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Shareholder Input on Poison Pills

New York - June 15, 2009 John Laide

More companies are giving shareholders a say on poison pills. According to FactSet SharkRepellent data, so far this year 21 companies that adopted or extended a poison pill have publicly disclosed they plan to put the poison pill to a shareholder vote within a year. That's already more than 2008's full year total of 18 and in fact is the most in any year since the first poison pill was adopted in the early 1980s. Unlike procedural and structural charter and bylaw takeover defenses that shareholders ultimately have a say in, poison pills can be adopted by corporate board's unilaterally without any shareholder approval (charter amendments require shareholder approval and while many companies allow the board to amend the bylaws without shareholder approval, any defense adopted could be repealed by shareholders who can also amend the bylaws). Such was the case for twenty years as shareholder input on poison pills was rarely sought. In late 2004, RiskMetrics Group (formerly Institutional Shareholder Services or "ISS") established a new policy, effective with the 2005 proxy season, to recommend a withhold vote for director nominees at companies that adopt or renew a poison pill after January 1, 2005 either without shareholder approval or the commitment to seek shareholder approval within 12 months of adoption. We expected to see a substantial increase in the number of companies putting poison pills up for shareholder ratification but very few did. In 2005, the first year of the policy, only six companies disclosed intentions to seek shareholder approval of a new adoption or extension and of those four actually followed through with the vote (the remaining two companies determined not to seek shareholder approval and let the poison pill lapse.) The six companies represented less than 5% of the total companies that adopted a poison pill or extended one during the year and thus would trigger the new RiskMetrics policy. The 21 companies this year represent almost 24% of the companies adopting or extending poison pills in 2009. While 76% of companies are still opting to not seek shareholder approval, the jump from less than 5% in 2005 to nearly a quarter this year is noteworthy.

More Companies Facing this Decision

Several factors are leading to more companies having to decide whether to seek shareholder approval of new poison pill adoptions and extensions. First, because 1999 was a banner year for poison pill adoptions and the typical poison pill has a 10-year term, numerous companies have poison pills scheduled to expire naturally during the year. According to FactSet SharkRepellent, 208 companies will need to decide whether to renew an expiring poison pill this year. The subset that decides to renew will also need to consider whether to seek shareholder approval. Secondly, the drop in valuations in 2008 into early 2009 sparked a modest resurgence in poison pill adoptions as many companies concluded their stock prices did not reflect the true value of the business. The 32 first time poison pill adoptions as of June 12th is roughly the same pace as 2008's full year total of 76, which was the most in three years. Also, while the volume of M&A has fallen substantially, unsolicited offers are still being launched. Unsolicited offers represent nearly a quarter of all announced deals involving full acquisitions of U.S. public companies since January of 2008 according to FactSet MergerMetrics. Adding to this potential threat is the fact that proxy fights for board seats are on the rise as we are on pace to surpass 2008's record total of 113 proxy fights (a poison pill can be useful in a proxy fight by capping the voting stake of the dissident and limiting certain "group" activities.)

Repercussions for Non-Compliance

Certainly, the RiskMetrics policy to withhold on directors has taken on added importance as companies increasingly switch from a plurality voting system to elect directors to a majority standard (or a plurality standard but with a resignation policy for directors who receive more withhold votes then votes for their election.) Under a plurality system if a company receives a majority withhold on a director, while it would generate negative PR for the company and reputational consequences for the individual director, would not affect the election of directors. For companies with a majority standard or resignation policy, a majority withhold would result in the director not being elected or having to submit his or her resignation to the board. Seventy-five percent of the S&P 500 currently have either a majority vote standard to elect directors or a plurality standard with a resignation policy. Small and midcap companies are also beginning to make this change. Twenty-six percent of the companies in the S&P 400 (midcaps) and S&P 600 (smallcaps) have either a majority vote standard to elect directors or a plurality standard with a resignation policy. A RiskMetrics Postseason Report for 2008 noted that three companies (The Cooper Companies, Inc., Administaff, Inc., and Rogers Corporation) all had directors receive a majority withhold in part because of the failure to put a poison pill adoption or extension to a shareholder vote. Based on the limited number of companies who have already filed vote results for 2009 annual meetings, we have identified three companies (Digi International Inc., Plexus Corp., and ZOLL Medical Corporation) that have had one or more directors receive a majority withhold and adopted poison pills since their 2008 annual meeting without seeking shareholder approval. None of the six companies have a majority standard to elect directors or a resignation policy. While Pulte Homes, Inc. has yet to file vote results for its May 14 annual meeting, on June 2 the company filed an 8-K to announce that three of its directors received more withhold votes than votes for their election and therefore each tendered their resignation to the Chairman of the Board in accordance with the company's director resignation policy. The company stated that the majority withhold on the directors was due to concerns with two corporate governance issues relating to the classification of the board and the company's poison pill which was adopted in March 2009 and was not submitted for shareholder approval. The board determined not to accept the resignations and announced it would put the declassification of the board to a vote and adopted an amendment to the poison pill requiring it to terminate if not approved by shareholders at the 2010 annual meeting.

How Have Companies Fared that Put a Poison Pill to a Vote

Since 2005, the first year of the RiskMetrics policy, 40 ratification proposals to approve a new poison pill adoption or an amendment to extend the term have appeared in corporate proxies. Twenty-three of the proposals passed, 9 were defeated, and the results are still pending for 8 of these proposals. So far, the actual vote results have been disclosed on 26 of these proposals. On average, these proposals garnered 60.7% of the votes cast including abstentions. For companies willing to adopt a poison pill that includes certain shareholder friendly features that RiskMetrics wants included in order for it to recommend its clients vote for the poison pill ratification proposal the success rate of these proposals increases substantially. These shareholder friendly attributes include a trigger no lower than a 20%, a term of no more than three years, no dead-hand, slow-hand, or no-hand provision, and a chewable shareholder redemption feature. Of the 12 companies that included all of these shareholder friendly features where a ratification vote has occurred and results disclosed, 11 were approved with only one defeat. On average, these RiskMetrics compliant pills garnered 69.0% of the votes cast including abstentions. RiskMetrics has separate criteria in evaluating ratification proposals for poison pills with the stated purpose of preserving a company's net operating losses ("NOL pills") including the value of the NOLs, a sunset provision, and "other factors that may be applicable." Four companies that have adopted NOL pills have submitted them for shareholder approval and all four were approved. Based on the three cases where the actual vote results have been disclosed, shareholders overwhelmingly support them with an average vote of 87.7% of the votes cast. Sixteen companies have put poison pills to a vote that don't include the RiskMetrics features resulting in eight being approved and eight defeated. Despite the increased difficulty getting these proposals approved it may be a route companies are willing to take because many advisors believe including the RiskMetrics features waters down the pill to the extent that they can't do the job they were designed for.


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