<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
----------------
SCHEDULE 14D-9
(AMENDMENT NO. 24)
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Solicitation/Recommendation Statement Pursuant to
Section 14(d)(4) of the Securities Exchange Act of 1934
QUICKTURN DESIGN SYSTEMS, INC.
(Name of Subject Company)
QUICKTURN DESIGN SYSTEMS, INC.
(Name of Person(s) Filing Statement)
COMMON STOCK, PAR VALUE $.001 PER SHARE
(including the associated preferred stock purchase rights)
(Title of Class of Securities)
----------------
74838E102
(CUSIP Number of Class of Securities)
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KEITH R. LOBO
PRESIDENT AND CHIEF EXECUTIVE OFFICER
QUICKTURN DESIGN SYSTEMS, INC.
55 W. TRIMBLE ROAD
SAN JOSE, CALIFORNIA 95131
(408) 914-6000
(Name, address and telephone number of person authorized to receive
notice and communications on behalf of person(s) filing statement)
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COPY TO:
LARRY W. SONSINI, ESQ.
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050
(650) 493-9300
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INTRODUCTION
The Solicitation/Recommendation Statement on Schedule 14D-9 (the "Schedule
14D-9") originally filed on August 24, 1998, by Quickturn Design Systems,
Inc., a Delaware corporation (the "Company" or "Quickturn"), relates to an
offer by MGZ Corp., a Delaware corporation ("MGZ") and a wholly owned
subsidiary of Mentor Graphics Corporation, an Oregon corporation ("Mentor"),
to purchase all of the outstanding shares of the common stock, par value $.001
per share (including the associated preferred stock purchase rights), of the
Company. All capitalized terms used herein without definition have the
respective meanings set forth in the Schedule 14D-9.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED
The response to Item 8 is hereby amended by adding the following to the end
of the section entitled "Litigation Concerning the Offer":
On December 3, 1998, the Court of Chancery of the State of Delaware
issued an opinion regarding amendments to certain provisions of Quickturn's
Bylaws and its stockholder rights plan, a copy of which is filed as Exhibit
53 hereto and is incorporated herein by reference.
The response to Item 8 is hereby amended by adding the following to the end
of the Item:
Additional information Regarding the Tender Offer
On December 3, 1998, MGZ extended its tender offer to January 11,
1999.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
The response to Item 9 is hereby amended by the addition of the following
new exhibit:
Exhibit 53 Opinion of the Court of Chancery of the State of Delaware dated
December 3, 1998.
2
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SIGNATURE
After reasonable inquiry and to the best of its knowledge and belief, the
undersigned certifies that the information set forth in this statement is
true, complete and correct.
<TABLE>
<C> <S>
Dated: December 4, 1998 QUICKTURN DESIGN SYSTEMS, INC.
</TABLE>
By:/s/ Keith R. Lobo
----------------------------------
Keith R. Lobo
President and Chief Executive
Officer
3
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EXHIBIT 53
IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE
IN AND FOR NEW CASTLE COUNTY
MENTOR GRAPHICS CORPORATION, :
an Oregon corporation, and MGZ CORP., a :
Delaware corporation, :
:
Plaintiffs, :
v. : C.A. No.16584
:
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. :
:
HOWARD SHAPIRO, :
:
Plaintiff, :
v. : C.A. No 16588
:
GLEN M. ANTLE, KEITH R. LOBO, :
RICHARD C. ALBERDING, MICHAEL R. :
D'AMOUR, YEN-SON HUANG, DAVID K. :
LAM, WILLIAM A. HASLER, CHARLES D. :
KISSNER, and QUICKTURN DESIGN :
SYSTEMS, INC., :
:
Defendants, :
OPINION
Date Submitted: November 9, 1998
Date Decided: December 3, 1998
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Kevin G. Abrams, Thomas A. Beck, Lisa A. Schmidt, Catherine G. Dearlove, J.
Travis Laster, Thad J. Bracegirdle, Leanne J. Reese, and Dominick Gattuso,
Esquires, 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 Plaintiffs
Mentor Graphics Corporation and MGZ Corp.
Norman M. Monhait, Esquire, of ROSENTHAL, MONHAIT, GROSS & GODDESS, P.A.,
Wilmington, Delaware, and Stanley Bernstein, Esquire, of BERNSTEIN LIEBHARD &
LIFSHITZ, LLP, New York, New York, for Shareholder Plaintiff in Civil Action
No. 16588
Kenneth J. Nachbar, William M. Lafferty, and Donna L. Culver, Esquires, of
MORRIS, NICHOLS, ARSHT & TUNNELL, Wilmington, Delaware; and James A. DiBoise and
David J. Berger, Esquires, of WILSON, SONSINI, GOODRICH & ROSATI, P.C., Palo
Alto, California, Attorneys for Defendants
JACOBS, VICE CHANCELLOR
<PAGE>
In the ever-evolving field of corporate takeover jurisprudence, the
defensive mechanism that has mutated more rapidly than others, and has prompted
the most widespread debate, is the "poison pill" rights plan. Since making its
legal debut in 1985,/1/ the story of the poison pill has been a work-in-
progress, with each variation and innovation generating new litigation and
occasions for judicial opinion writing. This case involves the pill's most
recent incarnation -- a "no hand" poison pill of limited duration and scope./2/
It marks the latest (but by no means the last) chapter of that work-in-progress.
To put this case into context, in Carmody v. Toll Brothers, Inc. ("Toll
------------------------- ----
Brothers"),/3/ this Court, in denying a Rule 12(b)(6) motion to dismiss a
- --------
complaint attacking a so-called "dead hand" poison pill,/4/ ruled that that form
of rights plan was subject to legal challenge under the Delaware General
Corporation Law
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/1/ See Moran v. Household International, Inc., Del. Supr., 500 A.2d
------------------------------------------
1346(1985).
