Brief Fact Summary. Mentor Graphics Corporation, (Plaintiff), challenges the validity of a “no and” rights plan of limited duration that the target company board adopted in response to Plaintiff’s hostile tender offer and proxy contest to replace the board and acquire Quickturn Design Systems, Inc., (Defendant).
Synopsis of Rule of Law. When a board of a corporation takes action to resist or defend against a hostile bid for control the target company board’s defensive actions will be entitled to business judgment rule protection only if it can establish that 1) it had reasonable grounds to believe that the hostile bid constituted a threat to corporate policy and effectiveness and 2) that the defensive measures adopted were reasonable in relation to the threat that the board reasonably perceived.
In order for the board's defensive actions to survive this enhanced judicial scrutiny, the board must establish: (1) that it had reasonable grounds to believe that the hostile bid for control threatened corporate policy and effectiveness; and (2) that the defensive measures adopted were reasonable in relation to the threat posed.View Full Point of Law
Whether the board had reasonable grounds to believe that the hostile bid constituted a threat to corporate policy and effectiveness.
Whether the defensive measures adopted were proportionate or reasonable in relation to the threat that the board reasonably perceived.
Yes. The board reasonably perceived a cognizable threat.
No. The defensive measures adopted were not reasonable in relation to the threat the board reasonably perceived.
The evidence shows that the perceived threat was the concern that Defendant shareholders might mistakenly accept Plaintiff’s inadequate offer, and elect a new board that would prematurely sell the company before the new board could adequately inform itself of Defendant’s fair value. The board reasonably perceived a cognizable threat.
The board’s justification for adopting the DRP was to force any newly elected board to take sufficient time to become familiar with Defendant and its value and to provide shareholders the opportunity to consider alternatives, before selling. DPR does not operate to delay a sale to any bidder but only an “Interested Person,” Plaintiff. Defendants have also failed to carry their burden by failing to explain why a six-month period is reasonable. Further, the purpose of the DRP is accomplished by the bylaw amendments.