Opinion ID: 2584011
Heading Depth: 1
Heading Rank: 7

Heading: The Poison Pill

Text: Plaintiffs' last argument regarding Count I is that Unison's adoption of the Rights Plan was a breach of the Stockholders' Agreement. The Rights Plan adopted by Unison is what is often referred to as a poison pill. A poison pill can take many forms; always, its purpose is to increase the time available for a board to react to a bid for takeover and, often, to make a takeover costly or unappealing by creating a negative which the acquirer must swallow. Now, 20 years after the pill was first proposed (then termed a warrant dividend plan), the defensive strategy is widely accepted, common in publicly traded companies, and viewed as an effective  arguably the most effective  defensive mechanism available to target corporations. See Lipton, Pills, Polls, and Professors Redux, 69 U. Chi. L. Rev. 1037, 1044 (2002); Bebchuk, Coates, & Subramanian, The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy, 54 Stan. L. Rev. 887, 904-05 (2002). The Summary of Rights to Purchase Common Shares issued by Unison stated: The purpose of the Rights Plan is to deter certain coercive takeover tactics and enable the Board of Directors to represent effectively the interest of shareholders in the event of a takeover attempt. Under the provisions of the Rights Plan, the Board declared a divided of one common share for each outstanding share of Unison common stock. The rights were not exercisable or transferable and did not carry any voting or other stockholder rights until the distribution date. A distribution date was defined to be 10 days after a person (including affiliates and associates) acquired, agreed to acquire, or commenced or announced a tender or exchange offer for common shares that would be sufficient in number to make the person owner of 20% or more of the then outstanding common shares. The rights granted by the plan included so-called flip-over and flip-in provisions which would allow the holder, under certain specified conditions, to buy an acquirer's stock and Unison's stock at a substantial discount (respectively, at a 50% discount and for $.001 per right per share of $1.00 par value). These rights would become exercisable in the event the acquiring person acquired, agreed to acquire, or commenced or announced a tender or exchange offer of more than 20% of the target's stock without the approval of the Unison board. Plaintiffs do not challenge the general authority of the Unison board to adopt the Rights Plan under Kansas law. While that issue has never been decided by this court, most states have followed the lead of Delaware in recognizing such rights plans. See Moran v. Household Intern., Inc., 500 A.2d 1346, 1353 (Del. Ch. 1985) (recognizing authority of directors to adopt rights plan; citing Del. Code Ann. tit. 8, § 157 for a corporation's power to issue rights to purchase shares and Del. Code Ann. tit. 8, § 141 for a board's authority to manage the corporation's business and affairs). Compare K.S.A. 17-6407 and 17-6301 with Del. Code Ann. tit. 8, §§ 157 and 141, respectively. Plaintiffs do, however, assert that the Unison board, through the adoption of the Stockholders' Agreement, limited its authority to adopt this particular plan which had a triggering event of the acquisition or potential acquisition of 20% of the stock. Plaintiffs argue this was a unilateral alteration of the contract terms specified in the Stockholders' Agreement which defined change of control to be an acquisition of 35% or more of the outstanding shares by any person or group of persons within the meaning of Section 3(a)(9) and Section 13(d)(3), as in effect of the date hereof, of the Securities Exchange Act of 1934, as amended . . . . The Stockholders' Agreement provided that it shall not be amended, modified or supplemented in any manner whatsoever except as otherwise provided herein or in writing signed by each of the parties hereto. We must consider this argument in light of the requirement that the Stockholders' Agreement be strictly construed. Thompson, 209 Kan. at 555. The Stockholders' Agreement did not prohibit the adoption of a rights plan. Nor did the Stockholders' Agreement restrict the power of the board of directors to issue dividends or additional common shares. See 11 Fletcher, Cyclopedia of the Law of Private Corporations § 5086 (2003). Thus, there was no restriction on the power of the board to do any of those things necessary to adopt or implement the Rights Plan. See Account v. Hilton Hotels Corp., 780 A.2d 245 (Del. 2001) (board has power to unilaterally adopt rights plan; rights plan