Companies race to swallow poison pills to thwart hostile bids as stock

prices plunge

Published: June 22, 2020 at 11:06 a.m. ET

By Lina Saigol, Marketwatch

‘As stock prices dropped precipitously in March, many companies

were quick to either put poison pills in place or put them on the
proverbial “shelf,” ’ says Frank Aquila, global head of M&A at
international law firm Sullivan & Cromwell

They are back, and this time they are being dubbed “anti-coronavirus pills.” Poison
pills, having fallen by the wayside, are being resurrected as companies whose stock-
market valuations have rushed to shore up their takeover defenses and thwart hostile
bids. These shareholder-rights plans allow existing shareholders to buy preferred
shares at a substantial discount, thereby diluting the stake of a bidder and making a
takeover more expensive.

In March alone, 57 public companies adopted poison pills in response to an activist

threat or as a preventive measure — the highest number of new adoptions in such a
short time period in over 20 years, according to Chicago-based law firm Sidley
Austin.

“The large volume of funds accumulated in recent years by private-equity firms and
hedge-fund investors, which have struggled in recent years to find attractive targets,
further increases the likelihood of a potential acquisition wave that exploits the recent
decline in firms’ market valuations,” noted the authors of a newly released report by
executive compensation consultancy Veritas.

Until recently, the number of active poison pills among U.S. corporations was
extremely low. Popular during the merger waves of the late 1980s and 1990s, the
device fell out of favor in the last two decades, in large part due to the influence of
proxy advisers. At the end of 2019, only 25 S&P 500 companies had an active
positive pill, the authors of the Veritas report noted.

The defense mechanism has come under intense criticism from shareholders who
claim they can protect directors trying to stay independent for reasons investors don’t
necessarily share.