The Williams Companies Stockholder Litigation

Court of Chancery of the State of Delaware · 2021 · Corporations

Corporationspoison pillstockholder rights planUnocaldirect vs. derivativepoison pillrights plananti-activist pill

Facts

At the outset of the COVID-19 pandemic and during a sharp decline in Williams's stock price, the board adopted a one-year stockholder rights plan with a 5% trigger, an expansive acting-in-concert provision, a broad beneficial ownership definition including certain derivatives, and a narrow passive-investor exemption. The board was not responding to any specific activist campaign, takeover bid, or other concrete threat; instead, directors expressed concern about possible future activism, possible short-term agendas, management distraction, and rapid accumulations of stock. The board focused largely on the 5% trigger and gave little attention to the plan's detailed features, and many directors had not read the key provisions before litigation. The plan remained in place even after Williams's stock price substantially recovered.

Issue

Whether the stockholders' challenge to the Williams rights plan was direct or derivative, and whether the board's adoption and maintenance of this anti-activist poison pill satisfied Unocal enhanced scrutiny. More specifically, the question was whether the board identified a legitimate threat and adopted a response proportional to that threat.

Rule

Under Tooley, a claim is direct when the alleged harm is suffered by stockholders individually and the remedy would benefit stockholders individually; a poison pill challenge seeking injunctive relief can therefore be direct when the pill interferes with stockholders' fundamental rights to vote, sell, communicate, and organize. Under Delaware law, all poison pills are reviewed under Unocal enhanced scrutiny: the board must show reasonable grounds, after a good-faith and reasonable investigation, for concluding that a legitimate threat to the corporate enterprise existed, and must then show that its response was reasonable in relation to that threat. Generalized hostility to stockholder activism, or hypothetical concerns that activists may pursue short-term agendas or distract management, are not cognizable threats; and even assuming a desire to detect rapid undisclosed accumulations could be legitimate, the response still must fall within a range of reasonableness.

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Pine Harbor Energy, a Delaware corporation based in Houston, adopts a one-year rights plan with a 5% trigger, a broad acting-in-concert definition, and a narrow passive-investor carveout. Leah Kim, a stockholder in Seattle, sues in the Court of Chancery seeking only a declaration that the plan is unenforceable and an injunction barring its operation, alleging that the plan restricts stockholders’ ability to communicate, organize, and support board change.

If the company argues that Leah’s claim is derivative because any burden falls equally on all stockholders, how should the court most likely rule?

Explanation. Under Tooley, the court asks who suffered the alleged harm and who would receive the benefit of the remedy. A challenge to a pill can be direct when the plan burdens stockholders’ fundamental rights to vote, sell, communicate, and organize, and the plaintiff seeks declaratory or injunctive relief that would run directly to stockholders. The fact that all stockholders are burdened equally does not make the claim derivative.