To Adopt or Not to Adopt: Poison Pills in the Wake of COVID-19
The Background: Equity prices have collapsed in the past month, making many companies vulnerable to opportunistic and abusive takeovers and activist tactics.
The Issue: How should companies respond?
The Outcome: Depending on market capitalization and other factors, companies should consider taking potential response actions, including ramping up stock watch programs, IR programs, and, potentially, adopting limited-duration shareholder rights plans.
As boards convene to discuss the implications of the current situation on, among other things, their employees, supply chain, finances, and overall business, takeover preparedness should be evaluated. Given huge declines in stock prices, many companies believe that they may be vulnerable to coercive or abusive takeover practices or activist programs and are considering defensive measures. Last week alone, six companies adopted shareholder rights plans, or "poison pills"; many more put them "on the shelf."
Avoiding Premature Adoption of a Shareholder Rights Plan
Companies with market capitalizations over $2 billion have a measure of protection through HSR Act filing requirements that smaller companies do not have, at least with respect to potential opportunistic takeover bids. While big cap companies can be vulnerable to activist accumulations given techniques available to certain investors, their size alone provides a measure of protection, at least until today's record volatility levels subside. Big cap and all other companies would, we believe, be well advised to ramp up stock watch programs to closely monitor their shareholder base, trading patterns, and share accumulations and maintain open lines of communication with their shareholders. Lastly, boards of big caps should be prepared to adopt a rights plan on short notice if it is warranted by an activist intervention or other event. This so-called "shelf" rights plan approach means educating or refreshing the board on what rights plans are and how they work, but not actually adopting a plan until specific circumstances warrant.
Considering Adoption of a Shareholder Rights Plan
Companies with market capitalizations under $2 billion should consider adopting a shareholder rights plan if they are confronted with an accumulator or if other circumstances warrant and, at a minimum, should go through the "shelf" rights plan process. Medium to smaller companies are generally not afforded the advance notice protections provided by HSR filings.
Even if unaware of such activity in its stock, a smaller cap company with a sufficiently depressed share price may still reasonably determine that there is a credible threat of such activity materializing and could adopt a plan.
The specific terms of a plan (duration, trigger percentage, grandfathering, etc.) cannot be determined in the abstract but depend on a company's particular circumstances, including whether or not an accumulator is known to be at work.
Don't Forget about the Proxy Advisors
ISS and Glass Lewis have historically been highly critical of rights plans and recommended "withhold" votes for directors/nominees if a board adopted a rights plan without shareholder approval. However, with sufficient justification from the company and a commitment to put any renewal to a shareholder vote, both ISS and Glass Lewis can be amenable to plans with a duration of less than one year.
Whether or not proxy advisors will recommend for or against a rights plan without a commitment to put it to a shareholder vote will depend on the particular circumstances at hand—whether the company has an accumulator, how long a period until the company's annual shareholder meeting, and the terms of the plan. In this regard, messaging is critical. Accompanying press releases and Form 8-Ks must emphasize the company's intent to prevent an abusive or coercive takeover, not an intent to prevent an activist from accumulating a stake. Furthermore, the short duration of the plan should be emphasized, and, if applicable, a commitment to put the plan to a vote at the upcoming annual meeting or prior to any renewal should be made.
Two Key Takeaways
- Shareholder rights plans may be effective for certain companies in light of current market conditions, but companies also have other steps that should be considered available to them.
- Companies adopting shareholder rights plans should be purposeful and customize their plans according to their current circumstances, specifically with respect to duration, trigger, and shareholder approval.