Michelle Leder, author of Financial Fine Print, has made a cottage industry out of combing through the footnotes and proxies of corporate financial reports. One would like to think that, with more than half of all American households having a stake in common stocks, that the devils that hide in the footnote details would not be such a mystery. But they are, which is why we often warn people to remain ever vigilant and skeptical when it comes to companies' financial statements.
Michelle posted an interesting little note this morning on her weblog at footnoted.org, regarding the just-released proxy statement from office supply giant Staples (Nasdaq: SPLS ) . This year's proxy contains four separate shareholder proposals having to do with various corporate governance issues at the company. It's fairly rare that any company has four shareholder proposals, but it's even more extraordinary at Staples -- they've had no shareholder proposals in their proxy statements since at least 1995.
The first two of these proposals address Staples' ability to issue what is euphemistically called a "shareholder rights plan," but is better known by the less optimistic-sounding "poison pill." Essentially, these plans are triggered in the event of an attempted hostile takeover of a company, allowing existing shareholders to purchase additional shares at a discounted price.
The timing for these proposals is a bit strange, as Staples had a poison pill in place for a decade, but it expired this year. Shareholders are attempting to block the company from adopting another without a prior vote from shareholders.
Here's the deal with poison pills -- they should more accurately be known as "management rights plans," since what they do is actually limit shareholders' ability to choose whether to go along with a hostile takeover on its merits. Most successful mergers usually result in gains in stock price of the acquired company. In many cases, the driving rationale for the acquirer to attempt to take over the company is poor management at the target company.
Why shareholders would want a plan in place that would limit their ability to unlock value in their investments and throw bad management out the door is a mystery to me, but thus is the case with these sorts of "shareholder rights" plans. Many investors consider poison pills to be red flags for companies -- something that lowers their impression of the potential value of the firm. If I see a poison pill in force, my general tendency is to move on to the next idea.
I'm somewhat surprised, then, that the same shareholder groups didn't take on something else in Staples' corporate structure that also lowers shareholder ability to exercise their full rights to hold management accountable -- the staggered board of directors. Where Staples does not have a poison pill in force, only one-third of the company's board has to stand for election this year. Slate fights like the ones that have taken place at Hewlett Packard (NYSE: HPQ ) , Disney (NYSE: DIS ) , and Computer Associates (NYSE: CA ) could not have taken place under the corporate construct at Staples.
It must be said that there is scant evidence beyond the sudden spike in shareholder activism that people are particularly displeased with Staples' management. That's not really the point, though. Were they to become dissatisfied with performance under current corporate bylaws they would be reduced to two options: either undertake an extraordinarily slow battle to gain control of the board, or to sell their stock.
Perhaps given the newfound activism among Staples shareholders, they can undertake an assault on the staggered board next year. For now, when you get ready to vote, keep in mind that in a pinch shareholder rights plans can be anything but.
Bill Mann owns none of the companies mentioned in this story.