500 A.2d 1346 (Del. 1985)
In August 1984 the Board of Directors of Household International, Inc. adopted a Preferred Share Purchase Rights Plan by a fourteen-to-two vote.1 Household is a diversified holding company whose principal subsidiaries operated in financial services, transportation, and merchandising.2 The Plan provided that common stockholders would receive one Right per share upon either the announcement of a tender offer for thirty percent of Household's shares or the acquisition of twenty percent of the shares by any single entity or group.3 Upon a triggering event the Rights became exercisable to purchase one one-hundredth of a share of preferred stock for one hundred dollars.4 In the event of a later merger or consolidation, each Right permitted the holder to purchase two hundred dollars of the acquirer's common stock for one hundred dollars.5
Household adopted the Rights Plan as a preventive measure rather than during an active takeover contest.6 Management had grown concerned about the company's vulnerability to hostile bids as early as February 1984 and had considered, then rejected, a fair-price charter amendment.7 The Board retained Wachtell, Lipton, Rosen and Katz and Goldman, Sachs & Co. to develop a takeover policy; those advisors attended the August 14 meeting and presented materials addressing the increasing frequency of bust-up takeovers in the financial-services sector, including Leucadia's attempt to acquire Arco.8
Appellant John Moran, a Household director and chairman of Dyson-Kissner-Moran Corporation, the company's largest stockholder, had separately discussed a possible leveraged buyout of Household by D-K-M, although those discussions never progressed beyond the preliminary stage.9 After the Board approved the Rights Plan, Moran and D-K-M filed suit.10 On the eve of trial Gretl Goiter, the holder of five hundred shares, was permitted to intervene as an additional plaintiff.11 The Court of Chancery conducted a trial and upheld the Rights Plan in a detailed opinion; the plaintiffs appealed that ruling to the Supreme Court of Delaware.12
Whether the Board of Directors of Household International, Inc. possessed authority under the Delaware General Corporation Law to adopt the Preferred Share Purchase Rights Plan?13
The Delaware General Corporation Law authorizes boards to issue rights to purchase shares under 8 Del. C. § 157 and preferred stock under 8 Del. C. § 151(g).14 Section 141(a) confers inherent authority to manage the business and affairs of the corporation; corporate law is not static and permits defensive mechanisms even absent explicit statutory language addressing takeovers.15
Yes. The facts of the case establish that Household International, Inc. is a diversified holding company whose principal subsidiaries operated in financial services, transportation, and merchandising.16 In August 1984 the Board of Directors adopted the Preferred Share Purchase Rights Plan by a fourteen to two vote after management grew concerned about vulnerability to hostile bids as early as February 1984.17 After the Board approved the Rights Plan, Moran and D-K-M filed suit; on the eve of trial Gretl Goiter, the holder of five hundred shares, was permitted to intervene as an additional plaintiff.18 The Court of Chancery conducted a trial and upheld the Rights Plan in a detailed opinion; the plaintiffs appealed that ruling to the Supreme Court of Delaware.
The Board possessed statutory authority because 8 Del. C. § 157 permits issuance of rights entitling holders to purchase shares and the Rights Plan fits within that power even when used as a takeover defense.19 The preferred stock underlying the Rights carries superior dividend and liquidation rights, distinguishing it from invalidated sham securities.20 The flip-over feature is analogous to customary anti-destruction provisions that protect conversion rights in mergers.21 The Board's inherent powers under 8 Del. C. § 141(a) to manage corporate affairs supply additional authority for adopting the preventive mechanism before any specific threat materialized.
