Sunday, September 20, 2009

Removing Poison Pills: A Case of Shareholder Activism

This paper is among the first to examine the removal of poison pills. Poison pills are adopted by boards without shareholder approval and have the potential to entrench management. In addition, the poison pills in our sample have been in place for a long time. If shareholders cannot force boards to remove the pills and the pills are in managements' best interests, why do boards remove them and why now? We hypothesize that boards remove poison pills because shareholders pressure them to do so. Our sample consists of 126 firms that removed their poison pills during the period 1990-2004. We show that shareholder proposals to remove are more prevalent among firms where shareholders submitted proposals to remove, that the pills were removed in spite of management's recommendation not to remove, and that removals were much more prevalent during the post-Enron period when shareholders were more active. We also examine why some firms remove their pills without any prompting from shareholders. We provide evidence consistent with the hypothesis that boards remove the pills when institutional investors actively negotiate the pills' removal. We also find that board independence and insider shareholdings are positively related to a board's responsiveness to shareholder activism to remove pills.