By Lina Saigol and Selin Bucak
MarketWatch photo illustration/iStockphoto
They are back, and this time they are being dubbed “anti-coronavirus pills.”
Poison pills, having fallen by the wayside, are being resurrected as companies whose stock-market valuations have rushed to shore up their takeover defenses and thwart hostile bids.
These shareholder-rights plans allow existing shareholders to buy preferred shares at a substantial discount, thereby diluting the stake of a bidder and making a takeover more expensive.
In March alone, 57 public companies adopted poison pills in response to an activist threat or as a preventive measure — the highest number of new adoptions in such a short time period in over 20 years, according to Chicago-based law firm Sidley Austin.
These include household names across a range of industries, including Occidental /zigman2/quotes/207018272/composite OXY -7.60% , Groupon /zigman2/quotes/207356672/composite GRPN +6.06% , Barnes & Noble /zigman2/quotes/206791624/composite BNED -10.15% , Hilton Grand Vacations and Spirit Airlines /zigman2/quotes/205782179/composite SAVE -2.53% .
“The large volume of funds accumulated in recent years by private-equity firms and hedge-fund investors, which have struggled in recent years to find attractive targets, further increases the likelihood of a potential acquisition wave that exploits the recent decline in firms’ market valuations,” noted the authors of a newly released report by executive compensation consultancy Veritas.
However, private-equity groups tend to shy away from hostile bids, meaning companies are unlikely to adopt shareholder-rights plans to fend off buyout firms.
“For reputational reasons, private-equity funds almost never launch hostile takeover bids over the objections on a target company’s board and management,” said Kai Liekefett, co-leader of Sidley Austin’s shareholder-activism practice. “In fact, the governing documents of many private-equity funds outright prohibit any hostile activity.”
Until recently, the number of active poison pills among U.S. corporations was extremely low. Popular during the merger waves of the late 1980s and 1990s, the device fell out of favor in the last two decades, in large part due to the influence of proxy advisers. At the end of 2019, only 25 S&P 500 companies had an active positive pill, the authors of the Veritas report noted.
Most of the poison pills that were recently adopted have a one-year duration, according to Sidley’s Liekefett. He expects most companies to keep these in place until they expire,he said.
“While the stock market may have overcome the extreme volatility we saw in the spring and market price have recovered remarkably, there remains a real risk of a second COVID-19 wave and more economic disruptions — along with another stock market crash,” he added.
The defense mechanism has come under intense criticism from shareholders who claim they can protect directors trying to stay independent for reasons investors don’t necessarily share.
Even Institutional Shareholder Services, which advises investors as to how to vote on corporate matters, has softened its stance toward poison pills amid the coronavirus crisis. In updated guidelines on April 8, it argued that, as long as they are in place for less than a year and are justified by a sharp fall in a company’s share price, poison pills should be judged on a case-by-case basis.