In Re Williams Companies Stockholder Litigation

Facts

A 'poison pill,' is a device that came to popularity in the 1980s as a response to front-end loaded, two-tiered tender offers. Ps challenge an anti-activist pill adopted by the board of directors of The Williams Companies, Inc. at the outset of the COVID-19 pandemic and amid a global oil price war. This pill is unprecedented in that it contains a more extreme combination of features than any pill previously evaluated-a 5% trigger threshold, an expansive definition of 'acting in concert,' and a narrow definition of 'passive investor.' Williams is a publicly traded Delaware corporation that owns and operates natural gas infrastructure assets, including over 30,000 miles of pipelines and 28 processing facilities, and handles approximately 30% of the nation's natural gas volumes. There were approximately 1.2 billion shares of Williams common stock outstanding. Its capitalization ranged from approximately $11.22 to $27.54 billion. About 50% of Williams' outstanding shares are owned by approximately twenty institutional investors. Williams' largest three stockholders-Blackrock, Vanguard, and State Street-collectively hold almost a quarter of the Company's common stock. Directors are elected annually for terms of one year. Williams stockholders have the right to remove directors without cause and to act by written consent. As of March 2020, the Board comprised twelve members-CEO Alan Armstrong and eleven outside directors. The complaint names as defendants Armstrong and ten of the outside directors. Before the Wuhan Flu, the stock price traded at a high of $24.04 and had been relatively stable over the preceding months. The pandemic and the ensuing oil price war between Saudi Arabia and Russia shocked the oil market and sent stock prices plummeting. The stock price fell to $18.90 by the end of February 2020. Trading volume was high and fluctuated dramatically from day to day, indicating 'a lot of unusual and short-term-type trading.' The stock was approaching lows similar to those in 2010 and 2016, despite the fact that earnings were 25% higher and the Company was carrying significantly less debt. The Board discussed a share repurchase program but opted to preserve liquidity and continue to de-leverage instead. On March 8, 2020, Saudi Arabia cut prices in reaction to Russia's conduct. The following day energy stocks 'fell to their lowest levels in 15 years, dropping 20% in a single day.' The stock closed at $14.99 on March 9, 2020. By March 19, the price had fallen to approximately $11, which was close to a 55% decline since January 2020. Outside director Cogut conceived of an alternative to the repurchase program. Cogut, a retired lawyer who had led the M&A and private equity practices of a prominent New York law firm, had joined the Board in 2016. Cogut had helped clients adopt rights plans roughly a dozen times beginning in the 1980s. Williams had an 'on-the-shelf' pill (the 'Shelf Pill')-a rights plan that the Company could quickly adopt in the event a threat arose. The Board considered a 'refreshment' of the Shelf Pill every so often; the last such refreshment took place in October 2019. Cogut felt that the 'circumstances that existed because of the pandemic' warranted 'a different type of pill.' The 'uncertainty' in the market required a solution that could 'insulate' management from activists 'who were trying to influence the control of the company.' The goal was to prevent 'any activism that would influence control over the company at an aggregate level above 5 percent.' Cogut proposed 'a shareholder rights agreement with a 5% triggering threshold, a one-year duration, and an exclusion for passive investors.' The plan was drafted and circulated among the directors and management. The plan and its purposes and market reactions were discussed in formal meetings and outside of them as well for a few days. Morgan Stanley informed the Board that: (a) only 2% of rights plans had triggers below 10%; (b) 76% of rights plans 'set the trigger' between 15% and 20%; and (c) '[n]o precedents exist below 5%.'The presentation did not cover any other provisions of the Plan. It further identified a substantial decline in active rights plans among public companies-only 55 at the end of 2019, down from a high of 946 at the end of 2009. Following a short discussion, the Board unanimously resolved to adopt a stockholder rights plan 'in substantially the form presented at the March 19th meeting.' The March 19 meeting, initially scheduled to last for one hour, adjourned after forty minutes. On March 20, 2020, the Company issued a press release that publicly disclosed the Board's adoption of the Plan (the 'March 20 Press Release').On March 30, 2020, the Company supplemented the 2020 Proxy Statement to disclose the Plan's adoption. The Board elected not to subject the Plan to a stockholder vote. The Plan was to expire at the end of one year and has four key features: (i) a 5% trigger; (ii) a definition of 'acquiring person' that captures beneficial ownership as well as ownership of certain derivative interests, such as warrants and options; (iii) an 'acting in concert' provision that extends to parallel conduct and includes a 'daisy chain' concept (the 'AIC Provision'); and (iv) a limited 'passive investor' exemption. The Board discussions focused almost exclusively on the 5% trigger.

