Carmody v. Toll Brothers, Inc.
723 A.2d 1180 (1998)
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Rule of Law:
A 'dead hand' poison pill provision that restricts the power to redeem the pill exclusively to incumbent directors or their designated successors is invalid under Delaware law. Such a provision impermissibly restricts the statutory power of future boards and disenfranchises shareholders by rendering their voting power ineffective.
Facts:
- Toll Brothers, Inc., a successful luxury home builder, was founded and led by brothers Bruce and Robert Toll, who were major shareholders and senior executive officers.
- The home building industry was undergoing a period of consolidation, creating a general risk of hostile takeovers for companies like Toll Brothers.
- In response to this general industry risk, but not to a specific takeover threat, the Toll Brothers board of directors adopted a shareholder Rights Plan, commonly known as a 'poison pill'.
- The plan contained standard 'flip-in' and 'flip-over' provisions, designed to make a hostile acquisition prohibitively expensive for an unwanted bidder.
- Crucially, the Rights Plan included a 'dead hand' or 'Continuing Director' feature.
- This feature stipulated that only the directors who were in office when the plan was adopted on June 12, 1997, or their approved successors ('Continuing Directors'), had the authority to redeem the poison pill rights.
- This provision effectively meant that if a hostile acquirer launched a proxy contest and successfully elected a new slate of directors, that new board would be powerless to redeem the pill to facilitate a merger.
Procedural Posture:
- A shareholder of Toll Brothers, Inc. filed a lawsuit against the company's board of directors in the Delaware Court of Chancery.
- The complaint challenged the validity of the 'dead hand' provision within the company's shareholder Rights Plan, alleging it was invalid under Delaware statutes and constituted a breach of fiduciary duty.
- The defendants, Toll Brothers and its directors, filed a motion to dismiss the complaint for failure to state a claim upon which relief can be granted, pursuant to Court of Chancery Rule 12(b)(6).
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Issue:
Does a 'dead hand' poison pill provision, which prevents any director except the incumbent directors who adopted the plan (or their designated successors) from redeeming the rights, violate the Delaware General Corporation Law and the board's fiduciary duties?
Opinions:
Majority - Jacobs, Vice Chancellor
Yes, the complaint states legally cognizable claims that a 'dead hand' provision violates both the Delaware General Corporation Law (DGCL) and the board's fiduciary duties. The court found the provision is subject to challenge on two primary grounds. First, it is statutorily invalid because it violates DGCL §§ 141(a) and 141(d) by creating two classes of directors with different voting powers without authorization in the certificate of incorporation, and it impermissibly restricts a future board's statutory authority to manage the corporation. Second, the adoption of the provision states a claim for breach of fiduciary duty under both the Blasius and Unocal/Unitrin standards. Under Blasius, it purposefully disenfranchises shareholders by making their vote to elect a new board impotent, as a new board would lack the power to redeem the pill. Under Unocal/Unitrin, the provision is a disproportionate defensive measure because it is coercive (forcing shareholders who want a deal to vote for incumbents) and preclusive (making a proxy contest 'realistically unattainable').
Analysis:
This Delaware Court of Chancery decision was a landmark ruling against the 'dead hand' poison pill, a potent anti-takeover device developed in the 1990s. The court's analysis strongly reaffirms the primacy of the shareholder franchise and the statutory power of a duly elected board of directors. By finding that such provisions are likely invalid on both statutory and fiduciary grounds, the decision severely limited a board's ability to entrench itself by stripping future boards of their core powers. This opinion set the stage for subsequent Delaware Supreme Court rulings, such as in Quickturn Design Systems, Inc. v. Shapiro, which effectively outlawed 'dead hand' and similar 'no hand' poison pills, thereby preserving the proxy contest as a viable path for shareholders to change corporate control.
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