On Friday, Twitter announced that it was adopting a shareholder rights plan in response to Elon Musk’s unsolicited buyout proposal. That document hasn’t been filed yet, but there are a few things to keep an eye out for when it is, because while Delaware courts have taken a dim view of some recent innovations in poison pill design targeting activists, they haven’t addressed those innovations in pills targeting old-fashioned hostile bids.
Delaware courts have traditionally upheld a board’s decision to adopt a poison pill, but a couple of recent cases have taken a more skeptical approach to pills incorporating aggressive provisions aimed at shareholder activism. The most notable of these cases includes Vice Chancellor Kathaleen McCormick’s decision in The Williams Companies Stockholder Litigation, (Delaware Court of Chancery, February 2021), which invalidated the Williams board’s decision to implement a pill with a 5% trigger and several other aggressive provisions, including a broad beneficial ownership definition and acting-in-concert (“wolfpack”) provision, and a narrow exclusion for passive investors.
While the recent focus in the Delaware courts has been on pills targeting activists, Twitter’s pill was adopted in response to an unsolicited takeover bid, and it will be interesting to see how aggressive an approach Twitter takes to some of these provisions. This excerpt from its press release suggests that its pill is likely more mainstream:
The Rights Plan is similar to other plans adopted by publicly held companies in comparable circumstances. Under the Rights Plan, the rights will become exercisable if an entity, person or group acquires beneficial ownership of 15% or more of Twitter’s outstanding common stock in a transaction not approved by the Board. In the event that the rights become exercisable due to the triggering ownership threshold being crossed, each right will entitle its holder (other than the person, entity or group triggering the Rights Plan, whose rights will become void and will not be exercisable) to purchase, at the then-current exercise price, additional shares of common stock having a then-current market value of twice the exercise price of the right.
Despite the statement about the pill being “similar” to those put in place by companies in comparable circumstances, because Twitter’s plan was adopted in response to a hostile bid, it might decide to take a more aggressive approach to the pill’s definition of beneficial ownership, acting in concert provisions and passive investor exclusion. That’s because, as commentators observed after the Delaware Supreme Court’s affirmed The Williams Companies decision, it is unclear whether the same analysis used in that decision would apply to a pill adopted in response to a hostile bid, and whether a Delaware court would accept a pill with “extreme” terms in the face of an actual hostile bid.
— John Jenkins, DealLawyers.com, April 18, 2022