Thursday, July 10, 2014
Ron Barusch at the WSJ points out some lessons for deploying poison pills following American Apparel's failure to use a pill to keep former CEO/Chairman Dov Charney at bay.
I won't go into the details, but let's just say the board probably felt they had good reason to let him go when they did last month. The result of the ouster has been a struggle for control of the company with Charney (founder and large bloc stockholder) seeking to fight his way back onto the board and the board resisting. Not long after being removed from the board, Standard General and Charney entered into a partnership whereby SG lent money to Charney to purchase shares of American Apparel stock from SG. Collateral for that purchase was Charney's existing bloc of APP stock. The long and short of it - SG was able to move into position where it had the ability to control 43% of APP stock.
After announcement of the partnership, APP adopted a pill. As Ron notes, that was just too late. SG and Charney were already in a position and even if they didn't acquire any more shares, they couldn't be touched.
Yesterday, the board of APP gave in and signed a support agreement with SG. That agreement provides that board will be reconstituted with five of the current seven members, including Charney, stepping down. The new board members will be chosen jointly by SG and the current board. Charney stays on as a consultant at his present salary with a determination as to what to do with him to be resolved after an ongoing internal investigation. And then finally a standstill agreement that will prevent SG and Charney from acquiring additional shares.
So, following the turmoil, Charney is still out (for the timebeing), the current board has been mostly dislodged and SG is suddenly in the cat-bird's seat.
This past year has been quite a year for activist investors. It looks like they are writing new playbooks, taking advantage of opportunities as they pop up. Maybe it's time to reconsider whether simply having a pill on the shelf ready to go is sufficient. Perhaps, boards should be considering adopting pills pre-emptively and taking their ISS lumps.