Poison Pill Deep Dive Series:
Acting in Concert

The third of a six-part series examining six specific and evolving rights plan provisions.

As discussed in greater detail in some of our prior articles,[1] a shareholder rights plan is a protective measure used by a public company to deter (though not necessarily prevent) a stockholder from exceeding a specified ownership percentage (the “ownership threshold”) without prior approval from the company’s board.

We have prepared a series of articles on some of the interesting and evolving features of rights plans and the various considerations that go along with them. This article is the third in the series and focuses on provisions in rights plans that expand the circumstances in which stockholders will be grouped together and have their ownership aggregated to account for stockholders acting with some amount of collective intent and coordination.

Acting in Concert

Rights plans traditionally have been drafted to apply the ownership threshold to the aggregated ownership of certain groups of stockholders. Specifically, the definition of beneficial ownership in most rights plans has included securities that are subject to any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of a company’s securities—borrowing from the definition of beneficial ownership for purposes of Regulation 13D under the Securities Exchange Act of 1934 (the “Exchange Act”).[2] To be clear, though, rights plans typically exclude from the definition a right to vote that arises from a revocable proxy given in response to a public solicitation made pursuant to the Exchange Act.

Over the years, especially the past decade, however, increased investor activism (particularly hedge fund activism) has given rise to stockholders coordinating their activities in ways not captured by the traditional definition of beneficial ownership. A chief example of this is hedge funds with small stakes in companies (i.e., less than 5%) coordinating in a way that aggregates to a large block of stock that allows them greater leverage to influence management. Hedge funds with the same or similar (often short-term) objective may form a loose network and communicate informally. When they act in concert or in parallel to effect change at a company, they may do so without any formal or even tacit agreements. Because there is no actual agreement, arrangement or understanding, the traditional definition of beneficial ownership will not always capture their coordination.

To protect against this type of stockholder activity, some companies have included “acting in concert” provisions in their rights plans that broaden the traditional definition of beneficial ownership to capture certain kinds of informal coordination among stockholders. Two types of acting in concert provisions have emerged: (1) an express provision and (2) a general provision. 

• Express provision: Under an express provision, a person is deemed to beneficially own any shares that are beneficially owned by any other person with respect to which such person is “Acting in Concert.”

“Acting in Concert” then is defined to provide, with some potential variations, that a person will be deemed to be “Acting in Concert” with another person if such person knowingly acts (whether or not pursuant to an express agreement, arrangement or understanding) at any time after the first public announcement of the adoption of this Right Agreement, in concert or in parallel with such other person, or towards a common goal with such other person, relating to changing or influencing the control of the company or in connection with or as a participant in any transaction having that purpose or effect, where:

(i) each person is conscious of the other person’s conduct, and this awareness is an element in their respective decision-making processes; and

(ii) at least one additional factor supports a determination by the board that such persons intended to act in concert or in parallel, which additional factors may include exchanging information, attending meetings, conducting discussions, or making or soliciting invitations to act in concert or in parallel; provided that the additional factor required shall not include actions by an officer or director of the company acting in such capacities.

The defined term also makes clear that a person is not “Acting In Concert” with another person as a result of (a) making or receiving revocable proxies given in response to a public solicitation made to more than ten stockholders of the company pursuant to the Exchange Act or (b) soliciting or being solicited in connection with a public tender or exchange offer made pursuant to the Exchange Act.

• General Provision: A rights agreement alternatively may provide that a person is deemed to beneficially own any shares which are beneficially owned by any other person with which the first person has any agreement, arrangement or understanding (whether or not in writing) to cooperate in obtaining, changing or influencing control of the company.

Not all rights agreements include an acting in concert provision (for plans adopted since March 1, 2020, about two-thirds had them).[3] If a rights agreement does have an acting in concert provision, it will include either the express provision or the general provision, but not both, as the provisions target the same informal stockholder coordination.

When companies are considering whether to add an acting in concert provision, they should be aware that, while Delaware courts have generally upheld the use of the traditional definition of beneficial ownership in rights plans,[4] the courts have not expressly ruled on triggering percentages that use an acting in concert provision.

In addition, some stockholders have criticized acting in concert provisions as chilling their ability to communicate with other stockholders. For example:

• In the 2017 dispute between Carl Icahn and Sandridge Energy, Icahn criticized an express acting in concert provision as “patently absurd” and “a transparent attempt to preclude large shareholders from communicating with one another and exercising their rights as shareholders.”[5] Sandridge later deleted the acting in concert provision, in order to “ensure there is no unintended consequence that might discourage communications between shareholders…”[6]
• In the 2018 dispute between John Schnatter and Papa John’s, Schnatter criticized an express acting in concert provision, alleging that it prevented him from communicating with other stockholders regarding corporate matters such as opposition to board proposals.[7]

To minimize the potential for stockholder criticism like the above, an acting in concert provision should not be drafted in a way that “fundamentally restricts” a successful proxy contest or otherwise prevents stockholders from communicating with each other in a manner otherwise permissible by the law.

Ultimately, companies should consider the facts and circumstances—particularly any actual threats faced—when determining whether to add an acting in concert provision to their rights plans. For instance, if a rights plan is being adopted in response to an actual hostile takeover launched by a strategic acquiror, an acting in concert provision may be unnecessary and may create needless enforceability concerns and concerns among stockholders; however, if a rights plan is being adopted in response to an activist investor, an acting in concert provision may be warranted.

[1] For more background, see our client alerts, “Protecting Against Opportunistic Acquisitions and Activism – Considering a Stockholder Rights Plan,” “Poison Pill Deep Dive Series: The Inadvertent Triggering Exception” and “Poison Pill Deep Dive Series: Grandfathering Existing Stockholders.”

[2] The definition of beneficial ownership in most rights plans also borrows the definitions of “associates” and “affiliates” from the Exchange Act, expanding the securities deemed to be beneficially owned by a stockholder to include those deemed to be beneficially owned by “associates” or “affiliates” of the stockholder, which are defined under Rule 12b-2 of the Exchange Act as follows:

• an “associate” of a company’s stockholder is (1) any corporation or organization (other than the company or any of its majority-owned subsidiaries) of which the stockholder is an officer or partner or is, directly or indirectly, the beneficial owner of ten percent or more of any class of equity securities, (2) any trust or other estate in which the stockholder has a substantial beneficial interest or as to which the stockholder serves as trustee or in a similar fiduciary capacity, and (3) any relative or spouse of the stockholder, or any relative of the spouse, who has the same home as the stockholder or who is a director or officer of the company or any of the company’s parents or subsidiaries; and
• an “affiliate” of a stockholder is a person that controls, is controlled by, or is under common control with, the stockholder, whether directly or indirectly through one or more intermediaries.

[3] Deal Point Data.

[4] E.g., see Stahl v. Apple Bancorp, Inc., C.A. No. 11510, 1990 WL 114222 (Del. Ch. Aug. 9, 1990).

[5] See Carl Icahn, Letter to the Board of Directors of Sandridge Energy (Nov. 30, 2017), available at: https://carlicahn.com/letter-to-the-board-of-directors-of-sandridge-energy/.

[6] See Sandridge, Letter to Shareholders (Jan. 23, 2018), available at https://www.sec.gov/Archives/edgar/data/1349436/000119312518017581/d511604dex991.html.

[7] See Verified Complaint, Schnatter v. Shapiro, C.A. No. 2018-0646-AGB (Del. Ch.), filed Sept. 5, 2018.