The Delaware Supreme Court has before it a case that could dramatically reshape corporate governance in the United States.  The case, The Williams Companies Stockholder Litigation, addresses the legitimacy of an “anti-activist pill” whose particularly aggressive features would severely limit both an activist’s economic incentives and its capacity to organize other shareholders.  The implications reach well beyond the hedge-fund wolf packs purportedly roaming the corporate landscape. The validation of such an anti-activist pill would throttle the incipient ESG activist movement that recently illustrated its potential in successful challenges at Exxon-Mobil. It would also require the Delaware courts to come up with a new legitimating theory for the discretionary authority reposed in corporate boards.

At the outset of the Covid-19 crisis, The Williams Companies adopted a “shareholder rights plan” designed to forestall an activist challenge to management’s running of the company during a period of economic uncertainty.  The pill contained two far-reaching elements.  The first was a 5 percent ownership trigger.  A party reaching that threshold would face an immediate dilution of its equity interest through a “flip-in” provision (which allows other shareholders to acquire more stock at a discount) and, in the event of a follow-up merger, would face further dilution through a “flip-over” provision (which allows shareholders of the target to buy the acquirer’s stock at a discount).  The second element was a sweeping definition of “acting in concert” for the purposes of determining “beneficial ownership.” The definition included acting “in parallel” or simply acting “towards a common goal” as pertains not just to “changing” but also “influencing control of the Company.”  The “acting in concert” concept was further broadened to include “daisy chain” connections: parties who were acting in concert with one party who was, in turn, acting in concert with another party, an aggressive provision lifted from the criminal conspiracy playbook associated with organized crime.  Institutional investors seem brought into this cabal merely through buying company shares in anticipation of a challenge to management, including by way of a proxy contest.

The beneficial ownership definition was further embellished by inclusion of synthetic ownership of the company stock that was the “underlying” security in a total return equity swap, which is cash-settled.

A comprehensive opinion by Chancellor McCormick enjoined the pill, principally through an application of the Unocal/Unitrin framework. The Chancellor found that the vague, omnibus threat that appeared to motivate the board to adopt the pill did not justify the pill’s extreme provisions.  The pill expired on its own terms a year after its adoption, in March 2021.  Yet the defendants are pursuing an appeal in the Delaware Supreme Court.

Perhaps the spur for the appeal is the award of $9.5 million in attorney’s fees.  But The Williams Companies pill is a management wish list of tools to suppress the possibility of an activist challenge.  In particular, it is designed to hunt down and kill off wolf packs, those aggregations of activist investors that purportedly respond to one another’s call to create the appearance if not the fact of a high level of shareholder dissatisfaction.

In one sense, the extreme nature of the Williams poison pill would make it easy to predict ready affirmance of the Chancellor’s opinion.  But this is a moment when the shareholder-centric model of corporate governance is under scrutiny if not attack.  The Business Roundtable has issued a statement that is widely interpreted to deprioritize the interests of shareholders in favor of stakeholders.  Managerial and political elites have pushed for “new paradigms,” “common sense principles,” and “inclusive capitalism.”  Asset managers have issued statements supportive of a broad conception of the corporate “purpose.”

The case against activism flies under two flags.  The first, the traditional approach, is that activist pressures lead firms to think about the short term rather than the long term.  Managers who are busily fighting off activists (or acting preemptively to avoid such a confrontation) are short-changing investments (R&D, for example) that will produce greater value in the long run in order to demonstrate superior short-term results that will keep the activists at bay.  This is bad from the perspective of both long-term shareholders and society because of the sacrifice of long-term economic growth.[1]

The second, more recent attack on activism is that its focus on shareholder value heightens income and wealth inequality.  Managers who are concentrating on delivering the highest returns for shareholders will hold down employee wages, which suppresses wage growth.  Moreover, executives are partly, sometimes principally, paid through stock-based compensation, which means that increasing shareholder returns may in itself exacerbate income inequality.  Additionally, since the distribution of public share ownership is skewed to the top 10 percent, even the top 1 percent, success at increasing stock values will exacerbate wealth inequality.[2]

These concerns have taken on national political valence.  Before the 2020 election, an influential senator proposed a semi-federalization of corporate law.[3]  President Biden has publicly called out the disparity between productivity growth and wage growth as the disconnect “between the success of our economy and the [workers] who produce that success.”[4] It is thus not inconceivable that the Delaware Supreme Court would see advantage in preempting potential federal encroachment on state corporate law through a doctrinal move that might relieve some pressure.  Delaware has a history of judicial turnaround[5] and legislative measures[6] that seem calibrated to address such hydraulics.[7]

