<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 34
TO SCHEDULE 14D-1
TENDER OFFER STATEMENT
(PURSUANT TO SECTION 14(D)(1) OF THE SECURITIES EXCHANGE ACT OF 1934)
QUICKTURN DESIGN SYSTEMS, INC.
(Name of Subject Company)
MENTOR GRAPHICS CORPORATION
MGZ CORP.
(Bidders)
COMMON STOCK, PAR VALUE $.001 PER SHARE
(including the Associated Rights)
(Title of Class of Securities)
74838E102
(CUSIP Number of Class of Securities)
------------------------
WALDEN C. RHINES
PRESIDENT AND CHIEF EXECUTIVE OFFICER
MENTOR GRAPHICS CORPORATION
8005 S.W. BOECKMAN ROAD
WILSONVILLE, OREGON 97070-7777
(503) 685-1200
(Name, Address and Telephone Number of Persons Authorized
to Receive Notices and Communications on Behalf of Bidders)
COPY TO:
JOHN J. HUBER, ESQ. CHRISTOPHER L. KAUFMAN, ESQ.
LATHAM & WATKINS LATHAM & WATKINS
1001 PENNSYLVANIA AVENUE, N.W. 75 WILLOW ROAD
WASHINGTON, DC 20004 MENLO PARK, CALIFORNIA 94025
(202) 637-2200 (650) 328-4600
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
MGZ Corp., a Delaware corporation ("Purchaser"), and Mentor Graphics
Corporation, an Oregon corporation ("Parent"), hereby amend and supplement their
Tender Offer Statement on Schedule 14D-1 filed on August 12, 1998 (the
"Statement"), as amended, with respect to the offer by Purchaser to purchase up
to 2,100,000 shares of Common Stock, par value $.001 per share, of Quickturn
Design Systems, Inc., a Delaware corporation, together with the associated
preferred stock purchase rights, for a purchase price of $14 per share, net to
the seller in cash, without interest thereon, as set forth in this Amendment No.
34. Capitalized terms used herein and not defined have the meanings ascribed to
them in the Schedule 14D-1 or in the Offer to Purchase.
ITEM 10. ADDITIONAL INFORMATION.
Item 10(f) of the Statement is hereby amended and supplemented by the
following:
1. On December 31, 1998, the Delaware Supreme Court issued a written opinion
holding that the Rights Agreement Amendment adopted by the Company Board is
invalid. A copy of the opinion is attached hereto as Exhibit (a)(62) and is
incorporated herein by reference.
ITEM 11. MATERIAL TO BE FILED AS EXHIBITS.
<TABLE>
<S> <C> <C>
(a)(62) -- Opinion of the Delaware Supreme Court dated December 31, 1998.
</TABLE>
2
<PAGE>
SIGNATURES
After due inquiry and to the best of my knowledge and belief, I certify that
the information set forth in this statement is true, complete and correct.
<TABLE>
<S> <C> <C>
Dated: January 4, 1999 MENTOR GRAPHICS CORPORATION
By: /s/ Gregory K. Hinckley
Name: Gregory K. Hinckley
Title: Executive Vice President, Chief Operating
Officer and Chief Financial Officer
MGZ CORP.
By: /s/ Gregory K. Hinckley
Name: Gregory K. Hinckley
Title: Secretary and Chief Financial Officer
</TABLE>
3
<PAGE>
IN THE SUPREME COURT OF THE STATE OF DELAWARE
QUICKTURN DESIGN SYSTEMS,
INC., a Delaware corporation,
KEITH R. LOBO, GLEN M. ANTLE,
RICHARD C. ALBERDING, MICHAEL R.
D'AMOUR, YEN-SON (PAUL) HUANG, DR.
DAVID K. LAM, WILLIAM A. HASLER, and
CHARLES D. KISSNER,
Defendants below, No. 511, 1998
Appellants,
v. Court Below: Court of Chancery
of the State of Delaware,
HOWARD SHAPIRO, in and for New Castle County
C.A. No. 16588
Plaintiff Below,
Appellee.
- -----------------------------------------
QUICKTURN DESIGN SYSTEMS, INC., a
Delaware corporation,
KEITH R. LOBO, GLEN M. ANTLE,
RICHARD C. ALBERDING, MICHAEL R.
D'AMOUR, YEN-SON (PAUL) HUANG, DR.
DAVID K. LAM, WILLIAM A. HASLER, and
CHARLES D. KISSNER,
Defendants below, No. 512, 1998
Appellants,
v. Court Below: Court of Chancery
of the State of Delaware,
MENTOR GRAPHICS CORPORATION, an in and for New Castle County
Oregon corporation, and MGZ CORP., a C.A. No. 16584
Delaware corporation,
Plaintiffs Below,
Appellees,
Submitted: December 29, 1998
Decided: December 31, 1998
<PAGE>
Before WALSH, HOLLAND and HARTNETT, Justices
Upon appeal from the Court of Chancery. AFFIRMED.
Kenneth J. Nachbar, Esquire, William M. Lafferty, Esquire, and Donna L.
Culver, Esquire, of Morris, Nichols, Arsht & Tunnell, Wilmington, Delaware; and
James A. DiBoise, Esquire and David J. Berger, Esquire (argued), of Wilson,
Sonsini, Goodrich & Rosati, P.C., Palo Alto, California, attorneys for
appellants.
Kevin G. Abrams, Esquire (argued), Thomas A. Beck, Esquire, Lisa A.
Schmidt, Esquire, J. Travis Laster, Esquire, Dominick Gattuso, Esquire, and
Michael K. Reilly, Esquire, of Richards, Layton & Finger, Wilmington, Delaware;
Fredric J. Zepp, Esquire, of Latham & Watkins, San Francisco, California, and
Marc W. Rappel, Esquire, of Latham & Watkins, Los Angeles, California; attorneys
for appellees, Mentor Graphics Corporation and MGZ Corporation.
Joseph A. Rosenthal, Esquire, and Norman M. Monhait, Esquire, of
Rosenthal, Monhait, Gross & Goddess, P.A., Wilmington, Delaware; and Stanley
Bernstein, Esquire and Abraham I. Katsman, Esquire, of Bernstein, Liebhard &
Lifshitz, LLP, New York, New York, for appellee, Howard Shapiro.
