Shareholder rights plans, or so-called poison pills, have long been a defense that corporate boards have utilized to deter hostile takeovers. But in recent years, the number of poison pills in place has declined significantly because institutional shareholders have opposed them. Investors have viewed any defense such as staggered boards or rights plans as inhibitors of value because they may deter suitors. The workings of the plans usually revolve around diluting the bidder through issuing more shares or allowing all shareholders except the bidder to buy more shares below market price. Voting control also is often diluted under a plan when it is triggered.
In fact, rights plans are still the most potent takeover defense available and there are two basic types – shareholder approved and tactical. The shareholder approved plan typically is put in place to deter inadequate takeovers and give the board time and alternatives to fight back. A tactical plan is adopted opportunistically to address a specific bid that the board wants to deflect.
According to Fact Set’s SharkRepellent, since 2007, 45 percent of companies that did not have a plan in place prior to an acquisition offer adopted one – and the trend is gathering momentum. Since the beginning of 2011, 11 of 15 companies that received hostile bids adopted a poison pill, including Human Genome Sciences (HGS) and Illumina.
An investor sued HGS for adopting a poison pill to fend off GlaxoSmithKline’s (GSK) $2.6 billion hostile bid. In his filing, Duane Howells alleged that the rights plan robs “the company and its shareholders of the opportunity to obtain a premium change of control transaction.” The suit accused management of acting to entrench themselves for their own financial interest. A judge quickly upheld the pill, noting that only one shareholder had sued.
Now GSK plans to launch a campaign to replace the entire board of HGS in order to advance its bid. HGS still maintains that GSK’s offer is inadequate, and seeks an auction of the company – a move that GSK hopes to cut off at the pass. Whether the poison pill and other defenses will do their job remains to be seen.
In a similar story, Illumina succeeded in fending of an approach from Roche through a vote by its shareholders that reelected management’s slate of directors. Had the Roche slate won, it could have killed Illumina’s poison pill and forced the company into deal talks. The stock went down upon the news, and there now is a class action suit alleging poor advice from Goldman Sachs, which advised Illumina to adopt the poison pill. Illumina’s position was that Roche struck at a time when the stock price was unusually undervalued and the rights plan was a necessary defense.
FactSet’s research reveals another interesting statistic: companies with poison pills are targeted more often than companies without them. Approximately 28 percent of the companies subject to unsolicited bids had poison pills in place, yet only about 25 percent of S&P 1500 companies have a right plan in force. This may well be due to the recognition by these companies that they are vulnerable.
All of this leads to the conclusion that public company boards would be well served to prepare for possible hostile bids and to view the company’s value through the eyes of their investors. Boards should listen to their investors so that they are not subject to surprise attack, and should pay attention to changes in the trading activity of their stock that signal large accumulations. If the stock is regularly trading below the company’s peer group, analyze why and consider actions to close the value gap.
Companies and boards should also establish a working group to defend against inadequate offers, and think through what actions are available to the board in advance of a surprise bid. When a bidder appears, be objective about whether it is in the interests of shareholders to go to war to resist a takeover, or whether shareholders would be better served through negotiation of a friendly deal.
At the end of the day, a poison pill is an important weapon in the defensive arsenal – but not a fool-proof solution.
Kathleen Wailes is a Senior Vice President at Levick Strategic Communication, the nation’s top crisis firm. She is also a contributing author to Bulletproof Blog™.