/2/ Some practitioners of the art have described this iteration as a "slow
hand" poison pill.
/3/ Del. Ch., C.A. No. 15983, Jacobs, V.C. (July 24, 1998, revised, July
27, 28, and Aug. 4, 1998).
/4/ A "dead hand" rights plan permits only the directors in office at the
time the rights plan was adopted or their designated successors ("continuing
directors") to redeem the rights. Thus, if the continuing directors are ousted
from office in a proxy contest waged by a bidder making a hostile tender offer,
the bidder's newly-e1ected board nominees could not redeem the rights to permit
the bidder from acquiring the stock tendered to it. Only the previous incumbent
directors (or their designated successors) could do so. See Toll Brothers, supra
----------------- -----
note 1 at 6-7; Jeffrey N. Gordon, "Just Say Never?" Poison Pills, Dead Hand
-----------------------------------------
Pills, and Shareholder Adopted Bylaws: An Essay for Warren Buffet, 19 Cardozo L.
- -----------------------------------------------------------------
Rev. 511, 523, 531-32 (1997).
1
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("DGCL") and Delaware corporate fiduciary principles. The Toll Brothers dead
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hand poison pill plan provided that if there were a change of control of the
board of directors, then for the entire lifetime of the pill only the
"continuing directors"/5/ would be empowered to redeem the rights to facilitate
an acquisition by a hostile bidder.
The "no hand" poison pill being challenged here is a variation of, and
operates in a different manner from, the "dead hand" pill addressed in Toll
----
Brothers. The pill in Toll Brothers created two classes of directors. One would
- -------- -------------
have the power to redeem and the other would not. That limitation would last the
entire lifetime of the pill. In contrast, the "no hand" pill in this case would
create no classes. It would evenhandedly prevent all members of a newly elected
---
target board, whose majority is nominated or supported by the hostile bidder,
from redeeming the rights to facilitate an acquisition by the bidder. The
duration of this "no hand" pill would be for six months after the new directors
take office. Those nuanced distinctions and their legal effect, none of which
were addressed in Toll Brothers, are what this lawsuit is about.
-------------
The dispute that underlies these actions for declarative and injunctive
relief
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/5/ See supra note 4.
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2
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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 are Mentor/6/ and an unaffiliated stockholder of
Quickturn; the named defendants are Quickturn and its directors. The plaintiffs
challenge the validity, on Delaware fiduciary and statutory grounds, of a "no
hand" rights plan of limited duration (the "Delayed Redemption Provision" or
"DRP") that the target company board adopted in response to the hostile bidder's
tender offer and proxy contest to replace that board as part of the bidder's
larger effort to acquire the target company. In response to that hostile bid,
the board also amended the company's by-laws 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 "By-Law Amendment").
The plaintiffs also challenge the legality of that By-Law Amendment.
This is the Opinion of the Court, after trial on the merits. For the
reasons discussed below, the Court determines that the DRP is invalid on
fiduciary duty grounds, and that the By-Law Amendment is valid and will be
upheld.
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/6/ 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 Civil Action No. 16588, are referred to collectively as
"plaintiffs."
3
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I. STATEMENT OF FACTS
A. THE PARTIES
Mentor (the hostile bidder-plaintiff) 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, and 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-defendant) is a Delaware corporation,
headquartered in San Jose, California. Quickturn has 17,922,518 outstanding
shares of common stock/7/ 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
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/7/ As of July 30, 1998.
4
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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 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./8/ 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.
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/8/ 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, 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).
5
<PAGE>
Since 1989, Quickturn has historically been a growth company, having
experienced increases in earnings and revenues during the past seven years./9/
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
$l5.875 to $21.25 range during the year preceding Mentor's hostile bid which
commenced in August 1998./10/
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,/11/ but in 1998, Quickturn's Asian sales declined dramatically with the
downturn of the Asian market./12/ Management has projected that the negative
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/9/ The following are the revenue (in millions) and growth percentages for
Quickturn from 1989-1997: 1989: Revenue ($1.3); 1990: Revenue ($6.6), Growth
(408%); 1991: Revenue ($12.8), Growth (94%); 1992: Revenue ($25.8), Growth
(102%); 1993: Revenue ($54.9), Growth (113%); 1994: Revenue ($65.5), Growth
(19%); 1995: Revenue ($82.4), Growth (26%); 1996: Revenue ($109.6), Growth
(33%); 1997: Revenue ($110.4), Growth (1%). In 1998, revenues are expected to
decline (estimated at Revenue ($100) and Growth (-9%)) DX2l6 at 4.
/10/ DX16 at 9.
/11/ Trial Tr. at 451-52; DX274D at 8.
/12/ 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. DX216 at 9. 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.
6
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impact of the Asian market upon Quickturn's sales should begin reversing itself
sometime between the second half of 1998 and early 1999.
B. THE QUICKTURN-MENTOR PATENT LITIGATION
To understand the economics and the motivation of Mentor's hostile bid for
Quickturn, one must appreciate the earlier relationship -- including,
importantly, the history of patent litigation -- between Mentor and Quickturn.
Since 1996 those two firms 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 selling, manufacturing, or
marketing its emulation product in the United States -- 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
re-entered 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
7
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infringing Quickturn's patents./13/ 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./14/ 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./15/
In an effort to circumvent the effects of the ITC orders, Mentor began
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/13/ See In the Matter of Certain Hardware Logic Emulation Systems and
-----------------------------------------------------------------
Components Thereof, Inv. No. 337-TA-383, Notice of Investigation, 61 Fed. Reg.
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9486 (ITC March 8, 1996).
/14/ 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); DX275G.
/15/ In the Matter of Certain Hardware Logic Emulation Systems and
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Components Thereof, Inv. No. 337-TA-383, 1997 ITC LEXIS 377, Notice of Issuance
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of a Permanent Limited Exclusion Order and a Permanent Cease and Desist Order
(ITC Dec. 3, 1997) ("ITC Permanent Orders").
