Human Relations in Organizations: Applications and Skill Building 8th Edition by Robert Lussier

Exercise 32

Poison Pill Hard to Swallow for a Healthy Bally's Total Fitness
Bally Total Fitness is the largest and only nationwide commercial operator of fitness centers, with approximately 400 clubs in the U.S., the Caribbean, Mexico, South Korea, and China. Bally uses the franchise business model. It has more than 40 years of experience and approximately 3.5 million members, more than the next 10 fitness center operators combined. Its employees include 23,500 on-site staff members, 6,700 group exercise instructors, and 3,500 personal trainers. Bally is committed to building upon its position and brand as the leading provider of fitness services, as it is helping its members achieve their fitness goals by providing the highest quality service, facilities, and products in a fun, friendly, safe, and welcoming environment.
Bally states that it operates in a manner designed to ensure its long-term success and maximize returns to shareholders. To this end, its CEO thought that the company should sell off some of its high-end gym brands in order to focus on its mid-sized clubs, and it was announced that he was exploring a possible sale or merger of the company. To the CEO's surprise, two investors were unhappy with this divestiture strategy and demanded for new management, an action that might trigger the firm's poison pill shareholders' rights plan.
The poison pill, which is triggered when investors join together and acquire 15 percent or more of the firm, allows the company to issue discounted shares to all stockholders except the acquirers, thereby diluting the acquirers' stake and voting rights. Bally said it had evidence that the two shareholders (whose combined holdings exceed 15 percent) were acting together; this could trigger the plan. The shareholders in question denied the charges and stated that they had no agreements, arrangements, or understandings with respect to the voting of Bally shares and that management had no reasonable basis to claim otherwise.
Using expectancy or reinforcement theory, describe why the CEO was surprised at the negative reactions of the stockholders to his divestiture strategy.