Moran v. Household International, Inc.
500 A.2d 1346 (1985)
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Rule of Law:
The business judgment rule protects a board of directors' adoption of a pre-planned defensive mechanism, such as a Preferred Share Purchase Rights Plan ("poison pill"), so long as the adoption is authorized by law and the board can prove it had reasonable grounds to perceive a danger to corporate policy and the defense was reasonable in relation to the threat posed.
Facts:
- In early 1984, the management of Household International, Inc. became concerned about the company's vulnerability to coercive, two-tier hostile takeovers common in the financial services industry.
- Household's board considered various defensive measures, including amending its charter with a 'fair price' provision, but decided against it.
- John A. Moran, a Household director and chairman of its largest single stockholder (Dyson-Kissner-Moran Corporation or D-K-M), initiated discussions about a potential leveraged buyout of Household by D-K-M.
- Concerned about the general takeover climate, Household hired legal and financial advisors to formulate a comprehensive takeover policy.
- On August 14, 1984, Household's Board of Directors adopted a Preferred Share Purchase Rights Plan (“Rights Plan” or “poison pill”) by a 14-2 vote.
- The Rights Plan was adopted as a prospective, preventative measure and not in response to any specific or pending takeover bid.
- The plan contained a 'flip-over' provision, which would be triggered if an acquirer bought 20% of Household's stock and then consummated a merger. This provision would allow Household's remaining shareholders to purchase the acquirer's stock at a 50% discount, making a hostile takeover prohibitively expensive.
Procedural Posture:
- John A. Moran and Dyson-Kissner-Moran Corp. (D-K-M) filed a lawsuit against Household International, Inc. in the Delaware Court of Chancery.
- Gretl Golter, a shareholder, was permitted to join the lawsuit as an additional plaintiff.
- The plaintiffs sought a declaratory judgment that Household's Preferred Share Purchase Rights Plan was invalid.
- After a trial, the Court of Chancery ruled in favor of Household, upholding the Rights Plan as a valid exercise of the board's business judgment.
- Moran, D-K-M, and Golter, as appellants, appealed the trial court's decision to the Supreme Court of Delaware.
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Issue:
Does a board of directors have the authority under Delaware law to adopt a Preferred Share Purchase Rights Plan as a pre-planned defensive measure against potential hostile takeovers, and is such an adoption protected by the business judgment rule?
Opinions:
Majority - McNeilly, Justice
Yes, a board of directors has the authority to adopt such a plan, and the decision is protected by the business judgment rule. The board possesses statutory authority under Delaware General Corporation Law, specifically §§ 157 and 141(a), to issue the rights as part of its duty to manage the business and affairs of the corporation. The court rejected the argument that § 157 is limited to corporate financing, stating that corporate law must evolve and that the 'flip-over' provision is analogous to permissible 'anti-destruction' clauses. The Plan does not unlawfully usurp shareholders' rights to receive tender offers or conduct proxy contests; rather, it empowers the board to prevent coercive bids and negotiate better terms, while still leaving open various avenues for a hostile acquirer to succeed. Applying the enhanced business judgment rule from Unocal, the court found the directors met their burden by showing they had 'reasonable grounds for believing that a danger to corporate policy and effectiveness existed' (i.e., coercive takeovers) and that the defensive mechanism was 'reasonable in relation to the threat posed.' The board acted on an informed basis after receiving extensive information and expert advice, and not for entrenchment purposes.
Analysis:
This landmark decision validated the use of the 'poison pill' as a preemptive defensive tactic, fundamentally shifting the balance of power in corporate takeovers from acquirers to incumbent boards. It established that directors do not have to wait for a specific threat to arise before adopting defensive measures. By extending the enhanced scrutiny of the Unocal test to a pre-planned defense, the court affirmed the board's proactive role in protecting the corporation from perceived threats, while also mandating that such power must be wielded responsibly and in proportion to the threat. The ruling empowered boards to negotiate with potential bidders, thereby preventing coercive, low-ball offers and theoretically securing better value for shareholders in a change-of-control transaction.
