January 26, 2022

Activism: Are Anti-Activist Pills Useless?

Over on The Activist Insight Blog, Josh Black recently discussed Mercury Systems’ decision to adopt a shareholder rights plan with a 7.5% threshold in response to an activist campaign by Starboard Value and Jana Partners, whch own 7.3% and 6.6% of the company, respectively. Josh wasn’t too impressed:

Poison pills are little to no deterrent for activists. Starboard and Jana have little incentive to halt their campaigns now and sell the stock and are in no way hindered from nominating directors or winning a proxy fight. Indeed, irritating institutional investors by pushing the boundaries of acceptable practice might put Mercury itself at a disadvantage. Mercury already has an advance notice bylaw, forcing the activists to make their intentions known well in advance of a shareholder meeting. Takeover bids by tender offer are vanishingly rare, and a board should be equipped to deal with standard proposals. The most practical effect is to limit the upside activists can earn by limiting the amount of capital they can invest.

While Mercury’s management offered the standard claim that the pill would allow its board to make informed decisions, Starboard wrote a measured letter to the board asking for the threshold to be raised to 15%.

But the real question is not so much how the pill will affect these campaigns or the ultimate future of Mercury but about the future of poison pills themselves. Perhaps the only reason a lawsuit has not yet been forthcoming is that Mercury is incorporated in Massachusetts, rather than Delaware, and thus benefits from a much more management-friendly legal regime.

Regarding the potential for irritating institutions by pushing the envelope, the blog notes that only five of the 55 non-NOL pills adopted at Russell 3000 companies in 2020 had a threshold of less than 10%, while Mercury’s was the only one adopted in 2021.

The blog alludes to the fact that pills targeting activism have recently taken it on the chin in Delaware, but even before the Delaware courts weighed in, some commentators were calling into question the relevance of pills to respond to shareholder activism. Pills may still have a role to play, but in the current environment, a defensive strategy that puts undue faith in a rights plan at the expense of a more comprehensive approach to the challenges of activism is one with a decidedly limited upside.

John Jenkins