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* Poison pills drop to lowest level in 20 years
* Companies adopting more nuanced approach to hostile bids
By Jessica Hall
PHILADELPHIA, March 30 As the number of poison
pills, or shareholder rights plans, drops to the lowest level
in a generation, corporations face investor pressure against
renewing broad takeover defenses but feel a duty to have
weapons at the ready to fight off bad offers.
The number of U.S. incorporated companies with a poison
pill in effect hovered at 1,000 on Tuesday, hitting the lowest
level since 1990, according to FactSet SharkRepellent. In
comparison, the number of poison pills in force at the end of
2001 totaled 2,218.
"Companies are generally not renewing poison pills and
there's an entire generation of poison pills lapsing," said
Jeffrey Kaplan, global head of mergers and acquisitions at Bank
of America Merrill Lynch.
Poison pills are a takeover defense that makes it costly
and difficult to acquire a company if any party acquires a
certain percentage of a corporation.
The drop in poison pills has mirrored a drop in other
takeover defenses, such as having a board of directors with
staggered election terms. At the end of 2009, only 164
companies in the S&P 500 had a staggered board, down from 294
at the end of 2001, according to FactSet SharkRepellent.
CORPORATE GOVERNANCE PRESSURE
The pressure to drop takeover defenses bubbled up in
2001-2002 era of corporate scandals such as Enron and WorldCom
as institutional shareholders demanded companies to be more
open and transparent with their governance practices.
Poison pills and staggered boards were targeted and became
shorthand for poor corporate governance practices. As
shareholder activists today continue to have loud voices,
corporations continue to move towards more open governance
practices and a further drop defense mechanisms.
"In the past, companies viewed rights plans as a fairly
low-cost takeover defense. Now, having a rights plan has a cost
-- you may face consequences such as pressure on your directors
because of opposition from institutional shareholders," said
Francis Aquila, a mergers and acquisitions attorney at Sullivan
& Cromwell in New York.
"Companies are asking when do I really need to have a
rights plan? Today, boards have to weigh the benefits of having
a rights plan against the cost," Aquila said.
"Some large institutional investors are trying to get
companies not to adopt new 10-year plans," said Columbia
University Law School professor John Coffee.
"By not adopting 10-year plans, but having the ability to
adopt pills as needed, you reduce the abrasive conflicts with
institutional investors," Coffee said.
The drop in takeover defenses does not put companies at a
disadvantage in fighting unwanted suitors. A company can put a
poison pill in place even after a tender offer is announced.
"Companies are not defenseless. They could put in a poison
pill the day after they get a hostile bid and they are still
protected," Coffee said.
Machine-tool maker Hardinge Inc (HDNG.O) last month
rejected a takeover offer from Brazil's Industrias Romi SA
(ROMI3.SA) and adopted a poison pill with a 20 percent trigger.
Hardinge on Tuesday advised shareholders to defer any action on
Romi's tender offer.
"The world has gotten to be a much more sophisticated
place. Ten-year plans were adopted in the face of theoretical
risk. The reality is, it's hard to wake up one day and be taken
over by surprise. You have time to put one in place," said Bob
Profusek, global M&A chair at Jones Day in New York.
"Responses ought to be tailored to specific facts and
issues," Profusek said.
Corporate vulnerability does not come from a lack of poison
pills or staggered boards. Instead, it is the current
environment of activism that puts companies more in the
spotlight for unsolicited deal activity.
"Companies are generally more vulnerable to unsolicited
bids today, but it's not simply because of the drop in the
number of rights plans. The vulnerability comes from the same
factors and pressures that are leading to the decline in the
number of rights plans -- such as institutional shareholders
being much more assertive," Aquila said.
"So, if you're a potential unsolicited bidder, you
recognize that a target company may have fewer defenses and
that its shareholders are more supportive of unsolicited bids.
Essentially it's all simply a change in approach being held by
shareholders, particularly institutional shareholders, in
asserting their views."
The drop in poison pills does not leave companies
powerless. Poison pills can be enacted quickly and for short
time periods to respond to a specific takeover threat.
"It would be wrong to infer any wimpiness on the part of
boards for not having a pill. It's actually a more
sophisticated method for the board to put a pill in place in
reaction to an action," Profusek said. "It's less willy-nilly
and a more nuanced, tailored approach."
(Reporting by Jessica Hall; Editing by Gary Hill)
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