March 8, 2021

Poison Pills: A Recap of 2020 Pill Adoptions & Terms

As we’ve previously noted, poison pills experienced a bit of a renaissance in 2020, with many companies opting to put a pill in place in response to the market volatility experienced during the pandemic’s early days. This Morrison & Foerster memo takes a look at the characteristics of the pills adopted last year, and also provides insight into options surrounding pill terms – including, among other things, variations in triggering mechanisms, the use of “in concert” language, grandfathering, “qualifying offer” provisions, and expiration terms.

This excerpt addresses issues associated with “last look” provisions providing the board a period of time to redeem a pill after it has been triggered:

There is some debate as to whether including a last look provision in a rights plan is good for the company. When a rights plan is crafted as a trip wire, the acquiror decides if the dilutive effects occur—it is the one that chooses to surpass the triggering percentage and thereby irreversibly trigger the plan. But when a rights plan contains a last look provision, it is the company’s board that has the final call on whether the dilutive effects occur because it has 10 days to redeem the rights after the plan has been triggered.

On the one hand, it seems sensible to put this decision in the hands of the board rather than a third party. A triggered rights plan will significantly affect the company and its capital structure, with related distractions, as described above with respect to the inadvertent triggering exception, and events significantly affecting the company should be decided by the board.

On the other hand, giving the board the final call on whether the dilutive effects occur may weaken the rights plan’s deterrent value. This happens because, during the 10-day window after the plan has been triggered, the board will be under considerable pressure in deciding whether to redeem the rights. The pressure comes from the fact that the board’s decision must be made consistent with the board’s fiduciary duties, based on current knowledge of the company’s situation, including the “threat” posed by the particular acquiror and the potentially significant effects of the triggered plan on the company.

I haven’t seen this kind of a deep dive into pill terms in a long time. Since many companies may be reviewing the terms of their pills or shelf pills in light of Chancery Court’s recent decision in The Williams Companies case, this is a memo that you may want to flag for future reference.

John Jenkins