Two questions you could ask about the poison pill that Hertz adopted yesterday are (1) why and (2) why now? The second question is tricky. You may have noticed that today is New Year's Eve. Is Hertz burying shameful news at year-end? Is it announcing positive news -- less "hey here's a pill" than "hey some cool activists are buying our stock aren't we cool" -- in an otherwise low-volume day, pushing Hertz up 9 percent to record highs today?
A related why-now question is, what tipped Hertz off to the fact that activists were buying its stock? Hertz itself cites "unusual and substantial activity in the Company's shares," which is not especially noticeable; recent volumes have mostly been below average, as you'd expect in December. Bloomberg News says the company "detected unusual options activity in recent weeks and suspects more than one activist investor has used options to take a position in its shares," which, sure, though I don't think there's a ton of precedent for big activist positions accumulated via listed options.1
Anyway, somehow the folks at Hertz found out some activists were buying -- the lead contender seems to be Dan Loeb's Third Point LLC, though Loeb "doesn't plan to pursue an activist position" -- and threw up a quick poison pill.2
The other question is why. The poison pill was originally designed to prevent coercive takeover offers by making it impossible for a potential acquirer to buy more than 20 percent of a target's stock without board approval: If you go over 20 percent, then the poison pill springs into horrible punitive action and effectively takes away a big chunk of your ownership.3
So you can't just launch a hostile tender offer to buy a company, because if you buy more than 20 percent of the stock you'll blow yourself up. So you're stuck negotiating with the board, which is no doubt looking out for shareholders' best interests and preventing coercive tender offers and doing all that other good board stuff.
Here, though, it seems fairly unlikely that Dan Loeb -- or Keith Meister's Corvex Capital, which owns some Hertz stock and has met with the company over the last month -- would launch a hostile takeover of Hertz. Not really the activist style. And Hertz's poison pill seems aimed not so much at preventing hostile takeovers as at deterring activists: The threshold for triggering the pill is just 10 percent of the stock, for one thing, and it includes not just actual shares but also equivalent economic ownership like swaps. The goal is not to prevent a coercive tender offer, but just to prevent a 10 percent owner.
Still, who cares, right? No activist owns more than 5 percent of Hertz right now, and probably no activist would want to get above 10 percent anyway. Getting above 10 percent raises weird legal questions and, among other things, makes it very difficult to sell at a profit.4
But the tricky thing here is that the Hertz pill -- like a number of recent anti-activist pills, including in Safeway and Air Products -- goes beyond just prohibiting activist investors from buying more than 10 percent of the stock for themselves. The relevant bit is Section 1(d) of the pill, which deems an investor a "beneficial owner" of shares that:
- she owns;
- her Affiliates or Associates own;5
- she has a right to acquire under an option, or has a right to vote;
- are owned by anyone else with whom she has "any agreement, arrangement or understanding" about acquiring or voting the shares or "obtaining, changing or influencing control" of Hertz; or
- are owned by her swap counterparty.
What that means is that if Dan Loeb has, say, 3 percent of Hertz and Wellington Management owns 9 percent of Hertz, Loeb can't safely call up Wellington and lobby them to join him in voting for change at Hertz: If they reach any sort of "agreement, arrangement or understanding" (written or not) about "influencing control" then, bang, they own 12 percent between them and trigger the poison pill and effectively lose their shares. So the activist's lobbying activities have to be limited: He can make public pronouncements about what changes he wants at Hertz, but an actual dialogue with other shareholders is dangerous.
Or if Loeb has 3 percent of Hertz and Meister has 3 percent of Hertz then they could perhaps reach some sort of agreement, but even that would be a risk. Because the pill doesn't just count their shares; it also counts shares owned by their "Affiliates" and "Associates," potentially including things like shares owned by pension funds of companies in which Loeb and Meister invest. The pill is full of traps.
Hertz's announcement of the pill pays lip service to the old-timey use of the poison pill to prevent coercive acquisitions:
This Rights Plan is intended to ensure that the board remains in the best position to perform its fiduciary duties and to enable all Hertz shareholders to receive fair and equal treatment. It is also designed to allow all Hertz shareholders to realize the long-term value of their investment by reducing the likelihood that any person or group would gain control of Hertz through open market accumulation without appropriately compensating the Company’s shareholders for such control or providing the board sufficient time to make informed judgments.
But that's not really what the pill says. The pill is not designed to prevent an uncompensated change of control of Hertz; it's designed to make life difficult for activist investors in Hertz: to make it hard for them to buy shares or coordinate with each other or otherwise challenge the board. That doesn't seem like it would be all that helpful to "enable all Hertz shareholders to receive fair and equal treatment." But it's convenient for the board anyway.
1 Over-the-counter put/call combos that dealers hedge using the underlying stock, sure. Listed options, less so?
2 Finally there is the delightful case of:
- activist investor buys, I dunno, 4 percent of Hertz, not really intending to buy more or even really be all that activist;
- activist investor realizes that it's late December;
- activist investor calls its prime broker and says "hey, if someone were to tell Hertz that there's been unusual activity in their stock and that they should put in a poison pill by year-end, we would not be all that offended";
- word gets to Hertz;
- Hertz announces pill;
- stock jumps;
- activist investor has a nice gain for its end-of-year numbers.
That actually seems unlikely here but as a concept I sort of like it.
4 Due to section 16(b) of the Exchange Act, the short-swing profits rule. Basically if you get above 10 percent and you sell at a profit within six months you have to disgorge the profit. More here, about Carl Icahn being the rare activist to go above 10 percent of a company's stock, though in somewhat unusual circumstances.
5 As defined in Rule 12b-2 don'tcha know. "An 'affiliate' of, or a person 'affiliated' with, a specified person, is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified." Associates include "any corporation or organization (other than the registrant or a majority-owned subsidiary of the registrant) of which such person is an officer or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of equity securities, any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity, and any relative or spouse of such person, or any relative of such spouse, who has the same home as such person or who is a director or officer of the registrant or any of its parents or subsidiaries."