Can Pills Poison the Transfer Agent Too?
By way of background, “poison pill” in the securities industry is the nickname given to a specialized form of “rights agency,” which essentially gives current shareholders of a public company the right to buy additional shares at a deep discount if one shareholder buys up to a certain percentage of the company’s stock – often 10%. The intent is to make the acquisition of more shares much more expensive as a practical matter (i.e., suddenly there are a lot more of them to buy) thus preventing a) the “raider” from trying to take the company over, or b) just as frequently now, preventing an “activist” from exerting a lot more influence over management and the board.
When the typical 10% is reached the company can declare the pill “triggered” (or not, if the acquirer is considered “friendly”) and have its stock transfer agent issue rights (like warrants) to all other shareholders to buy those deeply discounted shares. It is this last procedure that prompted our headline to this article, when one considers the consequences if the transfer agent is not ready to issue the rights. If the trigger is not mitigated by prompt negotiations or legal maneuvers (usually the case), and the transfer agent is obliged to perform its obligation to issue rights within a very short period of time – what if it cannot, in a timely manner, because no one focused on the operational requirements in such scenario? And what if that failure enables the raider or activist to succeed? How do you spell “lawsuit”?
Our advice to a company that either has a pill in place, or will soon implement one, is to have a very thorough review of the underlying rights agreement with its transfer agent – preferably including the agent’s operations management. There should be a detailed, written list of steps to be taken in the event of a trigger, with crystal clear deliverables for all parties – shared among and signed off on by everyone. Again, while pill triggers almost never happen, they have “Murphy’s Law” written all over them.
Final note: We frequently have cause to object, on behalf of clients, to excessive poison pill rights agency fees assessed by transfer agents in a “pre-triggered” mode. After all, as one stock transfer manager said years ago, all an un-triggered pill does is “sit out there and growl.” But, we will almost never object to sizable fees assessed by a transfer agent upon the trigger of a pill, because the associated work is extensive, it is critical, it is very time-sensitive – i.e., it is precisely when a transfer agent should be paid handsomely to perform it duties.