In a recent post-trial decision the Delaware Court of Chancery upheld a stockholder challenge to a “poison pill” rights plan adopted by The Williams Companies’ board of directors, declaring the plan unenforceable and issuing a mandatory injunction against its continued operation. See The Williams Companies Stockholder Litigation, C.A. 2020-0707-KSJM (Del. Ch. Feb.26, 2021). Following the Delaware Supreme Court’s 1985 decision in Moran v. Household International upholding a poison pill as a valid anti-takeover device provided it satisfies the Unocal intermediate review standard, public companies have employed this defensive measure successfully, not only to address takeover threats but also to protect valuable net operating loss assets and to respond to certain stockholder activism. In Williams, however, the court found that the defendants had failed to establish that particular unprecedented terms of the plan constituted a reasonable, proportionate response to the activist threat perceived by the board.

Background

Williams is a publicly traded Delaware corporation that owns and operates natural gas infrastructure handling about 30% of the nation’s natural gas volumes. Following the COVID-19 pandemic and an oil price war between Saudi Arabia and Russia that sent oil prices plummeting, Williams stock price fell almost 55% between January 2020 and mid-March 2020. Management, which previously had an expensive and distracting experience with activist investors, began to consider adoption of a poison pill plan different from the more traditional standby anti-takeover plan “on its shelf.” Typically a poison pill plan involves the issuance of a right to existing stockholders by way of a board declared dividend that, when triggered by the aggregation of a certain percentage of beneficial ownership by a person or group, gives all stockholders but the acquiring stockholder the right to acquire additional shares of the company at a discount, resulting in massive dilution of the acquiror’s holdings.

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