Transplanting a Poison Pill to Controlling Shareholder Regimes—Why It Is So Difficult

Kang, Sang Yop | January 1, 2013

Recently, the great tide of globalization has caused M&A activities to spill over into controlling shareholder regimes (economies dominated by controlling shareholders). Due to a seismic change arising from an unprecedented takeover wave, transplanting the Delaware pill has been heavily discussed in controlling shareholder regimes. This Article explores how legal and socio-economic conditions of the United States (State of Delaware) and controlling shareholder regimes are different and why transplanting the Delaware pill could create unintended results in controlling shareholder regimes. First, the legitimacy of the Delaware pill is supported by corporate governance institutions, such as a relatively functional board, a ballot box safety valve, and an efficient judiciary. Many controlling shareholder jurisdictions, however, do not have these lynchpins. As a result, the transplanted pill in controlling shareholder regimes could be absolute and M&A activities would be stifled. Second, the Delaware pill has invited a large number of friendly deals in the United States since the market has adjusted to the pill by developing a generous severance pay system. However, such a system is not legally or politically permissible in many controlling shareholder regimes. As a result, the transplanted pill would not encourage friendly M&A, but simply entrench target corporate insiders. Controlling shareholders may be more interested in a control premium than severance pay. The transplanted pill could enhance a controlling shareholder’s negotiation leverage and, as a result, the control premium. However, when a control premium should be shared with non-dominant shareholders by law or social norm, controlling shareholders are likely to be reluctant to initiate M&A activities in the first place. On the other hand, when controlling shareholders are allowed to take a substantial fraction of control premium, it cuts directly against a core rationale of adopting the pill, i.e., protecting weak non-dominant shareholders.