M&A

Tesoro Prepares a Poison Pill

A recent tender offer from Tracinda wouldn’t trigger the shareholder-rights plan, though.
Stephen TaubNovember 21, 2007

Tesoro Corp. says it will not make any recommendation to its shareholders regarding whether they should participate in a tender offer received in early November from Tracinda Corp.

At the same time, the oil company has adopted a “poison pill.” Also known as a shareholder-rights plan, it is designed to reduce the likelihood that a hostile acquirer can buy the company on the cheap. Under the plan, each stockholder of record on December 3 will receive a dividend of one right for each outstanding share of Tesoro.

In addition to the customary poison-pill provisions, the rights plan includes a number of other shareholder-friendly features: a threshold for triggering exercise of the plan of 20 percent of the outstanding shares of Tesoro common stock, a three-year fixed term, and a provision requiring a committee of independent directors to assess annually whether the rights plan remains in shareholders’ best interests.

The rights plan also includes a provision that it will not be triggered by a “qualifying offer” if at least 10 percent of investors request that a special shareholder meeting be convened to determine whether to exempt the offer from the rights plan. This is significant because critics of poison pills argue that they prevent companies from weighing offers that are not in management’s best interests but might be in their shareholders’ best interests.

The company notes that the rights plan will not be triggered by the successful completion of Tracinda’s tender offer, since it would result in Tracinda — the investment arm of billionaire Kirk Kerkorian — acquiring only about 19.98 percent of Tesoro’s outstanding shares.

Poison pills have seemingly been headed toward extinction among the largest companies. Just 37 percent of S&P 500 companies had poison pills in 2006, down from 46 percent in 2005, according to Risk Metrics.

Fortune 500 companies adopting first-time pills have been on the decline since 1996; in fact, only one such company has adopted a pill thus far in 2007, according to Thomson Financial. However, since 2004 there has been a spike in first-time adoptions by non-Fortune 500 companies, says Thomson.