Viewpoint | A brief description of the design and advantages and disadvantages of the "poison pill plan"
Published:
2021-12-08
Equity dilution anti-acquisition measures, or poison pill plan, refers to a company in the event of a hostile acquisition, through the issuance of new shares to increase the cost of the acquirer, or increase the risk of dilution of the shares held by the original shareholders of the acquirer after the successful acquisition, to resist the acquisition of a defensive measure. The poison pill plan has the characteristics of immediacy, pertinence and diversity. Since the start of Martin Lipton in 1982, the design has become the most popular anti-takeover measure for listed companies in the United States. In 2005, in the face of Shanda's acquisition, Sina introduced the poison pill plan as a powerful tool into China for the first time. This article will introduce the design ideas and advantages and disadvantages of several common poison pill programs. Prerequisites for the application of the 1. poison pill program The (I) poison pill program needs to be supported by the authorized capital system. The authorized capital system refers to the establishment of the company, although the total amount of registered capital should be determined in the articles of association, but the promoter only needs to subscribe for part of the shares, the company can be formally established, the rest of the shares, authorized the board of directors according to the company's production and operation situation and the securities market market at any time to issue the company's capital system. Although after the revision of the Company Law in 2013, China fully applied the payment system and played down the decisive role of the three principles of capital, it still adopted the statutory capital system. As a result, domestically listed companies are unable to adopt the poison pill program, while companies listed in common law countries and regions have no such concerns. (II) POISON PILLS PLAN REQUIRES CIRCULATION OF WARRANTIES A warrant is a call option issued by a company limited by shares to subscribe to its shares. It gives the holder the right to purchase certain shares of the issuing company at a pre-agreed price within a certain period of time. The types of securities stipulated in China's Securities Law are enumerated and do not allow the circulation of warrants. However, in the Hong Kong and US stock markets, such securities are quite popular. (III) poison pill program is an extension of boardroom centrism Board centralism means that the board of directors is at the core of corporate governance. In the design of the poison pill program, the board of directors is required to evaluate, make decisions and make corresponding plans and measures on the acquirer's offer in a timely manner. On the other hand, this is also an integral requirement of the authorized capital system. General Design Idea of 2. Poison Pill Program (I) valgus poison pill 1. Distribution of subscription rights The company distributes a special stock subscription right to common shareholders on a one-to-one basis. The subscription right is essentially a contract between the company and its shareholders. The Subscription Rights shall not be exercised until the conditions of activation have been met. Once activated, the subscription right can be separated from the common stock, and the acquirer must acquire the common stock and the special share subscription right separately, making it more difficult to acquire. 2. Activation Conditions There are two activation conditions for subscription rights. First, the acquisition direction of a certain proportion of the holders of shares issued a takeover offer, at this time the activation is designed to warn the acquirer, to prevent the acquisition effect. Second, without the consent of the acquired company institutions or individuals to achieve a certain percentage of the acquired company's shareholding, at this time the hostile takeover has begun, the company will take more drastic measures. 3. Content of subscription rights As a result of the merger, the surviving company will inherit all the rights and obligations of the acquired company, including, naturally, the company's contractual obligations to its shareholders. Therefore, after the activation condition is fulfilled, the holder of each special stock subscription right has the right to purchase the common stock of the surviving company one to two. The exercise price, which is only half of the market price of the stock, is clearly attractive to subscription rights holders. In this way, after the completion of the acquisition, the proportion of shares held by the original acquirer shareholders in the surviving company will be greatly diluted, which is the "toxicity" of the poison pill. And it is precisely because the plan allows the acquirer's shareholders to buy the acquirer's stock that it is known as an outward-turning poison pill. 4. Redemption clause The poison pill program designed two different redemption clauses for two different activation conditions. If the poison pill is activated because of the first condition, the company has the right to redeem the subscription right at a low price before the right is exercised. However, if the poison pill program is activated for the second reason, it can no longer be redeemed. This clause is aimed at a two-tier tender offer (I. e., the acquirer promises to acquire a certain percentage of the shares at a high price and then the remaining shares at a low price) to prevent the acquirer from controlling the board of directors with its shareholding ratio and then making a second round of acquisitions. (II) varus poison pill The design idea of the inverted poison pill is roughly the same as that of the inverted poison pill. The main difference is the content of the subscription right and the extension of the foreclosure right. Once the inverted poison pill is activated, shareholders of the acquired company other than the acquirer can purchase the target company's own stock at half price. At this point the acquirer's stake in the target company is greatly diluted, thereby increasing the cost of the acquisition and even losing the possibility of seizing control. The inward-turning poison pill often generally provides for foreclosure. Since the acquirer did not yet have control of the acquired company when the inverted poison pill took effect, the influence on the board of directors was not deep enough. So the board has the flexibility to respond to the takeover offer. There was a third generation of the poison pill program, but it was not recognized by the Delaware courts. Therefore, most of the current listed companies are using a combination of outward and inward poison pill plan, that