Moreover, the Delaware courts have a history of slapping down actors who they see as misusing the Delaware “system.”  This is surely at least partial explanation for decisions, like Corwin v. KKR Financial Holdings[8] and In re Trulia, Inc. Stockholder Litigation,[9] that target plaintiffs lawyers and the several appraisal decisions that have drained the juice out of appraisal arbitrage pursued by hedge funds.[10]  Given these factors, it would be a surprise but not a shock for the Delaware Supreme Court to reverse the Chancery Court decision in The Williams Cos. in whole or in part in the course of broadening the occasions for use of the poison pill and expanding the range of permitted features.

Nevertheless, this would amount to a major wrench to the Delaware corporate governance system.  It would require a re-basing of the rationale for the poison pill, which operates through discrimination against particular common shareholders and whose core legitimacy was premised on the ultimate power of the shareholder franchise.  Moreover, an empowered anti-activist pill would operate not just against the hedge fund activists, the villains de jour, but also against ESG activists, just now gaining influence, as reflected in the recent ExxonMobil contest.  Indeed, judicial validation of the anti-activist pill could kill off ESG activism just as it gets a head of steam.[11]

The Delaware Supreme Court should resist these pressures as short-termist and instead look to principles that stabilize and vindicate Delaware’s approach to corporate governance over the long term.  This should lead the Court to reject the anti-activist pill as simply outside the core legitimating principles of Delaware law that reside in protection of the shareholder franchise.  Unlike the original pill, which was designed to restore the board to its traditional structural role in vetting proposed mergers, the anti-activist pill is designed to protect the board against shareholder pressure expressed through director elections. The Court, which has on many occasions insisted on the importance of the shareholder franchise, including quite recently,[12] should put an end to this aberrant turn in corporate governance.

The Origins of the Pill

The “shareholder rights plan” that came to be known as the “poison pill” or simply “the pill” was forged in the fires of the takeover wars that erupted in the 1970s and early 1980s.  In the struggle for control over large companies, bidders wielded the tender offer, which became a legitimate and common tactic after enactment of the 1968 Williams Act and the follow-on SEC regulations. Target management’s defensive measures were limited and sometimes consisted of measures such as asset dispositions or acquisitions designed to make the target less attractive to the hostile bidder, but which also disrupted the target’s prior business plan and may well have reduced target shareholder value.

The pill ingeniously combined two elements. First was the Delaware corporate finance statutes that established the board’s power to issue “rights” to purchase shares[13] and then to prescribe the terms of “blank check” preferred stock.[14] Second was the just-inaugurated (in Unocal v. Mesa Petroleum[15]) power of the board to adopt defensive measures that would discriminate against a shareholder who made an unwanted bid.  But the pill persisted because it solved a certain structural problem while not undermining core principles of Delaware corporate governance.

The statutory set-up relating to mergers contemplated a two-step process: first, agreement by the board to a merger proposal and its terms; second, a subsequent shareholder vote on the merger agreement.  It turned out that the board’s prerogative depended upon a friction: the collective action costs of shareholder override given the dispersed ownership of a large public corporation.  The key element of the hostile takeover was the control entrepreneur’s ability to overcome this friction through a tender offer to obtain at least a majority of shares to be able to remove directors or to prevail at the next annual meeting.  By imposing a severe economic penalty for crossing a particular sub-control threshold, the pill blocked the tender offer as a form of structural work-around.  Another critical feature, however, was the retention by the board of the power to redeem the pill before a party crossed the ownership threshold.  This element induced the would-be acquirer to negotiate with the board.  Thus, the post-pill board had approval rights over merger terms prior to shareholder action, restoring the structural status quo.

The initial justification for the re-establishment of this status quo was the “threat” that particular bids presented to the shareholders, whose inability to coordinate required intervention of the board.  The initial threat, pivotal in both Unocal and Moran v. Household Int’l, Inc.[16], was the “structural coercion” inherent in a front-loaded two-tier bid, in which the bid structure could induce tendering even by shareholders whose reservation price was above the bid price. On the assumption that your own vote was not pivotal, the rational response to such a bid was to tender, even if you believed the offer was too low, since if it turned out that the offer succeeded, you would at least receive a mix that included the higher front-end consideration rather than entirely the lower back-end.