The Board of Directors possessed authority under the Delaware General Corporation Law to adopt the Preferred Share Purchase Rights Plan.22
Whether the Rights Plan usurps stockholders' rights to receive and accept hostile tender offers?23
A rights plan does not usurp stockholder rights to receive tender offers when the plan leaves open multiple methods for a hostile acquirer to succeed, including conditioning a tender on board redemption of the rights, acquiring fifty percent of the shares and causing a self-tender, or forming a group below the trigger threshold to solicit consents, and when the board remains subject to fiduciary duties in responding to any actual offer.24
No. The Rights Plan does not prevent stockholders from receiving tender offers because the recent takeover of Crown Zellerbach, which had a similar plan, demonstrates that hostile acquisitions remain feasible.2526 Evidence at trial showed numerous methods around the Plan, ranging from tendering with a condition that the Board redeem the Rights, tendering with a high minimum condition of shares and Rights, tendering and soliciting consents to remove the Board and redeem the Rights, to acquiring fifty percent of the shares and causing Household to self-tender for the Rights.27 One could also form a group of up to nineteen point nine percent and solicit proxies for consents to remove the Board and redeem the Rights.28 When faced with a tender offer and a request to redeem the Rights, the Household Board cannot arbitrarily reject the offer but must satisfy the same fiduciary standards applied to the original adoption of the Plan.29
The Plan produces no outflow of corporate funds, no impairment of financial flexibility, no dilution of earnings per share, and no adverse tax consequences, resulting in less structural change than other defensive mechanisms such as increased debt or sale of prize assets.30
The Rights Plan does not usurp stockholders' rights to receive and accept hostile tender offers.31
Whether the Rights Plan fundamentally restricts stockholders' rights to conduct a proxy contest?32
A rights plan does not fundamentally restrict proxy contests when the twenty percent trigger does not limit the voting power of individual shares.33 Many proxy contests succeed with insurgent ownership below twenty percent.34 The key variable for success is the merit of the insurgent's issues rather than the size of holdings.35
No. The Rights Plan does not fundamentally restrict stockholders' rights to conduct a proxy contest because the twenty percent trigger does not prevent acquisition of the right to vote shares through revocable proxies.3637 The relationship between grantor and recipient of a proxy is one of agency that remains revocable at any time.38 The Court of Chancery found that while the Plan deters the formation of proxy efforts of a magnitude that would trigger the Rights, it does not limit the voting power of individual shares.39 Evidence at trial established that many proxy contests are won with an insurgent ownership of less than twenty percent and that very large holdings are no guarantee of success.40 Testimony confirmed that the key variable in proxy contest success is the merit of an insurgent's issues, not the size of his holdings.41
Recent corporate takeover battles showed insurgents holding less than ten percent stock ownership were able to secure corporate control through a proxy contest or the threat of one.42
The Rights Plan does not fundamentally restrict stockholders' rights to conduct a proxy contest.43
Whether the Household directors satisfied the requirements of the business judgment rule when they adopted the Rights Plan on August 14, 1984?44
Directors satisfy the business judgment rule in adopting a defensive mechanism when they show reasonable grounds for believing a danger to corporate policy and effectiveness existed, demonstrate good faith and reasonable investigation, prove the mechanism was reasonable in relation to the threat posed, and when a majority of the board consists of outside independent directors.45
Yes. The Household directors satisfied the requirements of the business judgment rule because there are no allegations of bad faith or entrenchment purposes.46 The Board demonstrated reasonable grounds for believing Household was vulnerable to coercive two-tier tender offers and bust-up acquisitions in the financial services industry.47 The directors exercised informed business judgment by receiving beforehand a notebook containing a three-page summary of the Plan along with articles on the current takeover environment, engaging in extended discussion with representatives of Wachtell, Lipton and Goldman, Sachs, and hearing Moran's knowledgeable critique at the meeting.48
The Plan was reasonable in relation to the threat because it addressed the increasing frequency of boot-strap and bust-up takeovers while leaving open numerous avenues for hostile acquisitions.49 A majority of the Board consisted of outside independent directors, materially enhancing the proof that the decision was protected by the business judgment rule.50 The plaintiffs failed to carry their ultimate burden of persuasion to show any breach of fiduciary duty.51
The Household directors satisfied the requirements of the business judgment rule when they adopted the Rights Plan on August 14, 1984.52