Chesapeake Corp. v. Shore
2000 WL 193119, 771 A.2d 293 (2000)
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Rule of Law:
A board-adopted defensive bylaw that is preclusive, making a successful shareholder vote realistically unattainable, is invalid under enhanced judicial scrutiny, particularly when the board's deliberative process was grossly inadequate and the threat it purportedly addressed was mild.
Facts:
- Chesapeake Corporation and Shorewood Packaging Corporation, both in the specialty packaging industry, each identified the other as a potential acquisition target.
- Shorewood initiated acquisition talks by making an all-cash premium offer for Chesapeake, which the Chesapeake board rejected as inadequate.
- Chesapeake responded by making a competing all-cash premium offer to acquire Shorewood.
- The Shorewood board, which was dominated by insiders with significant financial interests in maintaining their positions, rejected Chesapeake's offer as inadequate.
- Fearing a hostile takeover attempt, the Shorewood board adopted a series of defensive bylaws, including one that required a 66 2/3% supermajority of all outstanding shares to amend the bylaws.
- Shorewood's management and insiders controlled nearly 24% of the company's stock, making it mathematically impossible for an insurgent to achieve a 66 2/3% vote against management's opposition, assuming a 90% voter turnout.
- Chesapeake purchased 14.9% of Shorewood's stock from Ariel Capital Management, Shorewood's largest institutional shareholder.
- Shortly before trial, the Shorewood board amended the supermajority requirement, reducing it from 66 2/3% to 60% of the outstanding shares.
Procedural Posture:
- Chesapeake and its acquisition vehicle, Sheffield, Inc., filed suit in the Delaware Court of Chancery against Shorewood and its board of directors.
- The plaintiffs sought to enjoin the defensive bylaws adopted by the Shorewood board, including the 66 2/3% Supermajority Bylaw.
- Shortly before trial, the Shorewood board amended the Supermajority Bylaw to reduce the required vote to 60%.
- The Court of Chancery conducted an expedited trial on the validity of the revised 60% Supermajority Bylaw.
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Issue:
Does a board-adopted supermajority bylaw, enacted as a defensive measure against a hostile takeover, violate the board's fiduciary duties when it makes a successful shareholder vote realistically unattainable and was adopted through a grossly uninformed process?
Opinions:
Majority - Strine, Vice Chancellor
Yes, the supermajority bylaw is an invalid defensive measure because it is a preclusive and disproportionate response to the threat posed by the acquirer's offer. Under the Unocal standard, a defensive measure must be reasonable in relation to the threat posed. Here, the court found the threat of price inadequacy from Chesapeake's offer to be mild and rejected the board's asserted threat of 'stockholder confusion' as pretextual and unsubstantiated, especially given Shorewood's sophisticated institutional stockholder base. The 60% Supermajority Bylaw was not a proportionate response because it was preclusive; the board failed to demonstrate that achieving a 60% vote was 'realistically attainable' for an insurgent opposing management, which controlled a significant block of stock. The board's deliberative process was found to be 'grossly inadequate,' as it failed to consider crucial factors like historical voter turnout, shareholder composition, or whether any insurgent could actually meet the threshold. Furthermore, under the Blasius standard, the board's primary purpose was to interfere with the shareholder franchise without a compelling justification. The bylaw was designed to entrench the incumbent board, making it an invalid impairment of the stockholders' right to vote.
Analysis:
This opinion provides a rigorous application of the Unocal and Blasius standards, reinforcing that defensive measures impeding the shareholder franchise face the highest level of judicial scrutiny. It clarifies that a defensive bylaw is 'preclusive' if it makes an insurgent's success realistically unattainable, not just mathematically impossible. The decision serves as a strong warning to corporate boards that they cannot justify preclusive voting requirements by citing a vague threat of 'stockholder confusion,' especially without a thorough, good-faith investigation. This case emphasizes the critical importance of a board's deliberative process in adopting defensive measures; a failure to analyze the practical impact of a defense on the shareholders' franchise is likely to be fatal under Unocal review.
