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Comment by codedokode | Hacker News Reader

I don't really understand how this "poison pill" is legal. Imagine that you own a stock that can be sold at free market at $10/share. Then the board decides that whoever buys those shares will have to resell them to board members at $1. This means that now the price of those shares drops to $1 and you have lost $9 per share. How this can be legal?

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That’s not the way it works. So of course it sounds illegal because you’ve made up an illegal scenario.

When the board triggers this clause, they may sell shares to existing shareholders at a discount. These are new shares. Companies have every right to sell shares outside of the exchange they’re listed on… and they do that all the time, through employee grants or options, for example.

When raising funds they generally sell new shares on the exchange, because that’s the highest price they can obtain for the share.. but they don’t have to do that.

And yes, in case you didn’t know, companies can sell as many shares as they want.

There must be some expectation about the rate of share issuance, I think that's what the parent comment is getting at. ESOP pools are well understood (and IIRC defined upfront). Threatening to sell massively discounted shares equivalent to existing shares without even so much as an SEC filing about it (as of a few hours ago), that's the part where it becomes questionable for me. If the new shares are marketable, then this is a defensive measure that actively destroys value for all existing shareholders.

A company cannot issue unlimited shares without concern for existing shareholders - taken to the extreme, doing so reduces the value of all holdings to zero.

Why doesn’t the board just issues shares to existing holders whenever Elon goes over 15%? You effectively dilute Elon out of getting over the 15%? It seems like the only difference with the poison pill is that you have to pay a discounted rate instead of getting new shares for free. But if the company can issues discounted shares to prevent a takeover why don’t they just issue free shares to prevent a takeover?

For example, if Elon goes to 16% ownership why doesn’t the board just distribute new shares to existing owners pro-rata to the point where Elon is back to 15%?

All of this seems pretty sketchy to me. I don’t see how the board is legally allowed to do this.

A company can't pay a dividend to some shareholders but not others. This action would effectively be giving in-the-money call options to some shareholders but not others. Probably legal, but pretty dodgy.

> company can't pay a dividend to some shareholders but not others

But it can sell shares to some and not others [1]. (This was a landmark decision [2].)

[1] https://law.justia.com/cases/delaware/supreme-court/1985/493...

[2] https://en.wikipedia.org/wiki/Unocal_Corp._v._Mesa_Petroleum....

Thanks for the links. Goodness what a mess of a precedent.

Having the board ignore a large shareholder would be one thing. Shares give votes, and terms don't turn over every day, and we don't kick out politicians as soon as the polls turn sour on them. Fine. But if a shareholder has enough shares to change the board composition (or just threatens to) the incumbents can just unilaterally decide that the challenger owns a smaller fraction of the company than they bought on the open market? Maybe it's not technically self-dealing, but it's bad.

Poison pill shares are new shares, issued by the company and then sold to existing shareholders (with the exception of anybody who owns more than say, 15%). Since these shares are sold at a discount to the current market price, it is arguable that existing shareholders are benefiting as they now get more shares at a cheaper price, while also screwing over anybody who is trying to get >15%.

Now, you may argue that it is in the best interest of the shareholders to allow the hostile takeover to go through, but it appears that the strict mechanics of the poison pill do not immediately hurt shareholders.

> poison pill shares are new shares

There are many varieties of poison pills [1].

[1] https://en.wikipedia.org/wiki/Shareholder_rights_plan

Issuing new shared dilutes the shares that all holders have. To benefit they have to purchase more, even though it's at a cheaper.

It's based on a constrained interpretation the business judgement rule [1][2][3].

[1] https://en.wikipedia.org/wiki/Business_judgment_rule

[2] https://en.wikipedia.org/wiki/Moran_v._Household_Internation....

[3] https://en.wikipedia.org/wiki/Unocal_Corp._v._Mesa_Petroleum....

Same. If I own 10% of a company, how can the board just decide through some mechanism that I now really own like 8% ?

Actually yes, this is often called "dilution", and it's common in companies that are raising money by selling stock. I'm sure there are complicated rules about when it's allowed and how much is allowed, but I don't know what they are.

They can always do that, by just issuing more shares. In fact, if you buy X shares, the percentage of the company you own could well decline over time. Or increase, in the case of stock buybacks.

Are there guardrails on this? This comment makes it sound like the board can print their own money.

> Are there guardrails on this?

If you've ever wondered why corporations have authorized and issued shares, there you go. Increasing the authorized share count requires a shareholder vote. Issuing shares under that cap does not. When shareholders increase the number of authorized shares, they are delegating that decision making to the Board.

It wasn't always like this. But as finance sped up, particularly towards the end of the 19th century, a railroad company which had to hold a shareholder vote to raise emergency equity because their free banking deposits in Nevada went bust would find itself systematically outmaneuvered by the ones who had pre-approval to plug the hole. As a result, most corporations now authorize the maximum number of shares reasonably possible, in almost all cases only moderated by some states' franchise taxes varying by number of shares.