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Court Of Chancery Explains Pill Limits

Posted In M&A

Yucaipa American Alliance Fund II, L.P. v. Riggio, C.A. 5465-VCS (August 12, 2010)

In this important decision, the Court of Chancery explains the limits on what may be included in a poison pill.  Briefly, the pill must not preclude a successful proxy contest.  This may mean that a pill that is triggered by a very low threshold is invalid.  However, a pill that does preclude joint proxy solicitations seems permissible.  In any event, the Unocal test will be applied.

The Court's very careful analysis is well worth studying.  For as it makes clear, the process used to adopt the pill is important with, as usual, the role of independent directors being critical. The effect of the pill under the particular circumstances is also important and while the Court does seem willing to accept the judgment of the Board when the process is sound,  the facts will be reviewed in a sort of balancing test to see if a proxy contest is precluded by the pill.

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