Mentor Graphics Corporation v. Quickturn Design Systems, Inc.

Brief Fact Summary.

Mentor Graphics Corp. (Mentor) (Plaintiff) challenged the legality of a “no hand†rights plan of limited duration adopted by the target company, Quickturn Design Systems, Inc. (Defendant), in response to Plaintiff’s tender offer and proxy contest.

Synopsis of Rule of Law.

Where a board of a Delaware corporation takes action to resist or defend against a hostile bid for control, the defensive actions are subjected to greater judicial scrutiny in case the board acts in its own interest, rather than the corporation’s.

Facts.

An Oregon electronics corporation, Mentor Graphics Corp. (Mentor) (Plaintiff), initiated a hostile tender offer in an effort to acquire a Delaware electronics business, Quickturn Design Systems, Inc. (Defendant).  Defendant decided the offer was not adequate and adopted two defensive measures in response to the hostile takeover bid.  First, a new By-Law Amendment was enacted requiring special stockholders meetings to take place 90 to 100 days following receipt of the shareholders request.  Second, Defendant amended its shareholders rights plan by eliminating the “dead hand†feature and replacing it with a Deferred Redemption Plan (DRP).  The effect of these amendments was to delay any special meeting and delay the ability of the new board to redeem the poison pill for six months.  Plaintiff claimed that the DRP violated Delaware law and sought an injunction and declaratory judgment against it.  Defendant moved for summary judgment, however, its motion was denied.

Issue.

Where a board of a Delaware corporation takes action to resist or defend against a hostile bid for control, are the defensive actions are subjected to greater judicial scrutiny in case the board acts in its own interest, rather than the corporation’s?

Held.

(Jacobs, V. Chan.)  Yes.  Where a board of a Delaware corporation takes action to resist or defend against a hostile bid for control, the defensive actions come under greater judicial scrutiny in case the board acts in its own interest, rather than the corporation’s.  For the actions of a target board to be entitled to business judgment rule protection, the target board must establish that it had reasonable grounds to believe that the hostile bid established a threat to corporate policy and that the defensive measures were proportionate or reasonable.  In this case, the board reasonably saw a cognizable threat, but the DRP was disproportionate.  The bylaw provision was valid, however, the DRP was invalid.

Discussion.

The court found that the DRP failed to pass the proportionality test.  The purpose of the DRP was to prolong the delay by an additional six months.  The board did not show why another six-month delay was necessary to achieve its stated purpose for its adoption.