Source: https://casetext.com/case/moran-v-household-intern-inc-2
Timestamp: 2018-11-20 00:09:44
Document Index: 393797456

Matched Legal Cases: ['§ 157', '§ 151', '§ 157', '§ 151', '§ 157', '§ 157', 'art:\n8', '§ 151', '§ 157', '§ 157', '§ 157', '§ 157', '§ 157', '§ 212', '§ 157', '§ 157', '§ 157', '§ 203', '§ 203', '§ 157', '§ 157', '§ 141', '§ 141', '§ 141']

Moran v. Household Intern., Inc, 500 A.2d 1346 | Casetext
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Household Intern., Inc.
Supreme Court of DelawareNov 19, 1985
Loventhal v. Hilton
…Today, rights plans have not only become commonplace in Delaware, but there is not a single state that does…
…The directors satisfy this burden by showing that they acted in good faith and after reasonable…
holding that 8 Del. C. § 157 authorizes the issuance of a "poison pill" defense mechanism
Summary of this case from Testa v. Nixon Uniform Service, Inc.
holding that the mere fact that directors are paid for their services does not impugn their ability to act
holding that a preplanned defensive mechanism should be evaluated under the business judgment rule
Summary of this case from Scheidt v. DRS Technologies, Inc.
…500 A.2d 1346, 1357 (Del. 1985), the court further reasoned that the combination of the NOL pill with…
…500 A.2d 1346 (Del. 1985), the Delaware courts have affirmed the value of shareholder rights plans to boards…
Decided: November 19, 1985. As Amended: November 20, 1985.
Irving S. Shapiro (argued), Rodman Ward, Jr., Stuart L. Shapiro, Stephen P. Lamb, Thomas J. Allingham II and Andrew J. Turezyn of Skadden, Arps, Slate, Meagher Flom, Wilmington, and Michael W. Mitchell, Jeffrey Glekel, Jeremy A. Berman and Joseph A. Guglielmelli of Skadden, Arps, Slate, Meagher Flom, New York City, for plaintiffs below-appellants.
Joseph A. Rosenthal and Norman M. Monhait of Morris and Rosenthal, P.A., Wilmington, and Marshall Patner of Orlikoff, Flamm and Patner, Chicago, Frederick Brace of Brace O'Donnell, and Geoffrey P. Miller (argued), Chicago, Ill., of counsel, for plaintiff intervenor below-appellant.
Charles E. Richards, Jr. (argued), Donald A. Bussard, Jesse A. Finkelstein, and Gregory P. Williams of Richards, Layton Finger, Wilmington, and George A. Katz, William C. Sterling, Jr., Michael W. Schwartz, Eric M. Roth, Warren R. Stern and Karen B. Shaer of Wachtell, Lipton, Rosen Katz, New York City, of counsel, for defendants below-appellees.
Lawrence C. Ashby of Ashby, McKelvie Geddes, Wilmington, Marc P. Cherno, Harvey L. Pitt, Pamela Jarvis of Fried, Frank, Harris, Shriver Jacobson, New York City, amicus curiae, and Matthew P. Fink, Thomas D. Maher, Investment Co. Institute, Washington, D.C., of counsel, for Investment Co. Institute.
Robert J. Katzenstein and Clark W. Furlow of Lassen, Smith, Katzenstein Furlow, Wilmington, and Kurt L. Schultz, Columbus R. Gangemi, Jr., Robert F. Wall, Jerome W. Pope of Winston Strawn, Chicago, Ill., amicus curiae, for the United Food and Commercial Workers Intern. Union.
This case presents to this Court for review the most recent defensive mechanism in the arsenal of corporate takeover weaponry — the Preferred Share Purchase Rights Plan ("Rights Plan" or "Plan"). The validity of this mechanism has attracted national attention. Amici curiae briefs have been filed in support of appellants by the Security and Exchange Commission ("SEC") and the Investment Company Institute. An amicus curiae brief has been filed in support of appellees ("Household") by the United Food and Commercial Workers International Union.
The SEC split 3-2 on whether to intervene in this case. The two dissenting Commissioners have publicly disagreed with the other three as to the merits of the Rights Plan. 17 Securities Regulation Law Report 400; The Wall Street Journal, March 20, 1985, at 6.
In a detailed opinion, the Court of Chancery upheld the Rights Plan as a legitimate exercise of business judgment by Household. Moran v. Household International, Inc., Del. Ch. , 490 A.2d 1059 (1985). We agree, and therefore, affirm the judgment below.
