In response to activist investor Elliott Management's growing stake in the company, Southwest Airlines has adopted a "poison pill" provision to protect itself from increased influence and potential disruptions to its management plans. The Dallas-based airline enacted the "limited-duration shareholder plan" on Wednesday, which aims to make it more challenging for Elliott to expand its current stake of approximately 11% in Southwest.

A poison pill defense is commonly employed by publicly traded companies facing pressure from dissatisfied investors who believe the company is underperforming and has untapped financial potential. By implementing this defense mechanism, Southwest aims to deter Elliott from increasing its stake, as doing so would result in significant dilution of Elliott's holdings.

While Elliott does not currently possess enough voting shares to replace board members or oust Southwest's leadership on its own, activist investors often garner support from other major institutional shareholders to achieve their goals. If Elliott manages to secure backing from shareholders holding a majority of shares, they could potentially place their own nominees on Southwest's board of directors.

However, Elliott's intentions stretch beyond board influence and potential takeover. The activist investor believes its plan could increase Southwest stock by $49 per share within a year, amounting to a 77% return on investment. Southwest's stock prices have declined by about 50% in the past three years, similar to its cross-town competitor, American Airlines.

The limited-duration shareholder rights plan, which applies to all current and future shareholders in Southwest, makes it more difficult and costly for an acquirer like Elliott to gain control over the company. If Elliott acquires 12.5% or more of Southwest's shares, existing shareholders gain the option to purchase additional shares at a lower price. This dilutes Elliott's holdings, decreasing their overall value and raising the cost for them to attain control.

Southwest Airlines' Executive Chairman of the Board, Gary Kelly, stated that the adoption of the Rights Plan is a prudent move to fulfill the board's fiduciary duties to all shareholders. Kelly emphasized that Southwest remains open to ideas for lasting value creation and has made efforts to engage constructively with Elliott since its initial investment.

Elliott Management has yet to comment further on the matter. It is worth noting that Southwest Airlines has always been regarded as a maverick in the industry, diverging from its competitors by not charging for the first two bags and not assigning seating, two lucrative revenue streams for other U.S. airlines.

The ongoing conflict with Elliott Management highlights the need for Southwest to carefully consider any proposed changes that may impact its successful business model. Elliott's original letter to Southwest's board of directors in June called for the removal of Gary Kelly and Southwest CEO Bob Jordan. However, Jordan has publicly stated that he has no plans to step down.

The poison pill defense is effective immediately and will remain in place for one year. Similar strategies have been adopted by other publicly traded companies to safeguard against outside investment groups gaining enough control to disrupt board takeovers or other strategic moves.

Southwest Airlines will release its second-quarter financial results on July 25, following their recent adjustment of financial expectations for the quarter due to challenges in adapting revenue management to current booking patterns in a dynamic environment.