The Williams Companies, Inc. v. Wolosky: A Tough Pill to Swallow for the Board

The Delaware Supreme Court recently held that a poison pill put in place by The Williams Companies, Inc. (“WCI”) was unreasonable, adopting an eighty-nine page decision issued by the Delaware Court of Chancery on February 26, 2021. (Sierra Jackson, Thomas Reuters). The Court of Chancery ultimately did not believe that a 5% threshold, which acted as the trigger for the poison pill, was reasonable relative to the threat that the pandemic presented to WCI. Id. This will likely discourage other companies from implementing such extreme poison pills in the future, even if the market is volatile as it was during the pandemic.

A poison pill is a shareholder rights plan that is implemented to prevent a hostile takeover. (Adam Hayes, Investopedia). A takeover, occurring when one company attempts to acquire another company by buying a majority of the company’s shares, becomes hostile when the target company does not want to be acquired. (Akhilesh Ganti, Investopedia). When a poison pill is enacted, at that point in time when the acquiring shareholder exceeds a particular threshold of stock ownership, the target company will sell its stock at a significant discount to its other shareholders, including its employees, in order to dilute the stock held by the acquiring shareholder. (Adam Hayes, Investopedia). For example, when a single shareholder acquires 25% of the company’s common stock, the company may offer its stock at a significant discount to its other shareholders in order to dilute the ownership of the acquiror in the target. Id. A poison pill is effectively an attempt to retain control of the company by diluting the company’s stock. Id.

A poison pill is permissible so long as it is reasonable for the company to believe that (1) there was a threat to the corporate enterprise and (2) the company’s subsequent response was reasonable relative to the threat to the corporate enterprise. (Allison Good, S&P Global). Poison pills are effective but have several distinct disadvantages. Id. For example, a poison pill can dilute the value of a company’s common stock. Id. In addition, if the poison pill is put in place to entrench the board of directors in their positions as directors, an inefficient or ineffective board could remain in control, but presumably this sort of poison pill would be declared unreasonable pursuant to the standard articulated by the Delaware Supreme Court. Id. When a board is entrenched in their positions as directors, they may use their role to pursue their own self-interest, rather than trying to maximize profit for the shareholders. (Alphabridge).

In The Williams Companies, Inc. v. Wolosky, WCI introduced a poison pill when the price of their stock fell from approximately $20.00 during the month of February to $8.73 on March 22, 2020. Id. The price fell quickly because the Organization of the Petroleum Countries (“OPEC”) and Russia refused to place restrictions on oil and gas production during the pandemic. (Ethan Klingsver, Paul Tiger, and Elizabeth Bieber; Harvard Law Forum on Corporate Governance). Other companies that produce oil and gas, including Petroleum and Chesapeake Energy Corporations, also implemented poison pills, albeit not as extreme as WCI, along with airlines. Id.

The aforementioned oil and gas companies, along with other industries hit hard by the pandemic, have adopted so-called “crisis poison pills” because of sudden vulnerability to corporate raiders. Id. A corporate raider is a person or entity that habitually breaks up or buys companies. Id. Crisis poison pills gain their name as such because they are implemented during periods of strong market turmoil, such as a global pandemic, to ensure management can retain control during unusually volatile time periods. (Ofer Edler and Michael D. Wittry, The Review of Corporate Financial Studies).

WCI’s poison pill stipulated that if a single shareholder acquired more than 5% of WCI’s common stock, any other shareholder could purchase WCI common stock at a substantial discount. (Allison Good, S&P Global). The Court took issue with the 5% threshold, because it was an unreasonable response by WCI’s Board of Directors in regard to their stated objective of “warding off ‘short-termism’ by activists looking to exploit the initial market panic over the Covid-19 pandemic.” (Mike Leonard, Bloomberg Law).

In its opinion, the Court said that the 5% threshold was “more extreme ... than any pill previously evaluated.” (Allison Good, S&P Global). According to Morgan Stanley, less than two percent of poison pills have a threshold below ten percent. (Hon. V.C. McCormick, Delaware Courts).

The Court also took issue with a provision that prohibited shareholders from communicating with one another. (Ethan Klingsver, Paul Tiger, and Elizabeth Bieber; Harvard Law Forum on Corporate Governance). In so doing, the Court felt that not allowing shareholders to communicate, specifically the definition of “acting in concert,” served only to “stifle stockholder communication.” Id. In so doing the Court of Chancery noted that, “[o]ne of the basic rights of a stockholder is to be able to communicate with his fellow stockholders on matters germane to such stock, and, if necessary, to organize other stockholders for corporate action.” (Hon. V.C. McCormick, Delaware Courts).

Experts in corporate governance believe that this holding will discourage the use of  extreme and “crisis” type poison pills, which ultimately may be best for shareholders. (Allison Good, S&P Global). When a poison pill contains an extreme threshold, such as a 5% ownership threshold, it encourages stagnant management because activist shareholders cannot take over by acquiring company stock. (Ofer Edler and Michael D. Wittry, The Review of Corporate Financial Studies). In contrast, a reasonable poison pill, especially in volatile markets, allows management to avoid acquisition by opportunistic corporate raiders. Id. While a poison pill can be a useful tool in preventing corporate raiders from attempting to maximize short term gains, additional guidance is needed from Delaware courts to ensure an entrenched board does not use poison pills and their extreme variations simply to retain power by entrenching the board in their positions as directors or in the absence of a reasonable threat to the company.