Steve Wolosky has long defended the legal rights of shareholders but having just won his first case as a plaintiff, he hopes boards will be reminded of their duties as guardians of corporate democracy – even in a crisis.
Steve Wolosky's Case Against Williams Companies' Unusual Poison Pill
Steve Wolosky, the doyen of activism lawyers, sued Williams Companies Inc (NYSE:WMB) last year in response to a highly unusual poison pill. A week ago, Delaware’s chancery court ruled in his favor, Vice Chancellor Kathaleen McCormick writing that the pill was "extreme" and disproportionate. If a standard issue poison pill is a form of nuclear deterrence, she noted, the Williams one "increases the range of [the company’s] nuclear missile range by a considerable distance."
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Williams, which did not respond to a request for comment, is able to appeal.
The decision capped a period of anxiety for corporations about activism occasioned by the COVID-19 pandemic (and for some, the oil price crisis) and stems – if just for a moment – experimentation with their legal defenses. Two other poison pills subject to legal challenge, at Tribune and AAR Corp, also crumbled on close inspection. Tribune is expected to roll back some of its provisions and AAR terminated its pill in October.
It has also produced a flurry of legal memoranda, mostly reassuring boards that poison pills have not been undermined in general, but that boards should be careful not to make them "overbroad," in the words of Wachtell Lipton Rosen & Katz, which warned last year that companies should not "rush or race" to adopt pills. Skadden, Arps, Slate, Meagher & Flom, another big corporate law firm, warned that "Proper board preparation and discussion to ensure that directors have a clear understanding of all the key terms of a rights plan and how such terms may differ from other rights plans… [is] critical."
Steve Wolosky, who doesn’t expect this to be the last poison pill to wind up in court, would rather boards relied on performing well to stay out of trouble and alternative legal defenses to prevent takeovers or creeping control. But he hopes the case will at least make companies more cautious in future. "Boards need to critically understand what they're trying to accomplish and the interest they're trying to protect," he told me in an interview.
A Trio Of Aggravating Provisions
At issue in Williams’ pill were a trio of aggravating provisions – a 5% threshold for triggering the dilution of an activist, an acting-in-concert provision that allowed the board considerable latitude in defining offenses, and an exemption for passive investors that caused concern for both BlackRock and Vanguard, according to exhibits referenced by the decision.
The combination was an attempt to impose a 12-month "moratorium" on activism so comprehensive that the plaintiffs described it as "Casey Cogut’s year-off" in a court filing, referencing the director that pushed the concept behind the pill – former Simpson Thacher & Bartlett M&A lawyer Charles Cogut – and the movie Ferris Bueller’s Day Off.
In particular, Wolosky and his team of litigators from Bernstein Litowitz Berger & Grossmann argued that the pill would chill shareholder communication.
The pill’s acting-in-concert provision allowed the board to define whether shareholders were in breach based on circumstances as commonplace as attending the same meetings, as long as their end goals aligned. Furthermore, a "daisy chain" provision could connect additional shareholders to the group, so long as they could be linked to one other member, leaving others in unknowing and unconscious breach.
"This is meant, in my view, to chill conversations among shareholders – even traditional long only investors," Steve Wolosky said. "The language is so broad that it has nothing to do with proxy contests or seeking to take over the company."
The Primary Offender Of The Pill
McCormick herself described the provision as "the primary offender" of the pill. That raises the question of whether other companies might be able to keep ground Williams sought to claim, while avoiding some of its vulnerabilities. A 5% pill, where the directors were better briefed and the drafting more exclusive, is still a hypothetical threat.
But that would still have to answer the question of proportionality. Previous cases "support the proposition that a board can adopt defensive measures in response to concrete action by a stockholder activist," McCormick wrote. "The board’s general concern about stockholder activism is insufficient."
Steve Wolosky feels that he has made his point. "The key achievement was, you had a shareholder rights plan with a number of problematic provisions all in one plan, we had the ability to have those provisions analyzed to see whether they were reasonable," he said yesterday. Lines have been drawn.
