The Rejected Threat of Corporate Vote Suppression: The Rise and Fall of the Anti-Activist Pill

Abstract

As disciplinary takeovers are replaced by activist shareholder campaigns, managements may well want to turn to the “anti-activist pill” as shelter from the storm. The economic shock from the widespread shutdown to combat the Covid-19 pandemic produced dozens of so-called “crisis pills.” The defense of these pills as avoiding “disruption” and “distraction” of managements can be seen as a test run for broader use of poison pills to fend off shareholder activism. The Delaware courts, first Chancery and then the Supreme Court, rejected this managerial defense tactic in a way that clarifies the role of the poison pill in corporate governance. In the context of a hostile tender offer, the pill may be legitimated as protecting the statutory “two-step” for a merger: first, screening and negotiating by the board, followed by a shareholder vote on a proposed merger. Delaware’s board-centric model relies on another statutory mechanism—a director election contest—as the appropriate avenue for managerial accountability. Various elements of the poison pill—the cap on share ownership and a definition of “beneficial owner” that goes beyond “record owner”—have unfortunate side effects on election contests but are necessary to prevent unvetted shifts in control via tender offer or the gradual accumulation of stock (a “creeping tender offer”) either directly or with confederates. An anti-activist pill converts these side effects into its very mechanism, precisely to block a successful director election contest. An election contest is different from a tender offer in this critical respect: Success requires persuasion of a shareholder majority who will remain shareholders after the event. A low pill trigger reduces the activist’s economic incentives and can reduce its credibility; a capacious definition of beneficial ownership burdens its task of persuasion. The Delaware Courts’ reaffirmation of the legitimating role of the shareholder franchise is particularly important now, as the set of shareholder activists expands to include ESG activists who will use director election contests to propose broader conceptions of corporate purpose and shareholder value pursuit.