The Tale of Poison Pills and Activist Investors

J.C. Penney recently announced amendments to its poison pill plan a defense strategy against potential hostile takeovers extending its expiration from 2014 to 2017 and lowering its threshold of ownership from 10% to 4.9% – in a bid calculated to protect its net operating loss carry-forward as well as lessen the likelihood of an unwanted takeover. According to Reuters, “[t]he poison pill, initially set to expire in August 2014, will be valid until January 26, 2017 unless shareholder vote against it at the annual meeting in May.”

Liz Hoffman, in her article “How J.C. Penney’s Reworked Poison Pill Can Protect Tax Benefits – and Ward Off Activists” for The Wall Street Journal’s Blog MoneyBeat, reports that the net operating loss pill utilized by the retailer will “preserve $2 billion in tax perks it could use to trim future tax bills.” The imposed 4.9% threshold also has the built-in ability to ward off attacks by activist hedge funds who often aim for stakes in the 5% to 15% range. Ben Fox Rubin of The Wall Street Journal reports that according to the company, “[e]xisting stockholders who currently own 4.9% or more…would trigger the plan only if they acquire additional shares, subject to some exceptions…”

Known officially as the shareholders rights plan, the poison pill’s invention in 1982 is credited to the famed lawyer Martin Lipton, founding partner of the law firm Wachtell Lipton Rosen & Katz. He created the poison pill in order to defend El Paso from an unwelcome takeover attempt by Burlington Northern Railroad. The move was later popularized when the Delaware Supreme Court affirmed its legality in 1985. In a 2010 Wall Street Journal article by Shira Ovide, Lipton explained that he dreamed up the anti-takeover defense in order to level the playing field and to give the boards of a target company the time to weigh their options.

“For decades, poison-pill defenses typically were triggered when a shareholder’s stake reached 20% of the company’s stock outstanding,” writes Liz Hoffman in her article “Bitter Medicine in Store for Activists” for The Wall Street Journal. “Once that happened, the company could flood the market with shares, diluting the shareholder’s stake and reducing the holder’s influence.” However, she explains that such a threshold was “more suited against corporate suitors wanting to wage a hostile takeover and not activists, who can often wield influence with much smaller stakes.”

Activist investors, writes Hoffman, are “those who take stakes in companies with the aim of pushing management to boost returns through increased share buybacks, higher dividends or even a breakup in the company.” Such investors, she adds, have become a growing force in companies in the U.S. Just last year, John Carney of CNBC proclaimed that the golden age of activist investors were upon us when he wrote an article about Carl Icahn, “considered the godfather of activist investors”, and his power to move stocks using tweets alone.

According to Hoffman, “[t]his year alone, activist investor Carl Icahn has demanded more share buybacks from Apple Inc. and taken a stake in eBay Inc. to push for a separation of its PayPal unit. Investor Daniel Loeb is nudging Dow Chemical Co. to split itself in two, and Jana Partners LLC is using its stake in Juniper Networks Inc. to push for cost cuts.” Hoffman reports that M. Adel Aslani-Far, global co-chairman of Latham & Watkins LLP’s mergers-and-acquisitions practice, is of the opinion that “[a]ctivism is clearly here to stay, and smart companies are rethinking their approaches…[t]here is a time to engage, and there’s a time to dig in.”

Because of this, companies are girding their loins and preparing themselves by revising their poison pills provisions and tightening shareholder access to board seats. “Hertz Global Holdings Inc. and Aéropostale Inc. ARO recently adopted tough poison pills that kick in when a shareholder takes a stake of 10%” Hoffman notes. Companies like Pfizer Inc. and Agrium Inc. “have changed their corporate bylaws in recent years to make it harder for outsiders to gain board seats. Some companies now require more advance notice and more details from shareholders seeking to nominate directors…[r]equirements that once ran for a few lines in corporate bylaws for nominations now take up several pages.”

According to FactSet, in 2005, less than 8% of poison pills had 10% triggers. Last year, over half of them had triggers set at 10%. Back in 2012, Netflix adopted the poison pill to defend against the threat of a takeover, mere days after Carl Icahn announced that he had acquired a 9.8% stake in the company. Icahn fired back, stating that “[a]s one of the company’s largest shareholders we are concerned about the poor corporate governance at Netflix that these and other actions reflect.” Recently, Netflix announced the early termination of its poison pill, initially set at 2015, after experiencing an astronomical growth of 275.6% over the past year.

Though things ended quite happily for Netflix, it must be said that poison pill defences could in fact, at times, prove detrimental to the very companies they have been engineered to protect. The instances where activists have succeeded in giving share prices a boost must not be discounted. Activists have helped streamline companies and make them more efficient and cost effective.

According to Hoffman, Greg Taxin, the managing director of Clinton Group, an activist fund with about $1.5 billion in assets, has this to say on the matter: “The notion that activists are the enemy, or that companies have to put up walls, is illogical…I’m an owner of these businesses, and I’m trying to make them more successful in a way that benefits everybody.”




About the Author:

Jeffrey Arsenault, Founder and Principal of Old Greenwich Capital Partners, LLC.

Mr. Arsenault has earned a reputation as an outstanding fund of funds manager, with a track record of superior risk-adjusted absolute returns. He founded Old Greenwich Capital Partners (“OGCP”) in 2005 to provide a unique access to an exclusive roster of outstanding managers. Mr. Arsenault leverages an extensive network of industry contacts developed over his 25+ years of investment experience in the industry.

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