The sixth of a six-part series examining six specific and evolving rights plan provisions.

As discussed in greater detail in some of our prior articles,[1] a shareholder rights plan is a protective measure used by a public company to deter (though not necessarily prevent) a stockholder from exceeding a specified ownership percentage without prior approval from the company’s board.

We have prepared a series of articles on some of the interesting and evolving features of rights plans and the various considerations that go along with them. This article is the sixth in the series and focuses on a provision in some rights plans that gives stockholders the power to cause an offer to be exempted from the rights plan if it meets certain criteria.

Qualifying Offer

Some rights plans contain what is known as a “qualifying offer” provision.[2] This provision provides that, if an offer meets certain defined criteria, and the board does not redeem the rights or exempt the offer within a certain period of time, the stockholders have the right to force the board to call a special stockholder meeting to vote on whether to exempt the offer from the rights plan.[3]

Most rights plans do not include a qualifying offer provision. Indeed, only about 15% of the rights plans adopted since March 1, 2020 contain the provision.[4] A board contemplating a qualifying offer provision should consider whether the provision could, under the circumstances, reduce the board’s leverage by opening a path for an acquiror to sidestep the board and appeal to stockholders, whether it could hinder the board’s ability to run an orderly auction process or whether it could allow stockholders to vote—in what is essentially a referendum on the offer—where the acquiror would not have otherwise had the ability to demonstrate wide stockholder support.[5]

That said, some boards have determined to include the provision to emphasize to stockholders that they are not categorically opposed to a takeover of the company. In fact, both ISS and Glass Lewis state in their guidance for stockholder vote recommendations that rights plans should contain a qualifying offer provision.[6]

Although the specifics vary by rights plan, the following are the typical criteria that an offer would need to satisfy in order to be a “qualifying offer”:

• the offer is for cash, on a fully financed basis,[7] or for common stock of the offeror (or a combination of both), for all of the outstanding common stock of the company at the same per share consideration;
• the offer price exceeds (in some plans, by a minimum specified margin) the highest market price for the shares measured over a specified period of time prior to the commencement of the offer;
• the offer is conditioned on a minimum tender of at least a majority of each of (1) the common shares then outstanding, and (2) the common shares then outstanding not held by the offeror;
• the offer is subject only to the minimum tender condition and other customary conditions (and not conditions such as financing or offeror’s receipt of satisfactory rights to conduct due diligence on the company);
• the offer will remain open for a specified period of time after any special stockholder meeting that was requested by the stockholders with respect to the offer;
• the offeror commits to consummate a second-step merger as soon as possible after completion of the offer in which all shares not tendered in the offer will receive the same consideration paid pursuant to the offer; and
• if the offer includes common stock of the offeror, (1) the offeror is listed on NASDAQ or the NYSE, (2) no stockholder approval of the offeror is required, and (3) no person owns more than 20% of the voting stock of the offeror.

Often, the rights plan provides that the company’s board (whether the whole board or a majority of the independent directors) determines whether an offer meets the defined criteria. Some rights plans, however, do not require such a determination by the board.

If an offer meets the defined criteria (i.e., it is a qualifying offer), and the board has not redeemed the rights or exempted the offer from the rights plan within a certain number of days after the offer has commenced, stockholders holding a specified percentage of the outstanding shares (excluding shares owned by the offeror) may submit a written demand to the board, directing the board to call a special stockholder meeting to vote on exempting the offer from the rights plan. After receiving such a demand, the board must convene the special meeting within a certain number of days. If the board fails to convene the special meeting, or holds the meeting and a majority of the outstanding shares (excluding shares held by the offeror) are voted in favor of exempting the offer from the rights plan at the meeting, the offer is deemed exempted from the rights plan, and the consummation of the offer will not trigger the rights plan.