does not impermissibly restrict transfer of shares). Furthermore, the Rights Plan did not alter the Stockholders' Agreement. The options to purchase granted by the Stockholders' Agreement were not altered. Nor was there a redefinition of the circumstances which triggered the rights granted by the Stockholders' Agreement. Additionally, at the time of the execution of the Stockholders' Agreement, Kansas had in place the Control Share Acquisitions Act, K.S.A. 17-1286 et seq. (the Act). Under the Act, the acquiror of 20% or more of the outstanding shares of an issuing public corporation (K.S.A. 17-1289) cannot vote those shares unless a majority of disinterested stockholders grant the acquiror voting rights. (Although the record in this case does not clearly establish that Unison is an issuing public corporation, Unison asserted the Act applied in Dolson's letter of February 2, 2000, and has continued to argue its applicability. Plaintiffs have not disputed this position. The Stockholders' Agreement provided that Kansas law governed interpretation.) Although the Act is very different from the Rights Plan at issue, both use a lower threshold than does the Stockholders' Agreement. The purpose of the Act is similar to that of the Rights Plan: [T]he fundamental purpose behind the enactment of control share acquisition statutes is to impose significant delays, if not insurmountable barriers, on potential offerors. . . . For practical purposes a suitor will be `extremely reluctant to acquire stock above any of the [statutory] threshold' lest she become permanently disenfranchised and unable to vote her stock. Matheson & Olson, Shareholder Rights and Legislative Wrongs: Toward Balanced Takeover Legislation, 59 Geo. Wash. L. Rev. 1425, 1444 (1991) (quoting Andre, A Preliminary Inquiring into the Utility of Vote Buying in the Market for Corporate Control, 63 S. Cal. L. Rev. 533, 554 [1990]). Although the Act does not directly impact the issue before us, it dispels the plaintiffs' argument that but for the Rights Plan their ability to sell up to 35% of Unison's stock was unfettered. Further, the Act illustrates that there can be different thresholds in various contexts for what constitutes change of control without there being an inconsistency or irreconcilable conflict. Further, we note that, in general, the courts of other states, particularly Delaware, have recognized that a corporation can undertake corporate actions even if it has the result of mooting a shareholder's agreement unless the law, articles of incorporation, bylaws, or a contract specifically prohibit the corporate action. For example, in Shields v. Shields, 498 A.2d 161 (Del. Ch. 1985), minority shareholders alleged a merger had the effect of breaching the shareholder's agreement by removing from the stock restrictions the requirement that other shareholders be offered first refusal rights of the shares at book value. The merger was largely to avoid the effects of a prior shareholders' agreement. The Delaware court found the action appropriate if the best interests of the shareholders as a whole would be served by [the] action . . . . 498 A.2d at 170. Thus, the validity of the action is to be tested by the provisions of the corporation law governing [the corporate action], and in appropriate cases by the fiduciary standards imposed upon directors and controlling shareholders, and not by the provisions of an agreement between shareholders of the corporation. 498 A.2d at 168. In the past, we have found Delaware decisions regarding corporation law persuasive, noting that the Kansas General Corporation Code has been patterned after, and at times contains identical provisions of, the Delaware general corporation law. Achey v. Linn County Bank, 261 Kan. 669, 676, 931 P.2d 16 (1997). Similarly, in this case, we find persuasive the rationale of the Delaware Chancery Court in generally upholding the lawfulness of rights plans under a variety of attacks, including breach of stockholders' agreements. In this case the Stockholders' Agreement was not directly amended by the Rights Plan. Nor was there an irreconcilable difference established by having two different thresholds which triggered distinct rights. Furthermore, the Rights Plan was not prohibited by the Stockholders' Agreement. Therefore, we find that the appropriate issue is whether there was a violation of fiduciary duty or other tortious action in adopting the Rights Plan. Thus, we affirm the trial court's decision to grant defendants' motions for summary judgment for breach of contract (Count 1) and to deny the plaintiffs' motion for partial summary judgment.