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8
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manufacturing its emulation products in the United States in 1997. Mentor also
filed a declaratory judgment action in Oregon, claiming that its products did
not infringe upon Quickturn's patents. Thereafter, the United States District
Court in Oregon issued an injunction prohibiting Mentor from selling, marketing,
or manufacturing its emulation products in the United States. That injunction
was affirmed by the Federal Circuit Court of Appeals,/16/ which on September 28,
1998, denied Mentor's final appeal of the District Court's preliminary
injunction./17/
At present, the only remaining patent litigation is pending in the Oregon
Federal District Court, where Quickturn is asserting a patent infringement
damage claim that, Quickturn contends, is worth approximately $225 million./18/
Mentor contends that Quickturn's claim is worth only $5.2 million or even less.
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/16/ Mentor Graphics Corp. v. Quickturn Design Systems, Inc., 999 F.Supp.
-------------------------------------------------------
1388 (D. Or. 1997), aff'd 150 F.3d 1374 (Fed. Cir. 1998).
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/17/ Mentor Graphics Corp. v. Quickturn Design Systems, Inc., No. 97-1564,
-------------------------------------------------------
1998 U.S. App. LEXIS 26538 (Fed. Cir. Sept. 28, 1998).
/18/ At trial, Dr. Walden Rhines, Mentor's Chairman, testified that
Quickturn's $225 million dollar damage claim did not concern him because Mentor
"had received a written offer for settlement of the patent suit from Quickturn
for $5.2 million, and then a verbal offer for $3 1/2 million after we initiated
the tender offer." Trial Tr. at 155. Dr. Rhines later altered his testimony on
this issue, calling the "settlement" offer a "cap on damages." Trial Tr. at
171-72. Whether there was a "settlement" offer or only a "cap on damages" is
disputed, but this Court need not resolve that dispute or determine the value of
the patent damage claim. All I need decide in this case is whether the Quickturn
board reasonably believed that the amount of Quickturn's patent damage claim was
sizeable. I find that the board had a reasonable basis for that belief. Whether
or not that belief was correct will be for another court to decide.
9
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C. MENTOR'S INTEREST IN ACQUIRING QUICKTURN
After it became clear that these legal barriers prevented Mentor from
competing effectively against Quickturn, Mentor began exploring the possibility
of acquiring Quickturn. If Mentor owned Quickturn, it would also own the
patents, and be in a position to "unenforce" them by seeking to vacate
Quickturn's injunctive orders against Mentor in the patent litigation./19/
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"/20/ and "Strategic
Alternatives Analysis." The Andersen report identified several advantages and
benefits Mentor would enjoy if it acquired Quickturn./21/
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/19/ Mentor assiduously denies that obtaining ownership of the patents,
which effectively would enable Mentor to reenter the United States market, was a
motivating factor for making its hostile bid. I conclude, however, that was the
primary, if not sole, motivation for Mentor's takeover bid, and reject Dr.
Rhines's contrary testimony on this subject (Trial Tr. at 52-53) as lacking
credibility.
/20/ Andersen used "Project Velocity" and "Cyclone" as code names for the
study and Quickturn, respectively.
/21/ 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. See PX4 at 19-20, PX6 at Ex.99(a)(q) and PX8 at Ex(a)(13).
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10
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The Andersen report also analyzed whether Mentor would create more value by
selling Meta or by purchasing Quickturn. Andersen concluded that selling Meta
would eliminate (for Mentor) Meta's forecasted 1998 loss of $3.4 million/22/ and
would possibly bring $50 million in a sale. Acquiring Quickturn, on the other
hand, would enable Mentor to sell its Meta products worldwide; obtain
Quickturn's product line, manufacturing facilities, and sales force; and
ultimately provide Mentor $610-$640 million of value. Lastly, Andersen concluded
that Mentor could pay $300 to $320 million -- about $16.80 to $17.90 per share
- -- to acquire Quickturn and still create an additional $290~$320 million in
synergistic value for Mentor./23/
Six weeks later, in December 1997, Mentor retained Salomon Smith Barney
("Salomon") to act as its financial advisor in connection with a possible
acquisition of Quickturn. Solomon prepared an extensive study which it reviewed
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/22/ The actual loss, as it turned out, was approximately $17 million
DX316; Trial Tr. at 1062-63.
/23/ At trial, Dr. Rhines claimed that he never saw the Andersen report
before his deposition in this action. Trial. Tr. at 126. That claim also lacks
credibility. A study of an issue of such prime importance to Mentor would have
been shown to the company's Chairman, and it is highly unlikely that the study
would have been commissioned by a senior executive without the Chairman's
knowledge. Moreover, at his deposition Andersen's representative contradicted
Dr. Rhines' version of those events, testifying that he had explained the
Andersen report to both Dr. Rhines and Mr. Gregory Hinckley, Mentor's Executive
Vice President, CEO and CFO. Cegelski Dep. at 39-40.
11
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with Mentor's senior executives in early 1998. The Solomon 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.
Rhines 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./24/ Mr.
Hinckley then assembled Mentor's financial and legal advisors, proxy solicitors,
and others, and began a three month process that culminated in Mentor's August
12, 1998 tender offer. During that three month period, Hinckley placed a high
premium on secrecy, cautioning the persons involved in preparing the bid not to
take any notes and to destroy all relevant documents./25/
D. MENTOR'S REASONS FOR ACQUIRING QUICKTURN
The foregoing facts, which are not seriously disputed, show that a major
purpose of Mentor's hostile bid for Quickturn was (and is) to eliminate the
- ---------------
/24/ Trial Tr. at 65.
/25/ Hinckley Dep. at 19, 36. Because Mentor apparently destroyed all
copies of the Solomon study, that document was not available during discovery
and only its general substance (as recollected by Mentor's witnesses) could be
determined. Hinckley Dep. at 27.
