The last period has brought back to the life of investors a term that was almost forgotten during the period of increases in the markets: poison pill. The sharp declines in the value of technology companies in the past year have led to cases where certain parties see before their eyes the possibility of taking over those companies in a hostile way, at a much lower price than they would have paid if they had done so during the period of the high tide in the markets.
The directors and management in companies that are the target of a hostile takeover are reluctant to such a move, which will usually lead to their replacement, and may in such a case adopt a defense mechanism known as a “poison pill” – designed to make the takeover attempt more difficult.
Thus, a few months ago the social network Twitter adopted a poison pill in an attempt to fend off a takeover attempt by billionaire Elon Musk, and in contrast, in recent weeks we learned of two Israeli technology companies that announced the adoption of a poison pill – the 3D printing company Stratasys (after the competitor Nano Dimension purchased 12% from its shareholders) and the video solutions company Kaltura (whose competitor Panopto wants to take over). In both cases, the program was activated for a year.
What is a poison pill? Dr. Assaf Eckstein, an expert in corporate and securities law and a senior lecturer at the Faculty of Law of the Hebrew University, explains that “a poison pill is a program under which the company assigns to the existing shareholders the right to purchase additional shares, at a very significant discount compared to the market price that he sees in front of him taking over outside the company.
Dr. Assaf Eckstein / Photo: Bruno Sharvit
“Simply put, the target company’s board of directors determines that in the event that a shareholder from outside the company arrives, who passes a certain holding threshold decided by the board of directors – let’s say 10% or 20% – the ‘pill’ is triggered, and the existing shareholders are offered to buy additional shares at a very significant discount. But this is directed Only for the current shareholders. Activating the poison pill increases the pie, the amount of shares, and then it will be more difficult for an outside taker to take over, because it will cost him much more.”
According to him, regarding the Israeli market, in the past there was nothing to talk about such mechanisms, because the market is mostly controlled by companies with dominant controlling owners, and when there is a dominant controlling owner, there is no chance of a hostile takeover anyway. According to data from 2020, only about 12% of the public companies in Tel Aviv were without a core of control, and their market value constitutes about 20% of the market value of all public companies.
“This trend is continuing, so we are expected to see more companies without a core of control, mainly because the private benefit from control is shrinking,” he says. “I mean, in a significant number of companies we are actually moving from the rule of the controlling owners to the rule of the managers. The one who sets the tone is the board of directors, and then we can talk about an attempt to take over and someone who can come from the outside. If the largest holder of the public company owns, say, 5% of the shares, it is clear that the takeover Hostility is possible. This is what we will probably see more in Israel. The cores of control are crumbling.”
According to him, in a hostile takeover, as opposed to a friendly acquisition in which the buyer contacts the board of directors, presents the plans and sources of financing and conducts negotiations on the terms – the collection of shares on the stock exchange begins, up to the point of a purchase offer of course. “Hence the terminology – a hostile takeover, meaning hostile in my eyes The target company’s board of directors,” says Eckstein.
Is it good or bad for shareholders?
“The million dollar question is whether a poison pill is a good thing or not? And the answer is that it depends on the circumstances,” notes Eckstein. There is always a tension between the fact that a poison pill can allow the board to become entrenched, and this is not good for the shareholders, because in effect the takeover mechanism is prevented from being used, which is an essential market mechanism that can restrain the officers. On the other hand, the pill can make it possible to fend off a takeover that might abuse a situation in the markets – then it helps the shareholders. In the US, there is a debate between legal scholars and economists, but there is no clear finding – whether the use of defense mechanisms against hostile takeovers, and in the process a poison pill – is beneficial or harmful to the target company.”
Eckstein points out a case where the poison pill may turn out to be a good thing: “Suppose there is a proposal from a hostile takeover, ‘over the head’ of the board. The board says the proposal is not good and takes defensive measures like a poison pill. This starts to set a process in motion, there are headlines in the newspapers, and new bidders arrive, Or the takeover raises the price.”