HOLLAND, Justice:
<PAGE>
This is an expedited appeal from a final judgment entered by the
Court of Chancery. The dispute arises out of an ongoing effort by Mentor
Graphics Corporation ( "Mentor"), a hostile bidder, to acquire Quickturn
Design Systems, Inc. ("Quickturn"), the target company. The
plaintiffs-appellees are Mentor(1) and an unaffiliated stockholder of
Quickturn. The named defendants-appellants are Quickturn and its directors.
In response to Mentor's tender offer and proxy contest to replace the
Quickturn board of directors, as part of Mentor's effort to acquire Quickturn,
the Quickturn board enacted two defensive measures. First, it amended the
Quickturn shareholder rights plan ("Rights Plan") by adopting a "no hand"
feature of limited duration (the "Delayed Redemption Provision" or "DRP").
Second, the Quickturn board amended the corporation's bylaws to delay the
holding of any special stockholders meeting requested by stockholders for 90 to
100 days after the validity of the request is determined (the "Amendment" or
"ByLaw Amendment").
Mentor filed actions for declarative and injunctive relief in the Court
of Chancery challenging the legality of both defensive responses by Quickturn's
board. The Court of Chancery conducted a trial on the merits. It determined that
the By-Law Amendment is valid. It also concluded, however, that the DRP is
invalid on fiduciary duty grounds.
In this appeal, Quickturn argues that the Court of Chancery erred in
finding that Quickturn's directors breached their fiduciary duty by adopting the
Delayed Redemption Provision. We have
- ---------------------
(1) Mentor and MGZ Corp., a wholly owned Mentor subsidiary specially
created as a vehicle to acquire Quickturn, are referred to collectively as
"Mentor." Unless otherwise indicated, Mentor and Howard Shapiro, the shareholder
plaintiff in Court of Chancery Civil Action No. 16588, are referred to
collectively as "Mentor."
<PAGE>
concluded that, as a matter of Delaware law, the Delayed Redemption Provision
was invalid. Therefore, on that alternative basis, the judgment of the Court of
Chancery is affirmed.
STATEMENT OF FACTS(2)
THE PARTIES
Mentor (the hostile bidder) is an Oregon corporation, headquartered in
Wilsonville, Oregon, whose shares are publicly traded on the NASDAQ national
market system. Mentor manufactures, markets, and supports electronic design
automation ("EDA") software and hardware. It also provides related services that
enable engineers to design, analyze, simulate, model, implement, and verify the
components of electronic systems. Mentor markets its products primarily for
large firms in the communications, computer, semiconductor, consumer
electronics, aerospace, and transportation industries.
Quickturn, the target company, is a Delaware corporation,
headquartered in San Jose, California. Quickturn has 17,922,518 outstanding
shares of common stock(3) that are publicly traded on the NASDAQ national
market system. Quickturn invented, and was the first company to successfully
market, logic emulation technology, which is used to verify the design of
complex silicon chips and electronics systems. Quickturn is currently the
market leader in the emulation business, controlling an estimated 60% of the
worldwide emulation market and an even higher percentage of the United States
market. Quickturn maintains the largest intellectual property portfolio in
the industry, which includes approximately twenty-nine logic emulation
patents issued
- ---------------------
(2) Given the expedited nature of the appeal, this Court has relied
almost verbatim on the excellent recitation of facts set forth in the Court
of Chancery's opinion. MENTOR GRAPHICS CORP. V. QUICKTURN DESIGN SYSTEMS, et
al., Del. Ch., C.A. No. 16584, Jacobs, V.C. (Dec. 7, 1998) .
(3) As of July 30, 1998.
<PAGE>
in the United States, and numerous other patents issued in foreign
jurisdictions. Quickturn's customers include the world's leading technology
companies, among them Intel, IBM, Sun Microsystems, Texas Instruments, Hitachi,
Fujitsu, Siemens, and NEC.
Quickturn's board of directors consists of eight members, all but one
of whom are outside, independent directors. All have distinguished careers and
significant technological experience.(4)
- ---------------------
(4) The Quickturn board includes Messrs. Glen Antle (President and
Chairman of Quickturn's board of directors); Michael D'Amour (Quickturn's
founding CEO and chairman through 1993, and Executive Vice President for
research and development and head of international sales until he left Quickturn
management in 1995); Dean William A. Hasler (a former Vice chairman and partner
of KPMG Peat Marwick; a former Dean of the Haas Graduate School of Business at
the University of California, Berkeley, a position he held until 1998; and
currently a technology and business advisor); Keith Lobo (Quickturn's President
and CEO); Charles D. Kissner (currently CEO and Chairman of the Board of Digital
Microwave Corporation, a telecommunications company, and a former President,
CEO, and director for Aristacom International, Inc.; also a former AT&T
executive); Richard Alberding (a management consultant for high technology
companies; and who currently serves on the board of directors of several
technology companies); Dr. David Lam (former Vice President at Wyse Technology,
former President and CEO of Expert Edge, Inc., and currently a technology and
business advisor in the semiconductor equipment industry and Chairman of the
David Lam Group); Dr. Yen-Son (Paul) Huang (a co-founder and President of PiE
and, following PiE's merger with Quickturn in 1993, Executive Vice President of
Quickturn until June 1997. Since then, Dr. Huang has served Quickturn only as a
director).
<PAGE>
Collectively, the board has more than 30 years of experience in the EDA industry
and owns one million shares (about 5%) of Quickturn's common stock.
Since 1989, Quickturn has historically been a growth company, having
experienced increases in earnings and revenues during the past seven years.
Those favorable trends were reflected in Quickturn's stock prices, which reached
a high of $15.75 during the first quarter of 1998, and generally traded in the
$15.875 to $21.25 range during the year preceding Mentor's hostile bid.
Since the spring of 1998, Quickturn's earnings, revenue growth, and
stock price levels have declined, largely because of the downturn in the
semiconductor industry and more specifically in the Asian semiconductor market.