On August 14, 1984, the Board of Directors of Household International, Inc. adopted the Rights Plan by a fourteen to two vote. The intricacies of the Rights Plan are contained in a 48-page document entitled "Rights Agreement". Basically, the Plan provides that Household common stockholders are entitled to the issuance of one Right per common share under certain triggering conditions. There are two triggering events that can activate the Rights. The first is the announcement of a tender offer for 30 percent of Household's shares ("30% trigger") and the second is the acquisition of 20 percent of Household's shares by any single entity or group ("20% trigger").
Household's Board has ten outside directors and six who are members of management. Messrs. Moran (appellant) and Whitehead voted against the Plan. The record reflects that Whitehead voted against the Plan not on its substance but because he thought it was novel and would bring unwanted publicity to Household.
If an announcement of a tender offer for 30 percent of Household's shares is made, the Rights are issued and are immediately exercisable to purchase 1/100 share of new preferred stock for $100 and are redeemable by the Board for $.50 per Right. If 20 percent of Household's shares are acquired by anyone, the Rights are issued and become non-redeemable and are exercisable to purchase 1/100 of a share of preferred. If a Right is not exercised for preferred, and thereafter, a merger or consolidation occurs, the Rights holder can exercise each Right to purchase $200 of the common stock of the tender offeror for $100. This "flip-over" provision of the Rights Plan is at the heart of this controversy.
Household did not adopt its Rights Plan during a battle with a corporate raider, but as a preventive mechanism to ward off future advances. The Vice-Chancellor found that as early as February 1984, Household's management became concerned about the company's vulnerability as a takeover target and began considering amending its charter to render a takeover more difficult. After considering the matter, Household decided not to pursue a fair price amendment.
A fair price amendment to a corporate charter generally requires supermajority approval for certain business combinations and sets minimum price criteria for mergers. Moran, 490 A.2d at 1064, n. 1.
In the meantime, appellant Moran, one of Household's own Directors and also Chairman of the Dyson-Kissner-Moran Corporation, ("D-K-M") which is the largest single stockholder of Household, began discussions concerning a possible leveraged buy-out of Household by D-K-M. D-K-M's financial studies showed that Household's stock was significantly undervalued in relation to the company's break-up value. It is uncontradicted that Moran's suggestion of a leveraged buy-out never progressed beyond the discussion stage.
Concerned about Household's vulnerability to a raider in light of the current takeover climate, Household secured the services of Wachtell, Lipton, Rosen and Katz ("Wachtell, Lipton") and Goldman, Sachs Co. ("Goldman, Sachs") to formulate a takeover policy for recommendation to the Household Board at its August 14 meeting. After a July 31 meeting with a Household Board member and a pre-meeting distribution of material on the potential takeover problem and the proposed Rights Plan, the Board met on August 14, 1984.
Representatives of Wachtell, Lipton and Goldman, Sachs attended the August 14 meeting. The minutes reflect that Mr. Lipton explained to the Board that his recommendation of the Plan was based on his understanding that the Board was concerned about the increasing frequency of "bust-up" takeovers, the increasing takeover activity in the financial service industry, such as Leucadia's attempt to take over Arco, and the possible adverse effect this type of activity could have on employees and others concerned with and vital to the continuing successful operation of Household even in the absence of any actual bust-up takeover attempt. Against this factual background, the Plan was approved.
"Bust-up" takeover generally refers to a situation in which one seeks to finance an acquisition by selling off pieces of the acquired company.
Thereafter, Moran and the company of which he is Chairman, D-K-M, filed this suit. On the eve of trial, Gretl Golter, the holder of 500 shares of Household, was permitted to intervene as an additional plaintiff. The trial was held, and the Court of Chancery ruled in favor of Household. Appellants now appeal from that ruling to this Court.
The Vice-Chancellor did rule in favor of appellants on Household's counterclaim, but that ruling is not at issue in this appeal.
Other jurisdictions have also applied the business judgment rule to actions by which target companies have sought to forestall takeover activity they considered undesirable. See Gearhart Industries, Inc. v. Smith International, 5th Cir., 741 F.2d 707 (1984) (sale of discounted subordinate debentures containing springing warrants); Treco, Inc. v. Land of Lincoln Savings and Loan, 7th Cir., 749 F.2d 374 (1984) (amendment to by-laws); Panter v. Marshall Field, 7th Cir., 646 F.2d 271 (1981) (acquisitions to create antitrust problems); Johnson v. Trueblood, 3d Cir., 629 F.2d 287 (1980), cert. denied, 450 U.S. 999, 101 S.Ct. 1704, 68 L.Ed.2d 200 (1981) (refusal to tender); Crouse-Hinds Co. v. InterNorth, Inc., 2d Cir., 634 F.2d 690 (1980) (sale of stock to favored party); Treadway v. Cane Corp., 2d Cir., 638 F.2d 357 (1980) (sale to White Knight), Enterra Corp. v. SGS Associates, E.D.Pa., 600 F.Supp. 678 (1985) (standstill agreement); Buffalo Forge Co. v. Ogden Corp., W.D.N.Y., 555 F.Supp. 892, aff'd, (2d Cir.) 717 F.2d 757, cert. denied, 464 U.S. 1018, 104 S.Ct. 550, 78 L.Ed.2d 724 (1983) (sale of treasury shares and grant of stock option to White Knight); Whittaker Corp. v. Edgar, N.D.Ill., 535 F.Supp. 933 (1982) (disposal of valuable assets); Martin Marietta Corp. v. Bendix Corp., D.Md., 549 F.Supp. 623 (1982) (Pac-Man defense).