With the assist of capital market developments, bidders turned to “any and all” cash offers which were designed to avoid the objection of Unocal. The pivotal case is Paramount v. Time,[17] decided in 1989, in which the Delaware Supreme Court decided that such a bid could nevertheless be subject to a preclusive defensive tactic.  This paved the way for a target’s invocation of a “just say no” defense in the refusal to redeem a pill when confronted with an all cash, all shares bid.[18]  The case is commonly regarded[19] as having embraced a theory that “substantive coercion” – a bid whose apparent appeal can misdirect shareholder judgment – is the “threat” that justifies such measures.  The notion of “substantive coercion” is introduced only in a footnote, however.[20]   Rather, the opinion is framed in terms of protecting board prerogative:

Plaintiffs’ position represents a fundamental misconception of our standard of review under Unocal principally because it would involve the court in substituting its judgment as to what is a “better” deal for that of a corporation’s board of directors.[21]

In short, the case stands for Delaware’s “board-centric” approach when it comes to mergers and acquisitions.  The board can authorize target defense tactics against a share purchase offer made to shareholders in which formally the company is a bystander because actions that would result in a merger ought to be vetted by the board in the first instance.  The subsequent cases that establish the need for a “fiduciary out” in a merger agreement rest on the distinctive role of the target board in initiating and superintending a merger.[22]  The subsequent cases that bar pill provisions that would limit the authority of a post-proxy contest directors focus on the “fundamental importance” of the board’s responsibilities in “negotiating a possible sale of the corporation.”[23]

In creating “board centrism” in the case of mergers, the Delaware courts did not establish a self-perpetuating board or “Platonic masters.”[24]  Just the opposite: Business disputes are to bechanneled through the corporate governance machinery in which director elections are the means by which shareholders can exert control over the direction of the firm.  Indeed, the shareholder franchise has been accepted as a cornerstone principle of the legitimacy of director authority.   In the famous phrasing of Chancellor Allen in Blasius:

The shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests…. [I]t is critical to the theory that legitimates the exercise of power by some (directors and officers) over vast aggregations of property that they do not own. [25]

In this respect, shareholder activism reflects the triumph of Delaware’s board-centric governance. Like a hostile bidder, an activist takes its proposal initially to the board.  But if rejected, the activist’s next move is different:  not a tender offer but a proxy contest; not generally even a contest for a majority of board seats, but a short-slate contest for a serious voice in the boardroom and perhaps an alternative strategic plan. Because an activist starts with only a small percentage of the company’s stock and no intention to obtain a control block, the activist ultimately must persuade the large institutional owners that are the majority owners of most large public corporations.  Such persuasion requires communication with other shareholders and can well lead to communication among shareholders who are trying to assess the arguments and rebuttals of the activists and the insurgents.  The core of shareholder governance is debate and deliberation.[26]

Reflection on Moran v. Household Int’l reminds us of how far the activist pill has deviated from the original justification for its extraordinary discrimination against a stockholder.[27] The plaintiff objected that the 20 percent trigger in the Household pill “fundamentally restricts stockholders’ right to conduct a proxy contest.”[28]  The court’s response was that, while the threshold would “deter” some proxy efforts, it would not necessarily “frustrate” them. In other words, the impediments to waging a proxy battle were a regrettable (but not fatal) side effect of the pill’s protection against the threat of a coercive bid.

The Anti-Activist Pill

By contrast, in an anti-activist pill, the regrettable side effect is precisely the point.  That is, the activist has no plan to push through a merger with a hostile bid, coercive in one way or another. The activist has no plans to obtain a change in control that could be a prelude to a merger. Rather, the activist is pursuing a change in the corporation’s business plan and perhaps board representation and is using the possibility of a proxy contest – a contested election of directors – to promote this objective. The very point of the activist pill is to disrupt the possibility of a proxy contest, for without that credible threat, the activist has no power. Without a credible threat of a proxy contest, the shareholder activist is a kibitzing gadfly.

