March 26, 2018

Antitakeover: NC Business Court Enjoins Poison Pill

Last week, in First Citizens Bancshares v. KS Bancorp (NCBC; 3/18), the North Carolina Business Court preliminarily enjoined the target of a hostile takeover attempt from using its recently adopted “poison pill” rights plan to thwart a bidder’s ongoing efforts to accumulate the target’s stock.

KS is privately-held, and its board adopted the rights plan in February 2018 in response to First Citizens’ purchases of shares from existing shareholders. Shortly after the company announced the pill’s adoption, First Citizens sought to enjoin it, arguing that under North Carolina’s Business Corporations Act, only public companies may adopt poison pills that discriminate against shares of the same class.

KS responded by contending that the statute permits all companies to enact pills – and that in any event, the statute only prohibits discrimination between shares, not between shareholders. It argued that the pill didn’t treat shares of the same class differently, just certain shareholders.

The Court concluded that First Citizens had the better of the argument when it came to interpreting the North Carolina statute:

The Court concludes that the plain meaning of the relevant statutes cited above, when read together, is that only public corporations as defined by the NCBCA are authorized to adopt poison pill shareholder plans that “preclude or limit,” “invalidate or void,” or otherwise discriminate between the rights attached to shares within the same class of stock. See G.S.§55-6-24. In other words, Section 55-6-24, permitting public corporations to discriminate between the rights attached to shares within the same class of stock, functions as an exception to the general rule in Section 55-6-01(a) that “[a]ll shares of a class must have preferences, limitations, and relative rights identical with those of other shares of the same class” unless divided into series.

The Court likewise rejected KS’s argument that its pill discriminated between shareholders, not shares – noting that other provisions of the North Carolina statute “support the notion that shares cannot be practically separated from shareholders’ rights arising out of those shares.”

While North Carolina’s statutory language loomed large in this decision, it’s worth remembering that even in Delaware, the status of poison pills adopted by privately-held companies seems less well-settled than it is for those adopted by their publicly-held peers. As Broc blogged at the time, it wasn’t all that long ago that the Chancery Court invalidated a poison pill adopted by the founders of privately-held Craigslist in response to a challenge from eBay.

John Jenkins