Opinion ID: 1508700
Heading Depth: 1
Heading Rank: 12

Heading: court of chancery invalidates delayed redemption provision

Text: When the board of a Delaware corporation takes action to resist a hostile bid for control, the board of directors' defensive actions are subjected to enhanced judicial scrutiny. [22] For a target board's actions to be entitled to business judgment rule protection, the target board must first establish that it had reasonable grounds to believe that the hostile bid constituted a threat to corporate policy and effectiveness; and second, that the defensive measures adopted were proportionate, that is, reasonable in relation to the threat that the board reasonably perceived. [23] The Delayed Redemption Provision was reviewed by the Court of Chancery pursuant to that standard. The Court of Chancery found: the evidence, viewed as a whole, shows that the perceived threat that led the Quickturn board to adopt the DRP, was the concern that Quickturn shareholders might mistakenly, in ignorance of Quickturn's true value, accept Mentor's inadequate offer, and elect a new board that would prematurely sell the company before the new board could adequately inform itself of Quickturn's fair value and before the shareholders could consider other options. [24] The Court of Chancery concluded that Mentor's combined tender offer and proxy contest amounted to substantive coercion. [25] Having concluded that the Quickturn board reasonably perceived a cognizable threat, the Court of Chancery then examined whether the board's response  the Delayed Redemption Provision  was proportionate in relation to that threat. In assessing a challenge to defensive measures taken by a target board in response to an attempted hostile takeover, enhanced judicial scrutiny requires an evaluation of the board's justification for each contested defensive measure and its concomitant results. [26] The Court of Chancery found that the Quickturn board's justification or rationale for adopting the Delayed Redemption Provision was to force any newly elected board to take sufficient time to become familiar with Quickturn and its value, and to provide shareholders the opportunity to consider alternatives, before selling Quickturn to any acquiror. [27] The Court of Chancery concluded that the Delayed Redemption Provision could not pass the proportionality test. Therefore, the Court of Chancery held that the DRP cannot survive scrutiny under Unocal and must be declared invalid. [28]