Josh Black, Editor-in-Chief, Insightia
Activists Request The SEC To Revise The No-Action Process
On January 26, Ceres, the Interfaith Center on Corporate Responsibility (ICCR), the Forum for Sustainable and Responsible Investment, and the Shareholder Rights Group wrote to the acting chair of the Securities and Exchange Commission (SEC), Allison Herren Lee, requesting the no-action process be revised to allow investors greater latitude to engage with sustainability concerns.
No-action relief, which allows companies to petition the regulator for comfort that they can exclude shareholder proposals from their proxy statement, frequently relies on micromanagement as justification – something shareholder proponents have long complained about. The "radical limitations" of the current framework were criticized this year for excluding proposals worthy of "priority attention."
The SEC has since rejected multiple requests from issuers to exclude shareholder proposals from their proxy statements, perhaps indicating it is taking into account investor concerns and recognizing more issues as material to shareholders. Although it is too early to measure the impact of the change in leadership since the end of 2020, the approval rate for no-action requests has held steady at approximately 50% since 2018, according to Proxy Insight Online data. The proportion of rejected proposals has subtly increased, primarily as a result of an increase in the number of withdrawn proposals.
Earlier this week, the SEC informed Citigroup that two shareholder proposals requesting it to perform a racial diversity audit and disclosure of lobbying activities were both ineligible for exclusion.
Citigroup claimed a proposal filed by union pension fund Change to Win Investment Group (CtW), asking the bank to provide an audit "analyzing Citi’s adverse impacts on non-white stakeholders and communities of color,” was immaterial, considering that the bank already produces ESG and racial inequality reports. Despite this, the SEC rejected the no-action request on February 26.
Citigroup also argued that a proposal seeking disclosure of lobbying payments, filed by Miller/Howard Investments, was "not economically relevant" to the company’s operations because it applied to a small subset of assets and sales, but its exclusion was rejected by the regulator.
On February 12, the SEC denied a request from Johnson & Johnson to exclude a shareholder proposal requesting the U.S. pharmaceutical company to conduct a civil rights audit.
The filer of the proposal, Trillium Asset Management, praised Johnson & Johnson for its commitments to address underrepresentation, but suggested a third-party civil audit would "provide rigorous independent insights, and may reveal additional ways in which [Johnson & Johnson] can have even more impact on systemic racism."
Johnson & Johnson requested no-action relief from the SEC, arguing that the company regularly publishes information on its "work to promote diversity, equity, and inclusion (DEI)," but the regulator demurred.
Some companies have been subject to criticism for their practice of seeking exclusion of multiple shareholder proposals on an annual basis. This year, Amazon has sought to exclude 11 shareholder proposals from its proxy statement, two of which have been excluded and nine still pending assessment. Energy company Chevron’s nine requests for no-action processes has led to two proposal withdrawals and seven requests still pending assessment.
Investors Desire Additional Clarity
When asked for comment, investors expressed their desire for additional clarity regarding the SEC’s rationale for no-action process results.
"While the new leadership is excellent, it is too early in the season to assess whether the new leaders can reverse the problematic developments of the last four years in the no-action process," said Sanford Lewis, director of the Shareholder Rights Group, in an interview with Proxy Insight Online. "Until last year, the staff normally issued written explanations of the rationale for its no-action decisions. So far, the staff is continuing to issue unwritten determinations in most requests, some of which are subject to multiple interpretations. We look forward to taking stock of the range of no-action decisions at the end of the season."
"While we have seen some encouraging signs from the new SEC staff, including some thoughtful written responses on ESG proposals, we still have some concerns," said ICCR CEO Josh Zinner. "For example, we were discouraged that the SEC allowed the exclusion of proposals asking companies to analyze the feasibility of adopting paid sick leave as a standard worker benefit, on the grounds that it did not constitute a significant social policy issue. In the midst of a global pandemic threatening the health of so many front line workers it is difficult to justify this ruling."
Rebecca Sherratt, Corporate Governance Editor, Insightia