Exhibit 70
IN THE SUPREME COURT OF THE STATE OF DELAWARE
QUICKTURN DESIGN SYSTEMS, )
INC., a Delaware corporation, )
KEITH R. LOBO, GLEN M. )
ANTLE, RICHARD C. )
ALBERDING, MICHAEL R. )
D'AMOUR, YEN-SON (PAUL) )
HUANG, DR. DAVID K. LAM, )
WILLIAM A. HASLER, and )
CHARLES D. KISSNER, )
)
Defendants below, ) No. 511, 1998
Appellants, )
)
v. ) Court Below: Court of Chancery
) of the State of Delaware,
HOWARD SHAPIRO, ) in and for New Castle County
) C.A. No. 16588
Plaintiff Below, )
Appellee. )
_______________________________
)
)
QUICKTURN DESIGN SYSTEMS, )
INC., a Delaware corporation, )
KEITH R. LOBO, GLEN M. )
ANTLE, RICHARD C. )
ALBERDING, MICHAEL R. )
D'AMOUR, YEN-SON (PAUL) )
HUANG, DR. DAVID K. LAM, )
WILLIAM A. HASLER, and )
CHARLES D. KISSNER, )
)
Defendants below, ) No. 512, 1998
Appellants, )
)
v. ) Court Below: Court of Chancery
) of the State of Delaware,
) in and for New Castle County
MENTOR GRAPHICS CORPORATION, ) C.A. No. 16584
an Oregon corporation, and )
MGZ CORP., a Delaware )
corporation, )
)
Plaintiffs Below, )
Appellees, )
Submitted: December 29, 1998
Decided: December 31, 1998
Before WALSH, HOLLAND and HARTNETT, Justices
Upon appeal from the Court of Chancery. AFFIRMED.
Kenneth J. Nachbar, Esquire, William M. Lafferty, Esquire, and Donna L.
Culver, Esquire, of Morris, Nichols, Arsht & Tunnell, Wilmington, Delaware;
and James A. DiBoise, Esquire and David J. Berger, Esquire (argued), of
Wilson, Sonsini, Goodrich & Rosati, P.C., Palo Alto, California, attorneys for
appellants.
Kevin G. Abrams, Esquire (argued), Thomas A. Beck, Esquire, Lisa A.
Schmidt, Esquire, J. Travis Laster, Esquire, Dominick Gattuso, Esquire, and
Michael K. Reilly, Esquire, of Richards, Layton & Finger, Wilmington,
Delaware; Fredric J. Zepp, Esquire, of Latham & Watkins, San Francisco,
California, and Marc W. Rappel, Esquire, of Latham & Watkins, Los Angeles,
California; attorneys for appellees, Mentor Graphics Corporation and MGZ
Corporation.
Joseph A. Rosenthal, Esquire, and Norman M. Monhait, Esquire, of Rosenthal,
Monhait, Gross & Goddess, P.A., Wilmington, Delaware; and Stanley Bernstein,
Esquire and Abraham I. Katsman, Esquire, of Bernstein, Liebhard & Lifshitz,
LLP, New York, New York, for appellee, Howard Shapiro.
HOLLAND, Justice:
2
This is an expedited appeal from a final judgment entered by the Court of
Chancery. The dispute arises out of an ongoing effort by Mentor Graphics
Corporation ( "Mentor"), a hostile bidder, to acquire Quickturn Design
Systems, Inc. ("Quickturn"), the target company. The plaintiffs-appellees are
Mentor/1/ and an unaffiliated stockholder of Quickturn. The named defendants-
appellants are Quickturn and its directors.
In response to Mentor's tender offer and proxy contest to replace the
Quickturn board of directors, as part of Mentor's effort to acquire Quickturn,
the Quickturn board enacted two defensive measures. First, it amended the
Quickturn shareholder rights plan ("Rights Plan") by adopting a "no hand"
feature of limited duration (the "Delayed Redemption Provision" or "DRP").
Second, the Quickturn board amended the corporation's bylaws to delay the
holding of any special stockholders meeting requested by stockholders for 90
to 100 days after the validity of the request is determined (the "Amendment"
or "ByLaw Amendment").
Mentor filed actions for declarative and injunctive relief in the Court
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/1/ Mentor and MGZ Corp., a wholly owned Mentor subsidiary specially
created as a vehicle to acquire Quickturn, are referred to collectively as
"Mentor." Unless otherwise indicated, Mentor and Howard Shapiro, the
shareholder plaintiff in Court of Chancery Civil Action No. 16588, are
referred to collectively as "Mentor."
3
of Chancery challenging the legality of both defensive responses by
Quickturn's board. The Court of Chancery conducted a trial on the merits. It
determined that the By-Law Amendment is valid. It also concluded, however,
that the DRP is invalid on fiduciary duty grounds.
In this appeal, Quickturn argues that the Court of Chancery erred in
finding that Quickturn's directors breached their fiduciary duty by adopting
the Delayed Redemption Provision. We have concluded that, as a matter of
Delaware law, the Delayed Redemption Provision was invalid. Therefore, on that
alternative basis, the judgment of the Court of Chancery is affirmed.
