Brief Fact Summary. Plaintiffs, Hilton Hotels Corp. et al., sought to enjoin Defendant, ITT Corp., from enacting a “Comprehensive Plan” that was designed to frustrate Plaintiffs’ hostile takeover.
Synopsis of Rule of Law. A plan by a target corporation’s directors that purposefully disenfranchises the shareholders’ voting of the directors in lieu of a takeover is invalid.
The standards for issuing a permanent injunction are substantially similar to those applied to requests for preliminary injunctive relief; however, in order to obtain a permanent injunction plaintiffs must actually succeed on the merits of their claims.View Full Point of Law
Issue. The issue is whether Defendant, under a hostile takeover bid, can entrench itself by defensive measures that are not voted in by shareholders.
Held. The United States District Court for the District of Nevada, in the absence of relevant Nevada law, applied Delaware state law and held that the Comprehensive Plan violates the shareholders’ rights to vote on the board of directors, regardless of good faith on the directors’ part, unless the Unocal standard of higher scrutiny is met. The Unocal standard would require that Defendant demonstrate that the acquiring company will pursue a different corporate policy (Defendant did not demonstrate this here) and requires a good faith reasonable investigation into any perceived threat (Defendant did not even meet with Plaintiff and simply asserted that the offer was too low despite contrary evidence). The court found that the classified board structure and subsequent voting precluded shareholders and intentionally disenfranchise shareholders prior to a proxy contest. Although the court looked favorable at the fact that a majority of directors were outside directors, the plan further
entrenched their positions
Discussion. The court notes that the business judgment rule exists to insulate the decisions of directors in management issues, but it should not apply when the decision is to adversely affect the rights of shareholders to vote for the board. There is a heightened scrutiny that clearly was not met in this case.