April 17, 2020

Poison Pills: What Do Covid-19 Crisis Rights Plans Look Like?

As I’ve previously blogged, a number of law firms have recommended that boards consider adopting poison pills in response to the Covid-19 crisis-induced market turmoil.  According to this DLA Piper memo, many companies appear to have followed that recommendation last month:

For the past few years, rights plans have increasingly come under attack by prominent shareholder advisory services, and the number of companies with active rights plans has declined. As of December 31, 2019, there were only 160 US companies with an active rights plan.

During March 2020, there were 22 adoptions (17 traditional and 5 NOL) by US companies. To put this in context, the number of traditional rights plans adopted by US companies in March was more than five times the number of traditional rights plans adopted in any single month since January 2017. The previous high since January 2017 was three, which occurred seven times in this period.

The memo also reviews the terms of the traditional rights plans adopted last month, and concludes that most of them are more aggressive than plans that were in-place at the end of 2019.  For instance:

– 59% of March plans utilize a two-tier trigger (which applies different triggering thresholds to activists and passive investors), compared to 9% of plans in place at year-end;

– 100% of March plans include a derivative trigger (which is intended to prevent “under the radar” accumulations of stock), compared to 51% of plans in place at year-end;

– 35% of March plans include “Acting in Concert” language, up from 16% of plans in place at year-end;

– 6% of March plans includes a 5% ownership trigger – which is uniquely low outside of the context of NOL pills.

Nearly all of the rights plans adopted last month were of the short-term variety (less than one year), so they didn’t trigger any proxy advisor-imposed shareholder approval requirements.  Speaking of proxy advisors, last week I blogged about ISS’s greater flexibility toward these plans during the current crisis, and Glass Lewis has also recently announced that it would take a “pragmatic approach” to the adoption of short-term pills during this period.

John Jenkins