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The Resilient Rights Plan: Recent Poison Pill Developments and Trends

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The Resilient Rights Plan: Recent Poison Pill Developments and Trends The Resilient Rights Plan: Recent Poison Pill Developments and Trends April 2011 Mark D. Gerstein [email protected] Bradley C. Faris [email protected] Christopher R. Drewry [email protected] Latham & Watkins LLP Latham & Watkins operates as a limited liability partnership worldwide with affiliates in the United Kingdom and Italy, where the practice is conducted through an affiliated multinational partnership. © Copyright 2011 Latham & Watkins. All Rights Reserved Table of Contents I. RIGHTS PLAN TRENDS................................................................................................. 2 A. Rights Plan Utilization and Terms...................................................................... 2 B. Analysis of Recent Trends in the Adoption of Rights Plans ............................. 4 C. Increasing Scrutiny by Proxy Advisory Firms ................................................... 7 II. TRADITIONAL RIGHTS PLANS ................................................................................... 9 A. Illustrating the Power of the Traditional Rights Plan: Air Products v. Airgas ................................................................................................................... 9 B. Merger-Related Rights Plans............................................................................ 12 III. DERIVATIVE POSITIONS AND “WOLF PACKS” AS TRIGGERS........................... 14 A. Modern Threats from Synthetic Equity Abuses .............................................. 15 B. Addressing the Abusive Use of Synthetic Equity Positions in Rights Plans ................................................................................................................... 17 C. Threats from Wolf Packs ................................................................................... 23 IV. NOL RIGHTS PLANS ................................................................................................... 27 A. Protecting the NOL Asset ................................................................................. 27 B. NOL Rights Plans............................................................................................... 27 The Resilient Rights Plan: Recent Poison Pill Developments and Trends INTRODUCTION Shareholder rights plans were developed more than 25 years ago to fend off opportunistic hostile offers and other abusive takeover transactions. Rights plans deter unauthorized stock accumulations by imposing substantial dilution upon any shareholder who acquires shares in excess of a specified ownership threshold (typically ten to twenty percent) without prior board approval. Although the freewheeling takeover environment of the 1980s is now a distant memory, corporations today face continued threats of abusive takeover transactions, as well as threats from activist and other “event-driven” investors who may disproportionately affect governance. The credit crunch and the resulting recession, accompanied by substantial deterioration in U.S. equity markets, exacerbated these vulnerabilities. Perhaps predictably in light of these events, there was a resurgence in the adoption and use of rights plans in 2008, and a subsequent decline as markets have normalized. This paper updates our paper first published in April 20091 and documents and analyzes these trends. Although the implementation of rights plans is normalizing to pre-recession levels, the past two years brought a number of important developments affirming the legality and demonstrating the effectiveness of shareholder rights plans: Though declining in popularity, particularly among large corporations, the recent Airgas and Air Products battle2 illustrates that a traditional rights plan, combined with a classified board, is a legally valid and powerful tool for protecting the board’s determination to reject an unsolicited takeover proposal that the board believes in good faith is inadequate and not in the best interests of the corporation and its stockholders. Corporations have continued to modify their rights plans to address the changing nature of equity ownership by including derivatives, swaps and other synthetic equity positions within the definition of “beneficial ownership.” While this approach to more modern abuses has not yet † Mr. Gerstein and Mr. Faris are partners in Latham & Watkins’ M&A Practice Group, of which Mr. Gerstein is a Global Chair, and Mr. Drewry is an associate at Latham & Watkins The authors extend our gratitude to associate Alexa Berlin for her significant contributions to the updated version of this paper. The views expressed in this paper are those of the authors alone and do not necessarily represent the views of Latham & Watkins or its clients. 