In a bid to fend off Elliott Capital's attempt to gain a controlling stake, Southwest Airlines has taken measures to protect itself by implementing a "shareholder rights plan," commonly known as a "poison pill." This move comes after Elliott Capital, a well-known activist investor, acquired nearly a $2 billion stake in the airline in pursuit of replacing its top management.

Elliott Capital's strategy includes transforming Southwest Airlines into a more comparable competitor to industry leaders such as American and JetBlue. The investor aims to introduce new policies, such as charging for bags and introducing basic economy fares. These changes are expected to align Southwest Airlines more closely with the offerings of its major competitors.

To counter Elliott Capital's growing influence and prevent a potential management shake-up, Southwest Airlines has resorted to the "poison pill" defense, which makes any attempt to gain control of the carrier prohibitively expensive, as stated in a filing with the Securities and Exchange Commission (SEC).

Should Elliott Capital increase its ownership stake to 12.5%, it would result in a dilution of its overall ownership as other shareholders would subsequently own more of the company. If the courts validate this "poison pill" strategy, Elliott Capital's ability to control the airline would effectively be capped.

Historically, courts have upheld the legitimacy of "poison pills" as a defensive mechanism against hostile takeovers. For Southwest Airlines' board to justify the implementation of this plan, they must demonstrate that it is a reasonable response to a perceived threat and that they are acting in the best interests of the company. The courts will examine whether the "poison pill" unduly restricts shareholder rights and may strike it down if it is seen as a mechanism to entrench management.

However, the limited duration of Southwest Airlines' "poison pill" defense, along with clear and reasonable conditions for redemption or termination, increases the likelihood of its sustenance.

As Southwest Airlines braces for a potential legal battle, the outcome will have significant implications for the future direction of the airline and its relationship with Elliott Capital.