Carmody v. Toll Bros. Inc.

Delaware Court of Chancery · Corporations

Corporationspoison pillsdirector authorityshareholder voting rightsfiduciary dutiesantitakeover defensesdead hand pillcontinuing directors

Facts

Toll Brothers adopted a poison pill rights plan on June 12, 1997, not in response to any specific bid, to deter hostile takeovers. The plan had standard flip-in and flip-over features, but uniquely allowed only "Continuing Directors"—directors in office when the plan was adopted or successors approved by a majority of those directors—to redeem the rights. The complaint alleged this dead hand feature made proxy contests futile because newly elected dissident directors could not redeem the pill. The plaintiff claimed the provision entrenched incumbents, interfered with shareholder voting rights, and unlawfully limited future boards' authority.

Issue

Whether a poison pill's dead hand provision, under which only incumbent directors or their approved successors may redeem the rights, states a legally cognizable claim of invalidity under Delaware law. Specifically, the court considered whether the complaint adequately alleged statutory invalidity under 8 Del. C. §§ 141(a) and 141(d), and breach of fiduciary duty under Blasius and Unocal/Unitrin.

Rule

A complaint challenging a dead hand poison pill states a claim where it alleges that the plan gives redemption power to only some directors, even though distinctive director voting powers and restrictions on board authority must be set forth in the certificate of incorporation under 8 Del. C. §§ 141(d) and 141(a). A dead hand provision is also subject to fiduciary challenge if it purposefully disenfranchises shareholders without compelling justification under Blasius, or if it is coercive or preclusive and therefore potentially disproportionate under Unocal/Unitrin. Such claims are ripe when the plaintiff challenges the provision's present deterrent effect on shareholder rights, even absent a pending bid.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Mesa Ridge Robotics, a Delaware corporation headquartered in Denver, adopts a rights plan on a clear day. The plan provides that only directors serving on the adoption date, or later directors approved by a majority of those incumbents, may redeem the rights. A stockholder sues the next month, alleging the provision presently deters bids and makes a proxy contest futile, even though no bidder has emerged.

If the corporation moves to dismiss on the ground that the claim is unripe because no takeover bid is pending, how should the court rule?

Explanation. The majority held that a challenge is ripe where the complaint attacks the rights plan's present depressing or deterrent effect on stockholders' entitlement to receive and consider takeover proposals and to vote for a board able to exercise full statutory powers. A pending bid or actual refusal to redeem is not required at the pleading stage. (Derived from Carmody v. Toll Bros. Inc. (n.d.).)