is, when the acquirer occupies a certain proportion of the company's shares, the acquired shareholders have the right to exercise the inward-turning poison pill, after the completion of the acquisition, the right to exercise the outward-turning poison pill. Advantages and Disadvantages of the 3. Poison Pill Program The poison pill program first has the advantage of immediacy. In the U.S. corporate law system of authorized capital, the board of directors is able to make and implement a plan based on the actual situation immediately after the acquirer initiates the acquisition, and in the absence of a hostile takeover, the preparation of the plan is not harmful to the company's equity structure. Secondly, as the redemption clause can be flexibly used after the optimization of the poison pill plan, the board of directors has more room for negotiation with the acquirer, which is more conducive to fighting for the interests of the company, shareholders and even themselves. Finally, the poison pill program poses a very significant threat to the acquirer relative to other anti-takeover measures. In the absence of a lawsuit to deny the poison pill program itself, most acquirers are repulsed by the poison pill program. At the same time, there is a downside to the poison pill program. Once the poison pill plan is implemented, it will have a huge impact on the equity structure of both companies. Since the companies implementing the poison pill plan are basically listed companies, major changes in the shareholding structure will cause severe fluctuations in the company's market value, which will undoubtedly harm the interests of shareholders, especially public investors. It is precisely because of this that many countries and regions are cautious about the poison pill program. In addition to the support of the United States, Japan chose to approve it after several iterations. Britain and Singapore banned the poison pill program in principle, but left room. Hong Kong law, which has the same origin, has a rather ambiguous attitude towards this. Chow Tai Fook's New World Development successfully resisted the malicious acquisition of the Naughty Child Fund through the poison pill program. Of course, the existence of the poison pill program is itself a deterrent to the acquirer without having to put it into practice. In practice, it is rare to see the activated poison pill plan, and the cases of "toxicity" completely distributed and the two sides breaking the net are even rarer. 4. epilogue The poison pill program, one of the most powerful tools in anti-takeover measures, has been hugely popular and controversial. For companies interested in cross-border mergers and acquisitions or overseas listings, the poison pill program is a weapon they must master and deal. At present, China's listed sectors, only allow the same shares of different rights of the board, with the application of the first generation of priority poison pill space. However, with the establishment of the Science and Technology Innovation Board and the Beijing Stock Exchange, and the successive amendments to the Securities Law and the Company Law, the increasingly relaxed business environment is bound to require increasingly diversified anti-acquisition tools. With the principle of foresight and prevention, domestic enterprises should also be aware of anti-acquisition tools such as poison pill programs.
Equity dilution anti-acquisition measures, or poison pill plan, refers to a company in the event of a hostile acquisition, through the issuance of new shares to increase the cost of the acquirer, or increase the risk of dilution of the shares held by the original shareholders of the acquirer after the successful acquisition, to resist the acquisition of a defensive measure. The poison pill plan has the characteristics of immediacy, pertinence and diversity. Since the start of Martin Lipton in 1982, the design has become the most popular anti-takeover measure for listed companies in the United States. In 2005, in the face of Shanda's acquisition, Sina introduced the poison pill plan as a powerful tool into China for the first time. This article will introduce the design ideas and advantages and disadvantages of several common poison pill programs.
Prerequisites for the application of the 1. poison pill program
The (I) poison pill program needs to be supported by the authorized capital system.
The authorized capital system refers to the establishment of the company, although the total amount of registered capital should be determined in the articles of association, but the promoter only needs to subscribe for part of the shares, the company can be formally established, the rest of the shares, authorized the board of directors according to the company's production and operation situation and the securities market market at any time to issue the company's capital system. Although after the revision of the Company Law in 2013, China fully applied the payment system and played down the decisive role of the three principles of capital, it still adopted the statutory capital system. As a result, domestically listed companies are unable to adopt the poison pill program, while companies listed in common law countries and regions have no such concerns.
(II) POISON PILLS PLAN REQUIRES CIRCULATION OF WARRANTIES
A warrant is a call option issued by a company limited by shares to subscribe to its shares. It gives the holder the right to purchase certain shares of the issuing company at a pre-agreed price within a certain period of time. The types of securities stipulated in China's Securities Law are enumerated and do not allow the circulation of warrants. However, in the Hong Kong and US stock markets, such securities are quite popular.
(III) poison pill program is an extension of boardroom centrism
Board centralism means that the board of directors is at the core of corporate governance. In the design of the poison pill program, the board of directors is required to evaluate, make decisions and make corresponding plans and measures on the acquirer's offer in a timely manner. On the other hand, this is also an integral requirement of the authorized capital system.
General Design Idea of 2. Poison Pill Program
(I) valgus poison pill
1. Distribution of subscription rights
The company distributes a special stock subscription right to common shareholders on a one-to-one basis. The subscription right is essentially a contract between the company and its shareholders. The Subscription Rights shall not be exercised until the conditions of activation have been met. Once activated, the subscription right can be separated from the common stock, and the acquirer must acquire the common stock and the special share subscription right separately, making it more difficult to acquire.