Section 13(d) of the Securities Exchange Act (the 'Exchange Act') requires that non-passive investors report 'beneficial ownership' of more than 5% of a class of stock but gives investors a ten-day window to report ownership levels using a Schedule 13D form. During that window, the investor is permitted to continue accumulating stock. Section 13(d) does not include derivative securities in the definition of 'beneficial ownership.' Section 13(d) aggregates the beneficial ownership of investors who are acting in concert, which under the Exchange Act occurs where 'two or more persons agree to act together for the purpose of acquiring, holding, voting or disposing of equity securities of an issuer.'1Section 13(d)'s definition of 'acting in concert' does not capture 'parallel conduct' nor a 'daisy chain' concept. Section 13(d) excludes 'passive investors,' defined as persons who acquired 'securities in the ordinary course of [their] business and not with the purpose nor with the effect of changing or influence the control of the issuer.'

The trigger threshold was 5% or more which at its current price would be $650 million. The Plan's definition of 'beneficial ownership' starts with the definition found in Rule 13d-3 of the Exchange Act, then extends more broadly to include 'certain c] synthetic interests in securities created by derivative positions,' such as warrants and options. The AIC Provision deems a Person to be 'Acting in Concert' with another where the Person: (1) 'knowingly acts . . . in concert or in parallel . . . or towards a common goal' with another; (2) if the goal 'relates to changing or influencing the control of the Company or [is] in connection with or as a participant in any transaction having that purpose or effect;' (3) where each Person is 'conscious of the other Person's conduct' and 'this awareness is an element in their respective decision-making processes;' and (4) there is the presence of at least one additional factor to be determined by the Board, 'which additional factors may include exchanging information, attending meetings, conducting discussions, or making or soliciting invitations to act in concert or in parallel.' The fourth factor of this definition gives the Board 'a great amount of latitude' for making the 'Acting in Concert' determination. The AIC Provision does not apply to a public proxy solicitation or tender offer. The Plan defines 'Passive Investor' as quite narrow. At the time the Board adopted the Plan, Williams had only three 13G filers in its stock: BlackRock, Vanguard, and State Street. On April 14, 2020, Williams management held an investors call. Their stated 'Rationale for Adoption' was to 'prevent an opportunistic party from achieving substantial influence or control without paying a control premium to other stockholders.' They selected the 5% threshold because with 'stock market prices so dislocated from fundamental values, a threshold above 5% would allow enormous accumulations by non-passive investors (all passive investors are exempt)' and because of the Company's 'recent past experiences with activism,' when 'Corvex and Sorobon [sic] owned, either as beneficial owners or as economic interest owners, 9.96% of the Company's outstanding shares. Neither owned more than 5%.' 'Many activist campaigns are conducted at levels below 10% ownership; a level higher than 5% simply does not protect a company against an opportunist.' 'The Rights plan is intended to . . . reduce the likelihood of those seeking short-term gains taking advantage of current market conditions at the expense of the long-term interests of stockholders, or of any person or group gaining control of Williams through open market accumulation or other tactics without paying an appropriate control premium.' The Board had the authority to redeem or amend the Plan, but it remains in place. The stock price has substantially recovered. By June 8, 2020, Williams's stock price had returned to $21.58; it closed at $21.68 on August 24, 2020. Wolosky (P) filed this litigation on August 27, 2020, asserting a claim for breach of fiduciary duty against Ds seeking declaratory and injunctive relief regarding the validity and enforceability of the Plan. The court certified a class defined as: 'all record and beneficial holders of company common stock who held stock as of March 20, 2020, and who continue to hold stock through and including the date on which the rights plan expires or is withdrawn, redeemed, exercised or otherwise eliminated,' excluding Ds. The board identified three reasons for adopting the plan: (1) a generalized concern about potential stockholder activism; (2) a concern that activists could pursue short-term agendas without caring about the long-term company health; and (3) a desire to detect attempts by activists to rapidly accumulate substantial amounts of stock, known as lightning-strike attacks.

Issues

Rule of Law

Holding and Decision

Legal Analysis

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