Los Angeles Business Journal

Gulp ... They're Back

By Deborah Crowe Monday, January 12, 2009

Has a wobbly stock market brought poison pills back in fashion?

Numerous medium-size and small companies nationwide and at least three across Los Angeles alone are rushing to adopt stockholder rights plans aimed at discouraging predators from taking advantage of a depressed share price by staging hostile takeover attempts.

Local homebuilder Ryland Group Inc., and oil and gas exploration company BreitBurn Energy Partners LP adopted protective plans just before Christmas. Fast-food chain owner CKE Restaurants Inc. announced its own plan last week.

Just a few years ago, shareholders of some of L.A.'s largest companies, including Amgen Inc. and then-public Hilton Hotels Corp., voted to junk their pills, which have often appeared to protect management's interests more than shareholders'.

Shareholder rights plans typically allow a company to flood the market with stock or employ some other tactic to fend off a takeover that's unwanted by management.

"It's like threatening to use a nuclear bomb to kill a fly," said Nell Minow, editor of the Corporate Library, which evaluates corporate governance practices of public companies. "Poison pills never get used, but the threat is enough to put a hold on a takeover."

Poison pills became popular in the 1980s as corporate raiders increasingly staged hostile takeover attempts. After that time, poison pills never went away, although they receded in popularity partly because they often were derided as ways to entrench and enrich bad managers.

Minow, who considers the term stockholder rights plan "snake oil language," does admit the plans can have legitimate uses.

"When a company's stock is significantly undervalued, it gives a board breathing room," she said. "The situation we're in now is exactly the one where you want to have that option available if someone comes in with a fire-sale offer for your company."

To deter conflicts of interest, the Corporate Library advocates what Minow calls "chewable pills," which give shareholders more power to vote to kill a pill.