STATEMENT OF FACTS/2/
THE PARTIES
Mentor (the hostile bidder) is an Oregon corporation, headquartered in
Wilsonville, Oregon, whose shares are publicly traded on the NASDAQ national
market system. Mentor manufactures, markets, and supports electronic design
automation ("EDA") software and hardware. It also provides related services that
enable engineers to design, analyze, simulate,
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/2/ Given the expedited nature of the appeal, this Court has relied
almost verbatim on the excellent recitation of facts set forth in the Court
of Chancery's opinion. Mentor Graphics Corp. v. Quickturn Design Systems, et
al., Del. Ch., C.A. No. 16584, Jacobs, V.C. (Dec. 7, 1998) .
4
model, implement, and verify the components of electronic systems. Mentor
markets its products primarily for large firms in the communications,
computer, semiconductor, consumer electronics, aerospace, and transportation
industries.
Quickturn, the target company, is a Delaware corporation, headquartered in
San Jose, California. Quickturn has 17,922,518 outstanding shares of common
stock/3/ that are publicly traded on the NASDAQ national market system.
Quickturn invented, and was the first company to successfully market, logic
emulation technology, which is used to verify the design of complex silicon
chips and electronics systems. Quickturn is currently the market leader in the
emulation business, controlling an estimated 60% of the worldwide emulation
market and an even higher percentage of the United States market. Quickturn
maintains the largest intellectual property portfolio in the industry, which
includes approximately twenty-nine logic emulation patents issued in the
United States, and numerous other patents issued in foreign jurisdictions.
Quickturn's customers include the world's leading technology companies, among
them Intel, IBM, Sun Microsystems,
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/3/ As of July 30, 1998.
5
Texas Instruments, Hitachi, Fujitsu, Siemens, and NEC.
Quickturn's board of directors consists of eight members, all but one
of whom are outside, independent directors. All have distinguished careers and
significant technological experience./4/ Collectively, the board has more than
30 years of experience in the EDA industry and owns one million shares (about
5%) of Quickturn's common stock.
Since 1989, Quickturn has historically been a growth company, having
experienced increases in earnings and revenues during the past seven years.
Those favorable trends were reflected in Quickturn's stock prices, which reached
a high of $15.75 during the first quarter of 1998, and generally traded in the
$15.875 to $21.25 range during the year preceding Mentor's hostile
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/4/ The Quickturn board includes Messrs. Glen Antle (President and
Chairman of Quickturn's board of directors); Michael D'Amour (Quickturn's
founding CEO and chairman through 1993, and Executive Vice President for
research and development and head of international sales until he left Quickturn
management in 1995); Dean William A. Hasler (a former Vice chairman and partner
of KPMG Peat Marwick; a former Dean of the Haas Graduate School of Business at
the University of California, Berkeley, a position he held until 1998; and
currently a technology and business advisor); Keith Lobo (Quickturn's President
and CEO); Charles D. Kissner (currently CEO and Chairman of the Board of Digital
Microwave Corporation, a telecommunications company, and a former President,
CEO, and director for Aristacom International, Inc.; also a former AT&T
executive); Richard Alberding (a management consultant for high technology
companies; and who currently serves on the board of directors of several
technology companies); Dr. David Lam (former Vice President at Wyse Technology,
former President and CEO of Expert Edge, Inc., and currently a technology and
business advisor in the semiconductor equipment industry and Chairman of the
David Lam Group); Dr. Yen-Son (Paul) Huang (a co-founder and President of PiE
and, following PiE's merger with Quickturn in 1993, Executive Vice President of
Quickturn until June 1997. Since then, Dr. Huang has served Quickturn only as a
director).
6
bid.
Since the spring of 1998, Quickturn's earnings, revenue growth, and stock
price levels have declined, largely because of the downturn in the
semiconductor industry and more specifically in the Asian semiconductor
market. Historically, 30%-35% of Quickturn's annual sales (approximately $ 35
million) had come from Asia, but in 1998, Quickturn's Asian sales declined
dramatically with the downturn of the Asian market./5/ Management has
projected that the negative impact of the Asian market upon Quickturn's sales
should begin reversing itself sometime between the second half of 1998 and
early 1999.
QUICKTURN-MENTOR PATENT LITIGATION
Since 1996, Mentor and Quickturn have been engaged in patent litigation
that has resulted in Mentor being barred from competing in the United States
emulation market. Because its products have been adjudicated to infringe upon
Quickturn's patents, Mentor currently stands enjoined from selling,
manufacturing, or marketing its emulation products in the United
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/5/ By the summer of 1998, Quickturn's stock price had declined to
$6 per share. On August 11, 1998, the closing price was $8.00. It was in this
"trough" period that Mentor, which had designs upon Quickturn since the fall
of 1997, saw an opportunity to acquire Quickturn for an advantageous price.
7
States. Thus, Mentor is excluded from an unquestionably significant market for
emulation products.
The origin of the patent controversy was Mentor's sale of its hardware
emulation assets, including its patents, to Quickturn in 1992. Later, Mentor
reentered the emulation business when it acquired a French company called Meta
Systems ("Meta") and began to market Meta's products in the United States in
December 1995. Quickturn reacted by commencing a proceeding before the
International Trade Commission ("ITC") claiming that Meta and Mentor were
infringing Quickturn's patents./6/ In August 1996, the ITC issued an order
prohibiting Mentor from importing, selling, distributing, advertising, or
soliciting in the United States, any products manufactured by Meta. That
preliminary order was affirmed by the Federal Circuit Court of Appeals in
August 1997./7/ In December 1997, the ITC issued a Permanent Exclusion
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/6/ See In the Matter of Certain Hardware Logic Emulation Systems and
Components Thereof, Inv. No. 337-TA-383, Notice of Investigation, 61 Fed. Reg.
