On March 19, 2020, Dave & Buster’s Entertainment, Inc. (D&B) announced that it adopted a takeover-defense poison pill to deter activist investors from taking control of the company by accumulating its shares on the open market. This measure came after the stock of D&B decreased almost 90% over a one-month period due to concerns related to the coronavirus and after Kohlberg Kravis Roberts, an investment firm that made its name as a corporate raider in the 1980s, disclosed a 12.7% ownership interest in D&B (including certain cash-settled forward contracts). With experts predicting that shareholder activism will rise as stock prices plummet in the wake of the coronavirus pandemic, other potentially vulnerable public companies should consider following D&B’s lead.
A takeover-defense poison pill, more formally known as a shareholder rights plan, is a tactic that a public company implements to make itself unattractive to third parties that would otherwise launch hostile campaigns to take control of the company. The most common type (and the varietal that D&B implemented) is known as a “flip-in poison pill.” It provides that, after the hostile party acquires a threshold percentage of the company’s shares (15% in the case of D&B), all shareholders other than the hostile party can purchase additional shares at a discount (50% in the case of D&B). Thus, each purchase of discounted shares dilutes the hostile party’s ownership interest and makes the campaign more expensive. Alternatively, a “flip-over poison pill” allows the company’s shareholders to purchase the acquirer’s shares at a discount if the hostile party’s campaign is successful. Other poison pills give shareholders the right to acquire additional shares of both the target and the acquirer.
While a poison pill may dissuade an unwelcome bidder, it comes at a cost. The two largest proxy advisory firms, Institutional Shareholder Services Inc. and Glass, Lewis & Co., LLC, generally disfavor the poison pill as a form of entrenchment that compromises shareholder rights and stifles corporate growth. Their proxy voting guidelines reflect that aversion: if the poison pill does not satisfy the criteria set forth in their guidelines (including, without limitation, shareholder approval or limits on duration of the poison pill), then the advisory firms will be more likely to recommend that shareholders vote against the company’s nominated slate of director candidates at the next annual shareholder meeting.
Nevertheless, depending on the circumstances, it may be a pill worth swallowing. According to Vox, Goldman Sachs is advising its corporate clients to prepare for an increase in hostile raids and shareholder activism as the coronavirus spreads and stock prices fall. While the poison pill is not a one-size-fits-all strategy, executives of public companies should consider whether they should implement this defense mechanism before it is too late.
If you are interested in discussing whether your public company should adopt a poison pill to guard against corporate raids and other hostile activities, please contact Alexandria E. Kane (firstname.lastname@example.org; 212.631.4409), Patrick Devine (email@example.com; 215.864.6272) or another member of the Corporate and Securities group.