12
<PAGE>
obstacles, caused by Quickturn's enforcement of its patents, to Mentor's reentry
into the U.S. market.
At trial, Dr. Rhines denied that is Mentor's purpose in seeking to acquire
Quickturn, but I find that not credible. Dr. Rhines denied giving a presentation
to the Mentor board at a July 22, 1998 Mentor special board meeting called for
the purpose of approving Mentor's planned offer for Quickturn. He also denied
having told the board that acquiring Quickturn was important because it would
allow Mentor to sell its products in the United States./26/ At least three other
persons who attended the July 22 meeting, however, have contradicted Dr. Rhines'
testimony. Jon Shirley and Fontaine Richardson, two of Mentor's outside
directors, testified in their depositions that Dr. Rhines was the first person
to make a presentation at Mentor's July 22 board meeting, and that Dr. Rhines
specifically stated that an acquisition of Quickturn by Mentor would allow
Mentor to sell its emulation products in the United States./27/ Daniel Burch,
Mentor's proxy solicitor who also attended that meeting, testified to that same
effect./28/
- ---------------
/26/ Trial Tr. at 45-46.
/27/ Richardson Dep. at 29-32; Shirley Dep. at 18-19.
/28/ Burch Dep. at 67-68. Dr. Rhines also testified that the ongoing
Mentor-Quickturn patent litigation was not a factor in Mentor's decision not to
sell its new Celero product (which arguably infringes upon Quickturn's patents)
in the United States, because Mentor has "insufficient production capacity to
meet the demand." That testimony is contradicted by several
13
<PAGE>
Also difficult to believe is Dr. Rhines' testimony that he did not know of
the Federal Circuit's August 5, 1998 decision affirming the injunction granted
by the Oregon Federal Court before Mentor commenced its hostile offer./29/ At
trial, Rhines testified that he closely follows the patent litigation between
the two companies./30/ It is inconceivable that, during the time Dr. Rhines was
meeting with Mentor's lawyers about making a hostile bid, he was not told about
a matter of such importance as the appellate court decision affirming an
injunction that prohibited Mentor from further competing against Quickturn in
the United States, and that precluded Mentor from further challenging the
validity of Quickturn's patents. In short, the Court finds no basis to credit
Mentor's contention that its hostile bid is unrelated to the patent litigation.
- ---------------
internal documents created by Mr. Braune, the head of Mentor's emulation
business. Those documents show that Mentor decided in late 1997 not to sell "any
---
emulation products in the United States," including the Celero product, because
of the patent litigation. DX 315 (emphasis in original). It is difficult to
believe that Dr. Rhines did not review (or was unaware) of memoranda that had
been prepared by a very senior executive in charge of Mentor's emulation
business.
/29/ It is difficult to swallow Dr. Rhines's testimony that Mentor is
"prepared to move forward without having...a presence in the U.S. market"
because Mentor "has been extremely successful outside the U.S." and therefore
could survive without such a presence. Trial Tr. at 78. In 1997, Mentor's
emulation business lost $14 million on $11 million in revenue, and the
forecasted results for 1998 were that Mentor would lose $17 million on revenues
of $18 million. DX 316; Trial Tr. at 1062-63. It is hard to understand precisely
in what sense Mentor's emulation business -- without a U.S. market presence --
had been "extremely successful."
/30/ See Trial Tr. at 54-55.
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14
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E. MENTOR LAUNCHES ITS OFFER AND PROXY CONTEST.
On August 11, 1998, the evening before Mentor launched its bid, Dr. Rhines
scheduled a dinner with Glen Antle, Quickturn's board chairman. After dinner Dr.
Rhines informed Mr. Antle that Mentor would be launching a hostile tender offer
for the outstanding shares of Quickturn the next morning. Dr. Rhines then handed
Mr. Antle a previously prepared letter to that effect. At no time during the
three month planning period did Mentor ever attempt to contact Quickturn's
management or its board to negotiate a consensual deal./31/
The next morning, 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
- ---------------
/31/ What Dr. Rhines did not disclose to Mr. Antle at that dinner was that
Mentor had already prepared two complaints, which Mentor planned to file the
next day, naming Mr. Antle and the other Quickturn board members as defendants.
Dr. Rhines claims that he did not disclose this because the subject "just didn't
come up." Trial Tr. at 73. Dr. Rhines also refused Mr. Antle's requests that
Quickturn be given time to consider Mentor's offer and perhaps proceed on a
friendly basis, because it was "too late." Trial Tr. at 846.
15
<PAGE>
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./32/
F. QUICKTURN'S DEFENSIVE RESPONSES
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 Board met three times --
on August 13, 17, and 21, 1998 -- to consider Mentor's offer and decide what
response to make.
1. THE AUGUST 13, 1998 BOARD MEETING
The Quickturn board first met on August 13, 1998, the day after Mentor
publicly announced its bid./33/ All board members attended the meeting, for the
- ---------------
/32/ The applicable by-law (Article II, (S)2.3) authorized a call of a
special stockholders meeting by shareholders holding at least 10% of Quickturn's
shares. See p. 30-31, infra, of this Opinion. 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.
/33/ DX 24.
16
<PAGE>
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 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./34/
During the balance of the meeting, the board discussed for approximately
- ---------------
/34/ 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. DX24, DX26, DX16.
17
<PAGE>
one to 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 available to the Company 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 stockholder
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, for August 17 and
August 21, 1998.
2. THE AUGUST 17, 1998 BOARD MEETING
The 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
18
<PAGE>
the period l998-2000. 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
measures, but took no action at that time./35/
Mentor assiduously challenges management's projections and the valuations
of Quickturn that flow from them. Mentor claims that the projections had no
basis in reality or historical experience, and in essence were cobbled together
to justify the board's anticipated rejection of, and defensive responses to,
Mentor's offer./36/ The defendants answer that the board carefully questioned
management about their projections, and that the directors had a good faith
basis
- ---------------
/35/ DX 26.
