The world's second- largest soft-drink maker, Pepsi Co has sued its bottler, the Pepsi Bottling Group (PBG), the world's largest manufacturer, seller and distributor of Pepsi-Cola beverages for its poison pill defence against the soft drink makers' proposed acquisition.

Pepsi filed a lawsuit in Delaware yesterday against PGB and certain board members for intentionally holding a board meeting without giving notice to all the directors of the PGB board and adopted a "poison pill," implemented certain new executive compensation packages and purported to amend the PBG bylaws in ways Pepsi believes are detrimental to its rights as a shareholder.

Since Pepsi is a majority shareholder in PGB by virtue of it's 33.1-per cent stockholding, it has two directors on the board of PGB. Both these directors were not informed about the board meeting called by PGB last week.

In the suit, Pepsi alleges, ''PBG and its board breached their fiduciary duties to PBG shareholders by adopting a shareholder rights plan, commonly referred to as a "poison pill," because it restricts Pepsi's rights as a PBG shareholder and constitutes an unreasonable and disproportionate response to Pepsi's constructive proposal.''

The suit seeks declaratory and injunctive relief.

On April 19, 2009, PepsiCo had offered to acquire all of the outstanding shares of common stock that it does not already own in its two largest anchor bottlers, Pepsi Bottling Group (PBG) and PepsiAmericas in its two largest anchor bottlers for a combined $6 billion. (See: Pepsi offers to buy out its two bottlers for about $6 billion)

Pepsi had offered PBG and PepsiAmericas (PAS), $29.50 and $23.27 per share respectively - a premium of 17.1 per cent over the closing price of the common stock of the two companies on 17 April.

In a move widely interpreted as posturing to get a better deal for its shareholders, PBG had rejected Pepsi's $4.2-billion cash-and-stock takeover proposal last week, citing the bid was ''grossly inadequate since Pepsi's proposal was made just prior to the public release of PBG's strong first quarter 2009 earnings released on 22 April. (See: Pepsi Bottling Group says Pepsi's $4.2 billion takeover proposal has no fizz)

On 4 May 2009, PBG announced that its board had rejected PepsiCo's proposal. In addition, PBG also announced that its Board had approved adoption of a shareholder rights plan, commonly referred to as a "poison pill," as well as retention arrangements for certain key employees and amendments to PBG's bylaws regarding notice and informational requirements for shareholder actions.

PGB said that the board had taken customary steps to protect PBG and its stockholders from opportunistic acquisition attempts by adopting of a stockholder rights plan, retention arrangements for certain key employees and amendments to PBG's bylaws regarding notice and informational requirements for stockholder actions.

Pepsico Bottling Group said in a statement, ''Pepsi has filed a lawsuit that is entirely without merit in an attempt to divert attention from its grossly inadequate proposal.''

Yesterday, the board of directors of PepsiAmericas (PAS) also rejected Pepsi's acquisition offer as the board felt that Pepsi's proposal was not in the best interest of the company's shareholders since it undervalued the strategic benefits of system consolidation.

While making the offer, Pepsi had said that the consolidation of its bottlers would bring in a saving at least $200 million a year, but both the bottlers believes that the synergies would bring in savings in multiples of $200 million.

Some analysts feel that Pepsi would realistically save at least $600 million annually and it should hike its offer to PGB from the present $29.50 a share to at least $38 a share while simultaneously increase its offer to PAS from $23.27 per share to $28 a share.

While making the offer last month, Pepsi had said that by acquiring both its bottlers in the US, the company would have the distribution of about 80 per cent of its total North American beverage volume, including both its direct-store-delivery and warehouse systems.

It also said that the acquisitions would create a leaner, more agile business model and provide a stronger foundation for Pepsi's future growth.