Historically, 30%-35% of Quickturn's annual sales (approximately $ 35 million)
had come from Asia, but in 1998, Quickturn's Asian sales declined dramatically
with the downturn of the Asian market.(5) Management has projected that the
negative impact of the Asian market upon Quickturn's sales should begin
reversing itself sometime between the second half of 1998 and early 1999.
QUICKTURN-MENTOR PATENT LITIGATION
Since 1996, Mentor and Quickturn have been engaged in patent litigation
that has resulted in Mentor being barred from competing in the United States
emulation market. Because its products have been adjudicated to infringe upon
Quickturn's patents, Mentor currently stands enjoined from
- ----------------------
(5) By the summer of 1998, Quickturn's stock price had declined to
$6 per share. On August 11, 1998, the closing price was $8.00. It was in this
"trough" period that Mentor, which had designs upon Quickturn since the fall
of 1997, saw an opportunity to acquire Quickturn for an advantageous price.
<PAGE>
selling, manufacturing, or marketing its emulation products in the United
States. Thus, Mentor is excluded from an unquestionably significant market for
emulation products.
The origin of the patent controversy was Mentor's sale of its
hardware emulation assets, including its patents, to Quickturn in 1992.
Later, Mentor reentered the emulation business when it acquired a French
company called Meta Systems ("Meta") and began to market Meta's products in
the United States in December 1995. Quickturn reacted by commencing a
proceeding before the International Trade Commission ("ITC") claiming that
Meta and Mentor were infringing Quickturn's patents.(6) In August 1996, the
ITC issued an order prohibiting Mentor from importing, selling, distributing,
advertising, or soliciting in the United States, any products manufactured by
Meta. That preliminary order was affirmed by the Federal Circuit Court of
Appeals in August 1997.(7) In December 1997, the ITC issued a Permanent
Exclusion Order prohibiting Mentor from importing, selling, marketing,
advertising, or soliciting in the United States, until at least April 28,
2009, any of the emulation products manufactured by Meta outside the United
States.(8)
- -------------------------
(6) SEE IN THE MATTER OF CERTAIN HARDWARE LOGIC EMULATION SYSTEMS AND
COMPONENTS THEREOF, Inv. No. 337-TA-383, Notice of Investigation, 61 Fed. Reg.
9486 (ITC March 8, 1996).
(7) SEE IN THE MATTER OF CERTAIN HARDWARE LOGIC EMULATION SYSTEMS AND
COMPONENTS THEREOF, Inv. No. 337-TA-383, Notice of Commission Decision Not to
Modify or Vacate an Initial Determination Granting Temporary Relief, and
Issuance of a Temporary Limited Exclusion Order and a Temporary Cease and Desist
Order, Subject to Posting of Bond By Complainant (ITC Aug. 5, 1996) ("ITC
TEMPORARY ORDERS"), aff'd, MENTOR GRAPHICS CORP. V. U.S. INT'L TRADE COMMISSION,
No. 97-1106, 1997, U.S. App., LEXIS 21646 (Fed. Cir. Aug. 15, 1997).
Mentor was also sanctioned more than $400,000 in that proceeding for
advancing defenses "based on inaccurate and misleading evidence" thereby
"needlessly increasing the cost of litigation" as a result of its continuing
practice of "bad faith discovery." IN THE MATTER OF CERTAIN HARDWARE LOGIC
EMULATION SYSTEMS, ALJ Order No. 96, Inv. No. 337-TA-383, 1997 ITC LEXIS 288
at *97 (ITC July 31, 1996).
(8) IN THE MATTER OF CERTAIN HARDWARE LOGIC EMULATION SYSTEMS AND
COMPONENTS THEREOF, Inv. No. 337-TA-383, Notice of Issuance of a Permanent
Limited Exclusion Order and a Permanent
<PAGE>
At present, the only remaining patent litigation is pending in the
Oregon Federal District Court. Quickturn is asserting a patent infringement
damage claim that, Quickturn contends, is worth approximately $225 million.
Mentor contends that Quickturn's claim is worth only $5.2 million or even less.
MENTOR'S INTEREST IN ACQUIRING QUICKTURN
Mentor began exploring the possibility of acquiring Quickturn. If
Mentor owned Quickturn, it would also own the patents, and would be in a
position to "unenforce" them by seeking to vacate Quickturn's injunctive
orders against Mentor in the patent litigation. The exploration process began
when Mr. Bernd Braune, a Mentor senior executive, retained Arthur Andersen
("Andersen") to advise Mentor how it could successfully compete in the
emulation market. The result was a report Andersen issued in October 1997,
entitled "PROJECT VELOCITY"(9) and "Strategic Alternatives Analysis." The
Andersen report identified several advantages and benefits Mentor would enjoy
if it acquired Quickturn.(10)
In December 1997, Mentor retained Salomon Smith Barney ("Salomon") to
act as its financial advisor in connection with a possible acquisition of
Quickturn. Salomon prepared an extensive study which it reviewed with Mentor's
senior executives in early 1998. The Salomon study concluded that although a
Quickturn acquisition could provide substantial value for Mentor, Mentor could
not afford to acquire Quickturn at the then-prevailing market price levels.
Ultimately, Mentor decided not to attempt an acquisition of Quickturn during the
first half of 1998.
After Quickturn's stock price began to decline in May 1998, however,
Gregory Hinckley, Mentor's Executive Vice President, told Dr. Walden Rhines,
Mentor's Chairman, that "the market outlook being very weak due to the Asian
crisis made it a good opportunity" to try acquiring Quickturn for a cheap price.
Mr. Hinckley then assembled Mentor's financial and legal advisors,
- --------------------
Cease and Desist Order (ITC Dec. 3, 1997) ("ITC PERMANENT ORDERS")
(9) Andersen used "Project Velocity" and "Cyclone" as code names for
the study and Quickturn, respectively.
(10) These included: (i) eliminating the time and expense associated
with litigation; (ii) creating synergy from combining two companies with
complementary core competencies; (iii) reducing customer confusion over
product availability, which in turn would accelerate sales; and (iv)
eliminating the threat of a large competitor moving into the emulation
market. Mentor has utilized these reasons in public statements in which it
attempted to explain why its bid made sense.
