We recently advised RCM Technologies, Inc. in connection with their implementation of a shareholder rights plan. As part of the research for this project, we noted that there has been a pattern of companies using these plans as a tool during times of economic weakness.
The data clearly shows that the number of shareholder rights plans either implemented or extended increased dramatically during recent recessionary periods including the 2001 recession, the Great Recession of 2008-09, and the current COVID-19 economic downturn we find ourselves in now.
Currently, through the first five months of 2020, there have been more plans implemented or extended than any of the prior ten full years.
* Year to Date through May 15, 2020
Source: Capital IQ
The Origin of “Poison Pills”: Safeguarding Shareholders from Hostile Takeovers
Shareholder Rights Plans are often called “poison pills”. The term “poison pill” stems from the fact that companies who enact a shareholder rights plan protect shareholders from aggressive take over tactics by allowing them to significantly dilute a hostile acquiror, significantly decreasing the attractiveness of the target company.
Empowering Companies: Control and Maximizing Value with Shareholder Rights Plans
The primary objective of these plans is to empower target companies and their shareholders by providing them with greater control over the acquisition process, thereby enabling them to maximize their value in the face of aggressive acquirers.
Evolving Perception: Why “Poison Pills” Fell Out of Favor
Over the past twenty-five years, we have observed that these plans, which became popular in the 1980s, went out of favor as a result of the perception from governance experts that poison pill’s served to protect management and board of directors rather than support shareholder’s best interests.
That said, there is still a time and place for these plans where companies have experienced a decline in value or are potentially vulnerable to takeover.
In addition, Institutional Shareholder Services (ISS) has recently published guidance in April, suggesting that plans with terms of less than a year where companies have experienced significant declines in value could be implemented and serve to be effective.
Here are a couple of excerpts from the guidance that may be of interest:
- “The COVID-19 pandemic is presenting unprecedented challenges not only to individual health, communities, jobs, businesses and economies, but also specifically to public companies and the shareholders that invest in them”
- “ISS’ existing policy approach is already appropriately flexible to take account for the adoption of poison pills in the face of genuine, short-term potential threat situations such as during the current pandemic”
- “As noted above, current ISS benchmark policy encourages boards to put poison pills to a shareholder vote, but provides companies with latitude in adopting short-term rights plans with reasonable triggers in response to active threats”
- “A severe stock price decline as a result of the COVID-19 pandemic is likely to be considered valid justification in most cases for adopting a pill of less than one year in duration; however, boards should provide detailed disclosure regarding their choice of duration, or on any decisions to delay or avoid putting plans to a shareholder vote beyond that period”
- “The triggers for such plans will continue to be closely assessed within the context of the rationale provided and the length of the plan adopted, among other factors”
Considering that shareholder rights plans have historically been utilized during times of economic turmoil and we are currently navigating a new and potentially recessionary period due to COVID-19, this may be the right time for certain companies to evaluate if implementing a shareholder rights plan could be advantageous for them.
Our Valuation Practice Group is compiled of experts committed to providing world-class advisory services in an effort to create the best results for our clients. We are happy and prepared to answer any questions you about shareholder rights plan and help determine if you could benefit from implementing a plan of your own. Reach out here today!
About the Author:
Managing Director, Objective Capital Partners
20+ Years of Experience
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