Chesapeake Corp. v. Shore

Delaware Court of Chancery · 2000 · Corporations

CorporationsTakeover defensesShareholder voting rightsBylawsSection 203Classified boardssupermajority bylawpoison pill

Facts

After Shorewood and Chesapeake each rejected the other's premium acquisition offer, Shorewood's board adopted a package of defensive bylaws to make it harder for Chesapeake to amend Shorewood's bylaws, remove the incumbent board, and install a new board favorable to Chesapeake's bid. The key defense was a supermajority bylaw increasing the vote needed for stockholder-initiated bylaw amendments from a simple majority to 66 2/3% of outstanding shares, later reduced shortly before trial to 60%. Shorewood management and insiders controlled nearly 24% of the stock, and the board did not meaningfully analyze whether an insurgent could realistically satisfy the supermajority threshold over management opposition. Chesapeake also bought 14.9% of Shorewood stock from Ariel under an agreement with upside protection, then made a public tender offer and consent solicitation challenging the bylaw and Shorewood's defenses.

Issue

Whether Shorewood's 60% supermajority bylaw, adopted in response to Chesapeake's hostile tender offer and consent solicitation, was valid under Delaware law. The case also asked whether Shorewood stockholders could eliminate the classified board by bylaw and then seat a new board, and whether Chesapeake became an interested stockholder under DGCL § 203 because of its agreement with Ariel.

Rule

A takeover defense that affects the stockholder franchise is reviewed under Unocal, and if adopted for the primary purpose of interfering with or impeding the stockholder franchise, it also must satisfy Blasius's compelling justification standard. Under Unocal, the board must show reasonable grounds, after a reasonable investigation and in good faith, to perceive a legitimate threat, and must show the response is proportionate, meaning not preclusive and within a range of reasonable responses. A bylaw is preclusive if victory by an insurgent is not realistically attainable. Stockholders may amend bylaws under DGCL § 109 to eliminate a classified board created by bylaw, and once that occurs the corporation is no longer one whose board is classified for purposes of § 141(k). An agreement does not make a bidder an owner of additional shares under § 203 absent voting rights or an agreement, arrangement, or understanding for the purpose of voting those shares.

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

Granite Fold, Inc., a Delaware packaging company based in Milwaukee, receives an unsolicited all-cash, all-shares premium offer from Cedar Peak Holdings. Granite Fold's board, controlled by senior executives and paid consultants, rejects the bid in a 25-minute phone call, receives no financial materials, and immediately adopts a bylaw requiring 58% of outstanding shares to amend the bylaws. The board says only that the offer is too low and that shareholders need "more focus."

If Cedar Peak challenges the bylaw, which is the strongest argument for invalidating it under the majority rule?

Explanation. A defensive measure affecting the stockholder franchise is reviewed under Unocal. The board must show reasonable grounds, after a reasonable investigation and in good faith, to perceive a legitimate threat. In the case, the court emphasized that a truncated process, lack of meaningful analysis, and vague reliance on "focus" could not sustain a supermajority bylaw. A board cannot meet its burden with bare assertions when it failed to study turnout, electorate composition, or whether the threshold was realistically attainable.