By Cydney Posner
In "Bitter Medicine in Store for Activists," the WSJ observes that, in response to heightened activity by activist hedge funds, companies are bolstering their defenses, whether through poison pills, accelerating acquisition timetables to minimize interference from activists or tightening rules for nominating board members.
Activist investors have increasingly promoted their own agendas of higher returns through share buybacks, higher dividends or even breakups of companies, including taking aim at a number of large and very well-known companies. Some companies have reacted by adopting tougher poison pills, including pills with a 5% ownership threshold (ostensibly) aimed at protecting against the loss of NOL carryforwards. (The tax code limits a company's ability to use its NOLs following an "ownership change," which can be triggered in the event of certain ownership increases by 5% shareholders.) The article also observes that, while historically, pills were aimed at preventing hostile takeovers and often had 20% thresholds, more companies are now adopting pills with 10% thresholds, which are aimed at deterring activists (who can be effective with relatively small stakes): "More than half of the poison pills adopted in 2013 are designed to be triggered when a holder gains a stake of 10%. In 2005, less than 8% of poison pills had a trigger of 10%, according to FactSet….More corporate poison pills also now explicitly include swaps, options and other financial products as part of an ownership stake. About 59% of poison pills adopted last year counted these derivatives, up from just 4% in 2008, according to FactSet."
Other large companies have recently amended their bylaws "to make it harder for outsiders to gain board seats. Some companies now require more advance notice and more details from shareholders seeking to nominate directors, including ownership of derivatives and the names of any other shareholders they are working with. Requirements that once ran for a few lines in corporate bylaws for nominations now take up several pages. In addition, the article contends that increased use in acquisitions of tender offers, which can be accomplished quickly, reflects companies efforts to avoid activist interference: "These deals are at their highest level since at least 2003, according to FactSet….Almost 30% of deals in the second half of 2013 used a tender offer, compared with 9.6% in 2006, according to FactSet." (Of course, companies almost always want to conclude acquisitions quickly, and other factors, such as changes in Delaware law, might actually account for much of that increase.)
However, the article suggests, "these defenses also could backfire on companies. While activists can be an irritant to management, some have succeeded in helping bolster share prices and making companies leaner and more efficient, some investors argue. And activists often feel they are acting on behalf of other shareholders."