Papa John's and the Poison Pill

Papa John’s Adopts ‘Poison Pill’ Defense Against John Schnatter


Papa John’s is preparing for a fight against John Schnatter, the pizza chain’s founder and former chairman, by adopting a so-called poison pill defense to protect itself against a hostile takeover attempt.

The plan, announced late Sunday by the company’s board, is meant to prevent any shareholder from amassing a controlling interest in Papa John’s. Mr. Schnatter, who resigned as chairman this month after a report that he had used a racial slur in a comment about black people, owns 30 percent of the company’s stock, making him its largest shareholder.

Mr. Schnatter has said since stepping down that doing so “was a mistake” and that he was pressured to leave by board members acting on “rumor and innuendo.”

The poison pill strategy — which has been used by, among others, Avis, Netflix and Sotheby’s, and in a battle between Men’s Wearhouse and Jos. A. Bank — is typically employed to fend off takeover efforts by activist investors and acquisitive rivals. It has rarely been used to preemptively rebuff a company founder, one notable exception being the poison pill that American Apparel adopted in 2014 amid an acrimonious split with its founder, Dov Charney.

.... Ms. Glaser declined to comment on the poison pill move by Papa John’s, which would take effect if Mr. Schnatter and his affiliates raised their combined stake in the company to 31 percent or if anyone were to buy 15 percent of the common stock without the board’s approval.
Don’t Eat the Poison Pill By Mistake


The pill “will prohibit Schnatter from acquiring more than 31 percent of the stock,” I wrote, but I was cheating. That was a shorthand description. That’s not how poison pills actually work. It’s not like you go to the stock exchange and put in an order for 100 shares and it bounces back with an error message saying “that would put you over 31 percent.”

Instead, the way poison pills work is … just sort of unbelievable. Basically, if anyone triggers the pill — if they go over 10 or 20 or 31 percent of the stock or whatever the trigger is — then every other shareholder of the company gets offered the right to buy a ton of the company’s stock at a big discount. If people exercise these rights — and they should because they offer the chance to buy stock at a big discount—then many more shares are issued and the triggering shareholder is massively diluted.

It just sort of seems like this shouldn’t be allowed, that companies shouldn’t be able to give massively discounted shares to all of their shareholders except the one they don’t like. But it is allowed; there is a famous case. I used to work at Wachtell, Lipton, Rosen & Katz, the law firm that invented the poison pill, and the pill document — here is Papa John’s, if you want to read one — is sort of scripture at that firm. I remember having this distinct sense that we had collectively gotten away with something, that we were all living off of some deep black magic that the firm’s elders had done back in the ’80s, that somewhere in a basement closet the notion of shareholder ownership was being tortured as the price for our success.

A big rights issue is a big corporate event, and exercising the rights requires cash, and if this happened a lot you could imagine an industry springing up around it. There’d be poison-pill arbitrageurs who’d buy poison-pill rights to get the new shares, and prime brokers would finance the purchase price, and it’d be a whole thing. But it isn’t, because poison pills are never triggered. The point of a poison pill is not to do this stuff; doing it would be super annoying and complicated. The point of the poison pill is that it convincingly threatens an acquirer with massive dilution, so potential acquirers are deterred from triggering poison pills. And it works.

Modern pills have a simpler alternative to the rights-exercise stuff, by the way, which is that the company can just give each shareholder (other than the triggering shareholder) one extra share of common stock for each share they already own. (See section 24 of the Papa John’s pill, if you’re curious.) This also dilutes the triggering shareholder — everyone else has twice as many shares, and the triggering shareholder doesn’t — but doesn’t require the rest of the shareholders to come up with money or, um, figure out what is going on. It’s just a 2-for-1 stock split, but a selective stock split that excludes the triggering shareholder. Again it just seems like that shouldn’t be a thing, but once you’re on board with the general idea of a poison pill, why not?
The SEC filing

The Onion

Comment: Not often seen ... not easily understood ... rarely triggered. As an aside Papa Murphy's is my pizza place. I don't own PZZA and don't intend to invest in it.

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