Capstone looks to extend poison pill for three years.
Current poison pill set to expire 30 days after annual meeting.
Shareholders to vote on extension at annual meeting.
Earlier this month, Capstone Turbine (NASDAQ:CPST) filed an 8K to amend its shareholder rights agreement, more commonly referred to as a "poison pill." The purpose of this type of agreement is typically used to prevent hostile takeover attempts, or to a lesser extent, to ward off activist shareholders. The current rights agreement, as amended, was to have expired thirty days after the annual meeting later this summer.
If the amendment is approved by shareholders at the 2014 annual meeting, the current agreement would be extended for three more years to the 30th day following the 2017 annual meeting. The rights are described as follows:
Under the terms of the Rights Agreement, each share of Common Stock outstanding has one Right attached to it, so that the purchase of a share of Common Stock is also a purchase of the attached Right. Each Right entitles the registered holder to purchase from the Company a unit consisting of one one-hundredth of a share (a "Unit") of Series A Junior Participating Preferred Stock, par value $0.001 per share (the "Series A Preferred Stock") at a Purchase Price of $10.00 per Unit, subject to adjustment. The terms of the Rights are set forth in the Rights Agreement.
The Series A Preferred Stock could then be used to purchase $20 of common stock, essentially allowing the non-Acquiring Person to buy additional shares of common stock at a 50% discount. The rights would be exercisable under certain conditions if an entity acquires a 20% stake. Reading further, one gets into the truly toxic portion of the poison pill:
At any time after a person or group of affiliated or associated persons becomes an Acquiring Person and prior to the acquisition by such person or group of fifty percent (50%) or more of the outstanding Common Stock, the Company may exchange the Rights (other than Rights owned by such person or group which have become void), in whole or in part, at an exchange ratio of one share of Common Stock, or one one-hundredth of a share of Series A Preferred Stock (or of a share of a class or series of the Company's preferred stock having equivalent rights, preferences and privileges), per Right (subject to adjustment).
In other words, it appears as though Capstone shareholders that are not an Acquiring Person could be given one additional common share of Capstone for each share that they own.
I have never been a big fan activist shareholders. Occasionally they will drive for changes that can result in short term gains, and at other times, they can drive changes that result in disaster [Bill Ackman at J.C. Penney (NYSE:JCP) is one such recent example]. I've never been one to favor poison pills either. I have frequently viewed these as devices to protect entrenched boards or incompetent management.
Capstone had a disappointing Fiscal 2014, and its management failed to deliver on both its revenue guidance and many important metrics. As a result, when my Proxy for Capstone arrives later this month, I will be voting against the extension, the board of directors, the advisory vote on executive compensation and the management compensation plans.
Disclosure: The author is long CPST, JCP. The author has a long term holding of CPST, but will also trade additional positions at any time. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.