Risk & Compliance

Tale of Two Poison Pills

What’s really behind the plans of EDS and Fortune Brands to nix their anti-takeover provisions?
Stephen TaubDecember 13, 2004

Electronic Data Systems (EDS) and Fortune Brands announced last week that they are eliminating their poison pills, but the new policies that have replaced them may not be as sincere as they appear.

The two companies are each establishing their own versions of so-called “fiduciary-out” policies, which can spoil the reason for eliminating the anti-takeover measures in the first place. Why? While it may look good now to shareholders that there is no poison pill in place, the provisions allow directors to institute one in the future, only seeking shareholder approval after the fact within a year of adoption, if the board determines the measure is in the stockholders’ “best interests.”

These disingenuous changes appear to be on the rise. Other companies earlier this year have announced variations of such provisions include ChevronTexaco, Allstate, Bristol-Myers Squibb, Hewlett-Packard, JP Morgan, Marathon Oil, Mattel and Visteon. Some of these companies said they would seek approval at the next annual meeting if they wind up instituting a pill under the fiduciary-out provision.

Specifically, Fortune Brands stated that it has established a new policy that requires shareholder approval for any future shareholder rights plan prior to or within 12 months of adoption. Its chairman and chief executive Norm Welsey said in a statement that the new policy “reflects being responsive to our shareholders.”

The board of directors also moved up the expiration date of the current shareholder rights plan to December 24, 2004, from December 2007. And to underscore how governance-friendly it has become, Wesley cheered that Fortune Brands’ board was among the first to adopt a three-year independent director evaluation (TIDE) provision. TIDEs call for a panel of independent directors to periodically review the shareholder rights plan.

Said Wesley: “The Board has continued to weigh the sentiments of our shareholders and has determined that our new policy can adequately protect our shareholders’ best interests.”

EDS states that it will not propose any shareholder rights plans for approval by stockholders at its 2005 annual meeting as its board initially planned. The board had said that if the proposed plan were not approved, it intended to redeem the current plan and not implement a new plan without stockholder approval.

EDS also reaffirmed its previously announced intent to submit proposals to stockholders at the 2005 annual meeting to repeal the outsourcing company’s classified board structure and eliminate the supermajority voting provisions in its charter and by-laws.

However, EDS qualified its announcement by adding that it will only adopt a shareholder rights plan if either its stockholders approved its adoption, or the board, including a majority of the independent members, determines that “under the circumstances existing at the time it is in the best interests of EDS’ stockholders to adopt a rights plan without seeking stockholder approval.”

These changes – while not unusual – aren’t favored by everyone. Some skeptics say that poison pills are just a ploy to entrench management. And the Council of Institutional Investors argues that one year is too long to wait on rights plans because during the intervening time companies could still adopt the pill.

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