Last week, the Delaware Chancery Court invalidated a shareholder rights plan adopted by The Williams Companies, stating that the plan's "extreme" features did not constitute a reasonable response to the threat posed to the company under the Unocal standard of review. Williams was one of more than 80 U.S. companies that adopted rights plans in 2020 in light of the market turmoil and precipitous share price declines caused by the COVID-19 pandemic. From January to mid-March 2020, Williams' shares lost more than half of their value, and although an accumulator had not publicly emerged in Williams' stock, the board was concerned with the potential for opportunistic behavior by shareholder activists. Accordingly, the Williams board adopted the rights plan in order to deter shareholder activism and to address concerns that activists may pursue a short-term agenda and distract management, or that a shareholder would rapidly accumulate a 5% or greater position in its shares.
Williams' plan differed considerably, however, from traditional rights plans (as well as COVID-era plans) in a number of respects. Specifically, the Williams plan used a 5% triggering threshold, substantially lower than the 10%-15% trigger typically used in modern defensive rights plans. The Williams rights plan also included only a narrow exclusion for so-called "passive investors," including Schedule 13G filers. Most critically, however, the Williams rights plan included a so-called "wolfpack" provision, which is designed to address consciously parallel strategies and behavior of shareholders that fall short of "group" activity under the federal securities laws by cross-attributing share ownership among shareholders that are deemed to be "acting in concert" under the rights plan.
The Williams plan provided that a shareholder would be deemed to be "acting in concert" with another where the shareholder knowingly acts in concert or in parallel, or toward a common goal relating to changing or influencing the control of the company with another, where each person is conscious of the other's conduct and where there is at least one additional factor determined by the board. The additional factor could include exchanging information, attending meetings, conducting discussions, or making or soliciting invitations to act in concert or in parallel―giving the Williams board a great deal of latitude to make "acting in concert" determinations. The "acting in concert" provision also included what the court described as a "daisy-chain" clause, which provided that shareholders act in concert with one another by separately and independently acting in concert with the same third party.
In applying the Unocal analysis, the court first assessed whether the threats identified by the Williams board―which were hypothetical in nature―were legally cognizable under Delaware law. The court noted that under Delaware case law, neither a generalized concern about shareholder activism nor a hypothetical concern about short-termism or other disruptive activist behavior "untethered to any concrete event" constitute a cognizable threat under Unocal. The last threat identified by the Williams board, however―the threat of a rapid, unreported, undetected accumulation of stock in a short period of time, a so-called "lightning strike attack"―was given more credence, and the court assumed for purposes of analysis that a rights plan designed to detect "lightning strikes" at a time when the company's stock price is undervalued would be a legitimate corporate purpose under Unocal.
The court determined, however, that Williams' adoption of a rights plan with "extreme" features was not a proportional response to that threat, and thus the plan failed the second prong of the Unocal analysis. Although Williams was not the first to use a 5% triggering threshold in a defensive rights plan, the court noted that the triggering threshold was an outlier and a departure from market norms. The court also noted that the exemption of the rights plan for passive investors was a "tripwire" that was drafted so narrowly that BlackRock, one of Williams' largest (and passive) shareholders, would have run afoul of the exemption merely by sending Williams an email criticizing the rights plan on the day of its adoption. Ultimately, however, the court found that the plan's fatal flaw was its "acting in concert" provision, under which even "benign" shareholder communications relating to influencing control of Williams could trigger the plan. The court's concern was intensified by the provision's "daisy-chain" clause, as well as the board's discretion to determine whether routine investor communications, meetings, and activities could trigger the plan.
Williams should not be viewed as a radical departure from existing Delaware jurisprudence overwhelmingly supporting poison pills. Instead, it serves as a reminder that the Unocal analysis is an enhanced level of scrutiny, and that directors bear the burden of demonstrating that a rights plan serves a legally recognized purpose and that the terms of the rights plan are proportionate to the threat at hand. Finally, given the court's finding that the Williams plan had an "extreme, unprecedented collection of features," particularized focus may be indicated if the terms of a proposed plan materially differ from normal practice.