The anti-activist pill in The Williams Company Shareholder Litigation is simply a representative example of all such pills. A low ownership trigger of course reduces the prospects for success in a proxy contest.  A low trigger means the activist can immediately command fewer votes; more shareholders must be persuaded.  A low trigger also caps the activist’s “skin in the game,” which could undercut the activist’s credibility with the shareholders it must persuade as well as limiting the activist’s economic upside, which is tied to share appreciation.[29]   But as the recent Exxon-Mobil proxy contest illustrated, a low threshold does not necessarily make a successful proxy contest “unattainable.”  For the largest corporations, with market capitalizations in the $10s or $100s of billions, serious skin-in-the game begins below 5 percent.[30]

The evil genius in the anti-activist pill is the effort to disrupt shareholder communication through an over broad definition of “beneficial owner.”  Recall that the definition of “beneficial ownership” in the Section 13(d) regulations focuses on  “having or sharing” “voting power” and “investment power” and that acquisition of beneficial ownership through a “group” requires parties to “agree to act together.”[31] The added concepts of parallelism, acting towards a common goal, chain-linked to parties you may not know, expands the idea of  “sharing” power and “agreement” without discernible boundaries.  This afternoon perhaps 30,000 people will have acted in parallel to buy tickets to a Yankees game with the common purpose of influencing the outcome through simultaneous cheering (or perhaps booing), and many will buy tickets and go precisely because they know others are acting in the same way.  So under the activist pill definitions, they may be “acting in concert.” Playing with the definition in this way is sport, but where a financial fiduciary faces the risk that its position in a particular company’s stock is at risk of substantial dilution because of a shallow interaction, that will chill communication.

Notice the reinforcing interaction between the low pill triggers and the capacious definition of beneficial ownership.  A low pill trigger is an immediate impediment because it reduces the prospective activist’s potential upside.  The all-inclusive definition of beneficial ownership is an impediment because it makes organization and success in a proxy contest more difficult.  Yet the two reinforce one another, perversely: The lower the pill trigger, the greater the need to bring along other shareholders for success in a proxy contest.  Yet as such organizational activity becomes more widespread, the greater the risk that other shareholders will be snared as “beneficial owners.”  With a low pill trigger, the activist will necessarily depend upon various forms of parallel and common behavior for success; yet it is those actions that present serious risks of economic harm to shareholders who could be found to be “beneficial owners” under the activist pill’s definition.  The features of an anti-activist pill are not separately impediments to a proxy contest; the low pill threshold and the high risks of communication or even common behavior and purpose are designed to work together to provide protection and insulation.

To recap: The original “poison pill” was designed to restore the structural status quo in the board’s plenary power to vet and approve mergers in which the company would be acquired. It has been repurposed as an anti-activist pill for an altogether different (and illegitimate) purpose: to disrupt the capacity of a shareholder activist to mobilize the election machinery to resolve a disagreement over business strategy.[32]

This difference becomes apparent in considering one the essential features of a pill: the board’s reserved redemption right. Until the part(ies) cross the beneficial ownership threshold, the board has the capacity to redeem the pill.  Notice how differently this functions in the context of a potential hostile bid and in a proxy contest.  In the case of the bid, the board’s redemption right serves as the mechanism to channel merger proposals for board vetting; if the board approves, friendly negotiations ensue and the board redeems the pill. The pill (or a “shadow pill”) can be used by the board to facilitate negotiations among several competing friendly bidders; the pill guarantees that none of the bidders can steal a march through a tender offer. The pill and its redemption enable the board to vet all possible mergers and orchestrate the competition.

How would this work in the case of the anti-activist pill?  Well obviously it wouldn’t.  “We want to challenge your control of the corporation because you have made strategic and operational mistakes.  Please give us permission to acquire more stock to give us greater economic upside and permission to enlist other shareholders in this venture.”  Really?  It is the misfit of the redemption right that emphasizes how the anti-activist pill is an illegitimate effort to supplant the shareholders’ core corporate governance rights. The pill does not work without a redemption right; it becomes a dead-hand pill squared. As Chancellor Chandler observed, the pill on its face is preclusive; it is the viability of a proxy contest that could lead to its redemption that is its saving grace. [33]  Yet it is the very point of an anti-activist pill to interfere with prospects for a successful proxy contest by a party that is not seeking a merger.

In the case of proxy contest where the objective is to replace incumbents with directors who might look more favorably upon a proposed merger, the bidder’s need to acquire a significant block of stock, or for there to significant deliberation among shareholders, are both low. If the bidder couples its proxy contest with a conditional cash tender offer, virtually the only issue for the other shareholders is the bid’s adequacy.  The shareholders do not need persuasion on potential private benefits extraction by a new controller, or the desirability of a new business plan, or board room dynamics.  By contrast, in a proxy contest waged by an activist, these are very real issues; they will arise at all stages in the run-up to an actual proxy battle as an activist considers its strategy, and an anti-activist pill is aimed against the necessary deliberation among shareholders. The actions that make a proxy contest feasible trigger the pill’s economic penalty.

