Poison Pill Deep Dive Series:
Last Look

The fifth of a six-part series examining six specific and evolving rights plan provisions.

As discussed in greater detail in some of our prior articles,[1] a shareholder rights plan is a protective measure used by a public company to deter (though not necessarily prevent) a stockholder from exceeding a specified ownership percentage without prior approval from the company’s board.

We have prepared a series of articles on some of the interesting and evolving features of rights plans and the various considerations that go along with them. This article is the fifth in the series and focuses on a provision in some rights plans that allows a company’s board a “last look” at redeeming the rights outstanding under a triggered plan before the plan’s dilution takes effect.

Last Look

As discussed in prior articles, many rights plans are crafted as a trip wire: if an acquiror[2] exceeds the specified triggering percentage, the rights plan is automatically triggered without any additional action, and the dilutive effects cannot be stopped or reversed. Not even the company’s board can undo them.

That said, some rights plans provide the board a limited window after an acquiror exceeds the specified triggering percentage—typically 10 business days—during which the board can redeem each right for a nominal amount. This is known as a “last look” provision, and it gives the board the ability to avoid the dilutive effects of a triggered rights plan.

A little less than half of the rights plans adopted in the past 4 months contained a last look provision.[3]

A last look provision is typically drafted as follows:

The Company Board may, at its option, at any time prior to the earlier of (i) the Distribution Date and (ii) the Expiration Date, redeem all, but not less than all, of the then outstanding Rights at a redemption price of $0.0001 per Right.[4]

The “Distribution Date” is generally defined as the 10^th business day after the public announcement that a person has surpassed the specified triggering percentage, thus creating the 10-day window during which the board may redeem the rights under the triggered plan.[5] The board’s otherwise broad right to amend the plan (which would include the right to accelerate the expiration of the plan) generally becomes significantly limited at the same time as the redemption right expires.

There is some debate as to whether including a last look provision in a rights plan is good for the company. When a rights plan is crafted as a trip wire (i.e., without a last look provision), the acquiror decides if the dilutive effects occur—it is the one that chooses to surpass the specified triggering percentage and thereby irreversibly trigger the plan.[6] But when a rights plan contains a last look provision, it is the company’s board that has the final call on whether the dilutive effects occur because it has 10 days to redeem the rights after the plan has been triggered.

On the one hand, it seems sensible to put this decision in the hands of the board rather than a third party. A triggered rights plan will significantly affect the company and its capital structure, and events significantly affecting the company should be decided by the board.

On the other, giving the board the final call on whether the dilutive effects occur may weaken the rights plan’s deterrent value. This happens because, during the 10-day window after the plan has been triggered, the board will be under considerable pressure in deciding whether to redeem the rights. The pressure comes from the fact that the board’s decision must be made consistent with the board’s fiduciary duties, based on current knowledge of the company’s situation, including the “threat” posed by the particular acquiror, and the potentially significant effects of the triggered plan on the company. 

Pressure may also come from the company’s other stockholders. Although diluting the acquiror gives the other stockholders the chance to increase their ownership percentages at a deeply discounted value, or even for free (if the board opts to implement an exchange rather than to allow exercise of the rights), it will likely take the acquiror’s proposed deal off the table. Moreover, at the point when a plan is triggered, at least in the takeover context, a significant number of the company’s stockholders will be arbitragers who had bought company stock with the expectation that a deal would happen and will likely want the board to redeem the rights and let the acquisition proceed, with less interest in the company’s long-term prospects.

As a result, if a rights plan with a last look provision is triggered, the acquiror knows that the board may be incentivized to negotiate and that there is a possibility that the board will decide to redeem the rights—thereby reducing the rights plan’s deterrent value.

In the end, whether or not to include a last look provision is an important issue for the board to consider, and it is key that the board be advised as to the positives and negatives of including the provision.

[1] For more background, see our client alerts, “Protecting Against Opportunistic Acquisitions and Activism – Considering a Stockholder Rights Plan,” “Poison Pill Deep Dive Series: The Inadvertent Triggering Exception,” “Poison Pill Deep Dive Series: Grandfathering Existing Stockholders,” “Poison Pill Deep Dive Series: Acting in Concert” and “Poison Pill Deep Dive Series: Triggering Percentage.”

[2] We use the term “acquiror” generally to indicate a party that acquires the company’s shares, which could include a party intending to acquire the entire company or an activist seeking a significant stake.

[3] Deal Point Data; this statistic excludes rights plans designed to protect net operating losses.

[4] A rights plan without a last look provision is typically drafted as follows (with emphasis added for clarity of this explanation): “The Company may, at its option, at any time prior to the earlier of (i) any person or group of affiliated or associated persons becoming an Acquiring Person and (ii) the Expiration Date, redeem all, but not less than all, of the then outstanding Rights at a redemption price of $0.0001 per Right.”

[5] The full definition of “Distribution Date” would typically be the earlier of (i) the 10^th business day after the public announcement that a person or group of affiliated or associated persons has become a triggering person or such earlier date, as determined by the board, on which a triggering person has become such, and (ii) such date (prior to such time as any person or group of affiliated or associated persons becomes a triggering person), if any, as may be determined by the board following the commencement of, or the first public announcement of an intention to commence, a tender offer or exchange offer the consummation of which would result in any person or group of affiliated or associated persons becoming a triggering person.

[6] The last look provision will only become relevant where an acquiror intentionally triggered the rights plan. As discussed in our prior article, most rights plans contain an inadvertent trigger provision, which allows the board to determine that the rights plan was not triggered if the acquiror inadvertently exceeds the specified triggering percentage.