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.

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Amidst a market-wide sell-off of public equities in the face of coronavirus uncertainty, companies across nearly every industry have seen significant declines in stock prices over the past several weeks. With the timeline for recovery of financial markets and the broader global economy increasingly unclear, in many cases stock prices no longer reflect the intrinsic value of the business and have instead become increasingly correlated with each day’s (often negative) news reports and indiscriminate selling across investment portfolios.

The current crisis has created a risk that well-capitalized activist investors or acquirers will seek to take advantage of the situation by acquiring significant stakes in companies at depressed prices. In the midst of a sell-off, an aggressive buyer can amass beneficial ownership of a significant percentage of voting securities of a target company without making public disclosure, particularly in light of its ability to continue buying during the 10-day window after the 5% ownership threshold is crossed but before an initial Schedule 13D is required to be filed with the SEC. This risk is even more acute for small-capitalization companies, for whom the mandatory filing and waiting period regime of the Hart-Scott-Rodino Antitrust Improvements Act may provide little protection, since it does not apply to acquisitions of shares resulting in aggregate ownership of voting securities valued at less than $94 million. Moreover, in light of the dismantling of takeover defenses at most companies over the last decade (including the forced elimination of classified boards and supermajority voting provisions as well as bestowing upon stockholders the ability to act by written consent and call special meetings), there are fewer tools in the toolkit for responding to hostile attacks. Unwary companies may awaken one morning to find that they have a new active shareholder with a large ownership percentage—a stake acquired at a price not reflective of the company’s long-term value, but one that will persist into an eventual recovery. Opportunistic buyers may also use equity derivatives to increase even further their economic investment in the target company.

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