Can the board of directors adopt a poison pill to manipulate a stockholder vote?
Admittedly, that’s a bit of a loaded question, and one to which we may not receive an answer.
At the end of last November, the board of directors of SandRidge Energy adopted a poison pill to, according to the company’s press release, “protect the interests of all shareholders and preserve their ability to fully consider all information related to the proposed Bonanza Creek merger… and vote as they see fit.”
On November 17, 2017, SandRidge announced that it had agreed to acquire Bonanza Creek in a cash-and-stock deal. On November 20, 2017, Fir Tree Partners filed a 13D disclosing its 8.2% position in SandRidge and announcing its opposition to the deal. Two days later, Carl Icahn filed his 13D disclosing a 13.5% stake and announcing his opposition to the deal. SandRidge adopted the poison pill on November 26, 2017.
In analyzing the validity of the adoption of a pill, a board will have to defend its actions under the so-called Unocal standard. That is, did the board have reasonable grounds to believe a threat to corporate policy existed, and was the action taken by the board reasonable in relation to that threat? (The Delaware Chancery Court has even suggested that in certain contexts, it would be a breach of the board’s fiduciary duties not to adopt a poison pill.)
The validity of a board’s adoption and use of poison pills in various contexts, e.g., to prevent an unsolicited acquisition or protect the company’s net operating loss tax credits, is well established. The SandRidge press release announcing the board’s adoption of the pill pays homage to those approved uses by stating the pill “is designed to deter the acquisition of actual, de facto or negative control of the company by any person or group without appropriately compensating its shareholders for such control,” and “[m]oreover, the Rights Plan could potentially preserve the Company’s estimated $470 million (as of December 31, 2017) of usable tax net operating loss carryforwards by deterring an ‘ownership change’” under the tax code.
It appears from the context in which the pill was adopted, however, that the true reason was to prevent existing stockholders from accumulating more stock, or coordinating with other stockholders, to vote against the Bonanza Creek deal.
Fir Tree first announced it had acquired over 2 million SandRidge shares in a 13G filing on December 31, 2016. It acquired another 310,000 shares before September 2017, and then another 600,000 shares around when SandRidge announced the Bonanza Creek deal. Perhaps the SandRidge board was not concerned with Fir Tree’s stake as it relates to an unsolicited deal or SandRidge’s NOLs.
The SandRidge board adopted the poison pill, however, only after both Fir Tree and Icahn, existing SandRidge stockholders, came out publicly against the Bonanza Creek deal. To be fair, while Icahn acquired many of his shares before the deal was announced, he only announced his ownership of SandRidge stock after the deal was announced. Also, in announcing its opposition to the Bonanza Creek deal, Fir Tree converted its 13G filing to a 13D filing, which indicates a change in investment intent from passive to active. That said, other than announcing their opposition to the merger, neither stockholder threatened to take control of the board or the company or even to solicit votes against the deal at the time the SandRidge board adopted the pill.
In this situation, existing stockholders of SandRidge simply articulated their belief that the Bonanza Creek deal was bad for the company. Is it reasonable for the board to disenfranchise stockholders by blocking their ability to acquire more stock, or work in concert with other stockholders, to vote against the merger? Or is a more reasonable response to Icahn’s and Fir Tree’s public stance on the merger for the board to control the narrative and convince stockholders to approve the deal?
Unfortunately, we will probably never get an answer to these questions. On December 28, SandRidge announced that it had agreed with Bonanza Creek to terminate the merger agreement stating, “After consultation with SandRidge’s largest shareholders, it became clear that the Company would not receive approval for the transaction at the planned special meeting.”
Days prior to this announcement, Icahn commenced a proxy contest to solicit votes against the deal after receiving a letter from SandRidge’s counsel stating that soliciting proxies, by itself, would not trigger the pill. It seems likely that Icahn will run a proxy contest to replace some or all of the current members of the SandRidge board. He has already sent a letter to the board demanding a seat in the boardroom and redemption of the pill. Whether or not he needs to challenge the pill to do so, and whether we’ll receive any guidance on the use of poison pill in this context remains to be seen.