Moran v. Household International

Delaware Court of Chancery · Corporations

Corporationstakeover defensesshareholder rights plansbusiness judgment rulederivative suitspoison pillrights plantakeover defense

Facts

Household's board, concerned about takeover vulnerability and aware of Moran's leveraged buyout interest and the attempted bust-up of a competitor, received advice from Wachtell Lipton and Goldman Sachs and adopted a preferred share purchase rights plan on August 14, 1984. The plan issued one right per common share, with rights becoming exercisable upon specified 20% or 30% triggering events and containing a flip-over feature that would heavily dilute an acquiror after a merger. The rights were redeemable by Household before a 20% triggering event, giving the board leverage in negotiating with would-be acquirors. Plaintiffs argued the plan made Household virtually takeover-proof and burdened shareholders' ability to sell into tender offers and wage proxy contests without shareholder approval.

Issue

Whether Household's board validly adopted the rights plan under Delaware law and whether the plan was an impermissible entrenchment device because it restricted shareholders' practical ability to participate in hostile tender offers and certain proxy contests. The court also considered whether plaintiffs' claims were derivative, ripe, and properly before the court.

Rule

A pre-planned takeover defense may receive the protection of the business judgment rule, but where the device alters the corporation's structure by shifting practical power from shareholders to directors, judicial inquiry is not foreclosed. In that setting, directors must go forward with evidence that the plan was adopted not primarily to retain control but from a reasonable belief that it was necessary to protect corporate policy and effectiveness; the ultimate burden of persuasion remains on the plaintiffs. A rights plan issued under DGCL authority is not invalid merely because it deters coercive two-tier offers or incidentally limits proxy efforts, so long as it serves a rational corporate purpose and is reasonable at the time.

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

Lakefront Devices, Inc., a Delaware corporation based in Chicago, adopts a shareholder rights plan that makes hostile two-tier tender offers economically unattractive. Nina Patel, who owns 2% of the stock, sues in her own name alleging the plan deprives shareholders of the chance to sell into premium bids and thereby reduces the value of her shares. She is not engaged in any proxy contest and alleges no injury different from other stockholders.

How should the court most likely characterize Nina's claim?

Explanation. A claim is individual only if the plaintiff alleges a separate and distinct injury or violation of a shareholder contractual right independent of the corporation. A generalized complaint that a rights plan reduces opportunities to receive takeover premiums is not a distinct injury and does not, by itself, assert an independent contractual right. Under the majority opinion, such claims are derivative. (Derived from Moran v. Household International (n.d.).)