9486 (ITC March 8, 1996).
/7/ See In the Matter of Certain Hardware Logic Emulation Systems and
Components Thereof, Inv. No. 337-TA-383, Notice of Commission Decision Not to
Modify or Vacate an Initial Determination Granting Temporary Relief, and
Issuance of a Temporary Limited Exclusion Order and a Temporary Cease and Desist
Order, Subject to Posting of Bond By Complainant (ITC Aug. 5, 1996) ("ITC
Temporary Orders"), aff'd, Mentor Graphics Corp. v. U.S. Int'l Trade Commission,
No. 97-1106, 1997, U.S. App., LEXIS 21646 (Fed. Cir. Aug. 15, 1997).
(continued...)
8
Order prohibiting Mentor from importing, selling, marketing, advertising, or
soliciting in the United States, until at least April 28, 2009, any of the
emulation products manufactured by Meta outside the United States./8/
At present, the only remaining patent litigation is pending in the
Oregon Federal District Court. Quickturn is asserting a patent infringement
damage claim that, Quickturn contends, is worth approximately $225 million.
Mentor contends that Quickturn's claim is worth only $5.2 million or even less.
MENTOR'S INTEREST IN ACQUIRING QUICKTURN
Mentor began exploring the possibility of acquiring Quickturn. If
Mentor owned Quickturn, it would also own the patents, and would be in a
position to "unenforce" them by seeking to vacate Quickturn's injunctive
orders against Mentor in the patent litigation. The exploration process began
when Mr. Bernd Braune, a Mentor senior executive, retained Arthur
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/7/(...continued)
Mentor was also sanctioned more than $400,000 in that proceeding for
advancing defenses "based on inaccurate and misleading evidence" thereby
"needlessly increasing the cost of litigation" as a result of its continuing
practice of "bad faith discovery." In the Matter of Certain Hardware Logic
Emulation Systems, ALJ Order No. 96, Inv. No. 337-TA-383, 1997 ITC LEXIS 288
at *97 (ITC July 31, 1996).
/8/ In the Matter of Certain Hardware Logic Emulation Systems and
Components Thereof, Inv. No. 337-TA-383, Notice of Issuance of a Permanent
Limited Exclusion Order and a Permanent Cease and Desist Order (ITC Dec. 3,
1997) ("ITC Permanent Orders")
9
Andersen ("Andersen") to advise Mentor how it could successfully compete in the
emulation market. The result was a report Andersen issued in October 1997,
entitled "PROJECT VELOCITY"/9/ and "Strategic Alternatives Analysis." The
Andersen report identified several advantages and benefits Mentor would enjoy
if it acquired Quickturn./10/
In December 1997, Mentor retained Salomon Smith Barney ("Salomon") to
act as its financial advisor in connection with a possible acquisition of
Quickturn. Salomon prepared an extensive study which it reviewed with Mentor's
senior executives in early 1998. The Salomon study concluded that although a
Quickturn acquisition could provide substantial value for Mentor, Mentor could
not afford to acquire Quickturn at the then-prevailing market price levels.
Ultimately, Mentor decided not to attempt an acquisition of Quickturn during the
first half of 1998.
After Quickturn's stock price began to decline in May 1998, however,
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/9/ Andersen used "Project Velocity" and "Cyclone" as code names for
the study and Quickturn, respectively.
/10/ These included: (i) eliminating the time and expense associated
with litigation; (ii) creating synergy from combining two companies with
complementary core competencies; (iii) reducing customer confusion over
product availability, which in turn would accelerate sales; and (iv)
eliminating the threat of a large competitor moving into the emulation
market. Mentor has utilized these reasons in public statements in which it
attempted to explain why its bid made sense.
10
Gregory Hinckley, Mentor's Executive Vice President, told Dr. Walden Rhines,
Mentor's Chairman, that "the market outlook being very weak due to the Asian
crisis made it a good opportunity" to try acquiring Quickturn for a cheap
price. Mr. Hinckley then assembled Mentor's financial and legal advisors,
proxy solicitors, and others, and began a three month process that culminated
in Mentor's August 12, 1998 tender offer.
MENTOR TENDER OFFER AND PROXY CONTEST
On August 12, 1998, Mentor announced an unsolicited cash tender offer for
all outstanding common shares of Quickturn at $12.125 per share, a price
representing an approximate 50% premium over Quickturn's immediate pre-offer
price, and a 20% discount from Quickturn's February 1998 stock price levels.
Mentor's tender offer, once consummated, would be followed by a second step
merger in which Quickturn's nontendering stockholders would receive, in cash,
the same $12.125 per share tender offer price.
Mentor also announced its intent to solicit proxies to replace the
board at a special meeting. Relying upon Quickturn's then-applicable by-law
provision governing the call of special stockholders meetings, Mentor began
soliciting agent designations from Quickturn stockholders to satisfy the
by-
11
law's stock ownership requirements to call such a meeting./11/
QUICKTURN BOARD MEETINGS
Under the Williams Act, Quickturn was required to inform its
shareholders of its response to Mentor's offer no later than ten business days
after the offer was commenced. During that ten day period, the Quickturn board
met three times, on August 13, 17, and 21, 1998. During each of those meetings,
it considered Mentor's offer and ultimately decided how to respond.
