Joseph M. Grieco
The poison pill has been a staple of Delaware corporate law for several decades. It was originally developed to ward off hostile takeovers and has been quite successful. Given the potency of the pill, Delaware courts have always applied an enhanced level of scrutiny, the Unocal test, when a board of directors’ decision to implement the poison pill is challenged. There has been a recent spate of litigation involving the poison pill in situations not previously litigated including Air Products & Chemicals, Inc. v. Airgas, Inc.; Versata Enterprises, Inc. v. Selectica, Inc.; andeBay Domestic Holdings, Inc. v. Newmarki.
This Note reviews the history of the poison pill including attempts to expand the potency of the pill in takeover situations, from alterations in the 1990s to the recent court decisions which discuss the use of the poison pill in combination with other corporate mechanisms, specifically the staggered board. The Note then focuses on the recent evolution of the poison pill outside of the corporate takeover context. The poison pill has been used successfully to protect corporate assets and unsuccessfully to protect corporate culture.
This Note argues that context is key when courts review poison pills, particularly when they are implemented outside of a corporate takeover. Corporate law is constantly evolving; this will create growing pains as the Delaware courts grapple with these new mutations. As the poison pill is increasingly used in innovative ways the courts must remain cognizant of the context in which directors are acting, to ensure the appropriate standard of review is applied. The Unocal test is highly dependent on the takeover context and exists to ensure that directors are not entrenching themselves when they decline a takeover offer. Applying this test to asset protection or closely-held corporation cases where there is no takeover offer, nor even an entrenchment motivation, may produce results that can unexpectedly stunt the growth of this developing area of corporate law.