Hostile Resistance to Hedge Fund Activism

We find that most actions taken to resist hedge fund activists, such as poison pill adoption, are identical to actions firms take in response to takeover threats. A poison pill states that if any shareholder, or group of shareholders, acquires more than a specified trigger percent of shares (typically 10 to 20%), all shareholders, excluding the triggering shareholders, may buy deeply discounted shares. Poison pills were originally designed to force prospective acquirers to negotiate with the board of a firm, rather than conduct a hostile takeover. A perhaps less well known aspect of the poison pill is that it also inhibits communication between large shareholders, since the stakes of individual shareholders who are perceived by the firm to be working together as a group can be aggregated for the purposes of determining whether the pill will be triggered. Other resistance measures taken by target firms, such as making it harder for shareholders to act by written consent and harder to call special meetings, also interfere with activists’ ability to coordinate with other shareholders to accomplish activism objectives.