April 28, 2020

Poison Pills: Are Companies “Fighting the Last War”?

There’s an old proverb that says “generals are always preparing to fight the last war.”  I’ve blogged quite a bit recently about the apparent resurgence in poison pill adoptions, but this King & Spalding memo says that companies that place their faith in pills & other antitakeover measures to deal with activism are likely doing the same thing. Here’s the intro:

After years of tremendous economic growth, COVID-19 has unleashed unprecedented market volatility and extreme value dislocations for U.S. public companies. Senior management and directors are facing existential business model, strategic, and human resource challenges that are generational in scope. Some law firms and other corporate advisors have responded to the pandemic with a focus on implementing shareholder rights plans or “poison pills” and other traditional defensive measures as a principal corporate response to the pandemic, which has caught the eye of governance experts and media pundits.

Updating a “shelf” poison pill may be prudent depending on circumstances, but traditional defensive prescriptions alone are insufficient as a strategy and may distract senior management and directors from addressing the real issues arising from the COVID-19 crisis. A comprehensive corporate strategy addressing the company-specific business model, industry, human resources, stakeholders, and other enterprise risk is far superior to one that places undue emphasis on poison pills. The best poison pill, in our view, is one that gathers dust on the shelf because a company’s proactive corporate strategy makes the pill unnecessary.

The memo’s bottom line is that “traditional defensive approaches are insufficient and can provide a false sense of security. It suggests that companies adopt a holistic strategy that focuses on active monitoring of their shareholder base, regulatory changes and market trends; comprehensive & proactive efforts to preempt threats through engagement, self-evaluation, board refreshment, routine shelf pill updating; and development of on-the-shelf mitigation strategies for key risks.

John Jenkins