The Quickturn board first met on August 13, 1998, the day after Mentor
publicly announced its bid. All board members attended the meeting, for the
purpose of evaluating Mentor's tender offer. The meeting lasted for several
hours. Before or during the meeting, each board member received a package that
included (i) Mentor's press release announcing the unsolicited offer; (ii)
Quickturn's press release announcing its board's review of Mentor's offer; (iii)
Dr. Rhines's August 11 letter to Mr. Antle; (iv) the complaints filed by Mentor
against Quickturn and its directors; and (v) copies of
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/11/ The applicable by-law (Article II, Section 2.3) authorized a
call of a special stockholders meeting by shareholders holding at least 10%
of Quickturn's shares. In their agent solicitation, Mentor informed Quickturn
stockholders that Mentor intended to call a special meeting approximately 45
days after it received sufficient agent designations to satisfy the 10%
requirement under the original by-law. The solicitation also disclosed
Mentor's intent to set the date for the special meeting, and to set the
record date and give formal notice of that meeting.
12
Quickturn's then-current Rights Plan and by-laws.
The Quickturn board first discussed retaining a team of financial advisors
to assist it in evaluating Mentor's offer and the company's strategic
alternatives. The board discussed the importance of selecting a qualified
investment bank, and considered several investment banking firms. Aside from
Hambrecht & Quist ("H&Q"), Quickturn's long-time investment banker, other
firms that the board considered included Goldman Sachs & Co. and Morgan
Stanley Dean Witter. Ultimately, the board selected H&Q, because the board
believed that H&Q had the most experience with the EDA industry in general and
with Quickturn in particular./12/
During the balance of the meeting, the board discussed for
approximately one or two hours (a) the status, terms, and conditions of Mentor's
offer; (b) the status of Quickturn's patent litigation with Mentor; (c) the
applicable rules and regulations that would govern the board's response to the
offer required by the Securities Exchange Act of 1934 (the "34 Act"); (d) the
board's fiduciary duties to Quickturn and its shareholders in a tender
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/12/ Apparently, the board had already decided to retain Quickturn's
outside counsel, Wilson, Sonsini, Goodrich & Rosati, as its legal advisors.
Larry Sonsini, Esquire, a senior partner of that firm, is shown on the minutes
of all three board meetings as "Secretary of the Meeting," and appears to have
authored those minutes in that capacity.
13
offer context; (e) the scope of defensive measures available to the
corporation if the board decided that the offer was not in the best interests
of the company or its stockholders; (f) Quickturn's then-current Rights Plan
and special stockholders meeting by-law provisions; (g) the need for a federal
antitrust filing; and (h) the potential effect of Mentor's offer on
Quickturn's employees. The board also instructed management and H&Q to prepare
analyses to assist the directors in evaluating Mentor's offer, and scheduled
two board meetings, August 17, and August 21, 1998.
The Quickturn board next met on August 17, 1998. That meeting centered
around financial presentations by management and by H&Q. Mr. Keith Lobo,
Quickturn's President and CEO, presented a Medium Term Strategic Plan, which
was a "top down" estimate detailing the economic outlook and the company's
future sales, income prospects and future plans (the "Medium Term Plan"). The
Medium Term Plan contained an optimistic (30%) revenue growth projection for
the period 1998-2000./13/ After management made its presentation, H&Q supplied
its valuation of Quickturn, which relied upon a "base case" that assumed
management's 30% revenue
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/13/ The Court of Chancery concluded that the Quickturn board had
grounds to anticipate that the company could "turn around" in a year and
perform at the projected revenue levels.
14
growth projection. On that basis, H&Q presented various "standalone"
valuations based on various techniques, including a discounted cash flow
("DCF") analysis. Finally, the directors discussed possible defensive measure
but took no action at that time.
The Quickturn board held its third and final meeting in response to
Mentor's offer on August 21, 1998. Again, the directors received extensive
materials and a further detailed analysis performed by H&Q. The focal point of
that analysis was a chart entitled "Summary of Implied Valuation." That chart
compared Mentor's tender offer price to the Quickturn valuation ranges
generated by H&Q's application of five different methodologies./14/ The chart
showed that Quickturn's value under all but one of those methodologies was
higher than Mentor's $12.125 tender offer price.
QUICKTURN'S BOARD REJECTS MENTOR'S OFFER AS INADEQUATE
After hearing the presentations, the Quickturn board concluded that
Mentor's offer was inadequate, and decided to recommend that Quickturn
shareholders reject Mentor's offer. The directors based their decision upon:
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/14/ The five methodologies and the respective price ranges were:
Historical Trading Range ($6.13- $21.63); Comparable Public Companies
($2.55-$15.61); Comparable M&A Transactions ($6.00- $31.36); Comparable Premiums
Paid ($9.54-$10.72); and Discounted Cash Flow Analysis ($11.88- $57.87).
15
(a) H&Q's report; (b) the fact that Quickturn was experiencing a temporary
trough in its business, which was reflected in its stock price; (c) the
company's leadership in technology and patents and resulting market share; (d)
the likely growth in Quickturn's markets (most notably, the Asian market) and
the strength of Quickturn's new products (specifically, its Mercury product);
(e) the potential value of the patent litigation with Mentor; and (f) the
problems for Quickturn's customers, employees, and technology if the two
companies were combined as the result of a hostile takeover.
QUICKTURN'S DEFENSIVE MEASURES
At the August 21 board meeting, the Quickturn board adopted two defensive
measures in response to Mentor's hostile takeover bid. First, the board
amended Article II, Section 2.3 of Quickturn's by-laws, which permitted
stockholders holding 10% or more of Quickturn's stock to call a special
stockholders meeting. The By-Law Amendment provides that if any such special
meeting is requested by shareholders, the corporation (Quickturn) would fix
the record date for, and determine the time and place of, that special
meeting, which must take place not less than 90 days nor more than 100 days
after the receipt and determination of the validity of the shareholders'
request.
