January 27, 2021

Poison Pills: Del. Chancery Skeptical of “Wolf Pack” Terms

In recent years, many companies have added so-called “wolf pack” provisions to their poison pills. This language is intended to ensure that the pill’s triggering thresholds address the ownership interests of multiple stockholders who, without expressly agreeing to act together, are nevertheless acting in concert. While wolf pack provisions are common in modern pills, these terms still must pass muster under the Unocal standard. A recent Chancery Court transcript ruling suggests that this may present more of a challenge than companies might expect.

This Richards Layton memo discusses the Chancery Court’s transcript ruling in In re Versum Materials, Inc. Stockholder Litigation, (Del. Ch.; 7/20) (transcript). The case involved a plaintiff’s application for a mootness fee for its role in causing Versum to eliminate a wolf pack provision & terminate a rights plan originally implemented to protect a merger of equals transaction with Entegris.

The company subsequently terminated the Entegris deal and agreed to be acquired by Merck at a higher price. This excerpt from the memo notes that in ruling on the mootness fee, the Chancery Court appeared somewhat dubious about whether wolf pack provisions could withstand Unocal scrutiny:

In its ruling on the mootness fee, the court noted that wolf pack provisions can be used to limit creeping takeovers and potential wolf pack activity by hedge funds. But in discussing the rights plan in light of Unocal’s reasonableness prong, the court noted that the evidence of such wolf pack activity in this case was “quite skimpy.”

Further, in discussing the rights plan in light of Unocal’s proportionality prong, the court indicated that Versum’s wolf pack  provision was “an expansive provision that [went] beyond traditional concepts of beneficial ownership to include … any type of parallel action in the context of a control contest, regardless of the existence of any type of arrangement, agreement, or understanding, and with the indicative events being, really, customary activities, such as exchanging information, attending meetings, or conducting discussions,” and that Merck’s actions in connection with its bid, such as “roadshows, solicitation calls, [and] meetings with stockholders,” could have been deterred by the wolf pack provision.

Additionally, the court noted that the wolf pack provision was asymmetric because it carved out from its scope Entegris and the Versum-Entegris merger such that Entegris was not similarly constrained by the provision. Although Merck submitted an affidavit stating that it did not view the wolf pack provision or the rights plan as an impediment to its topping bid, the court ultimately concluded that the plaintiffs’ actions conferred material benefits on Versum’s stockholders and awarded the plaintiffs $12 million in fees.

The memo points out that the circumstances of this case were somewhat unusual, in that it involved a rights plan that was adopted to protect a deal that was successfully jumped by another bidder. That set of facts made the plaintiff’s mootness fee claim fairly attractive.  But the memo also notes that wolf pack provisions have been challenged in a number of other cases dealing with Covid-19-related pill adoptions, and cautions that boards need to take appropriate steps before implementing a plan with such a provision in order to maximize its chance of satisfying enhanced scrutiny under Unocal.

The Versum Materials case was decided in a transcript ruling, which raises another question – just how much should this decision or any other transcript ruling be relied upon as precedent? This Prof. Bainbridge blog flags a recent article addressing that topic.

John Jenkins