Why A Shareholder Rights Agreement Is Called A 'Poison Pill'

Fred's Reacts To Alden's Stake Build

The company reasoned that the action comes after it observed unusual and substantial activity in its shares. The Wall Street Journal reported last week that hedge fund Alden Golden Capital has quietly picked up a large stake in Fred's, with the publication quantifying the stake at 25 percent. Fred's shares rallied strongly last week, reacting to an announcement that it would buy 865 stores and certain assets related to store operations located across the eastern and western United States from Walgreens Boots Alliance Inc WBA and Rite Aid Corporation RAD for $950 million in cash.

The purchase is seen a step to fortify its position as the nation's third largest pharmacy chain.

As part of the Rights Plan, Fred's said in its Tuesday's release it is issuing one right for each share of common stock outstanding at the close of business on January 5, 2017.

Alden Chased Pier 1 Imports, Too

In September, Alden Global Capital's move to buy a 9.5 percent stake in Pier 1 Imports Inc PIR has led the company to adopt a Shareholder Rights Protection Agreement.

Mechanism Of Shareholder Rights Plan

Shareholder rights plans, otherwise known as "poison pills," are defensive strategies, which allow shareholders the right to buy additional shares at a discount. Essentially, the stake of a hostile predator is diluted. The plans also make it prohibitively expensive for the predator to purchase shares.

In the case of Fred's:

• The rights will become exercisable only when a person or a group acquires beneficial ownership of 10 percent or more of its common stock.
• Upon the condition met, each right holder, other than the hostile acquirer, is entitled to purchase additional shares having a market value of twice the exercise price of the right.
• Any existing shareholder or group with a beneficial ownership of over 10 percent will be grand fathered at its current ownership level.

Poison Pill's Origin

"Poison pill" refers to the cyanide capsules to be swallowed by spies in the eventuality of them being caught by enemies. Thus, the shareholder rights plan is like a poison pill a company adopts (swallows) to keep any unsolicited corporate raider at bay.

Can Fred's succeed in warding off the hostile acquirer now that it has gobbled the poison pill? Only time will tell.

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