<PAGE>
proxy solicitors, and others, and began a three month process that culminated in
Mentor's August 12, 1998 tender offer.
MENTOR TENDER OFFER AND PROXY CONTEST
On August 12, 1998, Mentor announced an unsolicited cash tender offer
for all outstanding common shares of Quickturn at $12.125 per share, a price
representing an approximate 50% premium over Quickturn's immediate pre-offer
price, and a 20% discount from Quickturn's February 1998 stock
price levels. Mentor's tender offer, once consummated, would be followed by a
second step merger in which Quickturn's nontendering stockholders would receive,
in cash, the same $12.125 per share tender offer price.
Mentor also announced its intent to solicit proxies to replace the
board at a special meeting. Relying upon Quickturn's then-applicable by-law
provision governing the call of special stockholders meetings, Mentor began
soliciting agent designations from Quickturn stockholders to satisfy the
by-law's stock ownership requirements to call such a meeting.(11)
QUICKTURN BOARD MEETINGS
Under the Williams Act, Quickturn was required to inform its
shareholders of its response to Mentor's offer no later than ten business days
after the offer was commenced. During that ten day period, the Quickturn board
met three times, on August 13, 17, and 21, 1998. During each of those meetings,
it considered Mentor's offer and ultimately decided how to respond.
- -----------------------
(11) The applicable by-law (Article II, Section 2.3) authorized a
call of a special stockholders meeting by shareholders holding at least 10%
of Quickturn's shares. In their agent solicitation, Mentor informed Quickturn
stockholders that Mentor intended to call a special meeting approximately 45
days after it received sufficient agent designations to satisfy the 10%
requirement under the original by-law. The solicitation also disclosed
Mentor's intent to set the date for the special meeting, and to set the
record date and give formal notice of that meeting.
<PAGE>
The Quickturn board first met on August 13, 1998, the day after Mentor
publicly announced its bid. All board members attended the meeting, for the
purpose of evaluating Mentor's tender offer. The meeting lasted for several
hours. Before or during the meeting, each board member received a package that
included (i) Mentor's press release announcing the unsolicited offer; (ii)
Quickturn's press release announcing its board's review of Mentor's offer; (iii)
Dr. Rhines's August 11 letter to Mr. Antle; (iv) the complaints filed by Mentor
against Quickturn and its directors; and (v) copies of Quickturn's then-current
Rights Plan and by-laws.
The Quickturn board first discussed retaining a team of financial
advisors to assist it in evaluating Mentor's offer and the company's strategic
alternatives. The board discussed the importance of selecting a qualified
investment bank, and considered several investment banking firms. Aside from
Hambrecht & Quist ("H&Q"), Quickturn's long-time investment banker, other firms
that the board considered included Goldman Sachs & Co. and Morgan Stanley Dean
Witter. Ultimately, the board selected H&Q, because the board believed that H&Q
had the most experience with the EDA industry in general and with Quickturn in
particular.(12)
During the balance of the meeting, the board discussed for
approximately one or two hours (a) the status, terms, and conditions of Mentor's
offer; (b) the status of Quickturn's patent litigation with Mentor; (c) the
applicable rules and regulations that would govern the board's response to the
offer required by the Securities Exchange Act of 1934 (the "34 Act"); (d) the
board's fiduciary duties to Quickturn and its shareholders in a tender offer
context; (e) the scope of defensive measures
- --------------------
(12) Apparently, the board had already decided to retain Quickturn's
outside counsel, Wilson, Sonsini, Goodrich & Rosati, as its legal advisors.
Larry Sonsini, Esquire, a senior partner of that firm, is shown on the minutes
of all three board meetings as "Secretary of the Meeting," and appears to have
authored those minutes in that capacity.
<PAGE>
available to the corporation if the board decided that the offer was not in the
best interests of the company or its stockholders; (f) Quickturn's then-current
Rights Plan and special stockholders meeting by-law provisions; (g) the need for
a federal antitrust filing; and (h) the potential effect of Mentor's offer on
Quickturn's employees. The board also instructed management and H&Q to prepare
analyses to assist the directors in evaluating Mentor's offer, and scheduled two
board meetings, August 17, and August 21, 1998.
The Quickturn board next met on August 17, 1998. That meeting
centered around financial presentations by management and by H&Q. Mr. Keith
Lobo, Quickturn's President and CEO, presented a Medium Term Strategic Plan,
which was a "top down" estimate detailing the economic outlook and the
company's future sales, income prospects and future plans (the "Medium Term
Plan"). The Medium Term Plan contained an optimistic (30%) revenue growth
projection for the period 1998-2000.(13) After management made its
presentation, H&Q supplied its valuation of Quickturn, which relied upon a
"base case" that assumed management's 30% revenue growth projection. On that
basis, H&Q presented various "standalone" valuations based on various
techniques, including a discounted cash flow ("DCF") analysis. Finally, the
directors discussed possible defensive measure but took no action at that
time.
The Quickturn board held its third and final meeting in response to
Mentor's offer on August 21, 1998. Again, the directors received extensive
materials and a further detailed analysis performed by H&Q. The focal point of
that analysis was a chart entitled "Summary of Implied Valuation." That chart
compared Mentor's tender offer price to the Quickturn valuation ranges generated
by H&Q's
- -------------------------
(13) The Court of Chancery concluded that the Quickturn board had
grounds to anticipate that the company could "turn around" in a year and
perform at the projected revenue levels.
<PAGE>
application of five different methodologies.(14) The chart showed that
Quickturn's value under all but one of those methodologies was higher than
Mentor's $12.125 tender offer price.
QUICKTURN'S BOARD REJECTS MENTOR'S OFFER AS INADEQUATE
After hearing the presentations, the Quickturn board concluded that
Mentor's offer was inadequate, and decided to recommend that Quickturn
shareholders reject Mentor's offer. The directors based their decision upon: (a)
H&Q's report; (b) the fact that Quickturn was experiencing a temporary trough in
its business, which was reflected in its stock price; (c) the company's
leadership in technology and patents and resulting market share; (d) the likely
growth in Quickturn's markets (most notably, the Asian market) and the strength
of Quickturn's new products (specifically, its Mercury product); (e) the
potential value of the patent litigation with Mentor; and (f) the problems for
Quickturn's customers, employees, and technology if the two companies were
combined as the result of a hostile takeover.
