By: Rushabh Soni

A poison pill plan is a shareholder rights plan that makes the target company less attractive to potential acquirers.[1] Public companies can do this several ways, such as identifying a share acquisition threshold at which existing shareholders can buy new shares at a discount or buy shares of the acquiring company at a discount if the takeover is successful.[2] Poison pills occur when public companies rather dilute their stock value than sell to a potential acquirer whom they believe will completely overhaul the board of directors.[3]

Earlier this year, Macellum Capital Management, an activist hedge fund, sent a letter to the board of directors at Kohl’s nominating ten independent board members and asking to change some of its market strategies because of staggering performance and declining growth.[4] Macellum and others also sent offers for sale to buy Kohl’s, but Kohl’s rejected them because, according to them, the activist investors were undervaluing the company.[5] Shortly after, Kohl’s instituted a poison pill plan with the following parameters: (1) once a potential acquirer obtains more than ten percent in beneficial shares, other existing shareholders can purchase common stock at a fifty percent discount and (2) the rights expire in one year.[6] However, Kohl’s can still pursue a sale and entertain other potential acquirers.[7]

While Kohl’s does exactly that, it might be prudent to consider how potential acquirers who have gone out of favor with the board can still overcome the poison pill. In Just Do It: An Antidote to the Poison Pill, Velasco details three-pronged approach to overcoming the poison pill: (1) make an initial tender offer that just triggers the effects of the pill and (2) make a second tender offer after ascertaining the dilution.[8] For instance, in Kohl’s case, Activist Investor X can acquire ten percent of beneficial shares, enough to trigger the shareholders’ rights to purchase common shares at a fifty percent discount. Then, there would be a period in which the shareholders could elect to purchase more shares at the discount, thereby diluting the value of the acquired shares. After that, Activist Investor X could submit another tender offer that covers the dilution, but for obvious reasons,[9] the investor should submit an offer that is significantly above market. Here, Kohl’s shareholders can then keep buying additional shares at the discount, further diluting Activist Investor X’s shares, but shareholders would be investing a significant amount of money into this endeavor just to oppose an above-average tender offer.

Notwithstanding the above, courts may have to get involved if the strategy poses a coercion issue – if shareholders are somehow forced to take the offer. According to Unitrin, Inc. v. American General Corp., if shareholders tender shares to the activist investor based on some mistaken belief about the company, that constitutes substantive coercion.[10] In the face of any perceived coercion, Kohl’s would likely adopt additional measures to safeguard its investors.[11] However, the activist investor could certainly take advantage of the shareholders’ mistaken belief as to the future of the company; for instance, if shareholders believed that Kohl’s is likely not going to obtain a large enough market share to combat Amazon, the activist investor could take advantage of that fact and proceed with the poison pill antidote.

For the activist investor, the entire antidote strategy would involve an incredible amount of money and motivation.[12] However, if the activist investor truly believes in Kohl’s future, then it may be a tactic worth exploring as Kohl’s reins in more offers from other investors.

[1] See Poison Pill, Investopedia (Feb. 23, 2022), https://www.investopedia.com/terms/p/poisonpill.asp.

[2] Id.

[3] See Chron Contributor, Reasons for Firing a Chairman of the Board, Chron (April 20, 2021), https://work.chron.com/can-board-directors-fired-25969.html.

[4] See Macellum Nominates Ten Highly Qualified and Independent Candidates for Election to the Kohl’s Board of Directors, Business Wire (Feb. 10, 2022), https://www.businesswire.com/news/home/20220210005444/en/Macellum-No,%20minates-Ten-Highly-Qualified-and-Independent-Candidates-for-Election-to-the-Kohl%E2%80%99s-Board-of-Directors; see also Letter from Macellum Capital Management to Kohl’s Shareholders (Jan. 18, 2022), https://macellumcapitalmanagement.com/wp-content/uploads/2022/01/Letter-to-KSS-Shareholders_1-18-22.pdf.

[5] See Svea Herbst-Bayliss, Macellum asks Kohl’s for board seat, public commitment to explore sale, Reuters (Jan. 25, 2022), https://www.reuters.com/business/retail-consumer/exclusive-macellum-asks-kohls-board-seat-public-commitment-explore-sale-2022-01-25/#:~:text=Macellum%2C%20which%20owns%20roughly%205,Kohl’s%20at%20roughly%20%249%20billion.

[6] See Kohl’s Board of Directors Provides Update on Review of Unsolicited Expressions of Interest, Kohl’s (Feb. 4, 2022), https://corporate.kohls.com/news/archive-/2022/february/kohl-s-board-of-directors-provides-update-on-review-of-unsolicit; see also Kohl’s Corporation, (Form 8-K) (Feb. 3, 2022).

[7] See JinJoo Lee, Kohl’s Poison Pill Won’t Kill Potential Sale, Wall Street Journal (Feb. 10, 2022), https://www.wsj.com/articles/kohls-poison-pill-wont-kill-potential-sale-11644519380.

[8] See Julian Velasco, Just Do It: An Antidote to the Poison Pill, 52 Emory L. J. 849, 868 (2003).

[9] See Tiffany C. Wright, What Happens When I Don’t Tender My Shares?, Zacks (Mar. 6, 2019), https://finance.zacks.com/happens-dont-tender-shares-10043.html (stating that an investor will likely sweeten the deal by offering to buy shares at a premium since shareholders would likely not accept a low tender offer).

[10] See Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1384 (Del. 1995).

[11] See generally id.

[12] See generally Poison Pill, Investopedia (Feb. 23, 2022), https://www.investopedia.com/terms/p/poisonpill.asp.