Article Archives

New York partner Anne Champion and associate Lee Crain are the authors of “Press Pools Protect 1st Amendment During Pandemic,” [PDF] published by Law360 on April 7, 2020.

Washington, D.C. partner Joshua Lipshutz and Los Angeles partner Michael Holecek are the authors of “Gig-Worker Classification in the Age of COVID-19,” [PDF] published in The Recorder on April 3, 2020.

Paris associate Alexis Downe is the author of “The choice of French Law for the new ISDA Master Agreement: Part 2” [PDF] published by the Buttersworths Journal of International Banking and Financial Law in April 2020.

By: Eduardo Gallardo, Partner, New York

The public health crisis caused by COVID-19 has had a dramatic economic impact on the trading prices of U.S. companies across all industries. As boards of directors and management teams work to stabilize their operations and deal with the myriad issues caused by the pandemic, we have witnessed a number of opportunistic shareholder activists accumulating stakes in publicly traded targets. In the current environment, boards and their advisors should take, and several already have taken, a fresh look at the implementation of a shareholder rights plan (aka “poison pill”).

Rights plans were a permanent fixture in most public companies’ defensive profile until the turn of century, when various governance and proxy advisory groups began an effective campaign to pressure companies into letting expire, or terminating, their rights plans. This is reflected in the fact that, according to SharkRepellent, only approximately 1% of companies in the S&P 500 had an active rights plan in place as of March 1, 2020, while around the year 2000 approximately 60% of the S&P 500 had one. Instead of maintaining standing long-term rights plans as a general defensive measure, many companies have kept rights plans in draft form “on the shelf”—ready for implementation if needed. Under the existing extraordinary market conditions, companies in particularly affected sectors should evaluate the advisability of activating on-the-shelf plans.

In assessing whether to activate a rights plan, companies should consider the following:

Presence of Activist: Companies that already have an activist in their stock should closely monitor for potential accelerated accumulations. We recommend that boards take prompt action in the event there is a clear indication that the activist is proceeding with any aggressive accumulation of additional shares.
Schedule 13D: Federal securities rules and regulations require an activist or hostile bidder to publicly file a Schedule 13D within ten days after crossing the 5% ownership threshold. However, after the initial threshold is crossed, accumulations can continue during the ten-day filing window, such that the buyer could launch its public campaign after having acquired an ownership stake well over the 5% threshold. This is particularly important to consider for companies that are seeing increased trading volumes that might facilitate rapid accumulations of large blocks of stock. Companies should also keep in mind that currently SEC rules do not require the aggregation of certain derivative instruments in computing whether the 5% threshold has been crossed, a loophole often used by professional activists to conceal their economic exposure to a target.

It is important to note that, following the filing of an initial Schedule 13D, an activist will be required to file an amendment within one or two business days after each time it acquires an additional one percent of the class of securities. For a company with an existing activist, this amendment might be a good early-warning indicator of when to activate a rights plan.

HSR Filing Obligation: The Hart-Scott-Rodino Antitrust Improvements Act of 1976 generally requires a filing with the Federal Trade Commission and U.S. Department of Justice (with notice to the target company) and subsequent observation of the statutory waiting period before a person can acquire and, as a result of the acquisition, hold more than $94 million in shares for non-passive purposes. Although somewhat peculiar, for larger publicly traded companies, this antitrust rule generally establishes a more effective warning system against aggressive stock accumulations than Schedule 13D does under federal securities laws. However, the HSR filing obligations may not apply to groups of fund vehicles, as well as many derivative instruments, some of which are specifically designed with this purpose in mind. As a result, the HSR filings may not always provide the advance notice of an activist.
ISS Considerations: One of the main deterrents against adoption of rights plans in recent years has been the fact that the proxy advisory firm Institutional Shareholder Services (ISS) will generally recommend votes against incumbent director nominees at annual meetings where the company has recently adopted a rights plan with a term of more than one year. However, for plans with a duration of less than a year, ISS will make its recommendations on a case-by-case basis taking into account the disclosed rationale for adopting the plan and other relevant factors (such as a commitment to put any renewal of the pill to a shareholder vote).

We believe that existing market conditions should be strongly considered and taken into account by ISS when reviewing cases, particularly where the board articulates a clear rationale for implementation of the rights plan. Companies should also consider whether they previously adopted a governance policy promising to seek stockholder approval prior to adopting a rights plan unless the board, in the exercise of its fiduciary duties, determines that it is in the best interests of the company and stockholders to do so before seeking approval. Such policies should not deter adoption but typically also provide that any rights plan adopted without shareholder approval will expire unless approved by shareholders within the next year.

Duration: As a general matter, we believe that most companies that implement a plan in the coming weeks should consider an expiration date between six and nine months of adoption, and we have recently advised clients to adopt plans that expire on December 31, 2020. We believe that date strikes the right balance between adopting an instrument that protects shareholder value in this uncertain environment and mitigating against the potential criticism from governance groups. Of course, the board will always have the power to accelerate the term if it deems it in the best interests of the company and its shareholders.
Net Operating Losses (“NOLs”): For companies with NOLs, a deemed “ownership change” under Internal Revenue Code Section 382 can materially impair or eliminate NOLs. The complex Section 382 test is dependent on shifts of ownership of 5% or greater holders over a rolling three-year period. NOL rights plans have acquisition triggers of 5%—much lower than the customary rights plans—but otherwise are substantially identical to a traditional rights plan. In light of ongoing market volatility and changes in investor positions, for companies with both material NOLs and demonstrable ownership shift percentage under Section 382, an NOL rights plan may make sense.

