Southwest Airlines adopts 'poison pill' to fend off activist Elliott Management

Southwest Airlines said Wednesday that it has adopted a shareholder rights plan, more commonly known as a “poison pill,” in response to activist Elliott Management’s investment in the airline and push to oust CEO Bob Jordan and Chairman Gary Kelly.

The poison pill will only activate if Elliott — or another investor — acquires at least 12.5% of the company. If that threshold is crossed, all other shareholders will be entitled to purchase one new Southwest share for every share they currently own at a 50% discount.

Southwest shares added 1% on Wednesday after Southwest’s announcement. Other major U.S. airlines also rose.

Elliott disclosed in June that it had amassed a $1.9 billion stake, or about 11% of Southwest. The firm called out Southwest’s underperformance relative to some of its larger airline rivals that offer more products like premium seating.

Southwest said the poison pill was adopted in part because Elliott had made filings with antitrust authorities, known as HSR filings, that would allow the activist to acquire an even larger stake by next week. There is a 30-day waiting period after making an HSR filing, suggesting that Elliott began that process around the same time that it disclosed its stake in June.

“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,” Kelly said in a statement. Elliott and Southwest management met in person just two weeks ago, according to people familiar with the matter.

Such a provision would dilute Elliott’s influence and power over voting. Companies often adopt shareholder rights plans in response to an activist threat; rental car company Hertz adopted a poison pill in 2013 in response to “unusual” trading activity that management thought presaged an activist.

Southwest’s board backed the company’s leadership after Elliott disclosed its stake. Jordan said last month he has no plans to resign.

The Dallas-based airline has struggled with issues including an oversupplied domestic market, where its network is focused, and lengthy delays of new planes from Boeing.

Southwest had been under pressure even before Elliott’s investment to ramp up revenue and has said it is studying massive changes to its longstanding business model by potentially adding seating assignments and even premium seating. The airline had been wildly successful throughout much of its history, pulling in profits for most of its more than five decades of flying, an outlier in the boom-and-bust industry.

Elliott has mounted campaigns at other companies such as AT&T, Salesforce and Texas Instruments.

Elliott’s activist practice has helped it become one of the most successful hedge funds in the world, surpassing $65 billion in assets. The firm, which moved its headquarters in 2020 from New York to West Palm Beach, Florida, has only had two losing years in five decades.

Bank of America and Morgan Stanley serve as Southwest’s bankers. Vinson & Elkins and Kirkland & Ellis, two law firms with well-regarded activism defense practices, are Southwest’s lawyers.

Elliott did not immediately respond to a request for comment.