The "Pac-Man" defense is generally a target company countering an unwanted tender offer by making its own tender offer for stock of the would-be acquirer. Block Miller, The Responsibilities and Obligations of Corporate Directors in Takeover Contests, 11 Sec.Reg.L.J. 44, 64 (1983).
While appellants contend that no provision of the Delaware General Corporation Law authorizes the Rights Plan, Household contends that the Rights Plan was issued pursuant to 8 Del. C. § 151(g) and 157. It explains that the Rights are authorized by § 157 and the issue of preferred stock underlying the Rights is authorized by § 151. Appellants respond by making several attacks upon the authority to issue the Rights pursuant to § 157.
The power to issue rights to purchase shares is conferred by 8 Del. C. § 157 which provides in relevant part:
8 Del. C. § 151(g) provides in relevant part:
Appellants begin by contending that § 157 cannot authorize the Rights Plan since § 157 has never served the purpose of authorizing a takeover defense. Appellants contend that § 157 is a corporate financing statute, and that nothing in its legislative history suggests a purpose that has anything to do with corporate control or a takeover defense. Appellants are unable to demonstrate that the legislature, in its adoption of § 157, meant to limit the applicability of § 157 to only the issuance of Rights for the purposes of corporate financing. Without such affirmative evidence, we decline to impose such a limitation upon the section that the legislature has not. Compare Providence Worchester Co. v. Baker, Del.Supr., 378 A.2d 121, 124 (1977) (refusal to read a bar to protective voting provisions into 8 Del. C. § 212(a)).
Secondly, appellants contend that § 157 does not authorize the issuance of sham rights such as the Rights Plan. They contend that the Rights were designed never to be exercised, and that the Plan has no economic value. In addition, they contend the preferred stock made subject to the Rights is also illusory, citing Telvest, Inc. v. Olson, Del. Ch. , C.A. No. 5798, Brown, V.C. (March 8, 1979).
Third, appellants contend that § 157 authorizes the issuance of Rights "entitling holders thereof to purchase from the corporation any shares of its capital stock of any class . . ." (emphasis added). Therefore, their contention continues, the plain language of the statute does not authorize Household to issue rights to purchase another's capital stock upon a merger or consolidation.
Fourth, appellants contend that Household's reliance upon § 157 is contradictory to 8 Del. C. § 203. Section 203 is a "notice" statute which generally requires that timely notice be given to a target of an offeror's intention to make a tender offer. Appellants contend that the lack of stronger regulation by the State indicates a legislative intent to reject anything which would impose an impediment to the tender offer process. Such a contention is a non sequitur. The desire to have little state regulation of tender offers cannot be said to also indicate a desire to also have little private regulation. Furthermore, as we explain infra, we do not view the Rights Plan as much of an impediment on the tender offer process.
8 Del. C. § 203 provides in relevant part:
(1) Not less than 20 nor more than 60 days before the date the tender offer is to be made, the offeror shall deliver personally or by registered or certified mail to the corporation whose equity securities are to be subject to the tender offer, at its registered office in this State or at its principal place of business, a written statement of the offeror's intention to make the tender offer. . . .
Appellants contend that § 157 authorization for the Rights Plan violates the Commerce Clause and is void under the Supremacy Clause, since it is an obstacle to the accomplishment of the policies underlying the Williams Act. Appellants put heavy emphasis upon the case of Edgar v. MITE Corp., 457 U.S. 624, 102 S.Ct. 2629, 73 L.Ed.2d 269 (1982), in which the United States Supreme Court held that the Illinois Business Takeover Act was unconstitutional, in that it unduly burdened interstate commerce in violation of the Commerce Clause. We do not read the analysis in Edgar as applicable to the actions of private parties. The fact that directors of a corporation act pursuant to a state statute provides an insufficient nexus to the state for there to be state action which may violate the Commerce Clause or Supremacy Clause. See Data Probe Acquisition Corp. v. Datatab, Inc., 2d Cir., 722 F.2d 1, 5 (1983).
