771 A.2d 293 (Del. Ch. 2000)
Chesapeake Corporation, a Virginia corporation, and Shorewood Packaging Corporation, a Delaware corporation, both operated in the specialty packaging industry.1 As of early 1999 each company had identified the other as an acquisition candidate.2 On October 26, 1999, Shorewood's board approved an all-cash $40 per share offer for Chesapeake representing a 41% premium to the then-depressed market price.3 Chesapeake's board rejected the offer as inadequate after a November 3 meeting.4
On November 10, 1999, Chesapeake proposed to acquire all of Shorewood for $16.50 per share, a 40% premium.5 After telephone meetings on November 16 and 18, 1999, at which no written financial materials were provided, the Shorewood board rejected the offer.6 At the November 18 meeting the board adopted a package of defensive bylaws that eliminated stockholders' ability to call special meetings, removed directors without cause, and imposed a 66 2/3% supermajority requirement to amend the bylaws.7 The supermajority threshold was later lowered to 60% on January 5, 2000.8 Shorewood already had a poison pill in place and a classified board.9
On November 26, 1999, Chesapeake entered into an agreement with Ariel Capital Management to purchase 14.9% of Shorewood's shares at $17.25 per share together with upside protection in any future majority transaction.10 On December 3, 1999, Chesapeake commenced a $17.25 all-cash tender offer, a consent solicitation to eliminate the classified board, remove the sitting directors, and elect a new board, and this lawsuit challenging the supermajority bylaw.11 Shorewood's board rejected the tender offer at December meetings and mounted a counter-solicitation.12
Shorewood's nine-member board included six directors with substantial financial or personal ties to CEO Marc Shore that rendered them non-independent.13 The board invoked attorney-client and business-strategy privileges throughout the litigation and declined to have Marc Shore or other key insiders testify at the mid-January 2000 trial.14 Management insiders controlled nearly 24% of Shorewood's stock at all relevant times.15
Whether the 60% Supermajority Bylaw was validly adopted by the Shorewood board?16
Under Unocal Corp. v. Mesa Petroleum Co., a board adopting defensive measures must show after reasonable investigation that it had reasonable grounds to believe a threat to corporate policy and effectiveness existed.17 The response must be reasonable in relation to the threat posed.18 If the primary purpose of the measure is to interfere with or impede the exercise of the shareholder franchise, Blasius Indus. v. Atlas Corp. requires the board to demonstrate a compelling justification.19
No. Six of the nine Shorewood directors had substantial financial or personal ties to CEO Marc Shore rendering them non-independent.20 The board adopted the bylaw after brief telephone meetings on November 16 and 18, 1999 at which no written financial materials were provided and key issues such as likely voter turnout, the composition of the electorate, and attainability of the required vote were not considered.21 The board faced only a modest threat of price inadequacy from Chesapeake's fully negotiable all-cash premium offer that was already addressed by the existing poison pill and classified board.22 The bylaw raised the required vote to a level that was mathematically impossible for Chesapeake to attain without management support given the insiders' nearly 24% control of the stock.23
The board's process was grossly inadequate.24 Its identification of a stockholder confusion threat was not made in good faith or after reasonable investigation.25 The bylaw was preclusive and adopted with the primary intent of entrenching the directors, failing both Unocal and Blasius review.26
The 60% Supermajority Bylaw is invalid and may not be enforced against Chesapeake's consent solicitation.27
Whether Shorewood stockholders could amend the bylaws to eliminate the classified board structure and seat a new board?28
Yes. The plain language of 8 Del. C. § 141(k) protects directors of a corporation whose board is classified from removal without cause unless the certificate provides otherwise, but the stockholders possess independent statutory authority under 8 Del.
C. § 109 to amend the bylaws to eliminate the classified board structure, and once that amendment takes effect the directors are no longer protected because the board is no longer classified, allowing immediate removal without cause and the seating of a new board through the consent solicitation; the Shorewood certificate does not provide otherwise, and the company's pre-Defensive Bylaws had expressly permitted removal without cause, consistent with the fundamental policy of Delaware corporation law that stockholders control the governance structure of their corporations.31
Shorewood stockholders may validly amend the bylaws to eliminate the classified board and seat a new board through the consent solicitation.32
Whether Chesapeake became an interested stockholder under 8 Del. C. § 203 by virtue of the Ariel Agreement?33
Under 8 Del. C. § 203(c)(9), a person becomes an interested stockholder by acquiring ownership of 15% or more of the voting stock.34 This includes having an agreement, arrangement, or understanding for the purpose of voting shares beneficially owned by another.35 The statute requires a meeting of the minds that effectively commits the voting of the remaining shares.36
No. The Ariel Agreement expressly reserves Ariel's rights to vote the Non-Purchased Shares in its sole discretion and contains no provision binding Ariel to support Chesapeake.37 The economic incentives in the upside-protection clause do not render it economically irrational for Ariel to vote differently in most circumstances.38 The clause never incentivizes Ariel to prefer a lower Chesapeake bid over a higher third-party bid.39 Ariel retains full legal authority to vote the Non-Purchased Shares independently and has stated it will do so in the best interests of its clients.40
Chesapeake did not become an interested stockholder under 8 Del. C. § 203 as a result of the Ariel Agreement and remains free to pursue its consent solicitation.41