Hogan Lovells Publications | Quarterly Corporate and M&A Decisions Update | May 2021

2021 Q1 Decisions Update

The Williams Companies Stockholder Litigation, C.A. No. 2020-0707-KSJM (Del. Ch. Feb. 26, 2021)

Summary

In March of 2020, The Williams Company (Williams), a publicly traded natural gas infrastructure company, adopted a poison pill stockholders rights plan (the Plan) that contained a five percent trigger and a broad “acting in concert” definition that gave the board discretion to aggregate stockholders’ shares for purposes of the five percent trigger. Under the Plan, Williams could determine that shareholders were working towards a “common goal” about “changing or influencing” the company without also having to find that the stockholders entered into an “express agreement, arrangement or understanding.”

The court struck down the Plan, finding it to be an outlier when compared to other recently adopted poison pills. The court applied the “two-part inquiry” set out in the Delaware Supreme Court’s ruling in Unocal Corp. v. Mesa Petroleum Co., “asking first whether the board had reasonable grounds for identifying a threat to the corporate enterprise and second whether the response was reasonable in relation to the threat posed.” The court found Williams’ first two justifications for the Plan – preventing stockholder activism during a time of market uncertainty and the apprehension that hypothetical activists might pursue “short-term” agendas or distract management – were insufficient under Delaware law. But the court assumed without deciding that Williams’ third justification for the Plan – concerns that activists might stealthily and rapidly accumulate over five percent of Williams stock – might be sufficient under Unocal. Turning to the second prong of Unocal, however, the court found that the Plan was not a “reasonable” response to this threat. In particular, the court found that the Plan’s five percent trigger was “extreme” and “unprecedented” as compared to the normal 10-15 percent triggers in other poison pills. The court also found that the Plan’s “acting in concert” definition was too broad, sweeping in a variety of benign shareholder activities. These features combined to make a poison pill that was more severe than was necessary under the circumstances.

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