Post by Sapphire Capital on Aug 7, 2008 22:56:27 GMT 4
Derivative poison pills could be invalid
Source: Nicholas Pettifer
Despite recent reports, US companies will not be rushing to change their shareholder rights plans in the wake of the CSX case. The poison pills would punish the wrong parties and could be invalid.
In CSX v TCI Management, a district court found that investors building stakes in companies held beneficial ownership of the underlying shares in contracts for difference (CFD), or total return swap, deals.
If this decision stands, then holders will have to disclose their position if, combined with any equity stake they may hold, the CFDs reach defined levels.
As a result, some companies have changed their poison pill arrangements so that thresholds can be triggered by CFD holdings or combined equity and CFD holdings. But companies may be targeting the wrong people.
"The problem with attempting to use rights in connection with a CFD is that the party who actually owns the shares is some financial institution, not the beneficiary of the CFD," said the head of M&A at a US firm.
A problem arises because when thresholds are met in US poison pills, every shareholder (other than the investor who has triggered the pill) is invited to purchase more shares. This dilutes the shareholding of the stake-building investor.
Even though CSX said that CFD holders are the beneficial owners of the underlying shares, they would simply not purchase the shares under the CFD arrangement if the poison pill had diluted their price. This would mean that the financial institution in the CFD contract would receive economic ownership of the shares, but its stake would be significantly devalued. The wrong party would be punished.
"I'm not sure that a Delaware court would find that using a rights plan to deprive a financial institution of economic value of shares because it entered into a normal transaction with a third party would be reasonable, and therefore valid," said the M&A partner.
"It is possible to draft a rights plan provision that is narrowly tailored to a particular situation. But there will be no widespread adoption of defining CFDs as beneficial ownership for the purposes of a rights plan because of this problem."
Since rights plans were deemed a permissible defence to coercive two-tier offers in the 1980s, subsequent actions have been judged on their reasonableness to the potential corporate threat.
Despite this, it has been reported that waste hauler Republic Services, semiconductor manufacturer Micrel and construction materials supplier Louisiana Pacific have all amended their rights plans to add derivatives clauses.
The CSX case is pending appeal before the US Circuit Court of Appeals and the SEC seems reluctant to take any action until a decision is made.
In the meantime, lawyers notice reluctance in the market for participants to engage in stakebuilding via CFDs or swaps.
Source: Nicholas Pettifer
Despite recent reports, US companies will not be rushing to change their shareholder rights plans in the wake of the CSX case. The poison pills would punish the wrong parties and could be invalid.
In CSX v TCI Management, a district court found that investors building stakes in companies held beneficial ownership of the underlying shares in contracts for difference (CFD), or total return swap, deals.
If this decision stands, then holders will have to disclose their position if, combined with any equity stake they may hold, the CFDs reach defined levels.
As a result, some companies have changed their poison pill arrangements so that thresholds can be triggered by CFD holdings or combined equity and CFD holdings. But companies may be targeting the wrong people.
"The problem with attempting to use rights in connection with a CFD is that the party who actually owns the shares is some financial institution, not the beneficiary of the CFD," said the head of M&A at a US firm.
A problem arises because when thresholds are met in US poison pills, every shareholder (other than the investor who has triggered the pill) is invited to purchase more shares. This dilutes the shareholding of the stake-building investor.
Even though CSX said that CFD holders are the beneficial owners of the underlying shares, they would simply not purchase the shares under the CFD arrangement if the poison pill had diluted their price. This would mean that the financial institution in the CFD contract would receive economic ownership of the shares, but its stake would be significantly devalued. The wrong party would be punished.
"I'm not sure that a Delaware court would find that using a rights plan to deprive a financial institution of economic value of shares because it entered into a normal transaction with a third party would be reasonable, and therefore valid," said the M&A partner.
"It is possible to draft a rights plan provision that is narrowly tailored to a particular situation. But there will be no widespread adoption of defining CFDs as beneficial ownership for the purposes of a rights plan because of this problem."
Since rights plans were deemed a permissible defence to coercive two-tier offers in the 1980s, subsequent actions have been judged on their reasonableness to the potential corporate threat.
Despite this, it has been reported that waste hauler Republic Services, semiconductor manufacturer Micrel and construction materials supplier Louisiana Pacific have all amended their rights plans to add derivatives clauses.
The CSX case is pending appeal before the US Circuit Court of Appeals and the SEC seems reluctant to take any action until a decision is made.
In the meantime, lawyers notice reluctance in the market for participants to engage in stakebuilding via CFDs or swaps.