/36/ Mentor points out that (i) none of the Quickturn directors expressed
any concern at the August 17 meeting about whether management could meet the 30%
expectation (See Antle Dep. at 97; Lobo Dep. at 138) and that (ii) during each
---
of the last two quarters, the Quickturn board had received presentations at
board meetings showing that the company had fallen woefully short of the revenue
and EBIT projections in management's detailed "bottom up" operating plans. See
---
Trial Tr. at 971-72; PXl00 at 8; Lobo Dep. at 67-68. Mentor argues that, given
this history, the board members' failure to inquire into the Medium Term Plan
make them "the quintessential example of a 'torpid if not supine' board..."
Plaintiffs' Opening Post Trial Brief at 7. Mentor also attacks the Medium Term
Plan arguing that a $100 million 1998 revenue estimate was a clear
acknowledgment that Quickturn would fall short by $50 million in the revenues
projected in their 1998 plan. PX39; Trial Tr. at 594-95.
19
<PAGE>
to conclude that those projections were achievable. The issue, however, is not
whether the projections were substantively right or wrong, but whether the board
had a basis to believe they were reasonable. Having considered the evidence,
including the testimony of Quickturn's trial witnesses which I find credible, I
am satisfied that the board had grounds to anticipate that the company could
"turn around" in a year and perform at the projected revenue levels.
3. THE AUGUST 21, 1998 BOARD MEETING
The 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 application of
five different methodologies./37/ The chart showed that Quickturn's value under
all but one of those methodologies was higher than Mentor's $12.125 tender offer
price.
- ---------------
/37/ DX16; DX11 at 38. 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 ($9.54-$l0.72); and Discounted Cash Flow Analysis ($11.88-
$57.87).
20
<PAGE>
a. THE 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;/38/ (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.
b. THE 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, (S)2.3 of Quickturn's by-laws, which
-----
permitted stockholders holding 10% or more of Quickturn's stock to call a
special
- ---------------
/38/ Mentor argues that because their $12.125 per share offering price is
within or above all five ranges generated by H&Q, the Quickturn board's failure
to challenge the conclusions reached in H&Q's opinion was "indefensible."
21
<PAGE>
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 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./39/
Second, the board amended Quickturn's shareholder rights plan ("Rights
------
Plan") by eliminating its "dead hand" feature and replacing it with the Deferred
Redemption Plan ("DRP"), 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)./40/ Mentor would be an Interested Person.
- ---------------
/39/ The full text of the By-Law Amendment is set forth on pages 30-31,
infra, of this Opinion.
- -----
/40/ 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."
22
<PAGE>
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
poison pill for six months, in any transaction with an Interested Person./41/
Thus, the combined effect of the two defensive measures would be to delay any
acquisition of Quickturn by Mentor for at least nine months.
G. THE BOARD'S REASONS FOR ADOPTING THE DEFENSIVE MEASURES
Because of their importance, the board's reasons for adopting the two
defensive measures were the subject of substantial deposition and trial
testimony. That testimony, together with the other evidence that bears on those
issues, is next discussed.
1. THE BY-LAW AMENDMENT
The evidence, fairly summarized, shows that the board amended Article II,
(S)2.3 of the by-laws to delay the holding of a shareholder-called special
meeting, in order to protect the shareholders from stampeding into a decision
without adequate time to become informed and for reflection. The 90 to 100 day
period was chosen because it corresponded to the delay period mandated by
Quickturn's
- ---------------
/41/ See supra note 40.
-----
23
<PAGE>
preexisting "advance notice" by-law (Article II, (S)2.5). The advance notice by-
law requires shareholders who seek (inter alia) to nominate opposition
----- ----
candidates for election to the board of directors, to give advance notice of
their intent and furnish certain prescribed information about the opposition
candidates, at least 90 to 100 days before the scheduled date of the annual or
special meeting. The 90 to 100 day delay period of the By-Law Amendment was also
chosen to eliminate any argument that the advance notice by-law did not apply to
special meetings called by shareholders pursuant to Article II, (S)2.3./42/
2. THE BOARD'S REASONS FOR ADOPTING THE DRP
As earlier noted, 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. The DRP would accomplish that by prohibiting any newly
elected board, a majority of whose members were nominated by the proposed
acquiror, from redeeming the poison pill for six months following their
election, if the redemption would facilitate a transaction with an "Interested
- ---------------
/42/ The advance notice by-law is set forth infra at note 65. The basis for
-----
the argument that the advance notice bylaw would not apply to special meetings
called under Article II, (S)2.3 is discussed infra at p. 41. See also Trial
----- --------
Tr. at 391; Hasler Dep. at 15-16; Trial Tr. at 809; D'Amour Dep. at 46-49; Antle
Dep. at 123-24; Kissner Dep. at 129. The remaining board members' testimony on
this issue reflects the same rationale. See Trial Tr. at 856-57 (Antle);
---
Alberding Dep. at 67-69; Lam Dep. at 99-100; Lobo Dep. at 167-68.
24
<PAGE>
Person" (i.e., the acquiror).
----
The board's reasons for adopting the DRP are hotly disputed and the briefs
on this point are at times confusing. The Court's analysis of, and the
conclusion it draws from, that evidence, is set forth in Part IV of this Opinion
and will not be repeated here. Suffice it to say that the Court finds that the
board's stated rationale for adopting the DRP was to afford any newly elected
---
board sufficient time to adequately inform itself about Quickturn, its business,
and its true value, and also to allow stockholders sufficient time to consider
alternatives, before the board decided to sell the company to any acquiror./43/
---
H. THIS LITIGATION AND THE PRESENT
STATUS OF THE CONTROVERSY
Mentor filed this action on August 12, 1998, seeking (i) a declaratory
judgment that Quickturn's newly adopted takeover defenses are invalid, and (ii)
an injunction requiring the Quickturn board to dismantle those defenses. After
expedited discovery, the defendants moved for summary judgment. Following
extensive briefing and oral argument, the Court denied defendants' motion on
- ---------------
/43/ See DX16 at 9; Has1er Dep. at 28-30; D'Amour Dep. at 17; Antle Dep.