16
Second, the board amended Quickturn's shareholder Rights Plan by
eliminating its "dead hand" feature and replacing it with the Deferred
Redemption Provision, under which no newly elected board could redeem the
Rights Plan for six months after taking office, if the purpose or effect of
the redemption would be to facilitate a transaction with an "Interested
Person" (one who proposed, nominated or financially supported the election of
the new directors to the board)./15/ Mentor would be an Interested Person.
The effect of the By-Law Amendment would be to delay a shareholder
called special meeting for at least three months. The effect of the DRP would be
to delay the ability of a newly-elected, Mentor-nominated board to redeem the
Rights Plan or "poison pill" for six months, in any transaction with an
Interested Person. Thus, the combined effect of the two defensive measures
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/15/ The amended Rights Plan pertinently provides that: "[I]n the event
that a majority of the Board of Directors of the Company is elected by
stockholder action at an annual or special meeting of stockholders, then until
the 180th day following the effectiveness of such election (including any
postponement or adjournment thereof), the Rights shall not be redeemed if such
redemption is reasonably likely to have the purpose or effect of facilitating a
Transaction with an Interested Person."
An "Interested Person" is defined under the amended Rights Plan as "any
Person who (i) is or will become an Acquiring Person if such Transaction were to
be consummated or an Affiliate or Associate of such a Person, and (ii) is, or
directly or indirectly proposed, nominated or financially supported, a director
of [Quickturn] in office at the time of consideration of such Transaction who
was elected at an annual or special meeting of stockholders."
17
would be to delay any acquisition of Quickturn by Mentor for at least nine
months.
PROCEDURAL HISTORY
Mentor filed this action in the Court of Chancery on August 12, 1998,
seeking a declaratory judgment that Quickturn's newly adopted takeover
defenses are invalid and an injunction requiring the Quickturn board to
dismantle those defenses. After expedited briefing and oral argument, the
Court of Chancery denied Quickturn's case dispositive pre-trial motion on
October 9, 1998./16/ A trial was held on October 19, 20, 23, 26 and 28, 1998.
Thereafter, the parties submitted post-trial briefs on an expedited schedule.
During the course of the litigation in the Court of Chancery, the
Quickturn board, relying upon the By-Law Amendment, noticed the special meeting
requested by Mentor for January 8, 1999 -- 71 days after the October 1, 1998
meeting date originally noticed by Mentor./17/ After the trial, Mentor
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/16/ Mentor Graphics Corp. v. Quickturn Design Systems, et al., Del.
Ch., C.A. No. 16584, Jacobs, V.C. (Oct. 9, 1998).
/17/ Mentor later renoticed the special meeting date to November 24,
1998, anticipating that the Court of Chancery would issue its decision before
that time. After the Court of Chancery informed the parties that it would be
unable to issue a decision by November 24, Mentor agreed that its meeting
would be convened and then immediately adjourned to a later date.
18
announced in Amendments to its Schedule 14A-1 that were filed with the
Securities and Exchange Commission, that it had received tenders of Quickturn
shares which, together with the shares that Mentor already owned, represented
over 51% of Quickturn's outstanding stock.
QUICKTURN BY-LAW AMENDMENT
At the time Mentor commenced its tender offer and proxy contest,
Quickturn's by-laws authorized shareholders holding at least 10% of
Quickturn's voting stock to call a special meeting of stockholders. The then-
applicable by-law, Article II, Section 2.3, read thusly:
A special meeting of the stockholders may be called at any time by (i)
the board of directors, (ii) the chairman of the board, (iii) the
president, (iv) the chief executive officer or (v) one or more
shareholders holding shares in the aggregate entitled to cast not less
than ten percent (10%) of the votes at that meeting.
At the August 21, 1998 board meeting, the Quickturn board amended
Section 2.3 in response to the Mentor bid, to read as follows:
A special meeting of the stockholders may be called at any time by (i)
the board of directors, (ii) the chairman of the board, (iii) the
president, (iv) the chief executive officer or (v) subject to the
procedures set forth in this Section 2.3, one or more stockholders
holding shares in the aggregate entitled to cast not less than ten
percent (10%) of the votes at that meeting.
Upon request in writing sent by registered mail to the president or
chief executive officer by any stockholder or stockholders
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entitled to call a special meeting of stockholders pursuant to this Section
2.3, the board of directors shall determine a place and time for such
meeting, which time shall be not less than ninety (90) nor more than one
hundred (100) days after the receipt and determination of the validity of
such request and a record date for the determination of stockholders
entitled to vote at such meeting in the manner set forth in Section 2.12
hereof. following such receipt and determination, it shall be the duty of
the secretary to cause notice to be given to the stockholders entitled to
vote at such meeting in the manner set forth in Section 2.4 hereof, that a
meeting will be held at the time and place so determined.
The Court of Chancery found that the Quickturn board amended the By-Law
because (i) the original Section 2.3 was incomplete: it did not explicitly state
who would be responsible for determining the time, place, and record date for
the meeting and (ii) the original by-law language arguably would have allowed a
hostile bidder holding the requisite percentage of shares to call a special
stockholders meeting on minimal notice and stampede the shareholders into making
a decision without time to become adequately informed.