Justice White, joined by Chief Justice Burger and Justice Blackman also concluded that the Illinois Business Takeover Act was pre-empted by the Williams Act. Edgar, 457 U.S. at 630, 102 S.Ct. at 2634.
Having concluded that sufficient authority for the Rights Plan exists in 8 Del. C. § 157, we note the inherent powers of the Board conferred by 8 Del. C. § 141(a), concerning the management of the corporation's "business and affairs" (emphasis added), also provides the Board additional authority upon which to enact the Rights Plan. Unocal, 493 A.2d at 953.
8 Del. C. § 141(a) provides:
Appellants contend that the Board is unauthorized to usurp stockholders' rights to receive tender offers by changing Household's fundamental structure. We conclude that the Rights Plan does not prevent stockholders from receiving tender offers, and that the change of Household's structure was less than that which results from the implementation of other defensive mechanisms upheld by various courts.
In addition, appellants contend that the deterrence of tender offers will be accomplished by what they label "a fundamental transfer of power from the stockholders to the directors." They contend that this transfer of power, in itself, is unauthorized.
The contention that the Rights Plan alters the structure more than do other defensive mechanisms because it is so effective as to make the corporation completely safe from hostile tender offers is likewise without merit. As explained above, there are numerous methods to successfully launch a hostile tender offer.
Appellants' third contention is that the Board was unauthorized to fundamentally restrict stockholders' rights to conduct a proxy contest. Appellants contend that the "20% trigger" effectively prevents any stockholder from first acquiring 20% or more shares before conducting a proxy contest and further, it prevents stockholders from banding together into a group to solicit proxies if, collectively, they own 20% or more of the stock. In addition, at trial, appellants contended that read literally, the Rights Agreement triggers the Rights upon the mere acquisition of the right to vote 20% or more of the shares through a proxy solicitation, and thereby precludes any proxy contest from being waged.
Appellants explain that the acquisition of 20% of the shares trigger the Rights, making them non-redeemable, and thereby would prevent even a future friendly offer for the ten-year life of the Rights.
The SEC still contends that the mere acquisition of the right to vote 20% of the shares through a proxy solicitation triggers the rights. We do not interpret the Rights Agreement in that manner.
Thus, while the Rights Plan does deter the formation of proxy efforts of a certain magnitude, it does not limit the voting power of individual shares. On the evidence presented it is highly conjectural to assume that a particular effort to assert shareholder views in the election of directors or revisions of corporate policy will be frustrated by the proxy feature ofthe Plan. Household's witnesses, Troubh and Higgins described recent corporate takeover battles in which insurgents holding less than 10% stock ownership were able to secure corporate control through a proxy contest or the threat of one.
The business judgment rule is a "presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." Aronson v. Lewis, Del.Supr., 473 A.2d 805, 812 (1984) (citations omitted). Notwithstanding, in Unocal we held that when the business judgment rule applies to adoption of a defensive mechanism, the initial burden will lie with the directors. The "directors must show that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed. . . . [T]hey satisfy that burden `by showing good faith and reasonable investigation. . . .'" Unocal, 493 A.2d at 955 (citing Cheff v. Mathes, 199 A.2d at 554-55). In addition, the directors must show that the defensive mechanism was "reasonable in relation to the threat posed." Unocal, 493 A.2d at 955. Moreover, that proof is materially enhanced, as we noted in Unocal, where, as here, a majority of the board favoring the proposal consisted of outside independent directors who have acted in accordance with the foregoing standards. Unocal, 493 A.2d at 955; Aronson, 473 A.2d at 815. Then, the burden shifts back to the plaintiffs who have the ultimate burden of persuasion to show a breach of the directors' fiduciary duties. Unocal, 493 A.2d at 958.
In addition, to meet their burden, the Directors must show that the defensive mechanism was "reasonable in relation to the threat posed". The record reflects a concern on the part of the Directors over the increasing frequency in the financial services industry of "boot-strap" and "bust-up" takeovers. The Directors were also concerned that such takeovers may take the form of two-tier offers. In addition, on August 14, the Household Board was aware of Moran's overture on behalf of D-K-M. In sum, the Directors reasonably believed Household was vulnerable to coercive acquisition techniques and adopted a reasonable defensive mechanism to protect itself.
We have discussed the coercive nature of two-tier tender offers in Unocal, 493 A.2d at 956, n. 12. We explained in Unocal that a discriminatory self-tender was reasonably related to the threat of two-tier tender offers and possible greenmail.
The Directors adopted the Plan pursuant to statutory authority in 8 Del. C. § 141, 151, 157. We reject appellants' contentions that the Rights Plan strips stockholders of their rights to receive tender offers, and that the Rights Plan fundamentally restricts proxy contests.