QUICKTURN'S DEFENSIVE MEASURES
At the August 21 board meeting, the Quickturn board adopted two
defensive measures in response to Mentor's hostile takeover bid. First, the
board amended Article II, Section 2.3 of Quickturn's by-laws, which permitted
stockholders holding 10% or more of Quickturn's stock to call a special
stockholders meeting. The By-Law Amendment provides that if any such special
meeting is requested by shareholders, the corporation (Quickturn) would fix the
record date for, and determine
- -----------------------
(14) The five methodologies and the respective price ranges were:
Historical Trading Range ($6.13- $21.63); Comparable Public Companies
($2.55-$15.61); Comparable M&A Transactions ($6.00- $31.36); Comparable Premiums
Paid ($9.54-$10.72); and Discounted Cash Flow Analysis ($11.88- $57.87).
<PAGE>
the time and place of, that special meeting, which must take place not less than
90 days nor more than 100 days after the receipt and determination of the
validity of the shareholders' request.
Second, the board amended Quickturn's shareholder Rights Plan by
eliminating its "dead hand" feature and replacing it with the Deferred
Redemption Provision, under which no newly elected board could redeem the
Rights Plan for six months after taking office, if the purpose or effect of
the redemption would be to facilitate a transaction with an "Interested
Person" (one who proposed, nominated or financially supported the election of
the new directors to the board).(15) Mentor would be an Interested Person
The effect of the By-Law Amendment would be to delay a shareholder
called special meeting for at least three months. The effect of the DRP would be
to delay the ability of a newly-elected, Mentor-nominated board to redeem the
Rights Plan or "poison pill" for six months, in any transaction with an
Interested Person. Thus, the combined effect of the two defensive measures would
be to delay any acquisition of Quickturn by Mentor for at least nine months.
PROCEDURAL HISTORY
Mentor filed this action in the Court of Chancery on August 12, 1998,
seeking a declaratory judgment that Quickturn's newly adopted takeover defenses
are invalid and an injunction requiring
- ----------------------
(15) The amended Rights Plan pertinently provides that: "[I]n the event
that a majority of the Board of Directors of the Company is elected by
stockholder action at an annual or special meeting of stockholders, then until
the 180th day following the effectiveness of such election (including any
postponement or adjournment thereof), the Rights shall not be redeemed if such
redemption is reasonably likely to have the purpose or effect of facilitating a
Transaction with an Interested Person."
An "Interested Person" is defined under the amended Rights Plan as "any
Person who (i) is or will become an Acquiring Person if such Transaction were to
be consummated or an Affiliate or Associate of such a Person, and (ii) is, or
directly or indirectly proposed, nominated or financially supported, a director
of [Quickturn] in office at the time of consideration of such Transaction who
was elected at an annual or special meeting of stockholders."
<PAGE>
the Quickturn board to dismantle those defenses. After expedited briefing and
oral argument, the Court of Chancery denied Quickturn's case dispositive
pre-trial motion on October 9, 1998.(16) A trial was held on October 19, 20, 23,
26 and 28, 1998. Thereafter, the parties submitted post-trial briefs on an
expedited schedule.
During the course of the litigation in the Court of Chancery, the
Quickturn board, relying upon the By-Law Amendment, noticed the special meeting
requested by Mentor for January 8, 1999 -- 71 days after the October 1, 1998
meeting date originally noticed by Mentor.(17) After the trial, Mentor announced
in Amendments to its Schedule 14A-1 that were filed with the Securities and
Exchange Commission, that it had received tenders of Quickturn shares which,
together with the shares that Mentor already owned, represented over 51% of
Quickturn's outstanding stock.
QUICKTURN BY-LAW AMENDMENT
At the time Mentor commenced its tender offer and proxy contest,
Quickturn's by-laws authorized shareholders holding at least 10% of Quickturn's
voting stock to call a special meeting of stockholders.
The then-applicable by-law, Article II, Section 2.3, read thusly:
A special meeting of the stockholders may be called at any time by (i)
the board of directors, (ii) the chairman of the board, (iii) the
president, (iv) the chief executive officer or (v) one or more
shareholders holding shares in the aggregate entitled to cast not less
than ten percent (10%) of the votes at that meeting.
At the August 21, 1998 board meeting, the Quickturn board amended
Section 2.3 in response to the Mentor bid, to read as follows:
- -------------------
(16) MENTOR GRAPHICS CORP. V. QUICKTURN DESIGN SYSTEMS, ET AL., Del.
Ch., C.A. No. 16584, Jacobs, V.C. (Oct. 9, 1998).
(17) Mentor later renoticed the special meeting date to November 24,
1998, anticipating that the Court of Chancery would issue its decision before
that time. After the Court of Chancery informed the parties that it would be
unable to issue a decision by November 24, Mentor agreed that its meeting
would be convened and then immediately adjourned to a later date.
<PAGE>
A special meeting of the stockholders may be called at any time by (i)
the board of directors, (ii) the chairman of the board, (iii) the
president, (iv) the chief executive officer or (v) SUBJECT TO THE
PROCEDURES SET FORTH IN THIS SECTION 2.3, one or more stockholders
holding shares in the aggregate entitled to cast not less than ten
percent (10%) of the votes at that meeting.
