Mark D. Gerstein is a partner, Tiffany F. Campion is a senior attorney, and Joshua C. Reisman is an associate at Latham & Watkins LLP. This post is based on a Latham memorandum by Mr. Gerstein, Ms. Campion, Mr. Reisman, Christopher R. Drewry, Joshua M. Dubofsky, and Ryan J. Maierson. Related research from the Program on Corporate Governance includes Toward a Constitutional Review of the Poison Pill by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here); and The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk.
Key Points:
- Hostile takeover activity and stockholder activism often correspond with or follow periods of extreme market volatility and investor uncertainty. In the current environment, a significant uptick in adoptions of stockholder rights plans (so-called “poison pills”) is expected as companies confront a sharp decline in stock prices and face public valuations that may not be reflective of long-term intrinsic value.
- The terms of the rights plan—specifically duration, triggering thresholds, and timing of stockholder approval of the rights plan (if any)—should be tailored to the circumstances the board cites to justify the adoption of the rights plan.
- A narrowly tailored rights plan coupled with disclosure as to the specific threats the board is seeking to address should be sufficient to address the customary concerns of proxy advisory firms, governance advisory groups, and leading institutional investors, whose policies traditionally disfavor proactive adoption of rights plans.
- Companies impacted by significant stock price declines should proactively consider preparing rights plan materials, reviewing the rights plan with the board, and either adopting or putting the rights plan “on the shelf.”
The Impact of COVID-19 on Company Vulnerability
Over the last month, global financial markets have experienced unprecedented volatility in connection with the coronavirus pandemic (COVID-19). Investor concern about the impact of COVID-19 has led to market-wide sell-offs, resulting in companies across nearly every sector experiencing sharp stock price declines. Current market conditions are prime for hostile takeover activity and shareholder activism, and as such, a significant uptick in rights plan adoptions is expected as companies face sharp declines in stock prices and public valuations that may not be reflective of long-term intrinsic value. Indeed, a record-setting 11 public companies adopted poison pills between March 12 and 25 across a variety of industries. As boards grapple with the immediate and long-term implications of COVID-19, they should consider whether to implement defensive measures to attempt to proactively combat near-term coercive or abusive takeover and control practices.