No pill to ease Disney's takeover headache

/ Source: Financial Times

The new security gates at Disneyland in California, installed last week, are designed to keep terrorists out. But they offer no protection against a hostile takeover from Comcast.

By abolishing its so-called poison pill six years ago, a move which was lauded as progressive at the time, Disney has lowered its defenses against hostile predators.

Typically, poison pills are used to make a hostile acquisition more expensive, either by triggering the issuance of new shares or by allowing investors to sell shares at a premium.

Although this mechanism has never been tested in practice since it was devised in 1982 by New York lawyer Martin Lipton, it has proved to be an effective deterrent to unwelcome bids.

Michael Zaoui, European head of mergers and acquisitions at Morgan Stanley, says that poison pills can be an effective tool to help directors negotiate a superior deal for shareholders.

However, many companies have followed Disney's lead and are abolishing their poison pills. According to research by the Investor Responsibility Research Center, the shareholder advocate group, 55.1 percent of U.S. public companies surveyed in 2003 had poison pill provisions, slightly down from 1999's peak of 56 percent.

Since January, several companies have moved to abolish their poison pills, including Raytheon, Circuit City Stores, FirstEnergy, PG&E and Goodyear.

Shareholders have been rejecting poison pills because they believe they give too much power to boards as they have the right to trigger a pill without shareholder approval.

However, John Keefer, partner at corporate law firm King & Spalding, believes it would be a mistake for companies with poison pills in place to scrap them.

"Although there has never been a case where a poison pill has been triggered, they can deter someone from making a creeping takeover without paying a premium."

Only last month, a U.S. judge blocked Lord Black from selling his Hollinger International stake to the Barclay brothers. Judge Leo Strine of the Delaware Chancery Court also said he would approve a poison pill, which, if triggered, would dilute the controlling interest of the Barclays.

Patrick McGurn, vice-president and special counsel at Institutional Shareholder Services, says: "The poison pill has become such a big issue simply because so many U.S. companies have resisted gaining shareholder approval for introducing it."

The U.S. debate has also gained traction across the Atlantic, where, curiously, the momentum is moving in the opposite direction.

Industry observers say European shareholders are becoming more open to poison pills, particularly as the pace of hostile bids increases on the continent.

Last December, the European Parliament agreed to a modified proposal for an EU-wide takeover directive that allows directors to block hostile bids by using multiple voting shares, or poison pill, defenses without shareholder approval. More recently, Iberdrola, the Spanish electricity company, which was subject to a failed $29 billion hostile takeover by domestic rival Gas Natural last year, revealed plans to adopt poison-pill measures.

However, last week, Iberdrola said it had postponed these plans at the request of the Spanish stock market regulator. The EU believes such measures could hinder competition in the industry.

Ironically, despite the slew of governance questions surrounding Michael Eisner's reign as Disney chief executive, the company's decision to remove its poison pill was originally seen as pioneering corporate best practice. How times have changed.