The Williams Companies Stockholder Litigation
2021 WL 736780 (Del. Ch. Feb. 26, 2021) (2021)
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Rule of Law:
A board's adoption and maintenance of a stockholder rights plan (poison pill) is subject to enhanced scrutiny under Unocal, requiring the board to demonstrate that it had reasonable grounds for identifying a legitimate threat to the corporate enterprise and that its response was reasonable and proportional to that threat; generalized concerns about stockholder activism, short-termism, or distraction, without a specific, immediate threat, do not constitute legitimate corporate objectives.
Facts:
- The Williams Companies, Inc. ("Williams") is a publicly traded Delaware corporation owning and operating natural gas infrastructure assets across the U.S.
- In early 2020, Williams' stock price experienced a significant decline, falling by approximately 55% from January to March, due to the COVID-19 pandemic and a global oil price war.
- Around early March 2020, outside director Charles Cogut proposed the adoption of a stockholder rights plan (the "Plan") to Williams management to insulate the board and management from activists during market uncertainty and low stock price.
- The Plan, as proposed, included a 5% triggering threshold, a one-year duration, and an exclusion for passive investors, aiming to prevent any activism influencing control at or above the 5% level.
- The Board deliberated on the Plan over two meetings (March 18 and 19, 2020) and was advised by outside legal and financial advisors, but did not discuss any specific activist threats or rapid accumulations of Williams stock.
- The Plan's features included a definition of "beneficial ownership" that captured synthetic interests (like options), an "acting in concert" (AIC) provision extending to parallel conduct and a "daisy chain" concept, and a "passive investor" exemption that was narrowly drafted with conjunctive requirements, effectively excluding most forms of shareholder engagement.
- Williams issued a press release on March 20, 2020, and a proxy supplement on March 30, 2020, disclosing the Plan's adoption.
Procedural Posture:
- Plaintiff Steven Wolosky filed this litigation as a direct claim for breach of fiduciary duty against the Director Defendants, seeking declaratory and injunctive relief, in the Court of Chancery of the State of Delaware on August 27, 2020.
- Plaintiff City of St. Clair Shores Police and Fire Retirement System filed a similar action in the Court of Chancery on September 3, 2020.
- The Court of Chancery granted expedition on September 8, 2020, and consolidated the two actions on September 15, 2020.
- On November 11, 2020, the Court of Chancery certified a class defined as all record and beneficial holders of company common stock who held stock as of March 20, 2020, and who continued to hold stock through and including the date the rights plan expires or is withdrawn, redeemed, exercised, or otherwise eliminated, excluding the Defendants.
- A three-day trial was held from January 12 to 14, 2021.
- Post-trial briefing concluded on February 5, 2021.
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Issue:
Does a board of directors breach its fiduciary duties under Unocal by adopting a stockholder rights plan with a 5% trigger, broad 'acting in concert' provisions, and a narrow 'passive investor' exemption, primarily in response to hypothetical concerns about general stockholder activism, potential short-term agendas, and rapid stock accumulation during market volatility, without an identified specific threat?
Opinions:
Majority - McCormick, V.C.
Yes, the board of directors breached its fiduciary duties under Unocal by adopting and maintaining the Plan because, while the board's investigation into the Plan's adoption was reasonable and in good faith, the identified threats were not legitimate corporate objectives, and the Plan's features were disproportionate to any assumedly valid threat of rapid stock accumulation. The court applied the Unocal intermediate scrutiny standard to review the board's defensive actions, which requires the board to demonstrate that it had reasonable grounds for concluding a legitimate threat existed and that its response was reasonable in relation to that threat. The court assumed, for the sake of analysis, that the Board conducted a good faith and reasonable investigation. However, the court found that the Board's identified threats—generalized stockholder activism, concerns about "short-termism" or management distraction, and hypothetical rapid stock accumulation—were not legitimate corporate objectives under Delaware law. The court reasoned that viewing all stockholder activism as a threat is an extreme manifestation of the impermissible "we-know-better" justification for interfering with the stockholder franchise, and that concerns about short-termism and distraction similarly boil down to stockholders voting erroneously. While the court assumed, for the purposes of analysis, that the desire to fill gaps in federal disclosure laws to detect "lightning strikes" (rapid, stealthy stock accumulation) at a time of undervaluation could be a legitimate corporate objective, it concluded that the Plan's features were grossly disproportionate to even this assumedly valid threat. The Plan's combination of a 5% trigger, an expansive "acting in concert" provision (capturing parallel conduct and "daisy chains" among investors), and a very narrow "passive investor" exemption was unprecedented and far exceeded what legal commentators had proposed for "gap-filling pills." These extreme features, particularly the vague and broad AIC provision, were likely to chill a wide range of benign stockholder communications and impinge on fundamental stockholder rights, making the Plan unreasonable and invalid.
Analysis:
This decision significantly reinforces the strict application of Unocal's enhanced scrutiny to stockholder rights plans, especially those designed to counter stockholder activism. It clarifies that generalized concerns about shareholder behavior (such as activism, short-termism, or potential distraction) are not legitimate corporate threats under Delaware law sufficient to justify defensive measures that impinge on fundamental stockholder rights. The court's detailed scrutiny of the Plan's features, particularly the 'acting in concert' and 'passive investor' provisions, sets a high bar for boards seeking to adopt aggressive anti-activist pills, emphasizing the need for specific, concrete threats and a truly proportional response. This case will likely encourage boards to exercise greater caution and precision when drafting rights plans and to ensure that such measures do not unduly chill legitimate stockholder engagement and communication.
