that are beneficial to itself and infringe on the interests of minority shareholders. Therefore, the board of directors can launch the poison pill plan to protect minority shareholders. This proposition gives the board of directors the opportunity to hide the real intention of launching the poison pill plan and get the support of the court. For example, it is nominally to strive for a higher transaction price for shareholders, but in fact to compete for control. Therefore, the real purpose of some companies' drug pill plans is often ambiguous. The outside world can't get a glimpse of their intentions until they are sued or launched a public relations offensive.
Regardless of whether the Delaware court's claim of control premium is reasonable or not, its consistent position is clear: the poison pill plan will be found invalid only in extreme cases. Such extremes were included in the 1998 case of quickturn design systems, Inc. v. Shapiro.
In this case, the Delaware Supreme Court held that it was illegal to include the following provisions in the poison pill plan, that is, even if the director who launched the poison pill plan was dismissed, the new director could not revoke the poison pill plan, that is, the so-called "dead hand provisions". The court held that such provisions deprived the new directors of their statutory powers.
In 2021, in re Williams companies s'holder litig In the case, the court also rejected the poison pill plan proposed by Williams on the grounds that the trigger conditions of 5% poison pills were too strict and the definitions of beneficial ownership and acting in concert were too broad.
Similar noteworthy provisions also include the design of the "grandfather provision" in the poison pill plan, the length of the validity period, the provisions on the extension of the validity period, and so on.
Generally speaking, if the provisions of the poison pill plan give the current board of directors too much authority, and the poison pill is too easy to be triggered or difficult to be lifted, it is easy for the court to question the motivation of the board of directors and pay special attention to whether these Provisions excessively infringe on the shareholders' right to remove and replace directors.
03
Can Chinese companies use it
In recent years, due to the laissez faire attitude of Delaware courts towards poison pill plans, the vast majority of poison pill plans have agreed to apply Delaware laws. Even so, the court in the place of incorporation may still restrict such plans based on the protection of shareholders' rights and interests under the principles of company law.
Judges in other parts of the United States are more cautious about the poison pill program than in Delaware courts. For example, in the cases of Avon products, Inc. v. Chartwell associates L.P. and first citizens Bancshares, Inc. v. KS Bancorp, Inc., judges in New York and North Carolina rejected the poison pill plan of domestic registered companies. In addition, in offshore jurisdictions such as the Cayman Islands and the British Virgin Islands, the court's attitude towards the poison pill plan is far from clear.
These decisions remind the directors of the company that even if the poison pill plan is regarded as a useful trump card in the competition for control of the company, they still need to pay attention to reasonable boundaries and understand the attitude of different jurisdictions towards the poison pill plan in advance. In the past ten years, there have been many cases of Chinese enterprises using poison pill plan to resist acquisitions or maintain corporate control.
In China, although anti takeover schemes such as poison pill plan are feasible under the current legal framework, the board of directors can only make suggestions because the poison pill plan involves changes in the company's capital such as the issuance of new shares, which ultimately needs the approval of the shareholders' meeting. For example, according to the measures for the administration of the acquisition of listed companies, the responsibilities of the board of directors of the company in the face of external acquisition are limited to investigating the subject qualification, credit status and acquisition intention of the acquirer, analyzing the conditions of the offer, and making suggestions on whether the shareholders accept the offer, and have no right to make a final decision. If the shareholders' meeting can reach a majority opinion on opposing the acquisition or change of control, it will actually block the possibility of external acquirers acquiring the majority equity of the company at a low price. However, it is difficult to form a unified goal in the practice of equity acquisition. For example, in the "Baowan dispute" that attracted widespread attention in 2015, Vanke's management intended to launch the poison pill plan, but could not obtain the support of the shareholders' meeting, and finally resisted the acquisition by other means.
In addition, the core of the poison pill plan is to dilute the acquirer's equity by adding new shares. However, the share issuance of Chinese listed companies has strict conditions and procedural requirements, and must be approved by the securities regulatory authority. Therefore, there is great uncertainty and lack of timeliness. In past cases, A-share listed companies such as Gree Electric Appliance and Dashang Co., Ltd. have launched fixed growth plans to block external acquirers, but their possible effect is weaker than several poison pill plans mentioned above, which is difficult to get the support of minority shareholders, so the relevant plans also ended in miscarriage.
It should be noted that the revised draft of the company law published at the end of 2021 tentatively introduces the authorized capital system, allowing the board of directors of a joint stock limited company to decide to issue the remaining shares retained when the company is established according to the actual needs of the company's operation after obtaining the authorization of the articles of association or the shareholders' meeting. This legislative attempt shows that China is gradually loosening its legislative trend in corporate governance. Perhaps in the future legislation and supervision, it will further relax the restrictions on anti takeover measures such as the poison pill plan.
Based on the current situation of China's legislation and supervision, Chinese companies rarely apply the poison pill plan at this stage, and the poison pill plan can often be seen in the dispute over the control of overseas listed or Chinese companies with overseas control structure.
Taking the vie structure commonly adopted by zhonggai shares as an example, although the company's assets and main business activities are in China, the governance structure is overseas. Therefore, as long as enough shares of the company's overseas structure are acquired, the company's domestic assets and operations can be controlled, and the measures against such control acquisition need to be carried out overseas. Among them, well-known cases include earlier ones, such as Sohu in 2001 to fight against the acquisition of Beida Bluebird, and more recently, such as the poison pill plan launched by Ruixing coffee in 2021 to prevent the founder from returning to the company in order to support the management acquisition and fight against the acquisition of foreign investors during the privatization of Kexing holdings in 2018. These poison pill programs provide a weapon for the management from the legal level, put them in a favorable position in business negotiations, and indeed help the company fight against the investors it does not support and gain control of the company. But some of the poison pill plans have also caused heated litigation disputes.
In the future, it can be imagined that when Chinese companies involved in overseas structures face foreign acquisitions, or investors intend to bypass the board of directors to acquire shares of Chinese companies, the poison pill plan will still be an important weapon, and both investors and the board of directors should strengthen their understanding of their relevant offensive and defensive strategies, so as to effectively confront or reasonably use it.
Kang Jian and Liu Chang are lawyers of gaobojin law firm, focusing on disputes over corporate control, the enforcement of international judgments, arbitral awards and other complex cross-border disputes involving China; Huang kairu is a senior analyst of gaobojin law firm