Thus it’s clear: The goal of the anti-activist pill is to preclude challenges to the board’s power.  This is vote suppression, corporate style.  Under current conceptions of Delaware law, it cannot stand. There is no “compelling justification” that would sustain such an action. Chancellor McCormick was surely right that The Williams Company pill fails under Unocal as a disproportionate response.  But as Chancellor Allen said in Stahl v. Apple Bancorp[34], Blasius is the right standard for a pill, like the anti-activist pill in this case, that “represent[s] action taken for the primary purpose of interfering with the exercise of the shareholders’ right to elect directors.”  The importance of the shareholder franchise was recently underscored by Chief Justice Seitz in Coster v. UIP Companies, Inc.[35] in an opinion that fully embraced Blasius and its progeny. “[T]o invoke Blasius the challenged board action ‘only need[s] to be taken for the primary purpose of interfering with or impeding the effectiveness of the stockholder vote in a contested election for directors.’”[36]  This is indeed the objective of the anti-activist pill in The Williams Companies Stockholder Litigation, and the Delaware Supreme Court should be forthright in its defense of shareholder democracy.

ENDNOTES

[1] See John C. Coffee and Darius Palia, The Wolf at the Door: The Impact of Hedge Fund Activism on Corporate Governance, 1 Annals Corp. Governance 1 (2016).

[2] See generally Leo Strine, Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System, 126 Yale L.J. 1870 (2017).

[3] This is Senator Elizabeth Warren’s Accountable Capitalism Act, S.3348, 115^th Cong (2017-18) initially introduced Aug. 15, 2018, reintroduced as S.3215, 116h Cong. (2019-2020) (Jan. 16, 2020).

[4] President Joseph Biden, Remarks by President Biden on the Economy (May 27, 2021) (speech at Cuyahoga Community College).

[5] For example, the series of cases attempting to govern freeze-out mergers and going-private transactions and then refashioning the appraisal remedy and appropriate fiduciary standards, beginning with Singer v. Magnavox, 380 A.2d 969 (Del. 1977) and culminating with Weinberger v. UOP, 457A.2d 701 (Del. 1983) (refashioning appraisal remedy to avoid prior opportunistic use of “Delaware block” and heightening fiduciary standards at a time when federalization of corporate law was under discussion).

[6] See, e.g.,  Del. Gen. Corp. L. § 112 (2009), adopting shareholder proxy access legislation at a time of concerted proposals for a federal proxy access mandate.

[7] See Mark J. Roe, Delaware and Washington as Corporate Lawmakers, 34 Del. J. Corp. L. 1 (2009).

[8] 125 A.3d 304 (2015) (disinterested majority shareholder approval in an arm’s length merger provides a basis for dismissing a suit seeking post-closing damages before discovery and other litigation elements that create settlement value). See James D. Cox & Randall S. Thomas, Delaware’s Retreat: Exploring Developing Fissures and Tectonic Shifts in Delaware Corporate Law, 42 Del. J. Corp. L. 323 (2018).

[9] 129 A.3d. 885 (Del Ch. 2016) (rejecting proposed class action settlement providing only unimportant additional disclosure prior to shareholder vote but including a global release of possible fiduciary claims). See generally Matthew D. Cain, Jill Fisch, Steven Davidoff Solomon & Randall S. Thomas, The Shifting Tides of Merger Litigation, 71 Vand. L. Rev. 603 (2018).

[10] See Wei Jiang, Tao Li & Randall Thomas, The Long Rise and Quick Fall of Appraisal Arbitrage, 100 B.U. L. Rev.  2133 (2020).

[11] See Matthew Levine,  Exxon Lost a Climate Proxy Fight, Bloomberg, May 27, 2021 (describing interaction between ESG activist and asset managers).

[12]  Coster v. UIP Companies, Inc., 2021 WL 2644094 (Del. Supr. June 28, 2021).

[13]  Del. Gen. Corp. L. § 157 (a), (b) (issuance of rights to acquire stock);

[14]  Del. Gen. Corp. L. § 151(a), (g) (board authority to specify terms of a new class of stock).

[15]  Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. Supr. 1985).

[16] 500 A.2d 1346 (Del. Supr. 1985).

[17] Paramount Communications, Inc. v. Time, Inc., 571 A.2d 1140 (Del. Supr. 1990).

