Dive Brief:

• Red Robin instituted a short-term shareholder rights plans, often referred to as a poison pill, on Wednesday, according to a press release. The company said this will protect Red Robin from any takeover efforts while it searches for a new CEO and executes its strategic plan.
• The plan will be triggered when a shareholder owns 10% (or 20% for a passive institutional investor) or more of the company’s outstanding common stock, and makes further stock twice the value.
• The strategy comes less than 24 hours after a move by Vintage Capital, which has been slowly growing its stake in the company in recent months, to increase its stake in the company from 8.5% to 11.6%, according to an SEC filing.

Dive Insight:

This tactic is becoming common in the restaurant space, especially for casual dining, which has been in the hot seat due to ongoing declines in traffic and same-store sales. These short-term strategies are typically used when a shareholder starts to buy stock in an attempt to exert greater control over the company. While poison pills can prevent additional purchases of stocks without board approval, it can also dilute the shares and discourage institutional investors from buying shares, according to Investopedia.

Papa John’s used a poison pill in July 2018 to prevent ousted founder John Schnatter, who had 30% of company stock at the time, from taking over the company. After months of back and forth, Schnatter eventually agreed to step down from the board and started selling off his stock earlier this year.

Not all poison pills have helped stave shareholder and buyout pressures, however. Del Frisco’s used this strategy in December following criticism from Engaged Capital, which wanted the company to add new directors and consider a sale. The company said in May that it would lay off up to 15% of its general and administrative positions to save up to $5 million annually. Reports have also been swirling that there are at least three restaurant groups (Darden, Ruth’s Hospitality and Landry’s) bidding for the company.

Red Robin previously issued a shareholder rights plan in August 2010, but received much criticism from shareholders and pressure to sell the company. J. Alexander’s also used a poison pill in 2012, but is now under renewed criticism from an activist investor which has submitted a proposal to acquire the company.

Red Robin is in the midst of searching for a new CEO and a strategic turnaround. This includes closing underperforming stores while beefing up staffing and providing more training and handheld devices for staff to focus in on speed of service at other units. The company’s only significant growth area has been in off-premise, which grew 20.6% during the first quarter. The company posted mediocre results overall during the first quarter, with same-store sales dipping 3.3% during the period. Traffic also decreased 5.5% during the quarter.