COVID-19 Pandemic and Poison Pills

To the long list of surprises delivered by 2020, we can add a boom in adoption of stockholder rights plans, commonly referred to as “poison pills.” Close to a hundred companies adopted poison pills during the year — a 183% increase from 2019.^[1] It appears that as stock prices fell in the early days of the COVID-19 pandemic, some boards feared that their companies were vulnerable to activist investors seeking to accumulate positions that would allow them to potentially exercise or acquire control. The majority of the 2020 plans were approved in March, April and May, the early days of the pandemic. March and April alone were the “two most active months for poison pill adoptions” since January 2017.^[2]

Poison pills are designed to protect companies from hostile takeovers. When an investor’s ownership exceeds a threshold set by the plan, rights are distributed to the other stockholders, allowing them to purchase shares in the company at a discount — or, at the election of the board, to exchange each right for a share of the company’s stock — in either case materially diluting the holdings of the investor. A notable feature of this new generation of poison pills is their particularly low triggers. In the past, most plans^[3] were not triggered unless new investors acquired ownership of at least 15% of the companies’ outstanding shares, mirroring the threshold used by the Delaware Legislature in its anti-takeover statute (Section 203 of Delaware General Corporation Law).^[4] The average trigger of the new pills stands at about 12%, with some companies setting their triggers at 10% or lower.^[5]

The Delaware Court of Chancery recently considered one of these new plans in Williams Companies Stockholder Litigation (Del. Ch. Feb. 26, 2021) (McCormick, V.C.). In March 2020, the board of directors of the Williams Companies  adopted a poison pill plan with several unusual provisions: a 5% ownership trigger; a broad definition of beneficial ownership that included synthetic interests; a bar against stockholders “acting in concert,” even if they were not actually coordinating; and a narrow exemption for passive investors that permitted only buyers with no intention of influencing the company to bypass the trigger. On Feb. 26, the Court of Chancery ruled that the Williams board breached its fiduciary duties in adopting that plan, calling it “unprecedented” for its “extreme combination of features.”^[6] Although in Delaware a corporate board that adopts a poison pill plan need only perceive a reasonable threat and put in place a plan appropriately calibrated to address that threat, the court found that the Williams Cos.’ plan was improper because the plan was not targeted at a particular threat; and, in the court’s view, at least certain provisions seemed designed to circumscribe stockholder activism in general.

While the decision by the Court of Chancery may reflect the limits of what the judiciary will allow, other courts may not have the opportunity to weigh in. “The rate of poison pill adoptions began to decline” to more familiar levels when stock prices rebounded and stabilized in the latter half of last year.^[7] And a common feature of the early 2020 “crisis pills” is their short duration: Of the plans adopted last year, 73% have a duration of less than a year,^[8] and most of the remaining plans have three-year terms.^[9] Poison pills can traditionally go as long as 10 years,^[10] although the recent poison pills follow the recommendations of ISS and Glass Lewis of one-year terms.^[11] Given that the large majority of crisis plans were adopted between March and May, most will probably lapse before they may be challenged in court.

Only time will tell whether these plans generate new litigation or are extended. But as the markets continue to recover, and even exceed pre-COVID-19 levels, particularly aggressive plans will likely remain outliers, and future poison pills are likely to align more closely with traditional ones.

^[1] _{Deal Point Data: Top Takeover Defense Changes of 2020 at 2 (Jan. 2021).}

^[2] _{Id. (Deal Point Data only began collecting data on this trend in January 2017.)}

^[3] _{The exception are rights plans intended to protect an issuer’s net operating losses (NOLs), which typically have a trigger of just under 5%. Plans of this type were approved by the Delaware Supreme Court in Versata Enterprises, Inc. v. Selectia, Inc., 5 A.3d 586 (Del. 2010).}

^[4] _{The Delaware Supreme Court first addressed, and approved the use of, poison pills in Moran v. Household International, 500 A.2d 1346 (Del. 1985). The trigger of the plan in that case was set at 20% (30% in the case of a tender offer).}

^[5] _{Ofer Eldar & Michael D. Wittry, “Crisis Poison Pills,” The Review of Corporate Finance Studies, 3 (Dec. 8, 2020).}

^[6]_{The Williams Cos. S’holder Litig., 2021 WL 754593, at *2 (Del. Ch. Feb. 26, 2021) (McCormick, V.C.).}

^[7] _{Top Takeover Defense Changes of 2020 at 2.}

^[8] _{“Crisis Poison Pills” at 3. Under the United States Proxy Voting Guidelines of Institutional Shareholder Services (ISS), ISS will recommend a vote in favor of shareholder proposals to submit a poison pill to a shareholder vote or redeem it, unless the company has adopted a policy concerning the adoption of a poison pill specifying that the board will only adopt a plan in the exercise of its fiduciary duties and if the plan will be put to a shareholder vote or expire within 12 months. Where management puts a poison pill to a vote of shareholders, the ISS guidelines specify that the trigger should be no lower than 20% and the term should be no greater than three years. The current ISS guidelines (published Nov. 19, 2020, effective for meetings on or after Feb. 1, 2021) are available at https://www.issgovernance.com/file/policy/active/americas/US-Voting-Guidelines.pdf#page27.}

^[9] _{Top Takeover Defense Changes of 2020 at 2.}

^[10] _{“Crisis Poison Pills” at 3.}

^[11] _{Top Takeover Defense Changes of 2020 at 1.}