Southwest Airlines has invoked a so-called ‘poison pill’ shareholder plan in a bid to stop an activist investor who wants to oust the carrier’s leadership team from taking a bigger stake in the airline.
On Wednesday, Southwest announced that its Board of Directors had approved a limited-time shareholder rights plan, which will kick into effect if any one investor acquires a 12.5% more stake in the airline.
The rights plan does not effect shareholders who already own the trigger percentage in stock but will impact the U.S.-based hedge fund and activist investor firm Elliott Investment Management which recently acquired an 11% stake in Southwest.
Elliott wants to push Southwest CEO Bob Jordan and other senior leaders out and rewrite the airline’s strategy in a bid to win a 77% return on its investment.
As an activist investor, Elliott’s strategy is to invest in companies with the very purpose of pushing for major changes – either in the management or the company’s strategy – in order to improve the stock price.
A shareholder rights plan is a defensive strategy employed by listed companies to prevent a potential hostile takeover by giving other shareholders the right to buy additional shares at a discounted price. The rights plan will last for an initial 12 months but can be extended.
If activated, Southwest’s rights plan is designed to dilute the stake that Elliott has in the airline, making it more expensive for it to take a controlling stake in the airline.
“In light of the potential for Elliott to significantly increase its position in Southwest Airlines, the Board determined that adopting the Rights Plan is prudent to fulfill its fiduciary duties to all Shareholders,” explained former CEO and Executive Chairman of the Board, Gary Kelly.
“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 lasting value creation,” Kelly continued.
Last month, Jordan said he would not resign in the face of pressure from Elliott and blasted the firm for demanding change without providing any specific ideas.
Jordan is already in the process of shaking up Southwest’s strategy in a bid to make it more competitive with rivals. A full announcement is not, however, expected until September when Southwest has an investor day scheduled.
On Wednesday, Kelly backed his successor, saying he was “confident” that Southwest had the “right strategy, the right plan, and the right team in place to succeed.””
