Case Study: Inside Nordstrom’s Adoption of a “Poison Pill”

Nordstrom Inc. adopted a shareholder rights plan this week that the Seattle-headquartered retailer says will protect the interests of the company and all of its shareholders by reducing the likelihood that any entity will gain control. News of the “poison pill” – which went into immediate effect on Monday and is slated to run until September 19, 2023 – follows immediately from Mexican department store chain El Puerto de Liverpool S.A. de C.V. (“Liverpool”) disclosing that it has amassed a 9.9 percent stake in Nordstrom, making it the NYSE-traded company’s second-largest shareholder, following only behind former chairman Bruce Nordstrom.

The adoption of a “poison pill” by Nordstrom, on its own, is not exactly earth-shattering news given that the implementation of such a plan is a common move for companies facing a potential takeover. “Companies have various tools in their toolbox to ward off unwanted advances,” according to Rooney Law’s Allan Rooney. “One of the most effective anti-takeover measures is the shareholder rights plan, also known as a poison pill, [which] is designed to block an investor from accumulating a majority stake in a company and taking control.” In Nordstrom’s case, in the event that a person or entity acquires 10 percent or more of its outstanding shares, the poison pill will entitle existing shareholders to acquire shares of the company at a significant discount with the aim of dissuading a takeover attempt by Liverpool by either making the company less desirable or by diluting the potential-acquirer’s existing ownership stake in the company.

Not Fashion’s First Pill

Certainly not the first headline-making shareholder rights plan to be utilized in fashion, Gucci famously enacted a poison pill plan in February 1999 to fend off an unwanted takeover by LVMH. Under the watch of then-CEO Domenico De Sole, the Italian fashion brand issued more than 20 million new shares for employees to acquire, thereby, diluting the 34.4 percent stake that LVMH had quietly acquired to 26 percent. Almost a decade later, Hermès revealed – after landing on the opposite end of an attempted LVMH takeover of its own, one that the Birkin bag-maker characterized as “hostile” – that its bylaws allow it to use poison pills to fend of unwanted bids.

Since then, poison pills – which were first utilized in the 1980s – have gained significant steam. “It is not uncommon at all for American companies, or companies with [domestic arms] that are incorporated in Delaware or some other U.S. state to utilize poison pills in a situation where someone accumulates a large block of stock and where the company’s board fears that [such an accumulation] will lead to a hostile takeover,” Brian JM Quinn, a professor at Boston College Law School, who focuses on corporate law, M&A, and transaction structuring, told TFL.

Just this year, one poison pill, in particular, took center stage, with Twitter’s board of directors adopting a strategy in Aprilto “protect stockholders from coercive or otherwise unfair takeover tactics” from Tesla head Elon Musk. The move was effective, Quinn says, as it got Musk to “come to the table and pay a premium for the company.” (In furtherance of the $44 billion deal, Musk will pay $54.20 a share, a 38 percent premium to Twitter’s closing stock price on April 1, 2022.)


A Dive into Nordstrom’s Plan

Nordstrom’s recently-revealed plan may not fall outside of the norm of what other companies’ boards would do when faced with such a situation, but there are, nonetheless, some interesting elements at play, most of which call into question Nordstrom’s claim that its implementation of the shareholder rights plan is not a response to any specific takeover bid. A close read between the lines suggests that there is more going on here (of course) than Nordstrom is letting on.

Primarily, it is worth noting that an unprompted adoption of a poison pill is unlikely, as it might not ultimately hold-up for Nordstrom if it is challenged by shareholders given that courts have been unwilling to let such plans stand without the company at issue being able to identify a threat of takeover that prompted the adoption of the plan. A concrete example on this front come out of Delaware relatively recently, with the Supreme Court upholding a Chancery Court decision in November 2021 that shot down oil pipeline company The Williams Cos Inc’s poison pill. Among other things, the court found that the pill adopted by the company in March 2020 (in the wake of a stunning stock market crash) was improper because it was not targeted at a particular threat. (The court also took issue with certain “extreme” provisions, which “seemed designed to circumscribe stockholder activism in general,” Sullivan & Cromwell stated in a note.)

While Williams cited its desire to prevent stockholder activism during a time of market uncertainty as one of the threats at issue, especially given the fall of its stock price, the court determined that the company’s board was not aware of any specific activist efforts or potential takeovers at play, and struck down the pill.

Beyond that, the time-limited nature of the poison pill – which expires on September 19, 2023 – further suggests that Nordstrom has, in fact, put the plan in place in direct response to Liverpool’s acquisition. “If nothing happens within the year [that the pill is in place], the pill goes away,” Quinn says, asserting that pill is purely “a defense against a potential acquirer” – Liverpool here – and thus, is “not intended to be there forever.” (In the event that Liverpool goes away in nine months, for example, the pill will disappear on its own after nine months. Or, in the alternative, if Liverpool is still around upon the expiration of the pill, Nordstrom’s board can adopt a new pill.)

The time-limited nature of the Nordstrom poison pill is noteworthy, as it seems to fall in line with a larger trend in corporate governance. Institutional investors and advisory firms do not like it when companies “just have poison pills in place,” according to Quinn, as “absent any other information, pills generally signal that a company is not for sale and even if someone were to come along with a high bid, the board might say no.” As such, this has led to a rise in limited “good governance” pills that expire.

Against this background, the time limit put on the pill by Nordstrom almost certainly serves as “a message from the board to the company’s biggest institutional investors” that this is purely in response to a specific threat, per Quinn – and not a more general attempt to lock Nordstrom into the status quo on the ownership/operations front.

Finally, the nature of Liverpool’s filing with the U.S. Securities and Exchange Commission and Nordstrom’s response are worthy of note, with Liverpool filing a Schedule 13G form (as opposed to a Schedule 13D) just days before Nordstrom put its poison pill into place. Used to report a party’s ownership of stock that exceeds 5 percent of a company’s total stock issue, the 13G is interesting here, as it means that Liverpool is characterizing itself as a “passive investor” and disclaiming any present intent to control the company – as opposed to a party with some intent to control or influence the management of the business (such as seeking a board seat), the latter of which would call for a 13D filing.

Liverpool may be calling itself a passive investor in its filing (which could certainly change and result in an amended filing) and saying that its acquisition of a sizable block of Nordstrom stock comes in furtherance of an effort to “diversify its geographic foothold.” By putting a poison pill in place, Nordstrom is seemingly signaling that it does not believe Liverpool – and potentially for good reason. The types of parties that typically filed 13Gs are large institutional investors that have no interest in taking control of the underlying companies despite the volumes of stock they acquire. Liverpool stands out in that sense, as it is ”not an average passive investor,” just as Musk, who initially filed a 13G in connection with his stake in Twitter, is not a passive investor.

Given Liverpool’s status as an operating business in the department store industry, Nordstrom is likely right to question its current “passive investor” claim and put a plan into place in order to ensure that it cannot enact a takeover without Nordstrom’s board being able to negotiate an attractive deal for its shareholders.