Avis, a unit of the Avis Budget Group, recently adopted a poison pill over concerns about creeping control. On January 23, the car rental service instituted the poison pill to block hedge fund SRS Investment (“SRS”) from obtaining more than 10 percent voting power. SRS is Avis’s largest shareholder with a 28.5 percent interest in the company—a majority of which is composed of cash-settled derivatives and options. The hedge fund currently owns 9.7 percent of the common stock and recently chose not to renew a deal from last January that precluded it from adding to its current interest.
Avis Utilizes Poison Pill to Protect Against Creeping Control
Macerich Rejects Unsolicited $16 Billion Bid From Simon Property
Macerich Co., the third-largest mall owner in the U.S. by market value, rejected an unsolicited mall takeover bid from its rival and the largest U.S. mall owner Simon Property Group, Inc. on Tuesday.
Poison Pills in the Era of Shareholder Activism
Shareholder activism is the way in which shareholders leverage their equity stake to put public pressure on a corporation’s behavior. In his keynote address at the 2014 Berkeley Center for Law, Business and the Economy, and Berkeley Business Law Journal Shareholder Activism Symposium, Larry Sonsini, Chairman of Wilson Sonsini Goodrich & Rosati, declared that there has been a noticeable shift from a director-centric model to a shareholder-centric model. Until recently, shareholders were fighting defensive measures and managerial successions. Nowadays they are engaged in battles over corporate sales, spinoffs or corporate sustainability.
Corporate Law Experts Agree: Shareholder Activism Here to Stay
While the corporate law experts at Berkeley Law’s April 4 conference on shareholder activism offered different opinions about causes and impacts, they all found a patch of common ground: it’s here to stay.
Active shareholders assert their power as owners of a public company in order to change its behavior and encourage corporate responsibility, and their actions have increased dramatically in recent years. Triggering factors include sub-par share price performance, overly conservative financial strategies, and conglomerate business models. Since 2009, activist hedge funds have outperformed traditional hedge funds and other markets—forcing board rooms to take notice.
The conference, co-sponsored by the Berkeley Center for Law, Business and the Economy and the Berkeley Business Law Journal, illuminated this shifting landscape. Keynote speaker Larry Sonsini ’66, chairman of Wilson Sonsini Goodrich & Rosati, described how companies must adjust to these changes.
To read the rest of this article check out the link on the Berkeley Law website.
Netflix, Good Governance and Poison Pills
In response to Carl Icahn’s recent trading activities, the board of directors of Netflix, Inc. has approved a shareholder rights plan (the “Plan”), commonly referred to as a “poison pill.” The Plan allows Netflix shareholders to buy newly issued shares at a discount, diluting the Company’s shares and making a potential takeover more expensive and less attractive for potential buyers.
The Board approved the Plan in response to a takeover threat by Carl Icahn, an activist shareholder who currently owns 9.98% of the Common Shares. Icahn is not attempting to purchase the Company outright; rather, it appears he is attempting to attract other buyers who would buy Netflix at a premium. Instituting a shareholder rights plan is a common defensive tactic taken by boards of directors to thwart corporate takeovers.
Pursuant to the terms of the Plan, the Company has declared a dividend distribution of one right (each a “Right”) for each issued and outstanding common share of the Company. Each Right entitles the holder thereof to purchase one one-thousandth of a series A preferred share. The Plan is “flip-in,” whereby Netflix shareholders can exercise the Rights following the public announcement that a shareholder has acquired beneficial ownership of 10% or more of the Company’s common shares.
“Poison Pills” a Plausible Legal Solution for Dealing with External Activist Investors in Proposed Mergers/Acquisitions
It’s not uncommon for one or a few investors to acquire a large stake in a publicly-traded company in order to either force through or interfere with a proposed merger/acquisition. These investors can, on the one hand, engage in “vote no” campaigns, which can lead to large pay-outs (in the form of better terms for the deal) as well as temporary increases in the stock price of the company, but it can also prevent otherwise beneficial and profitable deals from occurring.Today some companies are requiring potential targets to adopt “poison pills” in order to prevent such hold-ups. Case in point: Dell, which insisted that Compellant Technologies implement a poison pill provision before entering into a merger agreement with the company.
There are limits on the legal efficacy awarded to these provisions. Latham & Watkins recently issued a client alert highlighting the generally recognized legal limits of poison pill provisions under Delaware state law by reviewing several recent cases.The limits are centered around the existence of a reasonable threat and whether the challenged provision was a proportional response that did not sacrifice the exercise of the franchise by stockholders.One solution that exists to satisfy the last provision (exercise of the franchise) is to require stockholder approval before a poison pill provision kicks in (known as a “chewable pill”).