Paul Shim and James Langston are partners and Charles Allen is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum. 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.
Last month, we described the increased threat of activists and acquirors seeking to capitalize on the COVID-19 sell-off to build positions in high-value companies at depressed prices. Even before the current crisis emerged, we recommended that all U.S. public companies regularly review their defense profile and have a shareholder rights plans “on the shelf.” For companies uniquely impacted by the crisis—especially those whose market capitalization has fallen below $1 billion—we suggested they re-assess their vulnerabilities in this new environment and consider whether now was the right time to adopt a rights plan to ward off potential opportunistic behavior. Some companies have done just that—since March 1, 2020, 24 U.S. public companies have adopted a defensive shareholder rights plan (6 other U.S. public companies have adopted NOL rights plans).
As we noted at the time, for a rights plan to comport with long-standing ISS and Glass Lewis guidance it must be limited in duration (one year or less unless otherwise approved by a shareholder vote) and the ownership trigger cannot be so low as to be unduly restrictive (recent precedents have tended to cluster in the 10-15% range, unless the shareholder rights plan is designed to protect tax attributes, in which case it will typically have a 4.9% trigger; ISS’ official position is that defensive pills generally should have a trigger no lower than 20%). If a rights plan adopted by a board adheres to this guidance, ISS and Glass Lewis will consider the adoption on a “case-by-case” basis in issuing their respective recommendations for the election of the directors adopting the rights plan. As witnessed last week, a board adopting a rights plan that meaningfully departs from a proxy advisor’s guidance can result in the firm issuing a withhold recommendation for one or more of the directors.