More Firms Dump ‘Poison Pills’
Under pressure from shareholder activists, 31 companies have abandoned anti-takeover defenses this year, a new survey shows.
Reversing a strategy that dates back two decades, the companies are reacting to complaints that so-called poison pills drive off potential buyers even for poorly performing companies.
“Some companies hide behind their poison pills,” said Joshua Fenton, director of research at Gabelli Asset Management, which oversees $28.2 billion for clients. “There’s definitely been a trend due to investor pressure.”
The push by investors raised the number of scrapped plans from nine in 2001, according to SharkRepellent.net, a corporate governance research firm. One result may be more takeovers, said Bruce Rosenthal, a merger attorney at New York-based Nixon Peabody.
“Rescinding or modifying the pill helps the mergers and acquisition market,” Rosenthal said. “Now boards and management that do have pills will really have to justify the prices they set for triggering the pill, and that should make for a more realistic market.”
About $1.22 trillion of takeovers have been announced so far this year, matching the total for all of 2003, according to data compiled by Bloomberg.
The poison pill was developed in the early 1980s by Martin Lipton, a New York attorney. The defenses defuse potential takeovers by allowing companies to issue additional shares once a hostile bidder acquires a certain percentage of stock, usually 10%. That makes it more expensive for the bidder to buy control.
In 1985, British billionaire James Goldsmith got around a poison pill defense and managed to take over San Francisco-based paper company Crown Zellerbach. That was the last time the defense was triggered at a major company.
Such tactics are outdated, said Ronald Gilson, a Stanford University law professor.
“Institutional shareholders hate pills, but the fact is the market got sophisticated in dealing with them,” Gilson said. “Most companies don’t give up a lot when they get rid of the pill.”
Even when not activated, they can be a valuable tool, said Herbert Denton, president of Providence Capital Inc. One such plan at PolyMedica Corp., where Denton is a director, helped prevent a takeover when a federal investigation sent its shares plummeting.
“Having a pill bought us a little protection, a little time,” Denton said. “In a case like this, it helps.”
In January, the Hollinger International Inc. board adopted a takeover defense in an attempt to prevent former Chief Executive Conrad Black from selling control of the newspaper publisher, which operates the Chicago Sun-Times. The following month, Black filed a counterclaim to invalidate the pill. The case is being heard in U.S. District Court in Chicago.
At Raytheon Co., the world’s largest missile maker, nonbinding shareholder proposals calling for investor control of the takeover defenses passed in each of the last four years. This year, 74% of shareholders supported the proposal.
Raytheon rescinded its plan in March, though it retained the power to use one in the face of a takeover bid. After the repeated shareholder votes, company spokesman James Fetig said, “this was the appropriate time to act.”
That same month, Staples Inc., the world’s largest office supply retailer, let its defense plan expire, saying that doing so was “in the best interests of the company.”
The Council of Institutional Investors, which represents 130 public and private pension funds, said it was concerned that some companies weren’t really abandoning the defense.
“Leaving the door open is troubling,” said Ann Yerger, the council’s deputy director. “What we want to see is shareholder approval” of all plans, she said.