---
at 134; Kissner Dep. at 211, 213; Alberding Dep. at 77.
25
<PAGE>
October 9, l998./44/ A trial was held on October 19, 20, 23, 26, and 28, 1998,
during which the parties amassed a voluminous record; thereafter, the parties
submitted extensive post trial briefs on an expedited schedule.
During the course of the litigation, the Quickturn board, relying upon the
By-Law Amendment, noticed the special meeting requested by Mentor from January
8, 1999 -- 71 days after the October 1, 1998 meeting date originally noticed by
Mentor./45/ After the trial, Mentor announced in Amendments to its Schedule
14A-l that were filed with the S.E.C., that it had received tenders of Quickturn
shares which, together with the shares that Mentor already owned, represent over
51% of Quickturn's outstanding stock./46/
II. THE CONTENTIONS
---------------
The plaintiffs claim that the By-Law Amendment and the DRP should be
invalidated on four separate grounds./47/ Because the parties' contentions are
- ---------------
/44/ Mentor Graphics Corp. v. Quickturn Design Systems, et. al., Del. Ch.,
----------------------------------------------------------
C.A. No. 16584, Jacobs, V.C. (Oct. 9, 1998).
/45/ Mentor later renoticed the special meeting date to November 24, 1998,
anticipating that the Court would issue its decision before that time. After the
Court 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.
/46/ Amendment Nos. 19 and 23 to Mentor's Schedule 14D-1; see infra note
-----
95 and accompanying text.
/47/ The plaintiffs have all but abandoned their claim based on Schnell v.
----------
Chris-Craft Indus., Inc., Del. Supr., 285 A.2d 437 (1971) that they raised
- ------------------------
during the summary judgment
26
<PAGE>
elaborated more fully in those sections of this Opinion that relate specifically
to each defensive provision, (see Parts III and IV, infra), those contentions
-----
are summarized only briefly at this point.
First, the plaintiffs contend that the defensive measures are invalid under
-----
Blasius Indus., Inc. v. Atlas Corp., ("Blasius"),/48/ because they constitute a
- ----------------------------------- -------
purposeful interference with the stockholder franchise without a compelling
justification. Specifically, plaintiffs argue that the By-Law Amendment
impermissibly impedes the stockholder franchise by imposing (i) a 90-100 day
delay between the date of Mentor's call of a special stockholders meeting and
the date of that meeting, and (ii) a 71 day delay between the meeting date
noticed by Mentor and the meeting date noticed by Quickturn. That delay is
claimed to infringe upon the stockholders' franchise because (i) it creates a
structure in which a stockholder vote is either impotent or self-defeating, and
(ii) it coerces Quickturn stockholders to not vote, or to abstain from voting,
or to vote for the
- ---------------
phase. See Plaintiffs' Brief in Opposition to Defendants' Motion for Summary
---
Judgment at 85. The argument was reduced to a footnote in their opening post
trial brief. Plaintiffs' Post Trial Opening Brief at 37 n 18. "The foregoing
-
evidence also confirms that the Quickturn directors improperly have manipulated
the corporate machinery for the inequitable purpose of entrenchment." Plaintiffs
have also not raised or supported another argument previously advanced in their
summary judgment briefs, namely, that the Quickturn boards' attempt to exempt
Mentor's offer from 8 Del C. (S)203 is improper and should be reviewed under
------
Unocal.
- ------
/48/ Del. Ch., 564 A.2d 651, 661(1988).
27
<PAGE>
incumbent board who are the only directors with full power to redeem the pill
after a successful proxy contest. Lastly, plaintiffs argue that the Quickturn
board has not shown a compelling justification for either defensive measure.
Second, the plaintiffs claim that the board's adoption of the defensive
------
measures constituted a breach of fiduciary duty under the dual-pronged test of
Unocal Corp. v. Mesa Petroleum Co. ("Unocal"),/49/ as elaborated in Unitrin Inc.
- ---------------------------------- ------ ------------
v. American Gen. Corp. ("Unitrin")./50/ The plaintiffs contend that the
- ---------------------- -------
Quickturn board did not have reasonable grounds to conclude that Mentor's bid
was a threat to corporate policy and effectiveness.
The plaintiffs also argue that the board's defensive responses (the By-Law
Amendment and the DRP) were preclusive, coercive, and fell outside a "range of
reasonableness." The defensive measures are said to be coercive for the same
reasons that they are violative of Blasius. The defensive measures are also
-------
claimed to be preclusive because the DRP will prevent a newly elected board
consisting of Mentor's nominees from immediately consummating Mentor's offer,
and because the combined defensive measures will create a lengthy delay period
that virtually assures that Mentor's offer will be withdrawn before the
- ---------------
/49/ Del. Supr., 493 A.2d 946, 955 (1985).
/50/ Del. Supr., 651 A.2d 1361, 1388 (1995).
28
<PAGE>
nonredemption period expires. Finally, the plaintiffs contend that the defensive
measures fall outside a range of reasonableness because they are unresponsive to
the threat perceived by the Quickturn board and because they have no
relationship to the board's purported justifications for adopting the two
defensive measures.
Third, the plaintiffs claim that the Quickturn board breached its duty of
-----
care under Cede & Co. v. Technicolor, Inc./51/ and Smith v. Van Gorkom./52/
------------------------------- --------------------
Specifically, they contend that (i) the board erroneously relied on a flawed H&Q
report in concluding there was a threat; (ii) the Quickturn board and its
advisors did not understand the DRP they had adopted, yet proceeded to implement
the DRP and the By-Law Amendment without regard to their impact on Quickturn's
shareholders upon Mentor's offer and proxy contest; and (iii) the Quickturn
board did not receive competent legal advice concerning the effect of the
defensive measures.
