City Capital Associates Limited Partnership v. Interco Incorporated

Court of Chancery of Delaware, New Castle County
551 A.2d 787 (1988)

ELI5:

Rule of Law:

When a board of directors has had a reasonable time to develop and present value-maximizing alternatives to a non-coercive, all-cash tender offer, its fiduciary duties require it to redeem its poison pill and allow shareholders to choose between the offer and the board's alternative.

Facts:

Interco Incorporated, a diversified holding company, adopted a common stock rights plan, or 'poison pill,' to defend against potential hostile takeovers.
In May 1988, City Capital Associates (CCA), an entity controlled by the Rales brothers, began acquiring a significant amount of Interco stock.
In response to CCA's accumulation of shares, Interco's board adopted a new, more potent poison pill in July 1988.
CCA made an initial all-cash offer for all Interco shares, which it eventually raised to $70 per share. The Interco board, advised by its investment bank Wasserstein Perella, rejected the offer as inadequate.
The Interco board developed and approved its own alternative: a major corporate restructuring plan involving the sale of significant assets, incurring substantial debt, and distributing a combination of cash and securities to shareholders, which it valued at a minimum of $76 per share.
CCA subsequently increased its all-cash, all-shares tender offer to $74 per share.
The Interco board rejected CCA's $74 offer as inadequate and refused to redeem the poison pill, thereby preventing Interco shareholders from tendering their shares to CCA.

Procedural Posture:

City Capital Associates LP (CCA) filed a lawsuit in the Delaware Court of Chancery against Interco Incorporated.
CCA, the plaintiff, sought a preliminary injunction to compel the Interco board to redeem its defensive stock rights plan ('poison pill').
CCA also sought to enjoin Interco from taking further steps to implement its proposed corporate restructuring.
Following extensive discovery, the court heard arguments on the plaintiff's application for a preliminary injunction.

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Issue:

Does a target company's board of directors breach its fiduciary duties by refusing to redeem a poison pill to block a non-coercive, all-cash tender offer after it has had sufficient time to develop and present its own value-maximizing alternative transaction to shareholders?

Opinions:

Majority - Chancellor Allen

Yes. A board's refusal to redeem a poison pill to block a non-coercive tender offer, after it has developed its own alternative, is not a reasonable defensive measure in relation to the threat posed. The court analyzed the board's action under the two-prong Unocal test. The first prong requires a cognizable threat to the corporation. Here, the CCA offer was non-coercive (all-cash, for all shares), so the only threat was one of price inadequacy. The court accepted that a board's good-faith belief that an offer is inadequate constitutes a legitimate threat, justifying the use of a pill for a reasonable period to explore alternatives or negotiate a higher price. However, the second Unocal prong requires the defensive response to be proportional to the threat. In this case, the pill's legitimate defensive purpose—providing time to develop an alternative—had been exhausted. The board had already formulated its restructuring plan. At this 'end-stage' of the contest, the pill's only function was to preclude shareholders from choosing CCA's offer over the board's restructuring. The court found this preclusive effect to be a disproportionate response to the 'mild' threat of a $74 cash offer when the board's alternative was a highly complex and debatable package of securities valued at only slightly more ($76). The court concluded that shareholders must be allowed to make their own decision between the two competing transactions.

Analysis:

This case significantly refines the Unocal doctrine by establishing limits on a board's ability to 'just say no' to a non-coercive tender offer. It clarifies that a poison pill is a tool to protect shareholders from coercion and to give a board time to create superior value, not a tool to permanently entrench management or force shareholders to accept the board's preferred outcome. The decision marks a pivotal moment in takeover jurisprudence, championing shareholder choice once the board's negotiating and value-creating window has closed. Future cases would build on this 'end-stage' analysis, shaping the balance of power between boards and shareholders in control contests.

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