Bankruptcy Poison Pills – New Attempts To Avoid Absolute Priority



Recently, bankruptcy lawyers representing debtors, whether or not they are conscious of the parallels, have begun including provisions in their chapter 11 plans which can best be described as poison pills. These plan provisions are intended to deter creditors or interested third parties from bidding on the ownership of a debtor at an auction of the debtor's ownership interest as required by the so-called absolute priority rule codified in 11 U.S.C. § 1129(b)(2)(B)(ii) and decisional law. While there appears to be no reported opinions ruling on these types of provisions, they are becoming more common and the adoption or validation of these provisions could significantly weaken what has been a fundamental protection of creditors in bankruptcy for over a hundred years.


"Corporations have long relied on so-called poison pills to protect themselves against hostile takeovers." Peter V. Letsou, Are Dead Hand (and No Hand) Poison Pills Really Dead?, 68 U. Cin. L. Rev. 1101, 1101 (2000). "Generally implemented by distributing rights to the corporation's existing shareholders to acquire new shares of common stock at below market prices, poison pills operate by threatening would-be acquirors with severe economic penalties should they proceed with offers while the rights remain outstanding." Id.

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