Yes, the board was allowed to create the poison pill. The court said that state law gives a company's board the power to manage its business, and that includes protecting it from threats. Creating a poison pill is a legal way to do that. The plan doesn't make a takeover impossible; an attacker could still try to convince shareholders to elect a new board that would cancel the plan. The court believed the board was acting in good faith to protect the company from a real threat—a hostile, two-step takeover that could be unfair to shareholders. Because the board did its homework and the defense was a reasonable response to the threat, their decision was valid.

Yes, the leaders of Household International, Inc. were allowed to make the Rights Plan and they did it the right way. The plan was a fair way to protect the company from being forced into a takeover. The leaders were informed, acted in good faith, and believed the plan was best for the company and its owners. The plan didn't unfairly stop owners from selling their shares or voting for new leaders, and it was a reasonable response to the worry about takeovers. If someone actually tries to take over the company, the leaders will still have to follow their duties to the company and owners, and their actions then will be judged by the same rules because the leaders showed they had good reasons to think there was a danger to the company, they investigated carefully and in good faith, and the plan was a fair response to the potential threat. It helps that most of the leaders who voted for the plan were outside directors who followed these standards.

It is undisputed that the Universal board's adoption of the rights plan as a defensive mechanism to combat hostile tender offers is a valid exercise of its business judgment to be protected by the business judgment rule

The ultimate response to an actual takeover bid must be judged by the Directors' actions at that time, and nothing we say here relieves [the directors] of their basic fundamental duties to the corporation and its stockholders

Therefore, the Selectica Board's future use of the Reloaded NOL Poison Pill must be evaluated if and when that issue arises

—upholding poison pill adopted as a pre-planned defensive measure because the company was "vulnerable" to a takeover

In Moran v. Household International, Inc., written shortly after the Unocal decision in 1985, the Delaware Supreme Court first upheld the legality of the poison pill as a valid takeover defense

… Supreme Court, in reviewing an attacked board of directors' preferred share purchase rights plan, under the business judgment rule, described the business judgment rule as a presumption that in making a business decision, directors of a corporation act on an informed basis, in good faith and in honest belief that an action is taken in the best interests of the company.

—is accorded the protection of the business judgment rule, and that rule's concomitant placement of the burden to rebut its presumption on the plaintiff, the board must carry its own initial two-part burden: First, a reasonableness test, which is satisfied by a demonstration that the board of directors had reasonable grounds for believing that a danger to corporate policy and …

When the [] Board of Directors is faced with a... request to redeem the Rights [Plan], they will not be able to arbitrarily reject the offer. They will be held to the same fiduciary standards any other board of directors would be held to in deciding to adopt a defensive mechanism, the same standard as they were held to in originally approving the Rights Plan

These duties stem in part from the quasi-trustee and agency relationship directors have to the corporation and stockholders that they serve

I] t has long been recognized that the relationship between grantor and recipient of a proxy is one of agency

Yes, a board of directors has the authority under Delaware law to adopt a poison pill rights plan, and its adoption is protected by the business judgment rule. The court found that the board possessed the statutory authority under Delaware General Corporation Law §§ 157 and 141(a) to issue the rights and manage the corporation's affairs, which includes planning for takeover contingencies. The 'flip-over' provision is a valid analogue to customary 'anti-destruction' clauses found in other corporate securities. The court rejected the argument that the Rights Plan usurps shareholders' right to receive tender offers, noting that several methods for a hostile acquirer to succeed still exist, such as conditioning a tender offer on the board redeeming the rights or waging a proxy contest to replace the board. Furthermore, the plan does not impermissibly restrict proxy contests, as evidence showed such contests are often won with less than 20% ownership. Applying the enhanced business judgment standard from *Unocal*, the court found the board acted on an informed basis, reasonably perceived a threat from coercive 'bust-up' takeovers, and adopted a defensive measure that was reasonable in relation to the threat posed. The decision to adopt the plan is therefore protected, though the board's future decision to redeem or not redeem the rights in the face of an actual offer would be subject to a separate fiduciary duty analysis at that time.

Yes. The directors of Household International, Inc. acted within their authority and appropriately applied the business judgment rule in adopting the Rights Plan. The Plan was a legitimate exercise of business judgment, designed to protect against coercive takeover tactics. The directors were informed, acted in good faith, and believed the Plan was in the best interests of the corporation and its shareholders. The Plan did not unduly restrict shareholders' rights to receive tender offers or conduct proxy contests, and it was reasonable in relation to the threat posed. The directors will be held to the same fiduciary standards in the event of an actual takeover bid, and their actions will be evaluated under the business judgment rule because the directors demonstrated that they had reasonable grounds for believing a danger to corporate policy and effectiveness existed, showed good faith and reasonable investigation, and the defensive mechanism was reasonable in relation to the threat posed. The proof is materially enhanced because a majority of the board favoring the proposal consisted of outside independent directors who acted in accordance with these standards.

Moran v. Household International, Inc.

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