DELAWARE COURT OF CHANCERY REJECTS UNREASONABLY BROAD “POISON PILL”

On February 26, 2021, the Delaware Court of Chancery held that a stockholder rights plan adopted during the COVID-19 pandemic by the board of directors of The Williams Companies, Inc. (“Williams” or the “Company”) was unenforceable.  See The Williams Companies Litigation, C.A. 2020-0707-KSJM (Del. Ch. Feb. 26, 2021).  Stockholder rights plans, commonly referred to as a “poison pill,” are defensive measures sometimes adopted by public companies to combat a perceived threat to the company. 

While several companies have adopted poison pills, the poison pill adopted by Williams was unique.  The Williams’ poison pill contained extreme components, including, among other things, an unusually low 5% trigger and broad language defining what qualified as acting in concert.  Moreover, the Williams’ poison pill was adopted for the sole purpose to deter activist stockholders.  A certified class of plaintiffs challenged the shareholder rights plan and argued that Williams’ board of directors breached their fiduciary duties.

The Court of Chancery evaluated Williams’ poison pill under the two-prong test established in Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).  Under Unocal, a company’s defensive measure will be upheld only if: (i) reasonable grounds exist for the board to identify a threat to the corporation and (ii) the response to the threat is reasonable.  In invalidating Williams’ poison pill, the Court of Chancery held that the purported threats considered by the Company’s board of directors were “purely hypothetical” in nature.  Additionally, the poison pill contained an “extreme, unprecedent collection of features” that did not “bear[] a reasonable relationship to their stated corporate objective.”  The Court of Chancery took issue with the 5% trigger and the overly broad acting in concert provision which could “sweep[] up potentially benign stockholder communications.”

While the Williams’ decision does not eliminate poison pills, boards of directors considering the adoption of a shareholder rights plan must recognize that challenges to poison pills will be subject to enhanced scrutiny.  As such, boards should carefully consider the threat to the company and tailor their shareholder rights plan accordingly.