Dallas-based Southwest Airlines approved a “poison pill” for shareholders to stop activist investor Elliott Investment Management from grabbing more influence over the company and undermining management’s plans to guide the carrier through recent turmoil.
Southwest’s board approved the “limited-duration shareholder plan” Wednesday morning as pressure mounts on Elliott after it amassed a stake worth nearly $2 billion. The shareholder plan, a form of “poison pill” used when publicly traded companies come under fire from disgruntled investors, would make it much more difficult for Elliott to increase its stake, which currently stands at about 11% of the company’s shares. Southwest.
The “poison pill” is a bold move often used to deter activist investors who have targeted companies they perceive to be underperforming and in financial turmoil.
“Unless it’s void for some reason, there’s no way to avoid a poison pill,” said Keith Gottfried, a Maryland-based shareholder activism advocacy consultant. “The punitive effect of exceeding the trigger threshold can cause the activist’s stake to fade by a very large amount.”
While Elliott does not have enough voting shares to specifically replace board members or oust management, activist investors traditionally lobby other large institutional shareholders to support their plan. If they can get support from investors with a majority stake, an activist like Elliott can put his nominees on Southwest’s board of directors.
But sometimes board influence or an outright takeover isn’t the only goal.
Elliott says his plan could boost Southwest’s stock to $49 a share within 12 months, a 77% return over the period, which would provide investors with hundreds of millions of dollars in profit. Southwest’s share price has fallen about 50% in the past three years, similar to that of US rival American Airlines. Southwest’s stock price rose 7% the day Elliott announced his stake and is still up 3.5% from before Elliott got involved.
The limited-duration stockholder rights plan is effective immediately and applies equally to all current and prospective Southwest stockholders. This special plan is activated when a shareholder acquires a certain amount of his common stock, which would allow all other shareholders to purchase shares at a discount. It expires in one year.
Ariel Hernãndez, a corporate lawyer at NTT Data, said this mechanism makes the acquisition more difficult and costly for a buyer such as Elliott.
“If Elliott buys 12.5% or more of Southwest Airlines’ stock, current shareholders gain the option to buy additional shares at a lower price,” he explained. “This action dilutes Elliott’s holdings, reducing their value and making it more costly and difficult for them to take control of the company.”
When shareholders buy additional shares at discounted prices, Hernãndez said, the total number of shares outstanding increases. As a result, Elliott’s shares represent a smaller portion of the company, reducing their value. Elliott would have to buy additional shares at a higher cost in order to regain the same level of control in the company.
“In light of the potential for Elliott to significantly increase its position in Southwest Airlines, the board determined that approval of the Rights Plan is prudent to fulfill its fiduciary duties to all shareholders,” said Gary Kelly, executive chairman of the board. . “Southwest Airlines has made a good faith effort to engage constructively with Elliott Investment Management since its initial investment and remains open to any ideas for sustainable value creation.”
Elliott declined to comment further on the matter.
Southwest has long been a problem in an industry where competitors tend to mirror each other. The airline does not charge for the first two bags for passengers and does not assign seats, two sources of profit for US airlines.
“You have to be very informed before you start proposing changes that could affect Southwest Airlines’ business model,” Southwest CEO Bob Jordan told reporters last month.
The letter to Southwest’s board specifically called for the removal of Kelly and Jordan. Jordan has publicly told reporters that he has no plans to leave.
Elliott’s letter, originally sent to Southwest’s board of directors in June, asked the company to consider three recommendations: improve the board, improve leadership and undertake a business review.
According to a statement Wednesday, Southwest’s board and advisers considered Elliott’s stock, the fact that it had not reported its full purported position in Southwest per filing with the U.S. Securities and Exchange Commission and that Elliott has made regulatory filings with US antitrust authorities that will give it the flexibility to take a significantly larger percentage of Southwest Airlines’ voting power in two of its funds starting July 11.
Other publicly traded companies have also adopted rights plans designed to make it more difficult for outside investment groups to gain enough control of a company’s stock to prevent a board takeover or movement of others to check the firm.
In 2022, Twitter Inc., now known as X, adopted a similar shareholder rights plan that became possible if a party acquired 15% of the stock without prior approval, according to Bloomberg. At the time, Tesla CEO Elon Musk was making big money offers for the company, among other parties interested in buying Twitter. Later that year, Musk bought the social media platform for $44 billion.
To break it down further, Southwest will issue one right for each share of common stock that will initially trade with Southwest’s common stock and will become exercisable only if any person or group earns 12.5%. or more, of the common stock of the company.
If the rights become exercisable, all holders of the rights will be entitled to purchase shares of common stock at a discount of 50% to the current market price or the company may exchange any rights held by such holders for a share of common stock, according to Southwest. Any stockholder who currently owns more than the incentive percentage may continue to own his shares of common stock, but the rights will become exercisable if a stockholder subsequently increases his ownership by one or more shares.
From a messaging standpoint, Gottfried said, this announcement gives Elliott a “sound bite” that the company is taking steps to strengthen its violations.
It could further escalate shareholder tensions when Southwest has not been performing well financially. Southwest reports its second quarter results on July 25. Last week, Southwest lowered its financial expectations for the quarter, “driven primarily by the complexities in aligning revenue management with current booking patterns in this dynamic environment.”
