May 19, 2022

Poison Pills: Updating Pill Terms for the Age of Activism & ESG

Harvard Law School profs Caley Petrucci & Guhan Subramanian recently posted an article in which they suggest some updating of the ground rules governing pills to address the challenges of sophisticated shareholder activism and the broader set of constituencies corporate boards are being asked to consider. As law review articles go, this one’s pretty short at 21 pages, and it’s definitely worth reading. Some specific recommendations include:

– Giving larger companies more tolerance on the trigger percentage for poison pills because the toehold stake is so much larger; in today’s world, what is relevant is the dollar stake an activist can acquire, not the threshold percentage (e.g., a 5% trigger in a $30 billion market cap company is probably more activist-friendly than a 10% threshold at a $5 billion market cap company).

– Third generation “parallel conduct” acting in concert provisions that include a board determination “guardrail” are not just an appropriate response to increasingly sophisticated activist attacks, but a best practice.

– “Daisy chain” language providing that stockholders are acting in concert with one another when they separately act in concert with the same third party. Without such a provision, large shareholders could evade the pill by coordinating their activities through a middleman who holds a trivially small percentage of the company.

– Definitions of beneficial ownership that address synthetic equity positions, because a pill that does not capture synthetic equity (at least with regards to synthetic equity that is morphable into shares with voting rights) would provide a yet another loophole that weakens the pill, if not rendering it virtually illusory.

The authors’ argue that these recommendations reflect an effort to balance concerns about the need to deal with sophisticated activism and multiple constituencies against the need for all shareholders, including activists, to be able to solicit support for their ideas or attempt to gain control of the company.  Whatever the motivation, the article offers a spirited defense of many of the same pill features that Chancellor McCormick found objectionable in her decision in The Williams Companies case. (H/T The Activist Investor).

John Jenkins