October 17, 2023

Poison Pills: Del. Chancery Rejects Challenge to “Plain Vanilla” Rights Plan

The Delaware courts haven’t been too kind to poison pills in recent years, but Vice Chancellor Laster’s bench ruling in Building Trades Pension Fund of Western Pennsylvania v. Desktop Metal, (Del. Ch.; 7/23) (transcript)), upheld a rights plan in the face of a derivative action seeking to enjoin its application.  At issue in the case was language in the plan providing that a person would be regarded as the beneficial owner of any shares held by another person with whom they had an “agreement, arrangement or understanding” with respect to the acquisition, holding, voting, or disposition such shares.

The plaintiff argued that this language – referred to as an “AAU provision” – prevented stockholders from sharing their views with each other on how to vote on a proposed merger. Vice Chancellor Laster disagreed, and this excerpt from a recent Richards Layton memo on the case explains his reasoning:

On July 5, Vice Chancellor J. Travis Laster, ruling from the bench on the motion to expedite, found that the plaintiff had failed to show a threat of irreparable harm and questioned whether the claims in the complaint were even colorable. The court characterized Desktop Metal’s rights plan as a whole, and the definition of beneficial ownership (including the AAU provision) in particular, as “absolutely standard,” noting that the language in the AAU provision was “not new” and that the exact same “agreement, arrangement or understanding” language has been used for years in Section 203 of the Delaware General Corporation Law, which is Delaware’s principal antitakeover statute, and in Section 13D of the Securities Exchange Act of 1934.

The court noted that the AAU provision included a standard exception for soliciting revocable proxies and also stated that “it doesn’t prohibit [stockholders from] talking about what they want to do” or from “voting down the deal if they want to do it.” In short, the court concluded that Desktop Metal’s rights plan was “a standard plain vanilla pill with a standard plain vanilla [AAU provision] in what is a standard plain vanilla buy-side deployment.” In finding there was no showing of irreparable harm, the court described the dispute as “academic,” given that the complaint was being brought by a stockholder “desirous of simply engaging in the academic question of whether, in this setting, standard [AAU provision] language creates some issue under enhanced scrutiny” rather than by a party who was being actively prevented from pursuing a course of action.

The memo says that Vice Chancellor Laster denied the plaintiff’s motion to expedite the proceedings, and the plaintiff voluntarily dismissed the complaint a few days later.

John Jenkins