December 21, 2005
Hedge Funds and Poison Pills
Phyllis Plitch, who writes the "Tracking the Numbers/Street Sleuth" column for the Wall Street Journal, wrote a piece in Tuesday's Journal (12/20/05 at C3) entitled "Hedge Funds Find Cure for Poison Pill: Teamwork." Her point? Hedge funds buy 9.9% each so as to not trigger a firm's poison pill plan and then work together (in "wolf packs") to influence target firm behavior. She cites Lipton claim that the SEC could stop all this by enforcing a group definition under Section 13(d) of the 34 Act. This is old news and incomplete. First, Section 13(d), forcing disclosure of stock positions when a bidder buys over 5% of the voting stock of a publicly traded company, aids hedge funds' wolf pack behavior. A single fund buys 5%, triggers the disclosure requirement that includes a description of its plans for the target and thereby implicitly invites other funds to join. Expanding a "group" definition in the section will cause technical filing difficulties perhaps but it does not solve any problems. Second, when two or three hedge funds each hold 9% stakes, the company itself does not want to trigger its own poison pill plan. A triggered poison pill plan causes numerous difficulties, affecting firm planning (through severe stock dilution) and negotiation and rewarding those hedge funds that have purchased stock but are not in any group that triggers the pill. A firm may group two hedge funds to hurt them by triggering the pill only to find that the firm has given windfall profits to three or four others. [You take out one wolf only to enable the rest of the pack to attack.] So an expanded group definition for a poison pill plan trigger is a problem not a solution. Hedge funds have thus, in a sense, used poison pill plans against the firms that have them.
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I read the article, but I did not understand how the hedge funds expect to get around the Millstien case. IIRC, the Millstien family just sort of talked about the target one Sunday morning at breakfast and boom they were a group. The threshold was not very high. Perhaps the hedge funds are operating on the "go ahead sue me" theory.
The problem with becoming a group is that the moment you are a group, each member of the group is deemed to have acquired the shares of all members of the group, and is required to file, disclose etc. If you don't everything you do is wrong.
Posted by: Robert Schwartz | Dec 22, 2005 12:31:02 AM