One of the most important developments in corporate law occurred 40 years ago when the Delaware Supreme Court approved an early version of the poison pill, a potent antitakeover device. The pill started as an untested, risky strategy to counter a particular type of potentially abusive tender offer. Over the ensuing decades, the poison pill evolved into an all-purpose antitakeover device that could effectively prevent almost any takeover, not just abusive ones.
Although hundreds of scholarly articles have been written about the poison pill, none has empirically examined the textual evolution of the device itself. The poison pill is simply a document, in the form of a contract, that spells out a mechanism for punishing a hostile bidder that engages in a hostile takeover. This Article uses a new database of the texts of 3,500 poison pills stretching back to the early 1980s to trace the evolution of the poison pill itself from its earliest beginnings to its modern form.
The analysis reveals that the poison pill was largely adapted from preexisting documents and did not emerge full-fledged at a particular point in time. Instead, the pill gradually evolved into its near-current form over a decade through innovations by multiple law firms. This challenges the standard narrative that the poison pill emerged from a single technological invention by one law firm. The revolutionary moment was not only the drafting of the document itself, but the Delaware Supreme Court’s endorsement of the instrument.
This Article argues that the innovation was not so much a technical one, as is commonly believed, but a policy innovation. The Delaware Supreme Court’s decision to validate the pill served essentially as a private antitakeover statute—it delegated to law firms the authority to enact and revise antitakeover law of the state through privately drafted contracts. This solved a problem of political gridlock in Delaware, where existing institutions were unable to provide a solution to the perceived problem of takeovers. This policy innovation may provide a roadmap for private law solutions to other public policy problems in corporate law.