March 23, 2020

Poison Pills: Has Their Time Come Again?

There are a lot of companies that have seen their stock prices fall through the floor as a result of the market’s ongoing meltdown. I know this because so many of them are well represented in my 401(k) plan.  Anyway, this Morgan Lewis memo says that now might be a good time to think about implementing a poison pill – not just as a pure antitakeover device, but also to protect the potentially significant NOLs that many companies may generate in the current environment.

This excerpt says there’s plenty of precedent for this action from the last time the equity markets cratered:

A look-back at the poison pills adopted in response to the then-unprecedented market disruption and volatility that followed the 2008 financial crisis may be a helpful predictor of what to expect in the wake of the stock market’s reaction to the COVID-19 pandemic. In 2008 and 2009, there were, respectively, 61 and 57 poison pills adopted. As companies accumulated substantial NOLs during this time that they wanted to preserve and protect to offset future federal tax liabilities, there was a significant uptick in NOL poison pill adoptions.

From 2007 to 2009, the number of NOL poison pills adopted increased nine-fold, from 4 to 37. In fact, 2009 remains the all-time record year for NOL poison pill adoptions. If you look at the companies that adopted NOL poison pills in 2009, you see strong representation by the industry sectors that were disproportionately impacted by the financial crisis such as financial services, automotive, and homebuilders, among others.

The memo says that if past experience is any guide, we should expect to see a substantial increase in the number of poison pill adoptions in the coming months, as companies deal with panic-driven market valuations that may make many of them prime targets for strategic behavior by activists and others.

It looks like companies are already taking this advice to heart. On Friday, the Williams Companies adopted a limited duration rights plan that will expire on March 31, 2021.  In the press release announcing the plan, Williams said that its board “has taken note that in light of the coronavirus and recent market events, the closing price of Williams common stock is, as of yesterday, 50% below the price just one month ago.”

Tomorrow’s Webcast: “Activist Profiles and Playbooks”

Tune in tomorrow for the webcast – “Activist Profiles & Playbooks” – to hear Joele Frank’s Anne Chapman, Okapi Partners’ Bruce Goldfarb, Spotlight Advisors’ Damien Park and Abernathy MacGregor’s Patrick Tucker discuss lessons from the 2019 activist campaigns, expectations from activists in the 2020 proxy season and how activism differs for large and small cap companies.

John Jenkins