Below are some of the key items to be considered when including a qualifying offer provision in a rights plan:

• What percentage of shares is necessary to cause the board to call the special stockholder meeting for consideration of the qualifying offer? The range varies, but is typically between 10% and 25%.
• How much time should the board be given to consider whether to redeem the rights or exempt the qualifying offer before the stockholder right to demand a stockholder meeting arises? Many qualifying offer provisions provide for 60-90 days.
• If a special stockholder meeting is demanded by the holders of the requisite number of shares, how long does the board have to call the meeting? The typical range is 90-120 days after receipt of the demand.
• What should the measurement period be for determining the “highest market price” for the company’s shares? Many qualifying offer provisions provide for 12 or 24 months prior to the commencement of the offer.
• Must the offer price represent a reasonable premium over the highest market price for the shares during the measuring period (which suggests that the offer price needs to be meaningfully greater than the highest market price)? Or, does the offer price only have to be greater than the highest market price?
• Should the offer not qualify as a “qualifying offer” if a financial advisor retained by the board renders an opinion that the consideration being offered to the stockholders is unfair or inadequate?
• If all or part of the proposed consideration is in the offeror’s stock, should the company have due diligence rights to investigate the offeror?
• Should each of the stockholders demanding the special meeting be required to satisfy the stockholder information requirements under the company’s advance notice bylaw?

In the end, a board contemplating a qualifying offer provision should consider the message it is trying to send to stockholders and any potential acquirors, and how the provision may play out under different circumstances in the future.

[1] For more background, see our client alerts, “Protecting Against Opportunistic Acquisitions and Activism – Considering a Stockholder Rights Plan,” “Poison Pill Deep Dive Series: The Inadvertent Triggering Exception,” “Poison Pill Deep Dive Series: Grandfathering Existing Stockholders,” “Poison Pill Deep Dive Series: Acting in Concert,” “Poison Pill Deep Dive Series: Triggering Percentage” and “Poison Pill Deep Dive Series: Last Look.”

[2] A rights plan with a qualifying offer provision is also sometimes called a “chewable pill.”

[3] Some qualifying offer provisions automatically exempt the offer from the rights plan if the offer meets the defined criteria and the board has not redeemed the outstanding rights or exempted such offer within a specified amount of time after the offer has commenced.

[4] Deal Point Data.

[5] A board should note that, if they adopt a rights plan, even without a qualifying offer provision, if an offer is made, they have a fiduciary obligation to consider whether terminating the rights plan or otherwise allowing the offer to proceed would be in the best interests of the stockholders.

[6] ISS’ proxy voting guidelines provide that, when considering whether to recommend that stockholders approve a rights plan that is put to a stockholder vote, the rights plan should contain a stockholder redemption feature – specifically, if the board refuses to redeem the rights 90 days after a qualifying offer is announced, 10% of the shares should be able to call a special meeting or seek a written consent to vote on rescinding the rights. See ISS United States Proxy Voting Guidelines Benchmark Policy Recommendations, published Nov. 18, 2019, available at https://www.issgovernance.com/file/policy/active/americas/US-Voting-Guidelines.pdf. This is different from the policy applied by ISS to determine whether to recommend votes against directors with respect to the adoption of a rights plan without stockholder approval, which calls for, among other things, a term of less than one year but not a qualifying offer provision.

Similarly, Glass Lewis will consider recommending that stockholders vote in favor of a rights plan that is put to a stockholder vote with a qualifying offer provision in which (a) the offer is not required to be all cash, (b) the offer is not required to remain open for more than 90 business days, (c) the offeror is permitted to amend, reduce or otherwise change the terms of the offer, (d) no fairness opinion is required and (e) there is a low to no premium requirement. See Glass Lewis 2020 United States Proxy Paper Guidelines, available at https://www.glasslewis.com/wp-content/uploads/2016/11/Guidelines_US.pdf.

[7] The rights plan would typically define “fully financed” to mean that the offeror has sufficient funds for the offer and related expenses, as evidenced by (1) firm, legally binding written commitments from responsible financial institutions having the necessary financial capacity, subject only to customary terms and conditions, (2) cash or cash equivalents then available to the offeror, set apart and maintained solely for the purpose of funding the offer, or (3) a combination of the foregoing.

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