How Hard to Swallow?

Ghitter: Are there [shareholder] benefits to poison pills? It’s a complex issue. I think you have to come down in the middle. On one side of the coin, it may be that a takeover bid could be very beneficial to the shareholders because the acquiror will offer higher prices. The shareholders can take the profit and move on to other investments. Poison pills can be advantageous because they allow a company, if an acquiror is in play, to have a bit of a hammer which they can use to seek out other investors, a white knight who can buy the shares at a higher price. On the other side of the coin, poison-pill situations can just protect the directors, avoiding a takeover when that may not be in the best interests of the shareholders. It’s a delicate balance.

Hunt: Used appropriately, poison pills can actually be helpful, mainly because in Canada they tend to be time-limited. They simply extend the amount of time available for a board of directors to consider an offer that’s been put before them. Generally speaking, that time can to be used to evaluate the bid, but also to see if there are other options that might better maximize value for shareholders, as well as to address any other concerns that stakeholders might have.

For example, a bidder can make an offer, can’t come to an agreement with a company, and so makes a hostile offer. If a poison pill exists, the bidder will often make an application to the securities commission to have it set aside. Generally speaking, it’s not unusual for the regulator to place a time limit on the poison pill.

Chapman: There’s no quick or easy answer here. I think poison pills have a real place and a purpose as long as that real place and purpose is to preserve shareholder value. Takeover bids often offer more than market value. In a mature industry that hasn’t got any real future, or one in which you have incompetent or disinterested management, shareholders would be very attracted to a takeover. If it’s to preserve management interest or to mask bad management, they’re inappropriate and bad. It happens both ways.

I don’t think that, outside of regulated industries like banking and broadcasting, there’s much more for the regulators to do. In resource industries like mining and oil and gas, oilsands and forestry, I don’t think there is any real role for more regulation. I don’t have any problem with China coming in and buying oilsands interests. Nor do I have any trouble with Norway doing it.

With respect to golden parachutes, I think there’s a disclosure issue, there’s a conflict-of-interest issue and there are some very fundamental questions about board governance. You have to question whether some of these boards are just Old Boys clubs, where the directors are there really in support of the president as opposed to protecting the shareholders. You’re beginning to see shareholders now getting at least symbolic votes on CEO compensation. The board of directors sets the CEO compensation but it goes to the shareholders’ meeting, often in a non-binding straw vote so that the directors can at least see if they’re getting the support of the shareholders.

Ghitter: I think that the regulatory agencies and the courts are heading in the right direction when they allow the poison pill to be in play but limit the time that they can be operative. This gives the shareholders time to consider their options and the opportunity to exercise shareholders’ rights, which exceed those of the directors.

Hunt: It’s important that shareholders get an opportunity to review and consider the offer and any alternatives that may come forward. Poison pills can be crafted to be more or less restrictive of shareholder rights and more or less protective of management rights. There are any number of defensive tactics that may be used, but the practical effect of a time-limited shareholders’ rights plan is really to give the board an opportunity to take a look at what all of the alternatives are and make sure that, at the end of the day, the shareholders come out ahead.

The Final Word
When I was the CEO of a national television network back in the 1990s, I had a pretty free hand in choosing my board of directors. The company, as it happened, was a not-for-profit charity, so there was no money involved beyond very basic remuneration for expenses. I had to persuade people to give up their time to support the company.

In the real world of today’s corporations, directors may also be selected or approved by the CEO. With rates of compensation unheard of even a decade ago raising the stakes, executives and hand-picked directors can tilt the scales against the rights of shareholders. Nomination committees and independent directors notwithstanding, executives and directors may try to stand together against the outside world.

The good news is that in the wake of last year’s financial crisis, shareholders are demanding and getting more say in how corporations are run, and how they respond to takeover bids.

Listen to the interviews that shaped this column, November’s Right Call Audio Collection, now.

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