Delaware Court Of Chancery Invalidates Energy Company’s Anti-Activist Poison Pill Adopted At The Outset Of The COVID-19 Pandemic And Amid Global Oil Price War
On February 26, 2021, Vice Chancellor Kathaleen St. J. McCormick of the Delaware Court of Chancery entered judgment in favor of stockholder plaintiffs against the directors of energy corporation The Williams Companies, Inc. and invalidated a stockholder rights plan—or “poison pill”—adopted by the corporation. In re The Williams Cos. Stockholder Litig., C.A. No. 2020-0707-KSJM (Del. Ch. Feb. 26, 2021). The board adopted the poison pill to deter stockholder activism in the midst of the COVID-19 pandemic and a global oil price war. Finding after a trial that the rights plan was not proportional to any legitimate threat identified, the Court held that the directors breached their fiduciary duties, declared the plan unenforceable, and permanently enjoined its operation.
In response to the corporation’s plummeting stock price, the board sought to deter stockholder activism by adopting the rights plan. As the Court noted, such rights plans, which originated as defensive measures against hostile takeovers, generally operate as follows: The company issues “rights” to its stockholders that become exercisable into shares at a discount (except by the acquirer) if a party acquires a stake in the company exceeding a specified triggering threshold; the rights thereby operate to dilute the ownership of the new acquirer. The Court explained that enhanced scrutiny under Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), is applicable to the review of poison pills.
The Unocal review entails a two-part inquiry. First, the board must demonstrate it had reasonable grounds for concluding that there was a threat to the corporate enterprise that warranted the implementation of a defensive measure. Second, the board must show that the measure was reasonable in relation to the threat posed.
Here, the Court found that the plan was “not adopted to protect against any specific threat at all.” Instead, the board was “acting pre-emptively to interdict hypothetical future threats.” In that regard, the Court identified three thematic concerns that appeared to be at issue: (i) generally to deter stockholder activism; (ii) to insulate the board from activist “short-term” agendas and distraction; and (iii) to ameliorate the risk that a stockholder might stealthily and rapidly accumulate large amounts of stock, without disclosure. The Court found the first two to be too general to justify a defensive measure. The Court assumed for purposes of the decision—but expressly declined to decide—that the last concern was a sufficient threat at a time when the stock price undervalued the corporation.
The Court evaluated the proportionality of the plan to the threat presented by this final concern and highlighted several key features that it considered “extreme” and collectively “unprecedented.” First, the plan set the triggering threshold at 5%, which was lower than all but one other rights plan ever adopted by a Delaware corporation. Second, the plan included a very broad definition of stockholders “acting in concert” whose holdings would be aggregated to reach the threshold. For example, it seemed to sweep in routine activities such as attending investor conferences and advocating for the same corporate action. Third, the standard exclusion of “passive investors” (whose accumulation of shares does not trigger the poison pill rights) was defined unusually narrowly and excluded any investor seeking to “direct or cause the direction of the management and policies” of the company.
The Court emphasized that the combination of these features restricted stockholders’ ability to communicate and nominate directors, thereby infringing on the stockholders’ rights to sell and vote beyond the typical interference of a traditional poison pill. Notably, for the same reason, the Court found plaintiffs’ claims were direct rather than derivative. Finding the plan outside the range of reasonableness, the Court declared the plan unenforceable.