Crown’s Poison Pill Set in Force by Goldsmith

Sir James Goldsmith boosted his stake in Crown Zellerbach on Tuesday to just over 20%, a move that triggered Zellerbach’s “poison-pill” shareholder rights and will hamper Zellerbach’s attempt to arrange a friendly merger.

“For the first time in history, a poison pill has exploded,” said Robert Pirie, president of Rothschild Inc., Goldsmith’s investment banker, in an interview.

Goldsmith, who boosted his stake in Zellerbach to 19.9% on Monday, made good on his threat to cross the 20% threshold the same day a federal judge in New York refused to intervene in what he called the “high stakes game of chicken” between the international financier and the 115-year-old forest-products company.

U.S. District Judge John M. Cannella on Tuesday denied Zellerbach’s last-ditch request for a temporary restraining order that would have barred Goldsmith from adding to his stake and triggering the poison pill.

The poison-pill shareholder rights enable their holders to buy $200 of shares in an acquiring company for $100. The rights were designed to ward off hostile suitors by making unfriendly takeovers prohibitively expensive.

Goldsmith, who has long contended that the shareholder rights are illegal, will certainly continue to press his legal challenges against the poison pill, according to sources familiar with his strategy.

He may also seek control of Zellerbach and continue to operate it as an independent company or liquidate it, these sources said. Such moves may hinder rights holders from buying into Goldsmith-controlled companies at half price.

“We’re in uncharted waters,” said a New York lawyer who specializes in mergers and acquisitions. “Goldsmith called Crown Zellerbach’s bluff. There’s going to be a lot more litigation before this one’s over.”

Indeed, Goldsmith signaled as much on Monday in a letter to Zellerbach’s board. “Any damage done to shareholders by the poison pill will be attributable directly to the board, which created the poison pill in the first place and had, but failed to take, numerous opportunities to eliminate the poison pill,” the Anglo-French financier wrote.

Zellerbach’s common stock closed at $41.625, down 12.5 cents, in New York composite trading Tuesday. The drop may have reflected the triggering of the poison pill and the resulting unlikelihood that a “white knight” will now come forward to rescue Zellerbach from Goldsmith.

Zellerbach has responded to Goldsmith’s overtures to acquire the company by announcing a plan to spin off about $800 million in timberland and Zellerbach’s fast-growing specialty packaging unit to shareholders. The restructuring plan was designed to increase the value of shareholders’ investments in Zellerbach.

Zellerbach said in a statement Tuesday that the restructuring “will not be affected” by the triggering of the poison pill but that such an event “may impede our flexibility with respect to alternatives and would therefore be a disservice to shareholders.”

Zellerbach added that “we believe that Goldsmith is determined to disrupt the restructuring program” and said that it wouldn’t succumb to pressure from Goldsmith to redeem the poison pill rights.