Last month, the Delaware Supreme Court issued a one-page order affirming the Chancery Court’s decision invalidating The Williams Companies’ “anti-activist” poison pill. This Fried Frank memo says that the Court’s laconic decision leaves many questions unanswered:
The Court of Chancery’s decision raised numerous questions that the Supreme Court’s brief ruling does not resolve. While some interpreted the lower court’s decision as casting doubt on the validity of pills generally except when adopted as a response to an actual, specific threat of hostile activity against the company, we note that the Chancellor’s opinion emphasized the “unprecedented” nature of the terms of the Williams pill.
Most notably, the pill had a 5% trigger (instead of the usual trigger in the range of 10-20% in the context of an antitakeover threat). In addition, the pill had an unusually broad definition of beneficial ownership, an unusually broad acting-in-concert (“wolfpack”) provision, and an unusually narrow exclusion for passive investors.
This combination of features, the Chancellor wrote, was more “extreme” than any pill the court had previously reviewed. The court stressed that the terms were so broad (in particular, with respect to the acting-in-concert provision) as to impinge on the stockholders’ fundamental right to communicate with each other and the company in ordinary ways. Moreover, with respect to the “purely hypothetical” nature of the threat to the company, we would note that there apparently was no corroboration that the board had actually identified even a general threat.
The memo says that the Chancery Court’s decision makes it clear that a board wishing to defend a pill with extreme terms needs to establish a record substantiating its determination that shareholder activism poses a threat to the company. However, the memo identifies the following remaining areas of uncertainty:
– The extent to which a wholly non-specific threat to the company would be viewed as sufficient by the court in the context of a board that had more specifically considered the potential threat.
– To what extent, even in the face of a purely hypothetical threat, a pill with typical, market (rather than “extreme”) terms would be validated by the court.
– To what extent the court, in the face of an actual and specific threat to the company, would accept a pill with “extreme” terms.
– Whether the court would apply the same analysis in the context of a pill directed against hostile takeover activity rather than shareholder activism.
– John Jenkins