2nd UPDATE: Penney Adopts Poison Pill After Activist Incursion

J.C. Penney Co. Inc. (JCP) took steps to thwart any shareholder from gaining control of the century-old retailer without company consent, 10 days after the surprise incursion of an activist investor and a landlord.

Penney said Monday that its board of directors instituted a shareholder rights plan Friday, commonly known as a poison pill, in response to news earlier this month that William Ackman, founder of hedge-fund Pershing Square Capital Managment, and Vornado Realty Trust (VNO), which owns several department-store locations Penney rents, had both taken significant Penney stakes.

Under the pill, holders of record as of next Monday who hold less than 10% of the company will receive the right to buy dilutive preferred stock if a holder hits 10% of the company or if a holder with 10% or more of the company increases ownership.

Pershing Square reports ownership of 16.5% and Vornado owns 9.9% of Penney, according to federal filings. Ackman and Vornado have filed as if they don't constitute a group, but they acquired their investments in tandem and intend to have discussions with Penney management and other interested parties.

Ackman didn't reply to email requests for comment, and Vornado declined to comment. Penney declined to comment beyond the press release.

J.C. Penney said in a release that 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."

Generally, poison pills work by allowing all holders the right to acquire a large amount of company stock for a substantially-below-market amount of money, essentially diluting the holdings of any unwanted pursuer to the point of making such further acquisitions unpalatable.

Pills can be seen as a coercive tactic by an entrenched board and management, and activists who try to overrule them--with varying degrees of success--are sometimes backed by corporate governance advisory firms. But they can successfully deter out-sized ownership by someone a company and its shareholders consider a threat, as with the current, unfolding case of bookstore chain Barnes & Noble Inc. (BKS) and activist Ronald Burkle's Yucaipa Cos. If the Penney situation turns hostile, a proxy contest could ensue where both sides claim the most compelling value proposition for the storied retailer.

Pershing Square has a mixed record in retail investing, having bailed on unsuccessful attempts to influence Target Corp. (TGT) and Barnes & Noble, while continuing to hold a stake in rival bookseller Borders Group Inc. (BGP) worth much less than Ackman paid for it. Real estate investment trust Vornado is one of the largest U.S. owners of offices and malls.

Penney 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 that 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 1.6% to $33.34.

-By Maxwell Murphy and Karen Talley, Dow Jones Newswires; 212-416-2171; maxwell.murphy@dowjones.com

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