****

Under the current extraordinary circumstances, companies in particularly vulnerable industries should actively assess the advantages and disadvantages of implementing a rights plan to ensure that all stockholders receive fair and equal treatment in the event of any proposed takeover of the company and to guard against creeping accumulations of control.

For more information, please contact the author Eduardo Gallardo. To view more insights regarding the COVID-19 pandemic, visit our COVID-19 Resource Center.

Orange County partner Blaine Evanson and Washington, D.C. associates Lochlan Shelfer and Jeremy Christiansen are the authors of “Arguments shed light on justices’ thinking in Seila v. CFPB,” [PDF] published by the Daily Journal on March 16, 2020.

Hong Kong partner Michael Nicklin and Singapore partner Jamie Thomas are the authors of “Coronavirus: Time for Companies to have a Financing Check-up whilst the Black Swan is Circling,” [PDF] published by Asian Legal Business on March 13, 2020.

San Francisco partner Ethan Dettmer, Washington, D.C. partner Joshua Lipshutz and San Francisco associate Eli Lazarus are the authors of “High court ruling will allow egregious misconduct to go unchecked,” [PDF] published by the Daily Journal on March 10, 2020.

Brussels partner Peter Alexiadis is the author of “Cartels in the utility sectors: An overview of EU and national case law,” [PDF] published in Concurrences on January 23, 2020.

Frankfurt partner Finn Zeidler is the author of “Aus der Praxis: Privilegierte Klageänderung in der Berufungsinstanz” [PDF] published by zpoblog.de on March 10, 2020.

London partner Sacha Harber-Kelly and associate Steve Melrose are the authors of “Is the Guralp Systems Limited No-Penalty DPA a Tectonic Shift or Factual Peculiarity?,” [PDF] published by the Anti-Corruption Report on February 19, 2020.

Orange County partner Oscar Garza and associates Douglas Levin and Matthew Bouslog are the authors of “Second Circuit Breathes New Life into § 546(e), Answering Unaddressed Question by Merit,” [PDF] published by the American Bankruptcy Institute Journal in its March 2020 issue.

Los Angeles partner James Zelenay Jr. and associate Sean Twomey are the authors of “False Claims Act Enforcement Under the Trump Administration,” [PDF] published by the Daily Journal on February 24, 2020.

Los Angeles partner Abbey Hudson, Los Angeles associate Dione Garlick and Palo Alto associate Collin James Vierra are the authors of “Community Shared Solar: Promising Option For Calif. Builders,” [PDF] published by Law360 on February 26, 2020.

Paris partner Pierre-Emmanuel Fender is the author of “Le rôle du fiduciaire dans une opération de fiducie,” [PDF] published in the n°154 issue of the French publication Revue LAMY Droit des Affaire in December 2019.

Brussels partner Peter Alexiadis and of counsel Alejandro Guerrero are the authors of “Sustainability Priorities and Competition Law Policies – A Meeting of Minds,” [PDF] published in Our World magazine in February 2020.

London partner Ali Nikpay is the author of “Clampdown on mergers could make Britain less competitive” [PDF] published by The Telegraph on February 14, 2020.

Los Angeles partner Abbey Hudson and associates Dione Garlick and Caroline Monroy are the authors of “Calif. Low Carbon Fuel Standard Price Cap Is A Trade-Off,” [PDF] published by Law360 on February 7, 2020.

Orange County partner Blaine Evanson and Washington, D.C. associate Jeremy Christiansen are the authors of “Rimini V. Oracle’s Ripple Effect On Textualism, Expenses,” [PDF] published by Law360 on February 6, 2020.

New York associate Alex Marcellesi is the author of “Guaranteed Payments and Interest: Why Treasury Is Overreaching,” [PDF] published by Tax Notes Federal on December 9, 2019.

As the 2020 legislative session in New York state gets under way, one of the topics on the agenda is sure to be whether New York will for the first time allow New Yorkers to engage in mobile sports betting. In that context, whether the Legislature even has the power to legalize mobile sports wagering, in light of the restrictions on gambling set forth in the state’s Constitution, is an issue that will be front and center. Ultimately, looking to the traditional methods of constitutional interpretation, the state Constitution should not be construed to bar mobile sports wagering in New York State; the Legislature should be free to offer it.

Currently, New York law does not allow mobile sports wagering, unlike the laws of an increasing number of states. But as the Legislature takes up this important issue, the questions surrounding whether New York should authorize mobile sports gambling should ultimately be ones of policy, not constitutionality. Mobile sports wagering can be authorized in New York state consistent with the state Constitution.

Mylan Denerstein, Akiva Shapiro and Lee Crain discuss these developments in their article, which was published in the New York Law Journal:

The Constitutionality of Mobile Sports Wagering in New York State (click on link)

Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues. Please feel free to contact the Gibson Dunn lawyer with whom you usually work, or the authors in New York:

Mylan L. Denerstein – Co-Chair, Public Policy Practice (+1 212-351-3850, [email protected])
Akiva Shapiro (+1 212-351-3830, [email protected])
Lee R. Crain (+1 212-351-2454, [email protected])

Attorney Advertising: The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.