Opinion ID: 1508700
Heading Depth: 1
Heading Rank: 13

Heading: delayed redemption provision violates fundamental delaware law

Text: In this appeal, Mentor argues that the judgment of the Court of Chancery should be affirmed because the Delayed Redemption Provision is invalid as a matter of Delaware law. According to Mentor, the Delayed Redemption Provision, like the dead hand feature in the Rights Plan that was held to be invalid in Toll Brothers, [29] will impermissibly deprive any newly elected board of both its statutory authority to manage the corporation under 8 Del.C. § 141(a) and its concomitant fiduciary duty pursuant to that statutory mandate. We agree. Our analysis of the Delayed Redemption Provision in the Quickturn Rights Plan is guided by the prior precedents of this Court with regard to a board of directors authority to adopt a Rights Plan or poison pill. In Moran, this Court held that the inherent powers of the Board conferred by 8 Del.C. § 141(a) concerning the management of the corporation's `business and affairs' provides the Board additional authority upon which to enact the Rights Plan. [30] Consequently, this Court upheld the adoption of the Rights Plan in Moran as a legitimate exercise of business judgment by the board of directors. [31] In doing so, however, this Court also held the rights plan is not absolute: [32] When the Household Board of Directors is faced with a tender offer and a request to redeem the Rights [Plan], they will not be able to arbitrarily reject the offer. They will be held to the same fiduciary standards any other board of directors would be held to in deciding to adopt a defensive mechanism, the same standards as they were held to in originally approving the Rights Plan. [33] In Moran, this Court held that the ultimate response to an actual takeover bid must be judged by the Directors' actions at the time and nothing we say relieves them of their fundamental duties to the corporation and its shareholders. [34] Consequently, we concluded that the use of the Rights Plan would be evaluated when and if the issue arises. [35] One of the most basic tenets of Delaware corporate law is that the board of directors has the ultimate responsibility for managing the business and affairs of a corporation. [36] Section 141(a) requires that any limitation on the board's authority be set out in the certificate of incorporation. [37] The Quickturn certificate of incorporation contains no provision purporting to limit the authority of the board in any way. The Delayed Redemption Provision, however, would prevent a newly elected board of directors from completely discharging its fundamental management duties to the corporation and its stockholders for six months. While the Delayed Redemption Provision limits the board of directors' authority in only one respect, the suspension of the Rights Plan, it nonetheless restricts the board's power in an area of fundamental importance to the shareholders  negotiating a possible sale of the corporation. Therefore, we hold that the Delayed Redemption Provision is invalid under Section 141(a), which confers upon any newly elected board of directors full power to manage and direct the business and affairs of a Delaware corporation. [38] In discharging the statutory mandate of Section 141(a), the directors have a fiduciary duty to the corporation and its shareholders. [39] This unremitting obligation extends equally to board conduct in a contest for corporate control. [40] The Delayed Redemption Provision prevents a newly elected board of directors from completely discharging its fiduciary duties to protect fully the interests of Quickturn and its stockholders. [41] This Court has recently observed that although the fiduciary duty of a Delaware director is unremitting, the exact course of conduct that must be charted to properly discharge that responsibility will change in the specific context of the action the director is taking with regard to either the corporation or its shareholders. [42] This Court has held [t]o the extent that a contract, or a provision thereof, purports to require a board to act or not act in such a fashion as to limit the exercise of fiduciary duties, it is invalid and unenforceable. [43] The Delayed Redemption Provision tends to limit in a substantial way the freedom of [newly elected] directors' decisions on matters of management policy. [44] Therefore, it violates the duty of each [newly elected] director to exercise his own best judgment on matters coming before the board. [45] In this case, the Quickturn board was confronted by a determined bidder that sought to acquire the company at a price the Quickturn board concluded was inadequate. Such situations are common in corporate takeover efforts. [46] In Revlon, this Court held that no defensive measure can be sustained when it represents a breach of the directors' fiduciary duty. A fortiori, no defensive measure can be sustained which would require a new board of directors to breach its fiduciary duty. In that regard, we note Mentor has properly acknowledged that in the event its slate of directors is elected, those newly elected directors will be required to discharge their unremitting fiduciary duty to manage the corporation for the benefit of Quickturn and its stockholders. [47]