A Delaware court's recent decision to throw out Williams Cos. Inc.'s shareholder rights plan should deter other companies from adopting similarly extreme poison pills, corporate law experts said.
As the COVID-19 pandemic and fears of an economic recession sent the natural gas pipeline giant's stock price plummeting, Williams on March 20, 2020, put in place a limited duration stockholder rights agreement to protect against activist investors snapping up cheap units. Once an entity acquires 5% or more of Williams common stock, the agreement enables a rights holder to buy a number of Williams shares with a market value of twice the exercise price. The agreement would have expired March 20.
But a lawyer who often represents activist investors sued Williams over "an extremely aggressive overreach of corporate power." The Delaware Court of Chancery agreed in a Feb. 26 ruling that the poison pill was "unprecedented in that it contains a more extreme combination of features than any pill previously evaluated by this court."
"Shareholder rights plans have a long history of being upheld in Delaware courts. That said, the Williams rights plan ... had to have reasonable grounds to believe there was a threat to the company and secondly a response to that threat that is reasonable," Latham & Watkins LLP partner Christopher Drewry said in an interview. "There's limits to what you can do."
While Williams in the past had faced activist investors like Soroban Capital Partners LP and Corvex Management LP, which advocated for a merger with Energy Transfer LP that eventually failed in 2016, the chancery court saw "no evidence that it was a motivating factor of the board as a whole" for the 2020 proposal, even though Williams maintained in the litigation that it was.
A provision for potentially hindering ordinary-course shareholder communications and the 5% "trigger threshold" particularly concerned the court. According to the ruling, Morgan Stanley advised Williams' board that "only 2% of all plans identified by Morgan Stanley had a trigger lower than 10%."
"The thirty-thousand-foot view looks bad for defendant," the ruling noted.
When the suit against the agreement was filed in August 2020, the pipeline firm's stock price had recovered from its March 18, 2020, low of $8.73. On March 5, Williams units settled at $24.26.
Other U.S. oil and gas companies that adopted poison pills around the same time were more exposed to the record-low crude oil prices that showed up after OPEC and Russia failed to agree to production cuts and the emerging pandemic sapped demand for fuels. Drillers Whiting Petroleum Corp. and Chesapeake Energy Corp. put shareholder rights plans in place in March and April 2020, respectively, before filing for Chapter 11 bankruptcy protection later that year. Refiner Delek US Holdings Inc. also took a poison pill in response to a perceived threat from activist investor Carl Icahn.
Those reactions to plummeting stock prices spread beyond the energy sector, according to Latham & Watkins' Drewry. Companies in other hard-hit industries, such as travel media provider Global Eagle Entertainment Inc.Global Eagle Entertainment Inc. and restaurant supply firm Chefs' Warehouse Inc., adopted shareholder rights agreements as well.
"I think there were over 35 rights plans adopted in response to the COVID crisis," Drewry said. "The vast majority of those were one-year duration adoptions, and so boards are having to reevaluate whether to renew them, and we haven't seen that yet because they started being adopted later in March of 2020."
Williams may have never redeemed its plan, but Drewry said the company could still appeal the decision at the Supreme Court of Delaware or opt to adopt a poison pill with terms similar to previous agreements upheld by Delaware courts.
No matter how the gas pipeline heavyweight decides to proceed, Hunton Andrews Kurth LLP partner Michael O'Leary said the chancery court's ruling reinforced the standard for what constitutes a reasonable threat.
"Many companies have a plan on the shelf, and I think what this decision says is you should not put in place and adopt a plan simply because your [stock] price falls and you're concerned it gives unknown, unidentified stockholder activists an opportunity to accumulate a block of your stock ... to exert influence on the company," O'Leary said in an interview.