Shareholders Likely to Gain ‘Poison Pill’ Case Clout
Shareholder activists are poised to win a strong legal boost in their long battle against the favorite anti-takeover technique of embattled company directors, the so-called poison pill.
A Denver-based federal appeals court is expected to rule shortly that stockholders have the power to block some boards from adopting the takeover defense, which usually makes hostile takeovers prohibitively expensive by allowing targets to flood the market with new shares.
The first federal appellate ruling on the issue will come from the U.S. 10th Circuit Court of Appeals. That court had asked the Oklahoma Supreme Court to advise it on whether a binding resolution approved by a majority of grocery distributor Fleming Cos. shareholders violated state law, as Oklahoma City-based Fleming claimed.
On Tuesday, the Oklahoma high court voted 9-0 to tell the 10th Circuit that the resolution barring poison pills at Fleming without previous shareholder approval was valid, as a lower federal judge had found.
“I am more than a little surprised,” said University of Virginia law professor Michael Dooley. “It’s a huge shot in the arm for shareholders.” Dooley said the 10th Circuit would have to follow the state court’s guidance, as the issue concerns state law.
The anticipated rubber-stamp by the 10th Circuit would be binding only in its six-state region, and only companies incorporated under Oklahoma law are immediately affected. But the opinion is likely to prompt shareholder activists and takeover-stock traders to submit similar binding anti-poison pill resolutions at companies incorporated elsewhere, to test their legality in other courts.
At least 10 shareholders already have proposed such measures this proxy season at companies including J.C. Penney, GTE, Quaker Oats and US West. Many more will now act this year or next, said Sarah Teslik, executive director of the Council of Institutional Investors in Washington. “This is huge. We will . . . switch from precatory [advisory] proposals to binding proposals.”
Patrick McGurn, of proxy advisor Institutional Shareholder Services, compared the development to California’s voter-referendum system. “If you don’t like what your elected officials are doing, in essence you go over their heads,” he said. “This is the continuation of that referendum concept into corporate America, and it’s likely to continue and grow over time.”
The sudden legal turn against directors’ power emerged from an Oklahoma battlefield already abandoned by both sides.
The troubles at Fleming began several years ago when chains it sold groceries to accused the company of inflating its charges in certain contracts. That fueled a series of expensive settlements.
Earlier, as the company’s shares tumbled, the International Brotherhood of Teamsters proposed a typical shareholder advisory resolution in 1995 urging the board to drop its poison pill and thus boost the possibility of a takeover of the firm. The measure passed easily, but the board kept the pill nonetheless.
The next year, the Teamsters tried something new: a binding resolution to change Fleming’s bylaws. The company argued that such a proposal would illegally restrict directors’ power, and it refused to submit it to a shareholder vote until it was forced to by a federal trial judge.
The measure then passed, and Fleming appealed to the Denver court. The company, which has long since dropped its pill and last year replaced its CEO, said it doesn’t intend to appeal an adverse ruling by the 10th Circuit.
Under Tuesday’s court ruling, there are two exceptions to when shareholders can forcibly prevent poison pills. One is when a company’s charter explicitly gives only directors control. Most firms don’t have that provision, according to Institutional Shareholder Services.
The other exception is when state law expressly gives directors the right to create pills, which are known formally as shareholder rights plans.
By the Oklahoma court’s count, 24 states have such statutes, including New York. But Oklahoma, California and Delaware--where most of the country’s Fortune 500 companies are incorporated--have no such laws.