The Court of Chancery concluded that the By-Law Amendment responded to
those concerns by explicitly making the Quickturn board responsible for fixing
the time, place, record date and notice of the special meeting and by mandating
a 90 to 100 day period of delay for holding the meeting after the validity of
the shareholder's meeting request is determined.
20
That specific delay period was chosen to make Section 2.3 parallel to, and
congruent with, Quickturn's "advance notice" by-law, which contained a similar
90 to 100 day minimum advance notice period.
The only By-Law Amendment-related issue that the Court of Chancery decided
was whether the Amendment, standing alone, fell outside any range of
potentially reasonable responses and, therefore, constituted a
disproportionate response to the threat posed by the Mentor tender offer and
proxy contest. Among the factors the Court of Chancery considered were whether
the challenged defensive response "is a statutorily authorized form of
business decision that a board of directors may routinely make in a non-
takeover context,"/18/ and whether the response "was limited and corresponded
in degree or magnitude to the degree or magnitude of the threat."/19/
The Court of Chancery concluded that the Quickturn board's adoption of
the By-Law Amendment did not violate the fiduciary principles embodied
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/18/ Unitrin, Inc. v. American General Corp., Del. Supr., 651 A.2d
1361, 1389 (1995); Unocal Corp. v. Mesa Petroleum Co., Del. Supr., 493 A.2d
946, 958 (1985); Cheff v. Mathes, Del. Supr., 199 A.2d 548, 554 (1964).
/19/ Unitrin, Inc. V. American General Corp., 651 A.2d at 1389.
21
in UNOCAL and its progeny./20/ Although the Delayed Redemption Provision and
the By-Law Amendment were enacted as a concerted defensive response to
Mentor's hostile takeover efforts, Mentor did not file a cross-appeal
challenging the Court of Chancery's decision upholding the validity of
Quickturn's amendment to its by-laws. Consequently, the Court of Chancery's
ruling on the By-Law Amendment is not at issue in this appeal and has become
final.
QUICKTURN'S DELAYED REDEMPTION PROVISION
At the time Mentor commenced its bid, Quickturn had in place a Rights
Plan that contained a so-called "dead hand" provision. That provision had a
limited "continuing director" feature that became operative only if an insurgent
that owned more than 15% of Quickturn's common stock successfully waged a
proxy contest to replace a majority of the board. In that event, only the
"continuing directors" (those directors in office at the time the poison pill
was adopted) could redeem the rights.
During the same August 21, 1998 meeting at which it amended the
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/20/ The Court of Chancery noted, however, that its "conclusion
should not be regarded as a pronouncement that a by-law mandated 90 to 100
delay interval between the request for and the holding of a
shareholder-initiated special meeting is invariably reasonable as a matter of
law." Mentor Graphics Corp. v. Quickturn Design Systems, et al., Del. Ch.,
C.A. No. 16584, Jacobs, V.C., slip op. at 43 (Dec. 7, 1998).
22
special meeting by-law, the Quickturn board also amended the Rights Plan to
eliminate its "continuing director" feature, and to substitute a "no hand" or
"delayed redemption provision" into its Rights Plan. The Delayed Redemption
Provision provides that, if a majority of the directors are replaced by
stockholder action, the newly elected board cannot redeem the rights for six
months if the purpose or effect of the redemption would be to facilitate a
transaction with an "Interested Person."/21/
It is undisputed that the DRP would prevent Mentor's slate, if elected
as the new board majority, from redeeming the Rights Plan for six months
following their election, because a redemption would be "reasonably likely to
have the purpose or effect of facilitating a Transaction" with Mentor, a party
that "directly or indirectly proposed, nominated or financially supported" the
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/21/ The "no hand" or Delayed Redemption Provision is found in a new
Section 23(b) of the Rights Plan, which states:
(b) Notwithstanding the provisions of Section 23(a), in the
event that a majority of the Board of Directors of the Company is
elected by stockholder action at an annual or special meeting of
stockholders, then until the 180th day following the effectiveness of
such election (including any postponement or adjournment thereof), the
Rights shall not be redeemed if such redemption is reasonably likely to
have the purpose or effect of facilitating a Transaction with an
Interested Person.
Substantially similar provisions were added to Sections 24 ("Exchange") and 27
("Supplements and Amendments") of the Rights Plan.
23
election of the new board. Consequently, by adopting the DRP, the Quickturn
board built into the process a six month delay period in addition to the 90 to
100 day delay mandated by the By-Law Amendment.
COURT OF CHANCERY
INVALIDATES DELAYED REDEMPTION PROVISION
When the board of a Delaware corporation takes action to resist a
hostile bid for control, the board of directors' defensive actions are
subjected to "enhanced" judicial scrutiny./22/ For a target board's actions
to be entitled to business judgment rule protection, the target board must
first establish that it had reasonable grounds to believe that the hostile
bid constituted a threat to corporate policy and effectiveness; and second,
that the defensive measures adopted were "proportionate," that is, reasonable
in relation to the threat that the board reasonably perceived./23/ The
Delayed Redemption Provision was reviewed by the Court of Chancery pursuant
to that standard.
The Court of Chancery found: "the evidence, viewed as a whole, shows
that the perceived threat that led the Quickturn board to adopt the DRP,
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/22/ Unocal Corp. v. Mesa Petroleum Co., Del. Supr., 493 A.2d 946, 955
(1985).
