Judicial Quote of the Week
By Vice Chancellor Leo Strine Jr. of the Delaware Court of Chancery, regarding the poison pill that prevents Oracle Corp. from taking over PeopleSoft Inc.:
"I'm going to pull the pill, so long as their is effective participation by the Sunni community in the upcoming Iraqi elections. That's my ruling."
That Judge Strine is one HI-larious man! Seriously, I do think that's pretty funny.
Here's some background, not that you need it to appreciate the joke:
Oracle is trying to takeover PeopleSoft. In the old days before the 1980s a company would do that by getting a majority of the shares (a "takeover"). But then some lawyers invented this thing called the poison pill to protect "incumbent" management from hostile takeovers, even if some other company does get a majority of shares. I.e. PeopleSoft's management makes a poison pill, so that Oracle can't get 51% of shares and elect their own board of directors who would, in turn, put in Oracle's preferred management. The way the poison pill works is by issuing additional shares to all of the minority shareholders whenever someone or some corporation (in this case Oracle) gets a certain percentage of the total shares. For example, say that there were 1 million shares of PeopleSoft Stock. The poison pill is a clause in the shareholders' contract that says, roughly, "if anyone buys up, 51% of the shares of PeopleSoft, then any other stockholder who's not party to that block will automatically be issued an additional 1/3 share for each share they own." So when Oracle gets 51%, or 510,000 shares, suddenly the total number of shares becomes not 1 million but rather 1,166,666 and they're still a minority shareholder. This way no one can get a majority of shares.
The poison pill was so effective, that in the 1990s people who wanted to do hostile takeovers had to find a new strategy. So what they did was start what's called a "proxy fight" at the same time that they are making a so-called tender offer to accumulate a controlling stake. A proxy fight is when certain shareholders try to convince their fellow shareholders to vote for a board of directors other than the one management wants. Usually shareholders pay no attention to the elections that choose boards of directors for the companies in which they hold shares. The management sends them a little card that says: "Please let us cast your votes at the shareholders meeting, since we know you wont' be attending." Hence the term proxy voting. Thus, a proxy fight is when someone other than management sends out their own card saying: "Management sucks. Our directors would hire management that would make your shares much more valuable. So let us do your voting for you. "
The idea of doing a proxy fight together with a tender offer is that the new board can be elected even without someone actually owning a majority of the shares. Then once the new board is elected, it can remove the poison pill provisions in the stockholders contracts and, then, allow the takeover to proceed.
The thing is that, ever resourceful, management lawyers came up with a way to prevent this too. They wrote poison pill language in shareholder contracts that said "only this particular board of directors can 'pull the pill'". This innovation was called the "dead-hand pill". It was deemed illegal (at least sort of) by the Delaware Chancery Court.
The Delaware Chancery is the court that makes virtually all of the important corporate law decisions in the U.S., reason being that most major corporations are incorporated in Delaware. The reasons for that are disputed and historically intricate. But some people think that the SEC might eventually pre-empt Delaware's role here or that the Chancery is already taking cues from the federal government about what to do in these cases. Anyway, for now the Delaware Chancery is head honcho on mergers and acquisitions law and they have been trying to decide what to do about poison pills for years.
So this dude Strine is trying to make up his mind about whether to let PeopleSoft's management keep their poison pill in place, thus averting a takeover by Oracle. The decision, when it comes down, is going to be the next big thing in M&A law, the kind of stuff that law students will be studying for the next ten years. At least maybe.
"I'm going to pull the pill, so long as their is effective participation by the Sunni community in the upcoming Iraqi elections. That's my ruling."
That Judge Strine is one HI-larious man! Seriously, I do think that's pretty funny.
Here's some background, not that you need it to appreciate the joke:
Oracle is trying to takeover PeopleSoft. In the old days before the 1980s a company would do that by getting a majority of the shares (a "takeover"). But then some lawyers invented this thing called the poison pill to protect "incumbent" management from hostile takeovers, even if some other company does get a majority of shares. I.e. PeopleSoft's management makes a poison pill, so that Oracle can't get 51% of shares and elect their own board of directors who would, in turn, put in Oracle's preferred management. The way the poison pill works is by issuing additional shares to all of the minority shareholders whenever someone or some corporation (in this case Oracle) gets a certain percentage of the total shares. For example, say that there were 1 million shares of PeopleSoft Stock. The poison pill is a clause in the shareholders' contract that says, roughly, "if anyone buys up, 51% of the shares of PeopleSoft, then any other stockholder who's not party to that block will automatically be issued an additional 1/3 share for each share they own." So when Oracle gets 51%, or 510,000 shares, suddenly the total number of shares becomes not 1 million but rather 1,166,666 and they're still a minority shareholder. This way no one can get a majority of shares.
The poison pill was so effective, that in the 1990s people who wanted to do hostile takeovers had to find a new strategy. So what they did was start what's called a "proxy fight" at the same time that they are making a so-called tender offer to accumulate a controlling stake. A proxy fight is when certain shareholders try to convince their fellow shareholders to vote for a board of directors other than the one management wants. Usually shareholders pay no attention to the elections that choose boards of directors for the companies in which they hold shares. The management sends them a little card that says: "Please let us cast your votes at the shareholders meeting, since we know you wont' be attending." Hence the term proxy voting. Thus, a proxy fight is when someone other than management sends out their own card saying: "Management sucks. Our directors would hire management that would make your shares much more valuable. So let us do your voting for you. "
The idea of doing a proxy fight together with a tender offer is that the new board can be elected even without someone actually owning a majority of the shares. Then once the new board is elected, it can remove the poison pill provisions in the stockholders contracts and, then, allow the takeover to proceed.
The thing is that, ever resourceful, management lawyers came up with a way to prevent this too. They wrote poison pill language in shareholder contracts that said "only this particular board of directors can 'pull the pill'". This innovation was called the "dead-hand pill". It was deemed illegal (at least sort of) by the Delaware Chancery Court.
The Delaware Chancery is the court that makes virtually all of the important corporate law decisions in the U.S., reason being that most major corporations are incorporated in Delaware. The reasons for that are disputed and historically intricate. But some people think that the SEC might eventually pre-empt Delaware's role here or that the Chancery is already taking cues from the federal government about what to do in these cases. Anyway, for now the Delaware Chancery is head honcho on mergers and acquisitions law and they have been trying to decide what to do about poison pills for years.
So this dude Strine is trying to make up his mind about whether to let PeopleSoft's management keep their poison pill in place, thus averting a takeover by Oracle. The decision, when it comes down, is going to be the next big thing in M&A law, the kind of stuff that law students will be studying for the next ten years. At least maybe.
posted by Billie @ 10:39 AM
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