Investor Talks May Help in Timing of Poison Pills: Attorney

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By Che Odom

March 2 — Here's another reason to engage shareholders—it may help a board decide when to put a shareholder rights plan, also known as a “poison pill,” into action, an attorney said March 2.

“A lot of companies have shelf plans, but how do they know when to adopt them?” said Melissa Sawyer, a partner in the New York office of Sullivan & Cromwell LLP's mergers and acquisitions group, speaking at a Practising Law Institute event.

A shareholder rights plan, which can be adopted by the board without shareholder consent, is a strategy used by a corporation to discourage hostile takeovers by attempting to make its stock less attractive to a potential acquirer.

Institutional investors generally are against poison pills, but such shareholders may be a good source of information about stock trades, which is needed to decide when to implement a pill, Sawyer said.

A shelf plan is a shareholder rights plan that has been drafted and, ideally, discussed with a company's board but hasn't been signed, issued or publicly announced, Sawyer continued. It's “just sitting on the shelf.”

The decision to adopt the plan depends on tracking trades, which may be done best with the help of a proxy solicitor, which would monitor trading within custodians, and by talking with stockholders to understand whether they are buying or selling, Sawyer said. “If several of your largest investors indicate in those conversations that they are selling down their stake, then the next logical question is who's buying it and is it the same person accumulating a large stake all at once?”

Hectic Deal Activity

Last year was a record-breaking one for mergers and acquisitions, and observers are predicting that the momentum will continue in 2016 (.

For example, JPMorgan's M&A Global Outlook said in February that solid economic growth over the last few years is boosting investor confidence in acquisitions. At the same time, growing cash reserves—about $6 trillion globally in the fourth quarter—has left potential buyers with plenty of power.

Meanwhile, Sawyer observed at the PLI event that proxy solicitors and shareholder engagement may be better, quicker ways of checking the pulse of trades than waiting for beneficial ownership reporting through Schedule 13D of the 1934 Securities Exchange Act or through the notifications of parties acquiring threshold amounts under the 1976 Hart-Scott-Rodino Antitrust Improvements Act.

“Traders can quickly buy large stakes in a company before they even hit the 13D 10-day disclosure window that would allow you to have insight into the size of their stake,” she said.

Under Hart-Scott-Rodino, a trader must buy about 78 million shares, which could be a much lower number than the 5-percent trigger under 13D, she said.

To contact the reporter on this story: Che Odom in Washington at

To contact the editor responsible for this story: Yin Wilczek at