Risk & Compliance

Two Take Pills; Don’t Call Them in the Morning

As shareholder-rights plans pick up to help companies fend off hostile suitors during the global stock sell-off, Cleveland-Cliffs and Mariner Energ...
Stephen TaubOctober 14, 2008

At least two more companies — Cleveland-Cliffs Inc. and Mariner Energy Inc. — this week said their boards approved shareholder-rights plans, in a sign that the global selloff in stocks has companies feeling undervalued and vulnerable to a hostile bidders.

Cleveland-Cliffs, which said it would officially be renamed Cliffs Natural Resources on Wednesday, said its poison pill is intended to protect the company and its shareholders “from potentially coercive takeover practices or takeover bids.” In a press release, the international mining company added, “The plan is not intended to deter offers that are fair and otherwise in the best interests of all of the Company’s shareholders.”

Under its plan, the rights will become exercisable and allow the holder to acquire the company’s common shares at a discounted price if a person or group acquires at least 10 percent of the company’s outstanding common shares, or, in the case of a person or group that currently owns 10 percent or more of the company’s outstanding common shares, that person or group acquires beneficial ownership of any additional shares.

Mariner, an independent oil and gas exploration, development, and production company, also said its rights plan would be triggered if an acquiring party accumulates 10 percent or more of Mariner’s stock and would entitle holders of the rights to purchase stock of either Mariner or an acquiring entity at half of market value.

Scott D. Josey, Mariner’s chairman, CEO, and president, said the plan’s adoption is not in response to any current accumulation of shares or takeover situation and is intended only as a general deterrent to potentially unfair or coercive takeover practices that could be employed, especially those exploiting market instability. “In light of the current circumstances in the financial and securities markets, we believe the Rights Plan represents a sound and reasonable means of safeguarding the interests of Mariner’s stockholders,” he added.

Interest in poison pills plummeted among American companies over the last-half-decade or so, with many allowing their shareholder-rights plans to expire. But in the face of a sagging stock market and a struggling economy, fears about becoming acquisition targets have made some more open to popping pills.

Indeed, the trend had started earlier in the year. In September we reported that poison-pill adoption had increased somewhat sharply, with 40 U.S. companies adopting new poison pills for the first time, according to FactSet SharkRepellent, which tracks poison-pill trends. In all of 2007, 42 companies adopted poison pills. In addition, 15 companies had acted to terminate their poison pill plans, compared to 20 doing so in 2007, 30 terminations in 2006 and 41 in 2005.

“Companies that wanted to get rid of their poison pills have done so,” says John Laide, of FactSet SharkRepellent, noting that the sharp decline in poison pills has steadied itself.