UPON REQUEST IN WRITING SENT BY REGISTERED MAIL TO THE PRESIDENT OR
CHIEF EXECUTIVE OFFICER BY ANY STOCKHOLDER OR STOCKHOLDERS ENTITLED TO
CALL A SPECIAL MEETING OF STOCKHOLDERS PURSUANT TO THIS SECTION 2.3,
THE BOARD OF DIRECTORS SHALL DETERMINE A PLACE AND TIME FOR SUCH
MEETING, WHICH TIME SHALL BE NOT LESS THAN NINETY (90) NOR MORE THAN
ONE HUNDRED (100) DAYS AFTER THE RECEIPT AND DETERMINATION OF THE
VALIDITY OF SUCH REQUEST AND A RECORD DATE FOR THE DETERMINATION OF
STOCKHOLDERS ENTITLED TO VOTE AT SUCH MEETING IN THE MANNER SET FORTH
IN SECTION 2.12 HEREOF. FOLLOWING SUCH RECEIPT AND DETERMINATION, IT
SHALL BE THE DUTY OF THE SECRETARY TO CAUSE NOTICE TO BE GIVEN TO THE
STOCKHOLDERS ENTITLED TO VOTE AT SUCH MEETING IN THE MANNER SET FORTH
IN SECTION 2.4 HEREOF, THAT A MEETING WILL BE HELD AT THE TIME AND
PLACE SO DETERMINED.
The Court of Chancery found that the Quickturn board amended the By-Law
because (i) the original Section 2.3 was incomplete: it did not explicitly state
who would be responsible for determining the time, place, and record date for
the meeting and (ii) the original by-law language arguably would have allowed a
hostile bidder holding the requisite percentage of shares to call a special
stockholders meeting on minimal notice and stampede the shareholders into making
a decision without time to become adequately informed.
The Court of Chancery concluded that the By-Law Amendment responded to
those concerns by explicitly making the Quickturn board responsible for fixing
the time, place, record date and notice of the special meeting and by mandating
a 90 to 100 day period of delay for holding the meeting after the validity of
the shareholder's meeting request is determined. That specific delay period was
chosen to make Section 2.3 parallel to, and congruent with, Quickturn's "advance
notice" by-law, which contained a similar 90 to 100 day minimum advance notice
period.
The only By-Law Amendment-related issue that the Court of Chancery
decided was whether the Amendment, standing alone, fell outside any range of
potentially reasonable responses and,
<PAGE>
therefore, constituted a disproportionate response to the threat posed by the
Mentor tender offer and proxy contest. Among the factors the Court of Chancery
considered were whether the challenged defensive response "is a statutorily
authorized form of business decision that a board of directors may routinely
make in a non-takeover context,"(18) and whether the response "was limited and
corresponded in degree or magnitude to the degree or magnitude of the
threat."(19)
The Court of Chancery concluded that the Quickturn board's adoption of
the By-Law Amendment did not violate the fiduciary principles embodied in UNOCAL
and its progeny.(20) Although the Delayed Redemption Provision and the By-Law
Amendment were enacted as a concerted defensive response to Mentor's hostile
takeover efforts, Mentor did not file a cross-appeal challenging the Court of
Chancery's decision upholding the validity of Quickturn's amendment to its
by-laws. Consequently, the Court of Chancery's ruling on the By-Law Amendment is
not at issue in this appeal and has become final.
QUICKTURN'S DELAYED REDEMPTION PROVISION
At the time Mentor commenced its bid, Quickturn had in place a Rights
Plan that contained a so-called "dead hand" provision. That provision had a
limited "continuing director" feature that became operative only if an insurgent
that owned more than 15% of Quickturn's common stock
- --------------------------
(18) UNITRIN, INC. V. AMERICAN GENERAL CORP., Del. Supr., 651 A.2d
1361, 1389 (1995); UNOCAL CORP. V. MESA PETROLEUM CO., Del. Supr., 493 A.2d
946, 958 (1985); CHEFF V. MATHES, Del. Supr., 199 A.2d 548, 554 (1964).
(19) UNITRIN, INC. V. AMERICAN GENERAL CORP., 651 A.2d at 1389.
(20) The Court of Chancery noted, however, that its "conclusion
should not be regarded as a pronouncement that a by-law mandated 90 to 100
delay interval between the request for and the holding of a
shareholder-initiated special meeting is invariably reasonable as a matter of
law." MENTOR GRAPHICS CORP. V. QUICKTURN DESIGN SYSTEMS, ET AL., Del. Ch.,
C.A. No. 16584, Jacobs, V.C., slip op. at 43 (Dec. 7, 1998).
<PAGE>
successfully waged a proxy contest to replace a majority of the board. In that
event, only the "continuing directors" (those directors in office at the time
the poison pill was adopted) could redeem the rights.
During the same August 21, 1998 meeting at which it amended the special
meeting by-law, the Quickturn board also amended the Rights Plan to eliminate
its "continuing director" feature, and to substitute a "no hand" or "delayed
redemption provision" into its Rights Plan. The Delayed Redemption Provision
provides that, if a majority of the directors are replaced by stockholder
action, the newly elected board cannot redeem the rights for six months if the
purpose or effect of the redemption would be to facilitate a transaction with an
"Interested Person."(21)
- ------------------------
(21) The "no hand" or Delayed Redemption Provision is found in a new
Section 23(b) of the Rights Plan, which states:
(b) Notwithstanding the provisions of Section 23(a), in the
event that a majority of the Board of Directors of the Company is
elected by stockholder action at an annual or special meeting of
stockholders, then until the 180th day following the effectiveness of
such election (including any postponement or adjournment thereof), the
Rights shall not be redeemed if such redemption is reasonably likely to
have the purpose or effect of facilitating a Transaction with an
Interested Person.
Substantially similar provisions were added to Sections 24 ("Exchange") and 27
("Supplements and Amendments ') of the Rights Plan.
<PAGE>
It is undisputed that the DRP would prevent Mentor's slate, if elected
as the new board majority, from redeeming the Rights Plan for six months
following their election, because a redemption would be "reasonably likely to
have the purpose or effect of facilitating a Transaction" with Mentor, a party
that "directly or indirectly proposed, nominated or financially supported" the
election of the new board. Consequently, by adopting the DRP, the Quickturn
board built into the process a six month delay period in addition to the 90 to
100 day delay mandated by the By-Law Amendment.
COURT OF CHANCERY
INVALIDATES DELAYED REDEMPTION PROVISION
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.(22) 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 "proportionate," that is, reasonable
in relation to the threat that the board reasonably perceived.(23) The
Delayed Redemption Provision was reviewed by the Court of Chancery pursuant
to that standard.