Fourth, the plaintiffs contend that the DRP is ultra vires under 8 Del. C.
------ ----------- -------
(S)141(a), and is therefore invalid as a matter of law.
To promote clarity, the Court first addresses, in Part III, the claims of
invalidity relating to the By-Law Amendment. Thereafter, in Part IV, it
- ---------------
/51/ Del. Supr., 634 A.2d 345, 367 (1993).
/52/ Del. Supr., 488 A.2d 858, 872-73 (1985).
29
<PAGE>
adjudicates the invalidity claims advanced against the DRP. The Court's
disposition of those claims makes it unnecessary to address the plaintiffs' due
care/53/ and ultra vires contentions.
----- -----
III. ANALYSIS OF THE BY-LAW AMENDMENT
--------------------------------
A. INTRODUCTION AND THE ISSUE PRESENTED
As earlier noted, 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, (S)243, 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 board amended (S)2.3 in response
to the Mentor bid, to read as follows:/54/
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
- ---------------
/53/ Because the DRP is invalidated on fiduciary grounds (See infra, Part
--- -----
IV) it becomes unnecessary to address any alternative claim of invalidity.
Because the By-Law Amendment is upheld, the due care claim is addressed, but not
as a separate legal argument, since the Court finds as fact that in adopting the
By-Law Amendment the board was properly informed.
/54/ The amended portion is shown in italics.
30
<PAGE>
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.
As the Court has found, the board amended the By-Law because (i) the
original (S)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 By-Law Amendment responded to those concerns by explicitly making the
board responsible for fixing the time, place, record date, and notice of the
31
<PAGE>
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 (S)2.3 parallel to,
and congruent with, Quickturn's "advance notice" bylaw, which contained a
similar 90 to 100 day minimum advance notice period./55/
The plaintiffs attack the By-Law Amendment on two separate fiduciary duty
grounds. First, they argue that the Amendment purposefully interferes with the
shareholders' voting franchise without compelling justification, and therefore
is invalid under Blasius because the 90 to 100 day delay, when added to the 6
-------
month nonredemption period imposed by the DRP, ensures to a near certainty that
Mentor will lose the election contest. The reason, plaintiffs claim, is that
shareholders who would otherwise favor Mentor's slate will be coerced either to
vote against Mentor or to abstain from voting altogether.
Second, the plaintiffs claim that the Amendment contravenes the fiduciary
precepts underlying Unocal and Unitrin, because it is a highly disproportionate
------ -------
response to any reasonably perceived threat posed by Mentor's offer.
Specifically, the plaintiffs contend that the Amendment, coupled with the DRP,
(a) is coercive
- ---------------
/55/ See PX42 at (S)2.5.
---
32
<PAGE>
for the same reasons that render it invalid under Blasius; and (b) is preclusive
-------
because even if Mentor's nominees win the election contest, the new board's
inability to redeem the poison pill for six months creates an unacceptably high
risk that the offer will be withdrawn before the tendered shares can lawfully be
purchased. Finally, plaintiffs argue that (c) in any event, and independent of
the DRP, the By-Law Amendment falls outside the range of potentially reasonable
responses, because the 90 to 100 day delay far exceeds whatever time would be
needed to achieve the Amendment's purpose of affording shareholders the
opportunity to make an informed decision about which director slate to vote for.
I conclude, for the reasons next discussed, that these challenges to the
By-Law Amendment lack merit. All but one of them assume the validity of the DRP.
To say it differently, both the Blasius claim and the "coerciveness" and
-------
"preclusivity" components of the Unocal/Unitrin claim challenge the By-Law
--------------
Amendment as part of a combined package consisting of the Amendment and the DRP.
Those arguments do not challenge the validity of the By-Law Amendment per se and
--- --
on a "standalone" basis. Because the Court determines that the DRP is invalid on
fiduciary duty grounds (see Part IV, infra, of this Opinion), and because both
-----
sides agree that Quickturn's shareholders will be informed of the Court's ruling
as to the DRP in advance of the shareholder meeting, any concerns about
33
<PAGE>
the DRP's impact upon the election contest and the Mentor offer will become
moot./56/
Accordingly, the only By-Law Amendment-related issue that the Court must
decide is whether the Amendment, standing alone, falls outside any range of
potentially reasonable responses to that threat and therefore constitutes a
disproportionate response to the threat posed by the Mentor offer and proxy
contest.
In deciding whether the By-Law Amendment falls within a range of reasonable
responses, the guiding principle is reasonableness, not perfection. So long as a
reviewing Court finds that the defensive measure (assuming it is neither
coercive nor preclusive) was objectively reasonable when adopted, the measure
must be upheld even if hindsight later reveals other choices that arguably were
better or wiser./57/
- ---------------
/56/ Had the DRP been upheld, then the Court would have scrutinized the By-
Law Amendment together with the DRP as a collective unitary response to the
perceived threat. Unitrin, supra, 651 A.2d at 1387. Because the Court has found
------- -----
the DRP invalid on grounds that are unrelated to the By-Law, it reviews the By-
Law Amendment defense without regard to the DRP.
