April 1, 2020
Authored by: Taavi Annus, William Seabaugh and R. Randall Wang
As public companies watch sharp market declines in their stock prices, many are wondering how they should respond.
A number of companies have adopted shelf rights plans that are reviewed by the board of directors on a “clear day” — in the absence of any takeover or activist activity — and at reasonable intervals. The plan would be adopted at a future date if deemed warranted, after consulting with legal and financial advisors. Shelf plans became popular over the past 15-20 years as institutional investors and proxy advisors expressed strong opposition to rights plans generally, unless short-term in nature and approved or ratified by shareholders.
Typically, a shelf rights plan can be adopted quickly by the board in response to a threat. However, it should be noted that HSR rules only require notification where the acquirer would hold total voting securities in excess of $94 million, which represents almost 20% of a $500 million market cap company. And a Schedule 13D needs only be filed within 10 days after acquiring beneficial ownership of more than 5%. Further, state takeover statutes may have thresholds of 15% or 20% beneficial ownership. As a result, in light of lower stock prices and high trading volumes, a potential acquirer might accumulate a large percentage of a company’s shares before the board becomes aware of that fact and is able to adopt the plan.
Under Delaware law, the adoption of a rights plan in the absence of a takeover threat would likely be subject to