Southwest Airlines adopts ‘poison pill’ plan after pressure from investor Elliott

Dallas-based Southwest Airlines adopted a “poison pill” provision for shareholders to stop activist investor Elliott Investment Management from wresting more influence over the company and undermining management plans to guide the carrier through recent turmoil.

Southwest’s board enacted the “limited-duration shareholder plan” Wednesday morning as pressure grows from Elliott after amassing a stake worth nearly $2 billion. The shareholder plan, a form of a “poison pill” used when publicly traded companies are under fire from disgruntled investors, would make it much more difficult for Elliott to increase its stake that currently stands at about 11% of Southwest shares.

The “poison pill” is a bold move often used to thwart activist investors that have targeted companies that they perceive are performing weakly and have financial upside.

“If it’s not invalidated for some reason, there is really no way around a poison pill,” said Keith Gottfried, a Maryland-based shareholder activism defense advisor. “The punitive effect of going above the triggering threshold could cause the activist stake to be diluted by a very large amount.”

While Elliott doesn’t have enough voting shares to singularly replace board members or oust leadership, activist investors traditionally lobby other major institutional shareholders to support their plan. If they can garner support from investors with a majority of shares, an activist such as Elliott could place its own nominees on Southwest’s board of directors.

But sometimes board influence or an outright takeover isn’t the only goal.

Elliott says its plan could boost Southwest stock $49 per share within 12 months, a 77% return during the period, which would net the investors hundreds of millions of dollars in profit. Southwest’s stock prices have fallen about 50% in the last three years, similar to that of cross-town rival American Airlines. Southwest’s stock price jumped 7% on the day Elliott announced its stake and is still up 3.5% compared to before Elliott got involved.

The limited-duration shareholder rights plan is effective immediately and applies equally to all current and future shareholders in Southwest. This particular plan is triggered when a shareholder acquires a certain amount of its common stock, which would let all other shareholders buy stock at a discount. It expires in a year.

Ariel Hernãndez, a corporate lawyer at NTT Data, said this mechanism makes the acquisition more difficult and costly for an acquirer, like Elliott.

“If Elliott purchases 12.5% or more of Southwest Airlines’ shares, current shareholders gain the option to buy additional shares at a lower price,” he explained. “This action dilutes Elliott’s holdings, decreasing their value and making it more costly and difficult for them to gain control of the company.”

When shareholders buy additional shares at discounted prices, Hernãndez said, the total number of outstanding shares increases. As a result, Elliott’s shares represent a smaller portion of the company, decreasing their value. Elliott would have to buy additional shares at a higher cost in order to regain the same level of control in the company.

“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,” said Gary Kelly, executive chairman of the board. “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.”

Elliott declined to comment further on the matter.

Southwest has long been a maverick in an industry where competitors tend to mirror one another. The airline doesn’t charge for the first two bags for passengers and doesn’t assign seating, two lucrative revenue sources for U.S. airlines.

“You’ve got to be very informed before you start proposing changes that could affect the business model of Southwest Airlines,” Southwest CEO Bob Jordan told reporters last month.

The letter to Southwest’s board specifically called for the removal of Kelly and Jordan. Jordan publicly told reporters he has no plans to leave.

Elliott’s letter, originally sent to Southwest’s board of directors in June, asked the company to take into account three recommendations: enhance the board, upgrade leadership and undertake a business review.

According to a release Wednesday, Southwest’s board and advisers considered Elliott’s stake, the fact that it had not reported its full purported position in Southwest on any filing with the U.S. Securities and Exchange Commission and that Elliott has made regulatory filings with U.S. antitrust authorities that would provide it the flexibility to acquire a significantly greater percentage of Southwest Airlines’ voting power across two of its funds starting as early as July 11.

Other publicly traded companies have also adopted rights plans, designed to make it harder for outside investment groups to gain enough control of a company’s stock to prevent a board of directors takeover or other moves to control the firm.

In 2022, Twitter Inc., now known as X, adopted a similar shareholder rights plan which became exercisable if a party acquired 15% of the stock without prior approval, according to Bloomberg. At the time, Tesla’s CEO Elon Musk was making large cash offers for the company, among other parties interested in buying twitter. Later that year, Musk bought the social media platform for $44 billion.

To further break it down, Southwest will issue one right for each share of common stock, which will initially trade with Southwest common stock and will become exercisable only if any person or group acquires 12.5% or more, of the company’s outstanding common stock.

If the rights become exercisable, all holders of rights will be entitled to acquire shares of common stock at a 50% discount to the then-current market price or the company may exchange each right held by such holders for one share of common stock, according to Southwest. Any shareholder that currently owns more than the triggering percentage may continue to own its shares of common stock, but the rights will become exercisable if a shareholder subsequently increases its ownership by one or more shares.

From a messaging standpoint, Gottfried said, this announcement gives Elliott a “sound bite” that the company is taking steps to bolster its offenses.

It could further escalate shareholder tensions when Southwest hasn’t been performing well financially. Southwest reports its second-quarter results on July 25. Last week, Southwest lowered its financial expectations for the quarter, “driven primarily by complexities in adapting its revenue management to current booking patterns in this dynamic environment.”