New Poison Pill Tactic Likely to Gain Converts

More companies will adopt the “poison pill” anti-takeover defense used by Household International now that Household’s plan has survived a legal challenge, merger specialists predicted Wednesday.

But they warned that Household’s defense, already copied by several major U.S. corporations, will not shield a company against hostile takeover bids.

In addition, the Delaware Supreme Court, which upheld Household’s plan, indicated that the defense could again be tested in court if Household--which did not adopt its plan to counter a specific threat--faced an actual takeover fight.

Poison pills come in various forms, but overall they refer to provisions aimed at making a target company prohibitively expensive, or “poisonous,” to a suitor that is opposed by the target company’s management.

The defense adopted by Household in 1984, known as a “flip-over” pill, gives its stockholders a right entitling them to buy an acquirer’s stock at half the market price in the event of a hostile merger.

The rights are triggered once the hostile bidder acquires 20% of Household’s shares or makes a tender offer for at least 30% of the stock. The companies can redeem the rights if they want to merge with a friendly partner.

In the Household case, the court rejected arguments from John A. Moran, a former Household director, who contended that the plan stripped shareholders of the opportunity to weigh virtually any tender offer, thereby serving to entrench management.

While the court was deciding the case, several other companies, including RCA, McDonald’s and Dart & Kraft, went ahead and adopted similar plans.

“There are many law firms that advised their clients not to adopt this defense because they did not think it would be upheld, but now those companies also will take another look at it,” said Charles Richards, a partner in the Wilmington, Del., law firm of Richards, Layton & Finger, which represented Household.

“There is going to be a proliferation of these pills,” agreed Joseph H. Flom, a partner with the New York law firm of Skadden, Arps, Slate, Meagher & Flom, which represented Moran in the Household case.

Flom told a group of institutional investors that “what the courts have said is, ‘You fellows that are advising companies, use your imagination, you’ve got carte blanche to write anything you want and let the fellow trying to make the bid figure out how he can get around it.’ ”

Several takeover experts agreed that the poison pill is most effective against “two-tier” offers, in which a bidder offers cash for a controlling interest in a company and then offers to buy the remaining shares for less, often by exchanging the stock for other securities.

Household said its poison pill was intended to prevent such offers so as to protect its stockholders from being coerced into quickly tendering their shares for the initial cash portion of the offer.

But Daniel J. Good, head of mergers and acquisitions at the investment firm E. F. Hutton & Co., said the two-tier bid is losing favor among corporate acquirers. Instead, bidders are increasingly offering to buy all of a company’s stock for one cash price, he said.

In those cases, the bidders place tremendous pressure on the target company’s directors, who have a fiduciary duty to get their stockholders the best price for their shares and hence might be forced to redeem a poison pill, Good said.

“We advise our clients, if you want to win, go all cash,” he said. “Household and any other company would be hard pressed to turn down a very fair cash offer just because they have a pill in place.”