There are ways to deter cheap bids for demerged companies.
UK shareholders were given a rare whiff of poison last month. The newly formed Millennium Chemicals, operating predominantly in the US, will be given a poison pill when it is demerged by Hanson. Christopher Collins, the parent group's vice-chairman, explains: 'Millennium's share price will probably be weak for a year or so after the demerger, as UK shareholders sell up. The purpose of the pill is to prevent a bidder buying the company on the cheap during that time. A bidder is unlikely to succeed unless he pays a price that satisfies the directors.'
'If it was a UK company we would not find it acceptable', protests Jim Stride, a fund manager at Sun Life. A second fund manager, who prefers not to be named, is less polite: 'It's a nonsense for Hanson to say it will release value by demerging, and then tell us the demerged shares will be so depressed by the exercise that the key to their value will be held by Millennium's board.' The effect of the pill will be to dilute the holding of anyone rash enough to buy - or offer to buy -15% of Millennium's shares without first securing the board's approval. All other shareholders would thereupon be able to buy new 'series A preferred shares' entitling them to significant dividends, votes and at least $67 worth of the bidder's shares in the event of a takeover.
Poison pills are constantly being popped on Wall Street, and have been since they were first developed to fend off greenmailers, dawn raiders and attempted takeovers of the mighty by the cheeky. Thus Millennium's pill seems uncontentious among fund managers specialising in the US. Speaking of pills in general, Robert Siddles, who runs the US desk at Gartmore, says: 'They were an issue in the 1980s, but they aren't any longer. I've seen them benefit shareholders by forcing the bidder to pay up.' Dell Computer, Westinghouse and Northwest Airlines are just three big corporations that have adopted poison pills in recent months.
So why hasn't the practice spread to the UK? In fact it has. The articles of submarine builder VSEL forbade anyone from owning more than 15% of its shares. Its takeover by GEC required an extraordinary general meeting to vary the articles. In such situations it's best for the bidder to have the support of the target's board.
However it's true that UK companies cannot administer a poison pill to frustrate a bid that has been made, or which is about to be. That's forbidden by Rule 21 of the Takeover Code ('no action to frustrate an offer ...' etc). Perhaps more important, British law and British institutional shareholders allow directors little latitude over the issue of shares.
In the US, the board merely has to judge that a share issue is in the interests of shareholders. In the UK, any significant issue requires share-holders' specific say-so. US boardroom decisions lead to poison pills which would never have been approved by UK shareholders, and their approval is therefore rarely sought. Of course, as any commercial lawyer is quick to explain, US shareholders who believe their directors have not exercised proper judgment can always go to law.
In practice pills probably elicit slightly better offers as often as they frustrate slightly mean ones. Their existence means that a bidder has to attract the support of a clear majority of the target company's shareholders. A pill might foil a $30 per share offer, say, which could narrowly have won control. But if $33 clearly has the support of shareholders, the target's directors could be too worried about class actions to deny the bidder their approval - which will immediately neutralise the pill.
As Freshfields lawyer William Lawes says: 'If a bidder is determined enough, it will prevail over all defences, however poisonous.'.