Poison pills drop to lowest level in 20 years

PHILADELPHIA (Reuters) - 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 toward 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.

NOT DEFENSELESS

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.”