Dallas-based Southwest Airlines has adopted a “poison pill” provision for shareholders to prevent activist investor Elliott Investment Management from exerting more influence over the company and undermining management’s plans to guide the carrier through recent turbulence.
Southwest’s board of directors adopted the “limited stock plan” Wednesday morning as pressure mounts on Elliott after amassing a stake worth nearly $2 billion. The stock plan, a form of “poison pill” used when publicly traded companies come under fire from disgruntled investors, would make it much harder for Elliott to increase its stake, which currently stands at about 11% of Southwest’s stock.
The “poison pill” is a bold measure often used to thwart activist investors who target companies they perceive as underperforming and with positive financial potential.
“If the decision is not overturned for some reason, there’s really no way to avoid a poison pill,” said Keith Gottfried, a Maryland-based shareholder activist defense attorney. “The punitive effect of exceeding the trigger threshold could result in very significant dilution of the activist’s stake.”
Although Elliott doesn’t have enough voting stock to replace board members or oust executives on his own, activist investors traditionally lobby other major institutional shareholders to back their plans. If they can win the support of investors with a majority stake, an activist like Elliott could place his own nominees on Southwest’s board.
But sometimes boardroom influence or outright takeover is not the only goal.
Elliott says his plan could send Southwest’s stock price up $49 a share within 12 months, a 77% return over the period, and would net investors hundreds of millions of dollars in profits. Southwest’s stock has fallen about 50% over the past three years, mirroring rival American Airlines. Southwest’s stock jumped 7% on the day Elliott announced its involvement and is still up 3.5% from where it was before Elliott got involved.
The limited-duration shareholder rights plan is effective immediately and applies equally to all current and future shareholders of Southwest. This special plan is triggered when a shareholder acquires a certain amount of its 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 the mechanism makes the acquisition more difficult and more expensive for an acquirer, such as Elliott.
“If Elliott buys 12.5 percent or more of Southwest Airlines stock, current shareholders will have the opportunity to purchase additional shares at a lower price,” he said. “This action dilutes Elliott’s holdings, diminishes their value and makes it more expensive and difficult for them to take control of the company.”
When shareholders buy additional shares at discounted prices, Hernandez explained, the total number of shares outstanding increases. As a result, Elliott’s shares represent a smaller portion of the company, which decreases their value. Elliott would have to buy additional shares at a higher price to regain the same level of control in the company.
“Given Elliott’s potential to significantly increase its position in Southwest Airlines, the Board of Directors determined that the adoption of the Rights Plan was prudent to fulfill its fiduciary obligations to all shareholders,” said Gary Kelly, Executive Chairman of the Board of Directors. “Southwest Airlines has made every 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 Airlines has long been an independent player in an industry where competitors tend to look the same. The airline does not charge for passengers’ first two bags and does not assign seats, two lucrative revenue sources for U.S. airlines.
“You have to be very informed before you start proposing changes that could affect the business model of Southwest Airlines,” Southwest Airlines CEO Bob Jordan told reporters last month.
The letter to Southwest’s board specifically called for Kelly and Jordan to step down. Jordan has publicly told reporters he has no plans to leave.
Elliott’s letter, originally sent to Southwest’s board in June, asked the company to consider three recommendations: improve the board, modernize leadership and undertake a business review.
According to a statement released Wednesday, Southwest’s board and advisers considered Elliott’s ownership interest, the fact that she has not disclosed her full assumed position in Southwest in any filing with the U.S. Securities and Exchange Commission and that Elliott has made regulatory filings with U.S. antitrust authorities that would give her the flexibility to acquire a significantly larger percentage of Southwest Airlines’ voting power in two of her funds as early as July 11.
Other publicly traded companies have also adopted rights plans, designed to make it harder for outside investment groups to gain enough control over a company’s stock to prevent a board takeover or other moves to control the company.
In 2022, Twitter Inc., now known as X, adopted a similar shareholder rights plan that became exercisable if one party acquired 15% of the stock without prior approval, according to Bloomberg. At the time, Tesla CEO Elon Musk was making large cash 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, which will initially trade with Southwest’s common stock and will only be exercisable if a person or group acquires 12.5% or more of the company’s outstanding common stock.
If the rights become exercisable, all rights holders will have the right to acquire common stock at a 50% discount to the then-current market price or the company will be able to exchange each right held by such holders for one share of common stock, Southwest said. Any shareholder who currently holds more than the trigger percentage may continue to hold their common stock, but the rights will become exercisable if a shareholder subsequently increases his or her holding by one or more shares.
From a messaging perspective, Gottfried said, the announcement gives Elliott a “sound message” that the company is taking steps to strengthen its attacks.
That could further exacerbate shareholder tensions as Southwest has not delivered strong financial results. Southwest will report its second-quarter results on July 25. Last week, Southwest lowered its financial guidance for the quarter, “primarily due to the complexity of adapting its revenue management to current booking patterns in this dynamic environment.”