Moran v. Household International, Inc.
1985 Del. Ch. LEXIS 389, 490 A.2d 1059 (1985)
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Rule of Law:
A board of directors' adoption of a shareholder rights plan (poison pill) is protected by the business judgment rule if the directors have an informed basis for believing the corporation is vulnerable to a takeover threat, and the plan is not primarily for entrenchment, but serves a rational corporate purpose, even if it indirectly limits share alienability or proxy contests.
Facts:
- Household International, Inc. (Household) was a diversified holding company, and its management became concerned about the company’s vulnerability as a takeover target in February 1984.
- John A. Moran, a Household director and Chairman of Dyson-Kissner-Moran Corporation (D-K-M), Household’s largest single shareholder, concluded Household’s stock was significantly undervalued.
- Moran approached Household’s Chairman, Donald C. Clark, to discuss a leveraged buy-out with management’s participation, and D-K-M subsequently increased its Household ownership by 500,000 shares.
- Clark declined the meeting request from the Murchison group, a Dallas-based investment company, who sought to discuss a matter of “mutual interest.”
- Clark engaged legal counsel (Wachtell, Lipton, Rosen and Katz) and investment bankers (Goldman, Sachs & Co.) to formulate a takeover policy for Household.
- On August 14, 1984, Household’s Board of Directors adopted a Preferred Share Purchase Rights Plan (the 'Rights Plan') by a majority vote, with Moran and John C. Whitehead dissenting.
- The Rights Plan issued one right for each common share, entitling holders to purchase a fraction of new preferred stock at an 'out of the money' price, but with significant 'triggering' and 'flip-over' features.
- The rights would 'trigger' if a person or group acquired 20% of Household’s common shares (or formed a group to vote 20%) or if a tender offer for 30% of outstanding stock was announced, and if a merger occurred, the rights would 'flip-over,' allowing holders to buy the acquiror's common stock at a deep discount.
Procedural Posture:
- John A. Moran and Dyson-Kissner-Moran Corporation (D-K-M), shareholders of Household, filed an action in the Delaware Court of Chancery, individually and derivatively, seeking to invalidate the Rights Plan.
- Gretl Goiter, another shareholder of Household, was permitted to intervene as an additional plaintiff in the action.
- Defendants, Household and its directors (excluding Moran and John C. Whitehead), filed a motion to dismiss the plaintiffs' complaints on several grounds, including failure to comply with demand requirements for derivative suits, lack of ripeness, and failure to join indispensable parties.
- The case proceeded to a nine-day trial in the Delaware Court of Chancery.
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Issue:
Does the adoption of a shareholder rights plan (poison pill) by a board of directors, intended to deter hostile takeovers but also potentially limiting shareholder alienability and proxy contest abilities, constitute a valid exercise of business judgment under Delaware law?
Opinions:
Majority - Walsh, Vice Chancellor
Yes, the adoption of Household's Preferred Share Purchase Rights Plan by the Board of Directors was a valid exercise of business judgment under Delaware law. The court found that the Household Board had an informed basis for believing the company was vulnerable to coercive two-tier takeovers, which were deemed destructive of shareholder interests. The Rights Plan, developed with extensive advice from legal and financial experts, was adopted after thorough discussion and served a rational corporate purpose to protect the corporation and all its constituencies from such threats. The court rejected the argument that the preferred stock issued under the plan was a 'sham security,' finding it had economic substance due to its ten-year life and potential protective value against partial tender offers. The court also applied the doctrine of 'independent legal significance,' stating that if an action can be accomplished under one section of the Delaware General Corporation Law (DGCL), it need not satisfy the requirements of another section to achieve the same result. While acknowledging that the plan indirectly limits the alienability of shares and deters certain proxy contests (particularly those involving a 20% ownership group), the court held these features were defensible as necessary to achieve the plan's overall deterrent effect against hostile takeovers. The court reiterated that directors are entitled to formulate a takeover policy, whether reactive or prospective, as long as it is taken to protect all corporate constituencies and not solely for entrenchment, consistent with the business judgment rule. The court further denied the defendants' motion to dismiss, concluding that the plaintiffs' claims adequately pled demand futility, were ripe for determination, and that the rights holders were not indispensable parties. The counterclaim by Household against Moran for alleged misuse of insider information was also dismissed for lack of evidential support.
Analysis:
This case is a landmark decision in corporate law, establishing judicial approval for the adoption of shareholder rights plans, commonly known as 'poison pills,' as a legitimate defensive strategy under the business judgment rule. It empowers target boards with a significant tool to deter hostile takeovers and negotiate with potential acquirors, thereby shifting the balance of power in change-of-control contests. The ruling underscored that proactive defensive measures, if adopted with an informed basis and for a rational corporate purpose, receive judicial deference, even if they indirectly impact shareholder rights like alienability and proxy contests. It clarified the application of the business judgment rule in contexts involving structural changes to the corporation, requiring boards to demonstrate a reasonable belief in a corporate threat while maintaining the ultimate burden of proof on the plaintiffs challenging the board's actions.
