Embattled retailers, battered and bruised by the COVID-19 pandemic’s crushing blows, are going on the defensive.
Volatility in the equity markets in recent weeks has mercilessly thrashed retail share prices. And in response to what now seems to be historic market and economic instability and uncertainty, many merchants are dusting off a maneuver—designed to stave off any strong-arm takeover tactics—known as the shareholder rights plan.
Categorically dubbed “poison pills,” these defensive schemes have been sanctioned by the highest powers, the corporate boards themselves. Poison pills enormously complicate the steps a potential acquirer and share owner must traverse to execute a hostile takeover.
And retailers have already started to circle their wagons.
On Friday, Chico’s FAS Inc. said it has adopted a limited shareholder rights plan, following a move by men’s wear player Tailored Brands Inc. earlier in the week. And in January, J.C. Penney Co. Inc., which has been shedding stores and searching for a revival strategy, renewed through 2023 the plan it had previously instituted.
When times are good, share prices are soaring and the living is easy, hostile takeovers aren’t typically on retail’s radar. But with the pandemic pushing stock prices down to, or near, 52-week lows, marquee merchants like Macy’s are in the uncomfortable position of acknowledging shrinking market cap that’s shoved them off the S&P 500 Index.
Poison-pill plans discourage hostile takeovers by empowering existing shareholders other than the potential acquirer to buy—through options or warrants—additional shares at a discount under certain conditions. Doing so effectively dilutes the ownership interest in the shares held by potential acquirer, or “corporate raider.”
Sometimes, having a poison-pill plan in place allows the company to find a “white knight” buyer that’s more simpatico with the board of directors, or analyze what it believes is in the best interests of the company and its shareholders. This also can compel the corporate raider into board negotiations, pushing the takeover contender to boost its offer price, which ultimately benefits shareholders. What’s more, existence of a poison pill can also curtail additional share purchases by activist investors trying to foist their agenda onto target companies, which oftentimes includes calls to sell the business.
Since the coronavirus outbreak began its unwavering assault on the U.S., 21 American firms adopted poison pill plans in March, says Deal Point Data, the “most in any month since we began tracking this activity on Jan. 1, 2017, and triple the previous most active month of January 2018 with seven adoptions.”
While poison pills are often an effective defense ploy, they’re not without limitations.
According to Alon Y. Kapen, a securities law partner at Farrel Fritz, “Poison pills are not intended to prevent an acquisition.” Rather, they’re intended to “protect the company and prevent a shareholder from gaining control through open market purchases” of stock, Kapen added, “without paying an appropriate control premium.”
Kapen expects that more companies are considering putting together a similar tactic, particularly if they anticipate a feeding frenzy by “opportunistic acquirers trying to gobble up undervalued companies.”
The securities attorney also believes that many companies are unprepared for what could be a surge in hostile activity. Many firms that once had these rights plans in place have since dismantled them over the years, faced with criticism that poison pills can be wielded as a tool to entrench existing boards and management.
According to Kapen, one way to make the plans more palatable is by “emphasizing that the board is doing the plan to prevent an abusive or coercive takeover, not to prevent an activist from accumulating a stake. And if the plan is only for a year, companies should highlight that, too.”
Chico’s did just that, noting on Friday that its board adopted a “limited duration shareholder rights plan.” The one-year plan expires on April 1, 2021, and isn’t intended to deter offers that are fair and otherwise in the best interest of Chico’s and its shareholders, the company said. It also pointed out that the plan has not been adopted in any response to a specific takeover bid or other proposal to acquire control of the company.
“In adopting the Rights Plan, the board has taken note of the unprecedented impact of the global COVID-19 pandemic on equity market evaluations, including the dislocation in the company’s stock price,” Chico’s said. “Given the current environment and trading levels as well as the importance of maintaining focus on the company’s operations, safeguarding the welfare of employees and serving customers, the board believes adopting the rights plan is in the best interest of all Chico’s FAS shareholders.”
Similarly, the plan adopted by Tailored Brands—parent to Men’s Wearhouse, Jos. A. Bank, Moores Clothing for Men and K&G—also calls for a 12-month term, expiring on March 29 next year. The plan may be terminated or the rights redeemed before the slated expiration date under certain conditions.
Tailored Brand’s plan is triggered if any person acquires 10 percent or more of the company’s outstanding common stock, or 20 percent in the case of certain passive investors.
“Under the Rights Plan, any person which currently owns more than the triggering percentage may continue to own its shares of common stock, but may not acquire an additional shares without triggering the Rights Plan,” the men’s retailer said. In adopting the plan, the company said it took note of the “substantial impact of the COVID-19 pandemic on market activity and increased volume and volatility in the trading of the company’s stock.”
In Penney’s case, the plan was initiated more than three years ago in January 2017 to protect the retailer’s net operating loss (NOL) carryforwards. The retailer said its NOLs total $2.6 billion, which can be used to offset future taxable income and reduce federal income tax liability. The ability to use them would be limited by a change in ownership under certain conditions. The plan, expiring on Jan. 25, 2020, is triggered if a party acquires 4.9 percent or more of the outstanding shares of its common stock.
By renewing the strategy, the plan is now in effect through Jan. 23, 2023.
Penney’s plans to seek shareholder approval at its annual meeting in May. If shareholders do not approve, the plan will terminate. The tax benefits don’t expire until 2032 and 2034. Penney’s has an upcoming Investor Day on Tuesday, when company executives are expected to detail plans for how it will restructure its debt of roughly $4 billion that’s due in 2023 and 2025.