UPDATE: J.C. Penney, Facing Activist Efforts, Adopts Poison Pill

J.C. Penney Co. (JCP) is ratcheting up its defense against activist investor William Ackman by adopting a shareholder rights plan that could dilute the influence of Ackman's Pershing Square Capital Management and Vornado Realty Trust (VNO), which recently built sizeable stakes in the department-store operator.

The move is J.C. Penney's most aggressive yet in trying to fend off the overtures of a billionaire investor who has suddenly set his sights on the century-old retailer.

Under the so-called poison pill adopted by J.C. Penney's board, all shareholders get a warrant for a preferred share that would carry the same value and voting power of a common share. This would make it more expensive for someone like Ackman, who already has a 10% or more stake in J.C. Penney, to acquire more shares. That's because not only will Ackman, if he wants to increase his stake in J.C. Penney, pay market price for common shares, but, according to the plan Penney adopted, he would also have to buy preferred stock that has an exercise price of $130.

The rights plan is meant to dilute the voting power of an acquirer so that they cannot vote their slate of directors to the board, and also suggests J.C. Penney management believes the stock is worth more, given the retailer's ambitions for growth.

J.C. Penney said it enacted the one-year plan to "promote fair and equal treatment" of shareholders and "in light of recent rapid accumulations of the company's outstanding stock."

Poison pills are generally viewed as anti-shareholder as they are seen as potentially warding off hostile-takeover attempts that could ultimately benefit stock owners.

One wrinkle is that Vornado only holds a 9.9% stake in J.C. Penney, according to its last regulatory filing on Oct. 8. The stake is just beneath the 10% minimum that J.C. Penney set for the poison pill. "This may suggest that J.C. Penney, whose stores are located on a number of Vornado properties, wants to keep Vornado out of the fray and avoid damaging their relationship," said Brian Sozzi, retail analyst at Wall Street Strategies. "But it also does not encourage them to do anymore" in terms of buying J.C. Penney shares.

Two weeks ago, Ackman's hedge fund and real estate investment trust Vornado reported respective stakes of 16.5% and 9.9% in the department-store operator. The firms said they intend to work together and expect to meet with Penney's management, board and other stockholders about its operations, management and future plans.

Pershing Square is known for its efforts to shake up retailers. Vornado, one of the largest U.S. owners of offices and malls, made a famous bet on bankrupt retailer and Manhattan real-estate owner Alexander's Inc. in the early 1990s, acquiring a site where the headquarters of financial-data provider Bloomberg LP was later built.

Representatives of Pershing and Vornado did not respond to requests for comment.

Penney's department stores have struggled against Macy's Inc. (M) and Kohl's Corp. (KSS) in the battle for frugal shoppers--though Chief Executive Mike Ullman said last month the retailer expects to see same-store sales improve in the fourth quarter as traffic is returning to malls.

J.C. Penney shares are down 2.8% to $32.94.

-Matt Jarzemsky contributed to this article

-By Karen Talley, Dow Jones Newswires; 212-416-2196; karen.talley@dowjones.com

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