December 17, 2019

Antitakeover: The Shadow Pill Flexes Its Muscle

Remember a few weeks back when I blogged about Xerox’s bear hug letter to HP’s board? In the closing paragraph of that letter, Xerox said that if HP didn’t agree to move forward with mutual due diligence, it would take its case directly to HP’s shareholders:

Accordingly, unless you and we agree on mutual confirmatory due diligence to support a friendly combination by 5:00 p.m. EST on Monday, November 25, 2019, Xerox will take its compelling case to create superior value for our respective shareholders directly to your shareholders. The overwhelming support our offer will receive from HP shareholders should resolve any further doubts you have regarding the wisdom of swiftly moving forward to complete the transaction.

If you parce the language closely, you’ll note that for all its bluster, Xerox never said that it would launch a hostile tender offer for HP.  Over on the “M&A Law Prof Blog,” Brian Quinn has an explanation for why Xerox didn’t take that step:

John Coates pointed out over a decade ago that every company has a “shadow pill”. A poison pill can be adopted by a board very quickly with no requirement that they get stockholder approval. Consequently, even though HP doesn’t have a pill in place now, it could have one in 15 minutes. Xerox knows that, so no hostile offer is forthcoming. Rather, by engaging with HP shareholders they are hoping to get HP to come to the table to negotiate a deal on Xerox’s terms. Market pressure to take the deal will, they hope get this across the finish line.

Prof. Quinn cites a recent study that says in today’s environment, pressure by institutional investors is a much more powerful force in corporate governance than any mandates imposed by corporate law.  Xerox must have read the same study, because they’ve recently been busy pitching the proposed deal to HP’s institutional investors.

John Jenkins