This article was first published on Activist Insight Online on June 30, 2020. For more information about the module, click here.
With more poison pills adopted in 2020 than in the past three years combined, the chaos behind the COVID-19 pandemic has seen shareholders largely accept a swathe of provisions that push at the boundaries of what would previously have been considered acceptable.
Among the 55 pills, also known as shareholder rights plans, adopted by U.S. companies this year, three Maryland companies included restrictions on the ability of replacement directors to revoke the takeover defenses, 48 companies adopted pills with triggers lower than 20% of their outstanding shares, and 24 companies made allowances for passive investors to hold a greater proportion of the stock than loosely defined activists.
Room for variation
Outgoing Council of Institutional Investors (CII) Executive Director Ken Bertsch does not think companies necessarily set out to test the limits of what shareholder were willing to accept. “I think it’s more that some companies were really shocked by their vulnerability,” he told Activist Insight Online in an interview. “Most of these are knee-jerk responses.”
However, he warned shareholders may be more ready to push back against pills that are adopted or extended in the next year. “Some shareholders may vote against [a pill] if it hasn’t expired,” he said. “People are going to be skeptical if these pills are extended without shareholder approval.”
Corporate defenders argue that there is no one-size fits all for poison pills. “When you have 55 rights plans adopted over three months, you’re going to see variation,” Derek Zaba, a co-chair of Sidley Austin’s shareholder activism practice, said in an interview. “So there is room for customization, especially when they’re created for different purposes.”
Wachtell, Lipton, Rosen & Katz, the law firm which invented the original poison pill, agrees. “Company-specific circumstances as well as indicia of emerging or present threats will help provide a nuanced rationale for implementation, and tailored design features that strike the right balance without over-reaching will matter,” Partners David Katz and Sabastian Niles wrote in an April memo that cautioned clients to have a pill “on the shelf and ready to go,” along with a plan to step up engagement with key shareholders.
How low can you go?
One thing is clear; the widely tolerated threshold of 20% has gone for good as the overwhelming majority had between a 4.9% and 15% trigger for funds that file Schedule 13D disclosures, according to Activist Insight Governance.
And while a 15% threshold may be tolerated because section 203 of Delaware’s corporate code allows companies other defenses against potential acquirers who have accumulated that level of stock, the 10% threshold is considered objectionable to activists, according to Andrew Freedman, a partner at activist law firm Olshan Frome Wolosky.
Nonetheless, after excluding net operating loss (NOL) pills, which commonly have a 4.9% threshold, 29 companies had triggers of 10% or less earlier this year.
“Given that these pills were in response to the COVID crisis, it may be allowed to pass,” said Bertsch, who retires this week. “If anytime there’s market pressure, pills are adopted at that threshold, I think there will be resistance from shareholders.”
Earlier in the year, Institutional Shareholder Services (ISS) recommended voting against the chairman of Williams Cos after it adopted a 5% pill, leading to 34% opposition at the annual meeting in April. “The adoption of the Shareholders Rights Plan in March 2020 was intended to protect the interests of our shareholders by reducing the likelihood that any person or group could take advantage of volatile markets and gain control of the company through open market accumulation or other tactics without paying a fair value for the company,” a spokesperson for Williams told Activist Insight Online.
Divide and rule
Moreover, some provisions have been out of fashion for years, only recently making a comeback. Only 14 poison pills of 104 adopted between 2013 and 2019 had separate triggers for passive and activist investors, usually distinguished between whether a shareholder could rely on the Schedule 13G filing exemption.
Of the 55 pills adopted in 2020, 24 differentiated between the two types of shareholders, with some limiting passive investors to as low as 12% of the stock, according to Activist Insight Governance.
Both Zaba and Bertsch noted that institutional investors have come to demand higher triggers for pragmatic reasons.
“This is just a practical reality of the world we live in… It’s not seen as discriminatory anymore,” Zaba told Activist Insight Online. “What was once viewed as a negative is now a positive.”
Other features may also be tested at some point by activists or pressure campaigns. According to a count by CII, Maryland real estate investment trusts American Finance Trust, Global Net Lease, and Whitestone REIT included “slow hand” provisions, that prevent them from being revoked for 180 days. “Dead hand” provisions, which have no time limit, were ruled illegal in Delaware, where most companies are incorporated, in 1998.
And eight companies were cited by CII as including language preventing shareholders from “acting in concert,” with evidence including meetings or discussions, along with the intent to accumulate stock beyond the trigger threshold or change control of the company. Some, but not all companies explicitly exclude the solicitation of proxies from their definition of acting in concert.
“Some activists skate close to the line between simply talking versus coordinating their behavior,” Zaba told Activist Insight Online. “Without a rights plan there isn’t any risk to playing this game – generally the only remedy is corrective disclosure. The benefit of an acting in concert provision is that there’s a penalty to them playing this game. It can help level the playing field.”