Poison Pills, Corporate Governance and Japan

The Wall Street Journal reported today that a Japanese court upheld the use of poison pills in that country, clarifying the law in this area.  As most know, poison pills are options or rights to buy additional shares distributed to shareholders as a dividend.  They are initially priced out of the money.  Certain "triggers" cause the options to become in the money, including the acquisition of a specified amount of stock.  The pill only functions, however, because it excludes the shareholder who bought the stock and triggered the price change.  No bidder will go forward with a hostile acquisition if it will trigger a poison pill. 

While poison pills were invented in the 1970s by Marty Lipton, it took a decision by the Delaware Supreme Court (Unocal) to validate them.  Unocal (which actually involved a self tender offer rather than a poison pill) did so by allowing management to discriminate against shareholders of the same class of stock, thereby permitting the distribution of rights that some could exercise and some could not.  Whatever one thinks of takeovers, the authority to discriminate among shareholders (say in the payment of a dividend) is something that can be quite damaging to the interests of investors. 

We will revisit this topic when we discuss the limits on poison pills contained in the North Dakota Publicly Traded Corporations Act.