[18] See Jeffrey N. Gordon, Corporations, Markets and Courts, 91 Colum. L. Rev. 1931 (1991) (discussing implications of Time.)

[19] See Air Products and Chem., Inc v. Airgas, Inc., 16 A.3d 48, 108-110 (Del. Ch. 2011) (Chandler, Ch.).  This is an opinion that I assign in a mergers and acquisitions course for its compact discussion of the Delaware law of target defensive measures.

[20] Footnote 17, discussing the concept as introduced in Ronald J. Gilson & Reinier Kraakman, Delaware’s Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, 44 The Business Lawyer, 247, 267 (1989).

[21] 571 A.2d at 1153.

[22] ACE Ltd. v. Capital Re Corp., 747 A.2d 95 (Del Ch. 1999); Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d 34, 48 (1993) (deal protection provisions in merger agreement “may not validly define or limit the directors’ fiduciary duties under Delaware law or prevent the [target] directors from carrying out their fiduciary duties under Delaware law”).

[23] Quickturn Design Systems, Inc. v. Shapiro, 721 A.2d 1281, 1292-93 (Del. Supr. 1998); Carmody v. Toll Brothers, Inc., 998 WL 418896 (Del. Ch. July 24, 1998).

[24] See Blasius Industries, Inc. v Atlas Corp., 564 A.2d 651, 663 (Del. Ch. 1988) (Allen, Ch.)

[25] Id. at  659.  See also 662 & 662 n.2; Accord, MM Cos. v. Liquid Audio, 813 A.2d 1118 (Del Supr. 2003); Coster v. UIP Companies, Inc., 2021 WL 2644094 (Del. Supr. June 28, 2021).

[26] See Edward Rock and Marcel Kahan, Anti-Activist Poison Pills, 99 B.U. L. Rev 915 (2019).

[27] Until Unocal and then Moran no Delaware case had permitted the discrimination against a shareholder that is the heart of a pill.  The citation to Cheff v. Mathes, 199 A.2d 548 (Del. Supr 1964) and other cases entailing “greenmail” are inapt.  The “discrimination” in such cases runs in favor of the greenmailer, who in any event has consented to the transaction; the potentially discriminated-against parties are the remaining shareholders.  They are both the shareholder majority (so can discipline the errant officers and directors) and are purportedly benefited, not injured, by the disparate treatment, which rids the corporation of a raider whose plan would purportedly reduce shareholder value.

[28] Moran, 500 A.2d at 1355.

[29] See generally Ronald J. Gilson and Jeffrey N. Gordon, The Agency Costs of Agency Capitalism: Activist Investors and the Reevaluation of Governance Rights, 113 Colum. L. Rev. 863 (2013) (discussing how an activist gains credibility).  See also Kahan & Rock, supra note –, at 923-925 (importance of pill thresholds to activists if not necessarily hostile bidders).

[30] Compare Icahn Amps Up Pressure on Apple, but His Stake Limits His Leverage (NY Times, Oct. 24, 2013) with Carl Icahn Sold Apple Too Soon & It Cost Him $3.7B (Forbes, Nov. 10, 2017) (earning $2 billion profit while pushing for subsequently executed stock buybacks; maximum ownership percentage approximately 0.9% ).

[31] See 15 CFR §§ 240.13d-3, 13d-5 (b)(1).

[32] The NOL pill validated in Versata Enterprises, Inc. v. Selectica, 5 A.3d 586  (Del Supr. 2010) is a one-off.  Because of the peculiarities of the federal tax regime governing net operating loss carryforwards, the very act of acquiring 5 percent or more of a company’s stock could cause harm.  Such an acquisition in combination with stock purchases by other shareholders could subject the company to an unwanted (by anyone) “ownership change.”  A pill designed to forestall a “creeping tender offer,” see Yucaipa American Alliance Fund II v. Riggio, 1 A.3d 310 (Del. 2010), is once again designed to protect the structural primacy of the board in negotiating mergers or a change in control that is foreseeably a prelude to a merger.

[33] Air Products, 16 A.3d at 122 n. 480.

[34] 1990 WL 114222 (Del. Ch. Aug 9, 1990) at *7.

[35] 2021 WL 2644094 (Del. Supr. June 28, 2021).

[36] Id at *8, citing MM Cos. Inc. v. Liquid Audio, Inc., supra, 813 A.2d at 1132.

This post comes to us from Jeffrey N. Gordon, the Richard Paul Richman Professor at Columbia Law School. Professor Gordon would like to acknowledge helpful discussion with Leo Strine.