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Poison Pill

Introduction

A poison pill, an example of a "shareholder rights plan", is a measure taken by a company to discourage someone from instituting a hostile takeover attack.

    Real-life example - Kona Grill

    Here is a real-life example of an implementation of a poison pill by Kona Grill during May 2009.

    "Private-investment firm Mill Road Capital LP said Thursday in regulatory filing that Kona Grill Inc. (KONA) responded to the firm's $10.75-a-share offer to take the restaurant operator private, indicating that it was not currently interested in pursuing such transaction. Mill Road Capital, a Greenwich, Conn., firm managed by a group of former Blackstone Group (BX) professionals, submitted its non-binding offer on March 28 and got an oral rejection from the company on May 1, according to the filing with the Securities and Exchange Commission. To fend off a potential hostile takeover, Kona Grill on May 28 adopted a "poison pill," under which the company will declare a dividend distribution of preferred share purchase right to stockholders if a person or group acquires 20% or more of the company's common stock. Kona Grill Chief Executive Officer Marcus Jundt said at that time that the company didn't adopt the poison pill in response to any specific takeover proposal, "but in response to the general takeover environment". Mill Road held a 4.9% stake in Kona Grill when it initiated the offer, and it has since boosted its stake to 8.2%, with beneficial ownership of 544,227 shares, according to the filing. Mill Road said in the filing that it believes Kona Grill would be better able to realize its full value as a private entity."

    Real-life example - Barnes & Noble

    Although most poison pills are often instituted by the owners of a company, sometimes the owners of a company want to discourage the implementation of a poison pill. For example, in May 2010 billionaire investor Ron Burkle's Yucaipa American Management sued Barnes & Noble and its directors, saying that the board of Barnes & Noble breached its fiduciary duty to shareholders by upholding a "dscriminatory" poison pill provision that would prohibit the company from being sold. The lawsuit charged the board with having a poison pill "without any legitimate corporate purpose". It said the pill entrenched Chairman Leonard Riggio, who founded the company in 1965, and the incumbent directors in a "self-dealing scheme," and prevents other shareholders from buying the same level of voting power as the Riggio family.

    In this case, the shareholder rights plan was triggered once a single investor's stake rises above 20 percent. It was designed to prevent hostile takeovers by allowing shareholders to buy more stock at a discount and dilute the buyer's holdings. Yucaipa said in the lawsuit that the family owned about 32.4 percent of the shares. Including insiders, the total rose to about 38.2 percent, the lawsuit said. Burkle's Yucaipa owned 19.62 percent of the company's stock, according to the filing. Yucaipa asked the board for permission to raise its stake to as much as 37 percent without tripping the pill's provisions, which would have made Burkle the company's largest individual shareholder. Yucaipa wanted shareholders to be able to buy the same number of shares as those held by the Riggios, or to stop the family from using the voting power associated with shares above the 20 percent threshold.

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