Market volatility has driven poison pill adoption conversations

The broader market has experienced unprecedented volatility over the past two months, with the S&P 500 shedding approximately 30% of its value at its recent trough in March. Heightened volatility has led to elevated concerns among boards over the potential for opportunistic bidders to leverage market volatility in a hostile takeover attempt, as investors have greater potential to double-down on current holdings or initiate large new positions. As board room discussions around opportunities to safeguard against unfriendly buyers have increased, so too have poison pill (also know as “shareholder rights plans”) adoptions.

Poison pill adoptions have increased tremendously in 2020

There were 27 poison pills adopted in Q1, 16 of which were short-term pills (defined as pills with a duration of one year or less), a likely indicator that the pill adoptions were driven by the potential for near-term hostile threats due to the velocity of the recent market sell-off.

The accelerated rate at which poison pills are being adopted shows no signs of slowing, as there have been 47 poison pills adopted year-to-date as of April 21, a figure substantially greater than the annual number of pills adopted in recent years. Based on the current trajectory of poison pill adoptions year-to-date, 154 plans are anticipated to be adopted in 2020, greater than five times the annual average number of plans implemented over the last decade.

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 *Projected number of poison pills adopted in 2020 based on YTD adoptions

Source: FactSet (as of 4/21/20)

Poison pill implementation considerations amid COVID-19-induced market volatility

Industry: Several industries (e.g., retail, leisure, and travel) have been severely impacted by recent market volatility and are therefore most vulnerable to hostile takeover bids.

Example: Spirit Airlines – March 30, 2020

  • After losing greater than 80% of its value in less than a month, Spirit Airlines adopted a limited duration poison pill.
  • Company rationale: “The COVID-19 pandemic has led to unprecedented disruption for the global airline industry. As a result, over recent weeks we have seen unique and severe dislocations in equity market valuations and, in particular, a substantial reduction in the share price of Spirit. […] We are adopting the Rights Agreement to protect against parties seeking to take advantage of the current market environment to the detriment of Spirit and its shareholders.”
  • Plan duration: 364-day duration; rights become exercisable if a person or group acquires 10% or more of the Company’s outstanding common stock.

Valuation: Companies with depressed valuations relative to their industry or peers are also at increased risk of unsolicited buyout bids.

Example: Dave & Buster’s Entertainment, Inc. – March 19, 2020

  • Dave & Buster’s adopted a poison pill after the company’s stock dropped nearly 90% relative to a month prior, as investors priced in substantial business impact from the COVID-19 pandemic.
  • Company rationale: “The Rights Plan is similar to plans adopted by other public companies, and is intended to promote the fair and equal treatment of all Dave & Buster’s shareholders and ensure that no person or group can gain control of Dave & Buster’s through open market accumulation or other tactics potentially disadvantaging the interest of all shareholders.
  • Plan duration: 364-day duration; rights become exercisable if a person or group acquires 15% or more of the Company’s outstanding common stock.

Activism: If a company has already been approached by a potential hostile bidder – or if a known activist currently owns stock – there is a greater risk of attack, particularly if the insurgent has a strong cash position.

Example: Occidental Petroleum Corporation – March 13, 2020

  • Occidental adopted a poison pill to fight a hostile takeover by activist investor Carl Icahn, after he obtained nearly 10% of the company’s stock.
  • Company rationale: “We adopted the Rights Agreement to protect stockholders from efforts to capitalize on recent market volatility and macroeconomic conditions to gain control of the company without paying all stockholders an appropriate premium for that control.
  • Plan duration: One-year duration; rights become exercisable if a person or group acquires 15% (or 20% in the case of passive institutional investors, as described in the Rights Agreement) in a transaction not approved by Occidental’s Board of Directors.

M&A: As M&A activity in place prior to the COVID-19-driven market sell-off begins to unravel due to the macroeconomic volatility swirling markets today, impacted companies are implementing shareholder rights plans to protect themselves from potential hostile takeover attempts.

Example: Woodward, Inc. – April 6, 2020

  • Woodward adopted a poison pill due to the market impact of the global pandemic and the termination of its planned merger with Hexcel.
  • Company rationale: “The Rights Plan is being adopted in response to the extraordinary business and market dislocations resulting from COVID-19 and the actions taken to contain it, as well as the termination of the Company’s merger-of-equals agreement with Hexcel Corporation as announced today, and not in response to any specific takeover threat.
  • Plan duration: One-year duration; rights become exercisable if a person or group acquires 15% or more of Woodward’s common stock without the approval of the Board.

Proxy advisory views on poison pill adoption

ISS and Glass Lewis have updated their policy guidance for poison pill adoption in light of the impact of the COVID-19 pandemic, and are taking a pragmatic, case-by-case approach. Both advisories will now consider companies adopting a poison pill as a result of ongoing macroeconomic volatility as reasonable context (and will generally not recommend that shareholders oppose the re-election of board members serving at the time of pill adoption), taking into consideration the following components on a case-by-case basis:

  • The duration of the pill is limited to one year or less
  • The company’s rationale for adoption of the pill including disclosure of imminent threats
  • Specific provisions including trigger points, terms, “qualified offer” provisions, and waivers for “passive” investors of the pill  

For poison pills that do not meet these criteria, or in cases where a company fails to put the pill up for shareholder vote in the future to renew it, ISS and Glass Lewis will likely recommend against the re-election of all board members who served at the time of the pill’s renewal.

Detailed disclosure is key

If you’re thinking about adopting a short-term poison pill as a result of the market environment today, make sure to provide convincing rationale behind your decision to do so. Before you adopt a pill, proactively communicate your justification to your top shareholders for putting a plan in place and ensure your pill requires shareholder approval for future renewal.