The Court of Chancery found: "the evidence, viewed as a whole, shows
that the perceived threat that led the Quickturn board to adopt the DRP, was the
concern that Quickturn shareholders might mistakenly, in ignorance of
Quickturn's true value, accept Mentor's inadequate offer, and elect a new board
that would prematurely sell the company before the new board could adequately
inform
- --------------------
(22) UNOCAL CORP. V. MESA PETROLEUM CO., Del. Supr., 493 A.2d 946, 955
(1985).
(23) ID.; SEE ALSO UNITRIN, INC. V. AMERICAN GENERAL CORP., Del. Supr.,
651 A.2d 1361, 1372 (1995); PARAMOUNT COMMUNICATIONS, INC. V. TIME, INC., Del.
Supr., 571 A.2d 1140, 1152 (1990).
<PAGE>
itself of Quickturn's fair value and before the shareholders could
consider other options."(24) The Court of Chancery concluded that Mentor's
combined tender offer and proxy contest amounted to substantive coercion.(25)
Having concluded that the Quickturn board reasonably perceived a cognizable
threat, the Court of Chancery then examined whether the board's response -- the
Delayed Redemption Provision -- was proportionate in relation to that threat.
In assessing a challenge to defensive measures taken by a target
board in response to an attempted hostile takeover, enhanced judicial
scrutiny requires an evaluation of the board's justification for each
contested defensive measure and its concomitant results.(26) The Court of
Chancery found that the Quickturn board's "justification or rationale for
adopting the Delayed Redemption Provision was to force ANY newly elected
board to take sufficient time to become familiar with Quickturn and its
value, and to provide shareholders the opportunity to consider alternatives,
before selling Quickturn to ANY acquiror."(27) The Court of Chancery
concluded that the Delayed Redemption Provision could not pass the
proportionality test. Therefore, the Court of Chancery held that "the DRP
cannot survive scrutiny under Unocal and must be declared invalid."(28)
DELAYED REDEMPTION PROVISION
VIOLATES FUNDAMENTAL DELAWARE LAW
- ------------------
(24) MENTOR GRAPHICS CORP. V. QUICKTURN DESIGN SYSTEMS, ET AL., Del.
Ch., C.A. No. 16584, Jacobs, V.C., slip op. at 50 (Dec. 7, 1998).
(25) UNITRIN, INC. V. AMERICAN GENERAL CORP., 651 A.2d at 1387.
(26) ID.
(27) MENTOR GRAPHICS CORP. V. QUICKTURN DESIGN SYSTEMS, ET AL., Del.
Ch., C.A. No. 16584, Jacobs, V.C., slip op. at 64 (Dec. 7, 1998).
(28) ID.
<PAGE>
In this appeal, Mentor argues that the judgment of the Court of
Chancery, should be affirmed because the Delayed Redemption Provision is invalid
as a matter of Delaware law. According to Mentor, the Delayed Redemption
Provision, like the "dead hand" feature in the Rights Plan that was held to be
invalid in TOLL BROTHERS,(29) will impermissibly deprive any newly elected board
of both its statutory authority to manage the corporation under 8 DEL. C.
Section 141(a) and its concomitant fiduciary duty pursuant to that statutory
mandate. We agree.
Our analysis of the Delayed Redemption Provision in the Quickturn
Rights Plan is guided by the prior precedents of this Court with regard to a
board of directors authority to adopt a Rights Plan or "poison pill." In
MORAN, this Court held that the "inherent powers of the Board conferred by 8
DEL. C. Section 141(a) concerning the management of the corporation's
'business and affairs' provides the Board additional authority upon which to
enact the Rights Plan."(30) Consequently, this Court upheld the adoption of
the Rights Plan in MORAN as a legitimate exercise of business judgment by the
board of directors.(31) In doing so, however, this Court also held "the
rights plan is not absolute":(32)
When the Household Board of Directors is faced with a tender offer and
a request to redeem the Rights [Plan], they will not be able to
arbitrarily reject the offer. They will be held to the same fiduciary
standards any other board of directors would be
- --------------------
(29) CARMODY V. TOLL BROTHERS, INC., Del. Ch., C.A. No. 15983, Jacobs,
V.C. (July 24, 1998) ("Toll Brothers"). SEE BANK OF NEW YORK CO., INC. V. IRVING
BANK CORP., N.Y. Sup. Ct., 528 N.Y.S.2d 482 (1988). SEE ALSO Shawn C. Lese,
NOTE: PREVENTING CONTROL FROM THE GRAVE: A PROPOSAL FOR JUDICIAL TREATMENT OF
DEAD HAND PROVISIONS IN POISON PILLS, 96 Colum. L. Rev. 2175 (1996); Jeffrey N.
Gordon, "JUST SAY NEVER?" POISON PILLS, DEAD HAND PILLS, AND SHAREHOLDER ADOPTED
BY-LAWS: AN ESSAY FOR WARREN BUFFETT, 19 Cardozo L. Rev. 511 (1997). CF.
INVACARE CORP. V. HEALTHDYNE TECHNOLOGIES, INC., N.D. Ga., 968 F. Supp. 1578
(1997) (applying Georgia law).
(30) MORAN V. HOUSEHOLD INTERNATIONAL. INC., Del. Supr., 500 A.2d 1346,
1353 (1985), citing UNOCAL CORP. V. MESA PETROLEUM CO., Del. Supr., 493 A.2d
946, 953 (1985).
(31) ID.