2. Activation Conditions
There are two activation conditions for subscription rights. First, the acquisition direction of a certain proportion of the holders of shares issued a takeover offer, at this time the activation is designed to warn the acquirer, to prevent the acquisition effect. Second, without the consent of the acquired company institutions or individuals to achieve a certain percentage of the acquired company's shareholding, at this time the hostile takeover has begun, the company will take more drastic measures.
3. Content of subscription rights
As a result of the merger, the surviving company will inherit all the rights and obligations of the acquired company, including, naturally, the company's contractual obligations to its shareholders. Therefore, after the activation condition is fulfilled, the holder of each special stock subscription right has the right to purchase the common stock of the surviving company one to two. The exercise price, which is only half of the market price of the stock, is clearly attractive to subscription rights holders. In this way, after the completion of the acquisition, the proportion of shares held by the original acquirer shareholders in the surviving company will be greatly diluted, which is the "toxicity" of the poison pill. And it is precisely because the plan allows the acquirer's shareholders to buy the acquirer's stock that it is known as an outward-turning poison pill.
4. Redemption clause
The poison pill program designed two different redemption clauses for two different activation conditions. If the poison pill is activated because of the first condition, the company has the right to redeem the subscription right at a low price before the right is exercised. However, if the poison pill program is activated for the second reason, it can no longer be redeemed. This clause is aimed at a two-tier tender offer (I. e., the acquirer promises to acquire a certain percentage of the shares at a high price and then the remaining shares at a low price) to prevent the acquirer from controlling the board of directors with its shareholding ratio and then making a second round of acquisitions.
(II) varus poison pill
The design idea of the inverted poison pill is roughly the same as that of the inverted poison pill. The main difference is the content of the subscription right and the extension of the foreclosure right. Once the inverted poison pill is activated, shareholders of the acquired company other than the acquirer can purchase the target company's own stock at half price. At this point the acquirer's stake in the target company is greatly diluted, thereby increasing the cost of the acquisition and even losing the possibility of seizing control. The inward-turning poison pill often generally provides for foreclosure. Since the acquirer did not yet have control of the acquired company when the inverted poison pill took effect, the influence on the board of directors was not deep enough. So the board has the flexibility to respond to the takeover offer.
There was a third generation of the poison pill program, but it was not recognized by the Delaware courts. Therefore, most of the current listed companies are using a combination of outward and inward poison pill plan, that is, when the acquirer occupies a certain proportion of the company's shares, the acquired shareholders have the right to exercise the inward-turning poison pill, after the completion of the acquisition, the right to exercise the outward-turning poison pill.
Advantages and Disadvantages of the 3. Poison Pill Program
The poison pill program first has the advantage of immediacy. In the U.S. corporate law system of authorized capital, the board of directors is able to make and implement a plan based on the actual situation immediately after the acquirer initiates the acquisition, and in the absence of a hostile takeover, the preparation of the plan is not harmful to the company's equity structure. Secondly, as the redemption clause can be flexibly used after the optimization of the poison pill plan, the board of directors has more room for negotiation with the acquirer, which is more conducive to fighting for the interests of the company, shareholders and even themselves. Finally, the poison pill program poses a very significant threat to the acquirer relative to other anti-takeover measures. In the absence of a lawsuit to deny the poison pill program itself, most acquirers are repulsed by the poison pill program.
At the same time, the poison pill program has a drawback. Once the poison pill plan is implemented, it will have a huge impact on the equity structure of both companies. Since the companies implementing the poison pill plan are basically listed companies, major changes in the shareholding structure will cause severe fluctuations in the company's market value, which will undoubtedly harm the interests of shareholders, especially public investors. It is precisely because of this that many countries and regions are cautious about the poison pill program. In addition to the support of the United States, Japan chose to approve it after several iterations. Britain and Singapore banned the poison pill program in principle, but left room. Hong Kong law, which has the same origin, has a rather ambiguous attitude towards this. Chow Tai Fook's New World Development successfully resisted the malicious acquisition of the Naughty Child Fund through the poison pill program.
Of course, the existence of the poison pill program is itself a deterrent to the acquirer without having to put it into practice. In practice, it is rare to see the activated poison pill plan, and the cases of "toxicity" completely distributed and the two sides breaking the net are even rarer.
4. epilogue
The poison pill program, one of the most powerful tools in anti-takeover measures, has been hugely popular and controversial. For companies interested in cross-border mergers and acquisitions or overseas listings, the poison pill program is a weapon they must master and deal. At present, China's listed sectors, only allow the same shares of different rights of the board, with the application of the first generation of priority poison pill space. However, with the establishment of the Science and Technology Innovation Board and the Beijing Stock Exchange, and the successive amendments to the Securities Law and the Company Law, the increasingly relaxed business environment is bound to require increasingly diversified anti-acquisition tools. With the principle of foresight and prevention, domestic enterprises should also be aware of anti-acquisition tools such as poison pill programs.
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