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J.C. Penney Adopts Poison Pill

The company's board put into place a shareholder rights plan.

J.C. Penney Co. Inc.’s board adopted a shareholder rights plan for a term of one year.

This story first appeared in the August 23, 2013 issue of WWD.  Subscribe Today.

The plan, known as a poison pill, is an antitakeover mechanism to discourage new investors from gaining control of the company.

The plan was not adopted in response to any effort from an investor to acquire control of Penney’s, the company said.

By putting the plan into place, the board is taking a proactive stance as a preemptive measure to make it more difficult for someone to come in and try to take control of the retailer. That’s achieved by diluting the stake of the would-be acquirer, who can’t take part in the plan, and by raising the price of the stock. The plan will continue in effect until Aug. 20, 2014, unless the rights are redeemed or exchanged for shares of common stock by the company on an earlier date.

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Under the terms of the plan, shareholders receive a dividend of one right for each share of the company’s common stock held by stockholders of record as of the close of business on Sept. 3. These rights are not initially exercisable, but can become so under the plan if a person or group becomes an “acquiring person” who obtains beneficial ownership of 10 percent or more of the firm’s common stock. Excluded from the definition of “acquiring person” are Pershing Square Capital Management and Vornado Realty Trust, each of which are existing shareholders.

Once a person or group becomes an “acquiring person,” the holder of each right, other than the “acquiring person,” will be entitled to buy, for an exercise price of $55 per right, additional shares of stock that have a market value of $110, or twice the exercise price.

Citi broadlines analyst Deborah Weinswig said that the plan “should service to limit potential distractions for management as they work on turning around the business. We were somewhat surprised that the plan was put in place and that the ownership threshold was relatively low, just 10 percent.”

This isn’t the first time Penney’s has adopted a poison pill.

In October 2010, the retailer’s board adopted a similar plan to make it prohibitively expensive for anyone, particularly William Ackman of Pershing Square Capital Management, to take control of the retailer without consent of the board. At the time Ackman had a 16.5 percent stake of the retailer. He subsequently upped that stake to 17.7 percent and joined the Penney’s board. Earlier this month, Ackman resigned his board seat after a bitter battle aimed at getting rid of Penney’s chairman Thomas Engibous and chief executive officer Myron “Mike” Ullman 3rd.

The poison pill keeps control of the company at the hands of the board by forcing the acquirer — who either then hits the 10 percent threshold or who already has hit the threshold and wants to acquire more — to deal directly with the company. That is what happened in the case of Ackman, in which his firm, Pershing, entered into a shareholder agreement with Penney’s when it added to its stake to raise its holding to 17.7 percent.