Morgan v. Household International, Inc.

Delaware Court of Chancery · Corporations

Corporationstakeover defensesshareholder rightsbusiness judgment rulepoison pillRights Planpoison pillpreferred share purchase rights

Facts

Household's board adopted a Preferred Share Purchase Rights Plan in August 1984 after management became concerned that the company was vulnerable to hostile, especially two-tier, takeover tactics. The plan issued one right per common share, with triggering events tied to 20% ownership, voting power, group formation, or a 30% tender or exchange offer, and included a flip-over feature that would heavily dilute an acquiror after a triggering event. Plaintiffs argued the plan improperly restricted shareholders' ability to sell into takeover bids and to conduct proxy contests, and that the preferred stock underlying the rights was invalid. Household defended the plan as a prospective anti-takeover device adopted after board deliberation to protect the corporation and its shareholders from coercive partial tender offers.

Issue

Whether Household's board validly adopted the Rights Plan under Delaware law and the business judgment rule, despite its deterrent effect on hostile two-tier tender offers and some proxy activity. The court also considered whether plaintiffs' claims were derivative, whether demand was excused, whether the claims were ripe, and whether rights holders were indispensable parties.

Rule

Pre-planned takeover defenses remain protected by the business judgment rule, but when a defensive device alters the corporation's structure by shifting power from shareholders to directors, the court may inquire whether the board acted primarily from a desire to retain control or from a reasonable belief that the device was necessary to protect corporate policy and effectiveness. In that setting, directors need not prove intrinsic fairness; they must go forward with evidence that the plan was reasonable at the time, while the ultimate burden of persuasion remains on the plaintiffs. A rights plan is not invalid merely because it deters hostile two-tier offers or incidentally affects proxy contests, so long as it serves a rational corporate purpose and is not adopted primarily for entrenchment.

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

The board of Lakefront Components, Inc., a Delaware corporation based in Chicago, adopts a rights plan that is intended to deter coercive partial tender offers. Priya Desai, a 4% shareholder in Seattle, sues in her own name, alleging the plan makes unsolicited bids less likely and therefore deprives her of the chance to sell at a premium that other shareholders will also lose.

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

Explanation. A shareholder states an individual claim only by alleging a separate and distinct injury or violation of a contractual shareholder right existing independently of any corporate right. A generalized claim that a rights plan depresses takeover prospects and thus reduces all shareholders' ability to sell at a premium is derivative, not individual. The majority opinion rejected the notion that shareholders have a contractual right to receive takeover proposals. (Derived from Morgan v. Household International, Inc. (n.d.).)