Posted by David Katz and Sabastian V. Niles, Wachtell, Lipton, Rosen & Katz, on
Thursday, April 2, 2020
The human and business challenges confronting America from the COVID-19 pandemic are unprecedented. These global challenges have also emerged during a time when most companies have unfortunately given up nearly all of the traditional and effective “takeover” defenses like classified boards, have structural profiles that do not deter (and may invite) opportunistic attack and whose non-index fund investors continue to confront tremendous pressure to show short-term performance or face redemption requests. As a number of public companies have seen the value of their common stock decline precipitously, some advisors have suggested to public company directors that such companies should rush to adopt and announce shareholder rights plans, known more colloquially as “poison pills,” solely in response to significant stock price declines. A handful of companies, especially those whose market capitalization have dropped below $1 billion, have implemented pills in recent weeks due to the now-present possibility of building a large stake rapidly and under the disclosure radar. In addition, a number of other companies facing specific threats of disruption, takeover threats, activist attacks, unusual trading activity or the need to preserve value and an announced strategic direction have considered implementing (and in some cases implemented) rights plans.
Our Firm developed the shareholder rights plan in 1982 and after almost four decades, this creation has withstood the test of time. We litigated the legality of the poison pill in the Delaware Supreme Court in 1985 in the Moran v. Household Int’l case, where the court found that the plan’s implementation was a legitimate exercise of business judgment by Household’s board. And over the last four decades, we have regularly modified and adapted the rights plan to meet evolving and current business and market conditions. Since the Moran case, our Firm has regularly defended the use of rights plans in Delaware and other jurisdictions and established its legality, culminating in the Delaware Airgas decision in 2011. Airgas reaffirmed the primacy of the board of directors in matters of corporate control under bedrock Delaware law and upheld the use of a rights plan to defeat a year-long, opportunistic hostile takeover attempt. We have litigated other favorable court rulings upholding rights plans and other defensive measures in a variety of contexts, including aggressive activism. Our Firm has adapted our form of rights plan for the COVID-19 crisis. We will use our expertise in designing and using the rights plan to sustain its legality and effectiveness in the current crisis environment and continue to provide judgment as to when and whether to adopt a pill.
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