/23/ Id.; See also Unitrin, Inc. v. American General Corp., Del. Supr.,
651 A.2d 1361, 1372 (1995); Paramount Communications, Inc. v. Time, Inc., Del.
Supr., 571 A.2d 1140, 1152 (1990).
24
was the concern that Quickturn shareholders might mistakenly, in ignorance of
Quickturn's true value, accept Mentor's inadequate offer, and elect a new
board that would prematurely sell the company before the new board could
adequately inform itself of Quickturn's fair value and before the shareholders
could consider other options."/24/ The Court of Chancery concluded that
Mentor's combined tender offer and proxy contest amounted to substantive
coercion./25/ Having concluded that the Quickturn board reasonably perceived a
cognizable threat, the Court of Chancery then examined whether the board's
response -- the Delayed Redemption Provision -- was proportionate in relation
to that threat.
In assessing a challenge to defensive measures taken by a target
board in response to an attempted hostile takeover, enhanced judicial
scrutiny requires an evaluation of the board's justification for each
contested defensive measure and its concomitant results./26/ The Court of
Chancery found that the Quickturn board's "justification or rationale for
adopting the Delayed
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/24/ Mentor Graphics Corp. v. Quickturn Design Systems, et al., Del.
Ch., C.A. No. 16584, Jacobs, V.C., slip op. at 50 (Dec. 7, 1998).
/25/ Unitrin, Inc. v. American General Corp., 651 A.2d at 1387.
/26/ Id.
25
Redemption Provision was to force ANY newly elected board to take sufficient
time to become familiar with Quickturn and its value, and to provide
shareholders the opportunity to consider alternatives, before selling
Quickturn to ANY acquiror."/27/ The Court of Chancery concluded that the
Delayed Redemption Provision could not pass the proportionality test.
Therefore, the Court of Chancery held that "the DRP cannot survive scrutiny
under Unocal and must be declared invalid."/28/
DELAYED REDEMPTION PROVISION
VIOLATES FUNDAMENTAL DELAWARE LAW
In this appeal, Mentor argues that the judgment of the Court of Chancery,
should be affirmed because the Delayed Redemption Provision is invalid as a
matter of Delaware law. According to Mentor, the Delayed Redemption Provision,
like the "dead hand" feature in the Rights Plan that was held to be invalid in
Toll Brothers,/29/ will impermissibly deprive any newly elected board
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/27/ Mentor Graphics Corp. v. Quickturn Design Systems, et al., del.
Ch., C.A. No. 16584, Jacobs, V.C., slip op. at 64 (Dec. 7, 1998).
/28/ Id.
/29/ Carmody v. Toll Brothers, Inc., Del. Ch., C.A. No. 15983, Jacobs,
V.C. (July 24, 1998) ("Toll Brothers"). See Bank of New York Co., Inc. v. Irving
Bank Corp., N.Y. Sup. Ct., 528 N.Y.S.2d 482 (1988). See Also Shawn C. Lese,
Note: Preventing Control From the Grave: A Proposal for Judicial Treatment of
Dead Hand Provisions in Poison Pills, 96 Colum. L. Rev. 2175 (1996); Jeffrey N.
Gordon, "Just Say Never?" (continued...)
26
of both its statutory authority to manage the corporation under 8 DEL. C.
Section 141(a) and its concomitant fiduciary duty pursuant to that statutory
mandate. We agree.
Our analysis of the Delayed Redemption Provision in the Quickturn Rights
Plan is guided by the prior precedents of this Court with regard to a board of
directors authority to adopt a Rights Plan or "poison pill." In Moran, this
Court held that the "inherent powers of the Board conferred by 8 Del. C.
Section 141(a) concerning the management of the corporation's 'business and
affairs' provides the Board additional authority upon which to enact the
Rights Plan."/30/ Consequently, this Court upheld the adoption of the Rights
Plan in Moran as a legitimate exercise of business judgment by the board of
directors./31/ In doing so, however, this Court also held "the rights plan is
not
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/29/(...continued)
Poison Pills, Dead Hand Pills, and Shareholder Adopted By-Laws: An Essay for
Warren Buffett, 19 Cardozo L. Rev. 511 (1997). Cf. Invacare Corp. v.
Healthdyne Technologies, Inc., N.D. Ga., 968 F. Supp. 1578 (1997) (applying
Georgia law).
/30/ Moran v. Household International. Inc., Del. Supr., 500 A.2d 1346,
1353 (1985), citing Unocal Corp. v. Mesa Petroleum Co., Del. Supr., 493 A.2d
946, 953 (1985).
/31/ Id.
27
absolute":/32/
When the Household Board of Directors is faced with a tender offer and
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 standards as they were held to in
originally approving the Rights Plan./33/
In Moran, this Court held that the "ultimate response to an actual takeover bid
must be judged by the Directors' actions at the time and nothing we say relieves
them of their fundamental duties to the corporation and its shareholders."/34/
Consequently, we concluded that the use of the Rights Plan would be evaluated
when and if the issue arises./35/
One of the most basic tenets of Delaware corporate law is that the
board of directors has the ultimate responsibility for managing the business
and affairs of a corporation./36/ Section 141(a) requires that any limitation
on the
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/32/ Id. at 1354
/33/ Id.; See also Unocal Corp. v. Mesa Petroleum Co., 493 A.2d at
954-55, 958.
/34/ Moran v. Household International, Inc., 490 A.2d at 1357.
/35/ Id.
/36/ 8 Del. C. Section 141(a). See Mills Acquisition Co. v. MacMillan,
Inc., Del. Supr., 559 A.2d 1261, 1280 (1989).
