October 29, 2009

Poison Pill Usage Continues to Decline

Here is something from Kevin Wells of RiskMetrics’ U.S. Research Team (as originally noted in RiskMetrics’ blog):

Though not as prevalent as they once were, shareholder rights plans, commonly referred to as “poison pills,” remain a fixture of the corporate governance landscape, according to a new report from RiskMetrics Group (available for purchase in RMG’s bookstore).

As the global economic crisis took a toll across U.S. and international capital markets over the past year, companies continued to adopt pills, albeit with more shareholder-friendly provisions. Indeed, an analysis of regulatory filings, proxy voting trends, and other data finds that companies are incorporating more shareholder-friendly provisions into their pills; moreover, companies are putting such plans to a shareholder vote in greater numbers than ever before.

Perhaps as a consequence of increased management votes to ratify or adopt pills, shareholder activism, as measured by filings of shareholder proposals to terminate or allow shareholders to vote on pills, has declined. However, those shareholder proposals appearing on ballots generally received high levels of support in 2009, winning majority support at Yum Brands and two other firms.

Amid the recent economic turmoil, 2009 has also seen the emergence of NOL (net operating loss) poison pills, which are meant to protect companies’ tax assets rather than to deter acquisition offers. It was an NOL pill, in fact, that became the subject of controversy in Selectica v. Versata, pending in Delaware Chancery Court, which may significantly affect future uses of pills by Delaware-incorporated companies.

Select key findings from the report include:

– Thirty-three S&P 1,500 companies enacted pills between July 1, 2008, and July 1, 2009. Their average term was 7.6 years, and 10 were for terms of three years or less. Four of those were enacted for a period of 12 months or less.
– The number of S&P 1,500 companies that maintained a pill declined again, falling from 34.5 percent in 2008 to 27.5 percent in 2009. In 2007, 42.5 percent of companies maintained a pill.
– In 2009, 69.2 percent of the S&P 1,500 companies that maintained a pill employed a 15 percent trigger. Another 19.6 percent employed a 20 percent trigger, while 7.9 percent employed a 10 percent trigger.