News

Shark Repellents and Poison Pills

By: Dennis Gardiner, Partner email

Now how do these terms fit into the Coop world? Actually, they are quite timely. Our clients have built their retained earnings quickly over the last few years, particularly as they utilize the benefits of the Section 199, Domestic Production Activities Deduction, to eliminate or lower the income taxes associated with a large portion of what has been retained.

As we visit our clients this year, we have found ourselves discussing retained earnings, qualified patronage, non-qualified patronage and retaining or allocating the benefits of Section 199. The topic of how much retained earnings is appropriate keeps surfacing as well. One of the concerns that comes up is how the proceeds of a sale of the company would be distributed if the company were to sell. And, with the retained earnings being significant relative to the equity in the names of the members, the concern turns to how vulnerable the cooperative is to an offer that could be perceived as attractive to the members but would end up being a discounted sale of the coop– one heck of a bargain for a buyer.

Shark repellents and poison pills are some of the defensive mechanisms that are designed to make a potential acquirer deal with the board of directors. Shark repellents reduce the desirability of the company and are used to stall the transfer of control over a period of years once the acquiring company has acquired a majority of the shares of the company they are trying to buy (target). The idea is that the company will be continually less desirable to the potential acquirer the longer they have to wait for control once they acquire a majority of the target company’s shares.

A poison pill is one of the defense mechanisms in another class of anti-takeover provisions that makes it difficult, or impossible, to acquire the necessary shares of the target company regardless of the desirability of the company.

What can your cooperative do to protect itself in an unsolicited take-over situation or in a friendly sale of a control transaction? The first step would be to engage an attorney who can advise you on a specific situation and ensure that the board’s actions are not likely to result in legal consequences later.

An unsolicited offer brings with it a plethora of practical and legal considerations. It is important for cooperatives to have in place defense mechanisms before an offer is made that will enable the board of directors to act as a buffer between the acquirer and the shareholders. With the success of many of our clients over the past several years, now might be as good as time as any to look into what would happen if another company set its sights on your cooperative.

Source: 2009 Summer edition of the NSAC’s “The Cooperative Accountant” written by David P. Swanson, Dorsey & Whitney LLP and Charles L. Woltmann, Sunkist Growers, Inc.