Law School Case Brief
Carmody v. Toll Bros. - 723 A.2d 1180 (Del. Ch. 1998)
A motion to dismiss under Del. Ch. R. 12(b)(6) will not be granted unless the court is reasonably certain that the plaintiff would not be entitled to relief under any set of facts that could reasonably be inferred from the complaint. The truth of all well-pleaded allegations in the complaint is assumed.
Defendants, the individual directors of defendant Toll Brothers’ Inc. (collectively, “Company”), adopted an antitakeover plan known as a "dead hand" rights plan, which was one that could not redeemed except by the incumbent directors who adopted the plan or their designated successors. The Company’s plan authorized a defined category of directors to redeem the preferred stock purchase rights. Plaintiff James Carmody, a shareholder in the Company, filed a lawsuit against the Company in Delaware chancery court contending that the dead hand provision was invalid as ultra vires and amounted to a breach of fiduciary duty. The Company filed a motion to dismiss, arguing that Carmody’s claims were not ripe, that he failed to make a pre-suit demand, and that the provision was valid.
Was the Company's "dead hand" plan subject to legal challenge on the basis that it violated the Delaware General Corporation Law and/or the fiduciary duties of the directors who adopted the plan?
The court denied the Company's motion to dismiss. The court concluded that the complaint stated legally sufficient claims. As the provision violated Del. Code tit. 8, § 141(a), (d) and amounted to breaches fiduciary duties, the complaint was ripe, and a pre-suit demand was not required. The court found that the plan: (1) conferred the power to redeem only upon some, but not all, of the directors, which transgressed the statutorily protected shareholder right to elect the directors who would be so empowered; (2) disenfranchised Carmody and other shareholders without a compelling justification; (3) made a proxy contest "realistically unattainable," and; (4) caused a current adverse impact. Because Carmody's claims were individual, not derivative, a pre-suit demand was not required and, if it were, grounds existed for excusal.
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