In mid-March 2020, concerned about opportunistic activist stockholders, a precipitous decline in oil prices and corresponding stock volatility, as well as uncertainty created by the unprecedented COVID-19 pandemic, the board of directors of the Williams Companies, Inc. ("Williams" or the "Company") adopted a one-year stockholder rights plan with a five percent trigger (the "Williams Plan"). Less than a year later, the Delaware Court of Chancery, after reviewing the Williams Plan under the Unocal standard, permanently enjoined it, and found that the directors had breached their fiduciary duties, thereby rendering it unenforceable.
The Williams Plan was not adopted in a vacuum. Indeed, according to the research firm Deal Point Data, at least 74 other companies adopted a non-NOL (net operating loss carryforwards) stockholder rights plan in 2020. However, the facts and circumstances that led to the adoption of the Williams Plan merit consideration and should serve as a reminder that facts matter.
In a March 20, 2020 press release, the Company stated that the Williams Plan "is intended to enable all Williams stockholders to realize the full potential value of their investment in the [C]ompany and to protect the interests of the [C]ompany and its stockholders by reducing the likelihood that any person or group gains control of Williams through open market accumulation or other tactics (especially in recent volatile markets) without paying an appropriate control premium." Notably, the Williams Plan included two key distinguishing features:
- A five percent trigger, with the practical effect being that the Williams Plan would be triggered if a person or a group were to acquire beneficial ownership of at least five percent of the Company's outstanding shares.
- An expansive "acting in concert" provision, the intent of which was to prevent a group of stockholders from sharing strategies and goals with respect to a campaign against the Company.
Following announcement of the Williams Plan, Institutional Shareholder Services (ISS), which previously had relaxed its rights plan policy in light of the pandemic, recommended that the Williams stockholders vote against the reelection of the chairman of the board at Williams' 2020 annual meeting of stockholders held on April 28, 2020, opining that the low five percent trigger threshold was "problematic" and that the rights plan "was not a reaction to an actual threat-real or perceived-of an activist investor or hostile bidder."
Subsequently, certain of the Company's stockholders sued to permanently enjoin the Williams Plan and asked the Delaware Chancery Court to declare it unenforceable. In a February 26, 2021 ruling, Vice Chancellor Kathleen S. McCormick wrote that it is "settled law" that adoption of a rights plan must be analyzed under the so-called enhanced scrutiny Unocal standard. In applying the two-part Unocal framework, the court examined:
- Whether the Williams' directors could demonstrate that they acted in good faith "to serve a legitimate corporate objective by responding to a legitimate threat" (a "Proper Purpose").
- Whether the response by the Williams board was "reasonable in relation to the threat posed" (a "Reasonable Response").
With respect to whether there was a Proper Purpose, the court reviewed three stated reasons for the adoption of the Williams Plan: (i) deterring a general threat of stockholder activism at a time of uncertainty and a low stock price; (ii) insulating "the board from activists pursuing 'short-term' agendas and from distraction and disruption generally"; and (iii) addressing a concern about a "lightning strike," where "a stockholder might stealthily and rapidly accumulate large amounts of stock" that would otherwise "go undetected under the federal disclosure regime."
However, given there was no evidence that the Williams board was aware of any actual activist activity at the time of the adoption of the Williams Plan, the court referred to these concerns as "hypothetical" and noted that abstract concerns about activism "untethered to any concrete event" were not cognizable threats under the first prong of the Unocal standard. However, without deciding the issue, the court assumed for purposes of its analysis that detecting a lightning strike at a time when the stock price undervalues a corporation was a Proper Purpose.
Vice Chancellor McCormick then analyzed whether the adoption of the Williams Plan was within a range of Reasonable Responses, concluding that the Williams Plan's "combination of features created a response that was disproportionate to [the] stated hypothetical threat." The court highlighted the unusual nature of the five percent trigger, noting that of the precedent rights plans identified by Williams' banker, only two percent had triggers below ten percent.
Further, the court identified that the Williams Plan was one of only nine rights plans, outside of an NOL context, to ever use a five percent trigger and expressed concern for certain other features of the rights plan, including the definitions of "beneficial ownership" and "passive investor."
In particular, the court criticized the "acting in concert" provision of the Williams Plan as being overly broad and vague, with a potential "chilling effect" on stockholder communications. In addition, while the court did not specifically address the inclusion of derivative interests in the definition of beneficial ownership, it did point out a "daisy chain" concept included in the Williams Plan that would trigger the plan if "stockholders act in concert with one another by separately and independently 'Acting in Concert' with the same third party" that "operates to aggregate stockholders even if members of the group have no idea that the other stockholders exist." Ultimately, the court concluded that the Williams Plan was not a Reasonable Response to the purported threat faced by the Company.
In enjoining the Williams Plan, the court has delivered a stark reminder that, when contemplating the adoption of a poison pill, corporate boards must be prepared or face scrutiny under a heightened standard. They must be prepared to defend their actions as a response to a legitimate, identified threat. Accordingly, while rights plans remain an important and valuable tool when faced with an unsolicited tender offer or an activist threat, they must be appropriately tailored to both a company's particular circumstances, with a Proper Purpose, and the threat posed, as a Reasonable Response. It remains prudent practice to have an "on the shelf" plan that has been reviewed and understood on a clear day, which can be quickly and efficiently tailored at a later date. Moreover, board minutes should reflect that the directors have a clear understanding of all material terms of a rights plan, including how such terms may differ from outstanding precedent. In fulfilling fiduciary duties, facts matter.
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