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Quickturn Design Sys. v. Shapiro - 721 A.2d 1281 (Del. 1998)

Rule:

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. 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 propionate, that is. reasonable in relation to the threat that the board reasonably perceived.

Facts:

Plaintiffs Shapiro and others sought a declaratory judgment that defendants, Quickturn Design Systems Corporation and its Board of Directors, alleging that defendants' adopted takeover defenses were invalid, and sought an injunction requiring defendant Board to dismantle those defenses. In response to a take-over bid initiated by plaintiffs, defendant board had voted to amend its by-laws pertaining to the requirements and time for holding any special meeting requested by shareholders. The lower court found that the amended by-law was valid, but that the deferred redemption provision was invalid. Defendants challenged the ruling.

Issue:

Is the deferred redemption provision a valid and reasonable takeover defense in this case?

Answer:

No.

Conclusion:

The court affirmed, holding that the delayed redemption provision was invalid under 8 Del. Laws § 141(a), because it prevented a newly elected board of directors from completely discharging its fundamental management duties to the corporation and its stockholders for six months. The provision improperly and illegally restricted the board's exercise of fiduciary duties on matters of management policy, including the ability to negotiate a possible sale of the corporation, which was a matter of fundamental importance to shareholders.

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