Poison Put Provisions in Debt Financing: Lessons on Enforceability From Recent Cases

Description

Poison put provisions are commonplace in debt financings.  They are change of control provisions in credit agreements and bond indentures that give debt holders a put right in the event of a turnover in the majority composition of a company’s board of directors.  Initially used to protect debt holders, poison puts have been increasingly used by companies to ward off shareholder activists by using the threat of a debt default to solicit votes in favor of the incumbent board.

Courts have long struggled with how to deal with these provisions, balancing the need for debt holders to know who they are dealing with against the rights of shareholders to have a say in board composition.

Poison put provisions were tested in the recent Delaware case involving a shareholder suit against Healthways and its lender regarding a “dead hand” poison put triggered if the directors were replaced, even with company approval. The court indicated the poison put was particularly onerous and allowed the suit to proceed to determine whether the company and its lender “knowingly” put forth the poison put.

Listen as our authoritative panel of practitioners discusses the use of poison put provisions in debt financings, various forms of poison puts and recent case law developments on the enforceability of these provisions.