1 See The Resurgent Rights Plan: Recent Poison Pill Developments and Trends, available at http://www.lw.com/upload/pubContent/_pdf/pub2628_1.pdf. 2 Airgas, Inc. v. Air Products & Chemicals, Inc., C.A. Nos. 5249-CC, 5256-CC, 2011 WL 806417 (Del. Ch. Feb 15, 2011). been fully tested in court, it survived a motion for injunctive relief in the Atmel case.3 NOL rights plans gained prominence due to the recession, in which many corporations generated significant net operating losses (“NOLs”). NOLs may be used to reduce future income tax payments and have become valuable assets to many corporations. Despite the turnaround in the economy, adoption of NOL plans remains significant. This trend is likely to continue given the effectiveness of these plans and the well- reasoned Delaware decision upholding Selectica’s NOL plan. I. RIGHTS PLAN TRENDS A. Rights Plan Utilization and Terms The use of rights plans spread widely after their introduction in the 1980s. Indeed, in 2002, approximately 60 percent of Standard & Poor’s 500 corporations had rights plans in place. However, as illustrated in the following chart, usage of rights plans declined beginning in 2003, as did the use of the classified board, albeit at a slower rate.4 100% S&P 500 Rights Plans and Classified Boards 80% Rights Plans in Force at Year End Classified Boards 62%62% 59% 59% 60% 55%55% 47%49% 43% 37% 40% 35% 35% 33% 29% 30% 22% 17 % 20% 13 % Percentage of Corporations of Percentage 0% 2002 2003 2004 2005 2006 2007 2008 2009 2010 Year Includes non-U.S. incorporated corporations. 3 Atmel Corporation, Current Report (Form 8-K) p. 3 (Nov. 16, 2009). 4 Unless otherwise noted, empirical data regarding rights plans throughout this paper is provided by, or derived from data provided by, SharkRepellent.net. 2 Factors that drove the decline in use of rights plans and classified boards include: an increase in the number, and success of, shareholder proposals to redeem rights plans and declassify boards5; proxy advisers, such as Institutional Shareholder Services (“ISS”), adopting policies recommending that shareholders vote “withhold/against” directors of corporations that adopted or renewed rights plans, or failed to declassify their staggered boards;6 an increase in the prevalence of majority voting policies, which increased the impact of adverse advisory firm recommendations following adoption or renewal of a rights plan without shareholder approval; buoyant equity markets, which provided a sense of confidence generally and may have muted the anxiety of boards of directors over the threat of hostile bids; and perhaps most important, wider employment by boards of the strategy to put a rights plan “on the shelf” to be deployed quickly and only if necessary in response to a specific threat. Much changed in 2008, however, as the credit crunch and the resulting recession, accompanied by substantial deterioration in U.S. equity markets, heightened the real and perceived threats of abusive takeover transactions. Though overall the number of S&P 500 corporations with rights plans in place continued to decline, in light of these events, there was a resurgence in the adoption and extension of rights plans, particularly among companies that had suffered precipitous drops in market capitalization. As markets began to normalize in 2010, so, too, did the adoption of rights plans. The following statistics illustrate certain important recent trends in rights plans. Recent Decrease in Adoption of New Rights Plans. In 2010, only 26 corporations adopted rights plans for the first time, marking a trend towards pre-recession levels.7 First-time adoptions peaked at 69 during the recession in 2008, and then began to decline in 2009, with 42. 5 INSTITUTIONAL SHAREHOLDER SERVICES, 2009 PROXY SEASON TRENDS (2011). 6 See ISS, 2011 Institutional Shareholder Services U.S. Proxy Voting Guidelines Summary, Jan. 27, 2011, available at http://www.issgovernance.com/files/ISS2011USPolicySummaryGuidelines20110127.pdf. Note that since 2005, it has been ISS’s policy to recommend a withhold/against vote for the entire board of directors (except new nominees) if the board adopts or renews a rights plan without shareholder approval. ISS’s current recommendations are discussed below in Part I.C. 7 2007 saw 20 first-time adoptions. 3 100 Decreasing Adoption of New Rights Plans 80 69 60 42 40 26 20 20 Number of CorporationsNumber 0 2007 2008 2009 2010 Year Rights Plans Adopted by Smaller Capitalization Corporations. Corporations with market capitalizations of less than $500 million continue to be the primary users of rights plans. Seventy-three small-cap corporations adopted or renewed rights plans in 2009, and 46 did so in 2010. Market Capitalization of Corporations that Adopted or Renewed Rights Plans 2009 2010 >2.5B 1B to 2.5B 750mm to
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