A shareholder rights plan, also known as the “corporate poison pill” is a form of defensive tactic corporate boards use to prevent a takeover by a bidder. This works by preventing takeover bidders form negotiating a price of sales directly with shareholders, instead forcing them to negotiate with the board. The plan gives shareholders the right to buy more shares at a discount should one shareholder buy a certain percentage of shares or more. For example, if a shareholder buys 20% of the shares, every other shareholder will have the right to buy new shares at a discount. These additional purchases would diminish the bidders interest knowing the cost of the bid would rise significantly. Similarly, knowing that the company had a shareholder rights plan the bidder may not want to take over without the board’s approval and so would negotiate with the board first.
With COVID-19 depressing stock prices over the last 3 months investment bankers have been recommending companies implement shareholder rights plans. This is unusual given the steady decline in the use of shareholder rights plans implemented over the last 20 years due to shareholder advisory firms threatening to get shareholders to withhold votes from companies with these plans that don’t meet specific requirements. This leaves public companies today caught between the advice of investment bankers and the possible votes against their directors that often accompany implementing such a plan.
Investment bankers are recommending that if a company believes that the decline in stock prices rendered their shareholders vulnerable to low-ball bids they should consider adopting a shareholder rights plan. While this decision can often attract unwanted attention from investors, the plummeting stock prices deflect the negative attention that normal comes with adopting the poison pill. The Institutional Shareholder Services even released a statement saying “A severe stock price decline as a result of the COVID-19 pandemic is likely to be considered valid justification in most cases for adopting a pill of less than one year in duration; however, boards should provide detailed disclosure regarding their choice of duration, or on any decisions to delay or avoid putting plans to a shareholder vote beyond that period”.
These unprecedented times and the advice of investment bankers have been effective in increasing the adoption of shareholder rights plans, as March 2020 saw more companies adopting plans than in any other month in recent years. This trend may leave otherwise prosperous business vulnerable to takeover bids and opportunistic accumulations of stock, so directors ought to consider their defensive profile and the options they have, including the adoption of shareholder rights plans.
More boards are considering shareholder rights plans for future implementation in response these unprecedented times. Their decisions are supported both by the ISS and Glass Lewis who released a statement saying “these dire conditions have prompted many companies to consider the added risk of opportunistic activism,” Glass Lewis stated that it “considers companies that are impacted by coronavirus and the related economic crisis as reasonable context” for adopting a shareholder rights plan. The recent upward trend in the adoption of SRPs (twenty two public companies adopted plans in March 2020, up from only five the previous month) demonstrates increased recognition of the virtue of SRPs within the appropriate contexts. If nothing else, an SRP gives the board adequate time to evaluate and respond to an offer from a takeover bidder. A board ought to consider whether the bidder’s offer provide more value to shareholders than execution by management and board of the long term plan for the company. An SRP may also send a positive signal to the market that the board will evaluate any options they receive, although it comes with the risk of a higher level of scrutiny of the board’s fiduciary responsibility. While SRPs come with risk, now more than ever is an appropriate time to consider its benefits as stock prices remain depressed.