The situation in the markets has an effect, and according to Eckstein, the market may underprice the stock due to several reasons – the inefficiency of the market, short-sightedness of the investors or reasons related to the unique vision of a company investing in a project that is complex to understand.
Eckstein adds, that in the context of hostile takeovers, the law in Israel on the subject is still undeveloped, while in the US there is the UNOCAL rule, which was established about 40 years ago. Can allow the management to fortify themselves for self-interested reasons, but on the other hand can make it possible to fend off an unwanted takeover in terms of the good of the company.
“Therefore, the board’s decision to use the poison pill is not immediately examined under the judicial review standard of a business judgment rule that gives a presumption of correctness to the decision, but neither do we go to the other extreme, nor examine the decision with the strictest standard of complete fairness.
“The standard of judicial review in relation to the decision to use the pill is an intermediate standard of enhanced scrutiny. The board of directors will be protected by the rule of business judgment if it proves the existence of two cumulative conditions: one, that it believed in good faith and on the basis of a reasonable examination that there was a threat to the target company from the hostile takeover, and that the measures taken against the attempted takeover are proportionate to the threat.”
The case of Netflix, the case of Israel Canada
Attorney Oded Kadosh, a partner at the Pearl Cohen firm, which specializes in mergers and acquisitions, recognizes an increasing trend in the use of poison pills in recent years. “The reasons are varied, starting with opportunities after significant price drops, continued low interest rates, and ending with difficulties in raising capital in the markets in general,” he says.
Adv. Oded Kadosh / Photo: Tomer Jacobson
According to him, “In general, companies that have maintained reasonable performance parameters, and whose shares have fallen over 50% in the last year, are a potential target for a hostile acquisition or takeover. Kaltora is a good example of what we expect to see with other companies – the company received a purchase offer and at the same time the shareholder collected shares in the market. The poison pill mechanism that was installed is a right for the shareholders to purchase a new type of shares, which confer significant excess rights (in dividend distribution and the sale of the company).”
Kadosh points out that it should be noted that if the poison pill is activated, it is a move that will result in a significant dilution of anyone who does not participate. Therefore, according to him, “while a poison pill may strengthen the stock in the immediate term, in the medium term it may create pressure on the price, because investors, especially institutional ones, are usually hesitant to invest in companies that rigidly defend against acquisition.”
What examples are there of cases where the poison pill was successfully activated?
“One of the more well-known cases is the adoption of a poison pill by Netflix in 2012 against a potential hostile takeover by investor Carl Aiken, who reached a 10% stake. Aiken, who is considered an activist shareholder, estimated that Netflix would be coveted by giants such as Amazon, Verizon and Comcast. In the event The pill worked and Aiken stopped the purchases.
Another example can be seen in the case of Haim Katzman’s Israel Canada and Norstar, after purchasing over 20% of the shares. Katzman and the Norstar management constructed a kind of poison pill in the form of an in-kind distribution of Gazit Globe shares to Norstar shareholders; It seems that the move will lead to a compromise or a judicial decision, but today it seems that there is no viability for the continuation of the takeover by Israel Canada.”
Kadosh warns that there are cases, of which we are likely to see more, in which the activist investor will claim that the poison pill adopted by the board of directors is not in line with the interests of the shareholders.
What do you recommend to controlling owners or directors of companies that want to adopt a poison pill?
“To make sure that the poison pill mechanism is not perceived as an attempt by the management to ensure the continuation of its tenure, even if the company does not meet the forecasts or does not show impressive growth and an action plan. On the other hand, the pill mechanism should be carefully considered in terms of proportionality, both in terms of a trigger (one or more) for activation and in the aspect Effective duration.
“It is also necessary to examine the meaning of the mechanism for the company’s investors in the immediate financial aspect, as well as to try to assess whether this or that poison pill mechanism may lead to pressure on the stock in the immediate or medium term.”