(32) ID. at 1354
<PAGE>
held to in deciding to adopt a defensive mechanism, the same standards
as they were held to in originally approving the Rights Plan.(33)
In MORAN, this Court held that the "ultimate response to an actual takeover bid
must be judged by the Directors' actions at the time and nothing we say relieves
them of their fundamental duties to the corporation and its shareholders."(34)
Consequently, we concluded that the use of the Rights Plan would be evaluated
when and if the issue arises.(35)
One of the most basic tenets of Delaware corporate law is that the
board of directors has the ultimate responsibility for managing the business
and affairs of a corporation.(36) Section 141(a) requires that any limitation
on the board's authority be set out in the certificate of incorporation.(37)
The Quickturn certificate of incorporation contains no provision purporting,
to limit the authority of the board in any way. The Delayed Redemption
Provision, however, would prevent a newly elected board of directors from
completely discharging its fundamental management duties to the corporation
and its stockholders for six months. While the Delayed Redemption Provision
limits the board of directors' authority in only one respect, the suspension
of the Rights Plan, it nonetheless restricts the board's power in an area of
fundamental importance to the shareholders -- negotiating a possible sale of
the corporation. Therefore, we hold that the Delayed Redemption Provision is
invalid under Section 141(a), which confers upon any newly elected board of
directors full power to manage and direct the business and affairs of a
Delaware corporation.(38)
- --------------------
(33) ID.; SEE ALSO UNOCAL CORP. V. MESA PETROLEUM CO., 493 A.2d at
954-55, 958.
(34) MORAN V. HOUSEHOLD INTERNATIONAL, INC., 490 A.2d at 1357.
(35) ID.
(36) 8 DEL. C. Section 141(a). See Mills Acquisition Co. v. MacMillan,
Inc., Del. Supr., 559 A.2d 1261, 1280 (1989).
(37) 8 DEL. C. Section 141(a) states: "The business and affairs of
every corporation organized under this chapter shall be managed by or under
the direction of a board of directors, except as may be otherwise provided in
this chapter or in its certificate of incorporation. If any such provision is
made in the certificate of incorporation, the powers and duties conferred or
imposed upon the board of directors by this chapter shall be exercised or
performed to such extent and by such Person or persons as shall be provided
in the certificate of incorporation."
(38) 8 DEL. C. Section 141(a). See, e.g., Paramount Communications,
Inc. v. QVC Network, Inc., Del. Supr., 637 A.2d 34, 41-42 (1994).
<PAGE>
In discharging the statutory mandate of Section 141(a), the directors
have a fiduciary duty to the corporation and its shareholders.(39) This
unremitting obligation extends equally to board conduct in a contest for
corporate control.(40) The Delayed Redemption Provision prevents a newly elected
board of directors from completely discharging its fiduciary duties to protect
fully the interests of Quickturn and its stockholders.(41)
This Court has recently observed that "although the fiduciary duty
of a Delaware director is unremitting, the exact course of conduct that must
be charted to properly discharge that responsibility will change in the
specific context of the action the director is taking with regard to either
the corporation or its shareholders."(42) This Court has held "[t]o the
extent that a contract, or a provision thereof, purports to require a board
to act or not act in such a fashion as to limit the exercise of fiduciary
duties, it is invalid and unenforceable."(43) The Delayed Redemption
Provision "tends to limit in a substantial way the freedom of [newly elected]
directors' decisions on matters of management policy."(44) Therefore, "it
violates the duty of each [newly elected]director to exercise his own best
judgment on matters coming before the board."(45)
- -------------------------
(39) REVLON, INC. V. MACANDREWS & FORBES HOLDINGS, INC., Del. Supr.,
506 A.2d 173, 179 (1986); ARONSON V. LEWIS, Del. Supr., 473 A.2d 805, 811
(1984); GUTH V. LOFT, INC., Del. Supr., 23 Del. Ch. 2, 5 A.2d 503, 510 (1939).
(40) MILLS ACQUISITION CO. V. MACMILLAN, INC., Del. Supr., 559 A.2d
1261, 1280 (1989); SMITH V. VAN GORKOM, Del. Supr., 488 A.2d 858, 872-73
(1985).
(41) SEE MORAN V. HOUSEHOLD INTERNATIONAL, INC., 500 A.2d at 1354.
(42) MALONE V. BRINCAT, Del. Supr., ______ A.2d ______ (1998).
(43) SEE PARAMOUNT COMMUNICATIONS, INC. V. QVC NETWORK, INC., 637
A.2d at 51 (emphasis added). SEE, E.G., MILLS ACQUISITION CO. V. MACMILLAN,
INC., 559 A.2d at 1281 (holding that a "board of directors . . . may not
avoid its active and direct duty of oversight in a matter as significant as
the sale of corporate control"); GRIMES V. DONALD, Del. Ch., C.A. No. 13358,
slip op. at 17, Allen, C. (Jan. 11, 1995, revised Jan. 19, 1995), AFF'D, Del.
Supr., 673 A.2d 1207 (1996) ("[t]he board may not either formally or
effectively abdicate its statutory power and its fiduciary duty to manage or
direct the management of the business and affairs of this corporation").
(44) ABERCROMBIE V. DAVIES, Del. Ch., 123 A.2d 893, 899 (1956),
REV'D ON OTHER GROUNDS, Del. Supr., 130 A.2d 338 (1957).
(45) ID.
<PAGE>
In this case, the Quickturn board was confronted by a determined bidder
that sought to acquire the company at a price the Quickturn board concluded was
inadequate. Such situations are common in corporate takeover efforts.(46) In
Revlon, this Court held that no defensive measure can be sustained when it
represents a breach of the directors' fiduciary duty. A FORTIORI, no defensive
measure can be sustained which would require a new board of directors to breach
its fiduciary duty. In that regard, we note Mentor has properly acknowledged
that in the event its slate of directors are elected, those newly elected
directors will be required to discharge their unremitting fiduciary duty to
manage the corporation for the benefit of Quickturn and its stockholders.(47)
CONCLUSION
The Delayed Redemption Provision would prevent a new Quickturn board
of directors from managing the corporation by redeeming the Rights Plan to
facilitate a transaction that would serve the stockholders' best interests,
even under circumstances where the board would be required to do so because
of its fiduciary duty to the Quickturn stockholders. Because the Delayed
Redemption Provision impermissibly circumscribes the board's statutory power
under Section 141(a) and the directors' ability to fulfill their concomitant
fiduciary duties, we hold that the Delayed Redemption Provision is invalid.
On that alternative basis, the judgment of the Court of Chancery is AFFIRMED.
- ---------------------
(46) REVLON, INC. V. MACANDREWS & FORBES HOLDINGS, INC., 506 A.2d at
185.
(47) MALONE V. BRINCAT, Del. Supr., _____ A.2d _____ (1998).