28
board's authority be set out in the certificate of incorporation./37/
The Quickturn certificate of incorporation contains no provision purporting,
to limit the authority of the board in any way. The Delayed Redemption
Provision, however, would prevent a newly elected board of directors from
completely discharging its fundamental management duties to the corporation
and its stockholders for six months. While the Delayed Redemption Provision
limits the board of directors' authority in only one respect, the suspension
of the Rights Plan, it nonetheless restricts the board's power in an area of
fundamental importance to the shareholders -- negotiating a possible sale of
the corporation. Therefore, we hold that the Delayed Redemption Provision is
invalid under Section 141(a), which confers upon any newly elected board of
directors full power to manage and direct the business and affairs of a
Delaware corporation./38/
In discharging the statutory mandate of Section 141(a), the directors
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/37/ 8 Del. C. Section 141(a) states: "The business and affairs of
every corporation organized under this chapter shall be managed by or under
the direction of a board of directors, except as may be otherwise provided in
this chapter or in its certificate of incorporation. If any such provision is
made in the certificate of incorporation, the powers and duties conferred or
imposed upon the board of directors by this chapter shall be exercised or
performed to such extent and by such Person or persons as shall be provided
in the certificate of incorporation."
/38/ 8 Del. C. Section 141(a). See, e.g., Paramount Communications,
Inc. v. QVC Network, Inc., Del. Supr., 637 A.2d 34, 41-42 (1994).
29
have a fiduciary duty to the corporation and its shareholders./39/ This
unremitting obligation extends equally to board conduct in a contest for
corporate control./40/ The Delayed Redemption Provision prevents a newly elected
board of directors from completely discharging its fiduciary duties to protect
fully the interests of Quickturn and its stockholders./41/
This Court has recently observed that "although the fiduciary duty
of a Delaware director is unremitting, the exact course of conduct that must
be charted to properly discharge that responsibility will change in the
specific context of the action the director is taking with regard to either
the corporation or its shareholders."/42/ This Court has held "[t]o the
extent that a contract, or a provision thereof, purports to require a board
to act or not act in such a fashion as to limit the exercise of fiduciary
duties, it is invalid and
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/39/ Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., Del. Supr.,
506 A.2d 173, 179 (1986); Aronson v. Lewis, Del. Supr., 473 A.2d 805, 811
(1984); Guth v. Loft, Inc., Del. Supr., 23 Del. Ch. 2, 5 A.2d 503, 510 (1939).
/40/ Mills Acquisition Co. v. MacMillan, Inc., Del. Supr., 559 A.2d
1261, 1280 (1989); Smith v. Van Gorkom, Del. Supr., 488 A.2d 858, 872-73
(1985).
/41/ See Moran v. Household International, Inc., 500 A.2d at 1354.
/42/ Malone v. Brincat, Del. Supr., ______ A.2d ______ (1998).
30
unenforceable."/43/ The Delayed Redemption Provision "tends to limit in a
substantial way the freedom of [newly elected] directors' decisions on matters
of management policy."/44/ Therefore, "it violates the duty of each [newly
elected]director to exercise his own best judgment on matters coming before
the board."/45/
In this case, the Quickturn board was confronted by a determined bidder
that sought to acquire the company at a price the Quickturn board concluded was
inadequate. Such situations are common in corporate takeover efforts./46/ In
Revlon, this Court held that no defensive measure can be sustained when it
represents a breach of the directors' fiduciary duty. A fortiori, no defensive
measure can be sustained which would require a new board of directors to breach
its fiduciary duty. In that regard, we note Mentor
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/43/ See Paramount Communications, Inc. v. QVC Network, Inc., 637
A.2d at 51 (emphasis added). See, e.g., Mills Acquisition Co. v. MacMillan,
Inc., 559 A.2d at 1281 (holding that a "board of directors . . . may not
avoid its active and direct duty of oversight in a matter as significant as
the sale of corporate control"); Grimes v. Donald, Del. Ch., C.A. No. 13358,
slip op. at 17, Allen, C. (Jan. 11, 1995, revised Jan. 19, 1995), aff'd, Del.
Supr., 673 A.2d 1207 (1996) ("[t]he board may not either formally or
effectively abdicate its statutory power and its fiduciary duty to manage or
direct the management of the business and affairs of this corporation").
/44/ Abercrombie v. Davies, Del. Ch., 123 A.2d 893, 899 (1956),
rev'd on other grounds, Del. Supr., 130 A.2d 338 (1957).
/45/ Id.
/46/ Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d at
185.
31
has properly acknowledged that in the event its slate of directors are
elected, those newly elected directors will be required to discharge their
unremitting fiduciary duty to manage the corporation for the benefit of
Quickturn and its stockholders./47/
CONCLUSION
The Delayed Redemption Provision would prevent a new Quickturn board
of directors from managing the corporation by redeeming the Rights Plan to
facilitate a transaction that would serve the stockholders' best interests,
even under circumstances where the board would be required to do so because
of its fiduciary duty to the Quickturn stockholders. Because the Delayed
Redemption Provision impermissibly circumscribes the board's statutory power
under Section 141(a) and the directors' ability to fulfill their concomitant
fiduciary duties, we hold that the Delayed Redemption Provision is invalid.
On that alternative basis, the judgment of the Court of Chancery is AFFIRMED.
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/47/ Malone v. Brincat, Del. Supr., _____ A.2d _____ (1998).
32