Corporate Governance

Yucaipa American Alliance Fund II, LP v. Riggio: The Growing Use of Poison Pills to Preclude a Proxy Contest (Uncertain Factual Conclusions)

By J Robert Brown Jr.

The legal analysis in the end allows for the use of poison pills in a way that tilts the playing field in favor of management.  The reasoning is, in places, supported by what is effectively factual findings by the court that may be accurate but are not entirely supported by the authority cited. 

Thus, in concluding that the election of a minority of the directors was a "threat" to B&N, the Chancery Court noted that "[o]nce an insurgent has won one election, the incumbent board majority's ability to be intransigent in the face of stockholder sentiment is greatly limited." 

This is a fairly significant point and it is highly factual.  Essentially, the court is taking the position that any time an insurgent elects even a single director, management's ability to act is severely constrained.  The authority for the proposition?

• See 1 ARTHUR FLEISCHER, JR. & ALEXANDER R. SUSSMAN, TAKEOVER DEFENSES: MERGERS AND ACQUISITIONS § 6.05[A] at 6-34 (6th ed. 2010) ("[A] bidder that acquires a majority of the voting power of a company . . . may be able to effect changes in the company's bylaws, such as requiring unanimous approval for certain board actions . . . [to] harass the directors and seek to limit their activities.").?

The authority cited in the footnote is accurate.  Shareholders with a majority of the shares can adopt bylaws and, with that authority, can potentially "harass" management.  But the quote in the opinion went to the consequences of an insurgent electing a director to the board, something that can occur without majority ownership of shares.  The opinion may or may not be right on the basic point but either way the issue is not resolved by the authority cited. 

Full post as published by The Race to the Bottom on September 15, 2010 (boomark / email).