Misnomer in ‘poison pill’ label

The public airing of the intracorporate dispute among the members of the third generation of the Lopez clan has drawn attention to a term that is hardly used, if at all, in the local business community: poison pill.

The major stockholders of the Lopezes’ holding company described as poison pills the provisions in contracts entered into by the company with third parties that required the continued stay of Federico “Piki” Lopez and his assignees in high management positions under pain of possible loss of majority control.

But taken in the context of the derivation of that term and the business activity to which it is meant to apply, the description of those provisions is disputable.

That term first gained popularity (or notoriety) in the United States in the 1900s when some venture capitalists preyed on iconic US companies that were having serious financial problems.

Those speculators bought shares in those companies that were sufficient to initiate a proxy fight for management control or used their stockholders’ rights as a platform to make life difficult for management for ulterior reasons.

If the targeted management felt beleaguered by their action or wanted to avoid a costly corporate fight with no certainty of victory, it would offer to buy back their shares at outrageous prices.

To stave off that threat, some companies put provisions in their bylaws that would prevent or discourage attempts at hostile takeover or make it so expensive that the people behind it would be forced to back off.

Those provisions were romanticized by the US media then as poison pills because of their adverse financial effects on unwanted company gatecrasher in case they are triggered.

A classic example is a provision that states that if the board of directors declares the purchase of the company’s stock as indicative of a veiled hostile takeover, the stockholders, except the so-called intruders, shall have the right to buy unsubscribed shares at, say, 50 percent discount of its par or book value.

That purchase would enable those stockholders, acting collectively and at the behest of management, to dilute the voting strength of the new entrants and be able to maintain the status quo.

Unless it can be shown, for example, that the poison pill is discriminatory (which it is not because it can be availed of by all existing stockholders without distinction), that provision is considered a valid exercise of the right of the board, whose members are presumed to represent the stockholders’ interests, to manage the company in a manner it deems fit.

The poison pill idea fell out of favor later because the companies that were susceptible to hostile takeover had taken appropriate steps to improve their corporate governance to prevent attempts by outsiders to play on stockholder dissatisfaction with management to gain control.

To this writer’s knowledge, there has been no instance yet in the local business community that a poison pill provision, in the manner that it was originally conceived, has been adopted by any reputable corporation or otherwise been the subject of regulatory inquiry.

Note that the elements that apply to poison pills do not exist in the scenario of the Lopezes’ intracorporate dispute.

In the first place, there is no hostile takeover that can be attributed to Prime Infrastructure Capital, Inc. because it bought the shares of First Gen Corp. with the prior consent and approval of its board.

And not only that, Prime Infra was given the right to buy additional shares at a discount in case Piki Lopez and his assignees lose their managerial positions and, in the process, enable it to gain control of First Gen.

For all intents and purposes, Prime Infra cannot be considered the intruder that the claimed poison pills are supposed to ward off.

From the looks of it, the fight among the Lopez cousins may get uglier, with Piki Lopez asking the Securities and Exchange Commission to look into alleged fraudulent activities in sister company ABS-CBN.

Hell hath no equal to scorned family members!