/57/ As our Supreme Court held in Unitrin, 651 A.2d at 1385-1386 (quoting
-------
Paramount Communications, Inc. v. QVC Network Inc., Del. Supr., 637 A.2d
- --------------------------------------------------
34, 45-46(1994)):
[A] court applying enhanced scrutiny should be deciding whether the
directors made a reasonable decision, not a perfect decision. If a
board selected one of several reasonable alternatives, a court should
not second guess that choice even though it might have decided
otherwise or subsequent events may have cast doubt on the board's
determination. Thus, courts will not substitute their
34
<PAGE>
Although a determination of this kind is fact specific and not constrained by
any prescribed formula, among the factors the Court must consider is 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,"/58/ and whether the response "was limited and corresponded in degree
or magnitude to the degree or magnitude of the threat."/59/
B. THE REASONABLENESS OF THE AMENDED
BY-LAW'S 90 TO 100 DAY DELAY PERIOD
Whether the Amendment is a response proportionate to the threat
necessarily depends upon the nature of the threat the board reasonably
perceived. The threat here resulted from the incompleteness of the original
Article II, (S)2.3 of the By-Laws, which permitted stockholders having the
requisite number of voting shares to call a special stockholders meeting "at any
time," yet failed to specify who would determine the time, place, and record
date for the meeting. The
- ---------------
business judgment for that of the directors, but will determine if
the directors' decision was, on balance, within a range of reason-
ableness.
(Emphasis in original, citations omitted).
/58/ Unitrin, 651 A.2d at 1389; Unocal, 493 A.2d at 958; Cheff v. Mathes,
------- ------ ---------------
Del. Supr., 199 A.2d 548,554 (1964).
/59/ Unitrin, 651 A.2d at 1389.
-------
35
<PAGE>
perceived threat was that a hostile bidder seeking to replace the board would
rely upon that lacuna in (S)2.3 to call a special meeting on minimal notice, and
thereby force Quickturn's shareholders to decide which director slate should be
elected without adequate time to become properly informed.
The By-Law Amendment was a response to that threat. The specific feature of
that response which the plaintiffs contend is pernicious, is its mandated 90 to
100 day delay period between the shareholders' request for, and the holding of,
a stockholder-initiated special meeting./60/ That feature is disproportionate,
plaintiffs argue, because a delay of that magnitude cannot be justified in terms
of the By-
- ---------------
/60/ Plaintiffs characterize the 90 to 100 day period as a "minimum" delay
because the delay period does not begin to run until "the receipt and
determination of the validity of such...request [to call a special meeting]."
(Emphasis added). Because the Amendment does not identify the process by which
the validity of a shareholder-initiated request for a special meeting would be
determined, the amended By-Law is facially unclear as to when the 90 to 100 day
period would begin to run. If construed by the board to include litigation, the
validity-determination process could be highly protracted and potentially delay
the holding of the meeting for an indeterminable period.
Because of that uncertainty, the plaintiffs attack the By-Law on the
additional ground that its indefiniteness permits an abuse that would
effectively enable an incumbent board to delay a proxy contest for board control
indefinitely and thereby perpetuate itself in office. Although I agree that the
criticized language is vague and that if interpreted in that manner could lend
itself to abuse, on this record that imperfection cannot serve as a basis to
invalidate the By-Law Amendment, because there is no evidence that the board has
interpreted the "determination of the validity" language in an abusive or self-
perpetuating manner. What the board did do was have Corporation Trust Company
count the votes tendered by Mentor on September 28, 1998. Shortly thereafter,
Corporation Trust verified that Mentor had the necessary votes to call a special
stockholders meeting, and on October 1, the board noticed the special meeting
for January 8, 1999--71 days after the special meeting date originally noticed
by Mentor. On this record, I cannot conclude that the Board acted improperly in
its implementation of the amended By-Law.
36
<PAGE>
Law's stated purpose: to afford shareholders sufficient time to make an informed
decision. Plaintiffs emphasize that most proxy contests conclude within 30 to 35
days, and that shareholders -- particularly the sophisticated insider and
institutional investors who hold significant amounts of Quickturn's stock -- do
not need thrice that much time to inform themselves about the relative merits of
competing director slates. Plaintiffs conclude that because the board has failed
to show how the 90 to 100 day delay period was tailored to achieve the
Amendment's avowed purpose, and also because this case does not involve the
limited circumstances our courts have held could justify a board-caused delay of
a stockholders meeting,/61/ the By-Law Amendment is unreasonable and must be
stricken.
The plaintiffs do not dispute that the period intervening between the call
and the holding of a stockholders meeting to elect directors should be long
enough to
- -------------------
/61/ Plaintiffs argue that our courts have validated a board-induced delay
of a shareholder vote in two circumstances: a sudden, unexpected, and radical
change in the proxy contest environment shortly before a scheduled shareholders
meeting (citing Kidsco v. Dinsmore, Del. Ch., 674 A.2d 483 (1995), aff'd Del.
------------------ -----
Supr., 670 A.2d 1338 (1995)); or an articulated need for time for the target
board to develop strategic alternatives to a hostile offer (citing Kidsco,
------
supra; Stahl v. Apple Bancorp, Inc., 579 A.2d 1115 (1990); H.F.Ahmanson & Co.
- ----- ---------------------------- ------------------
v. Great Western Financial Corp., Del. Ch., C.A. Nos. 15549, 15555, 15556,
- --------------------------------
15557, 15560, Jacobs, V.C. (June 3, 1997); and Golden Cycle, Inc. v. Allan, Del.
---------------------------
Ch., C.A. No. 16301, Lamb, V.C. (May 20, 1998)). Plaintiffs further point out
that there has been no significant change in the proxy contest environment, and
that Quickturn is not attempting to arrange any alternative value-maximizing
transaction.
37
<PAGE>
give the shareholders a reasonable opportunity to inform themselves about the
issues presented, particularly where the election is contested. Nor do the
plaintiffs dispute that the Quickturn board had the statutory authority to adopt
a by-law (or amend a pre-existing by-law) to mandate such a reasonable interval.
Thus, the issue becomes whether the 90 to 100 day delay interval chosen by the
Quickturn board is reasonable in relation to that purpose.
The plaintiffs contend that it is not, because (to reiterate) most proxy
contests are completed within 35 days, and the sophisticated insider and
institutional investors who hold a large percentage of Quickturn's stock do not
need a period three times that long to become informed. But even if that is
true, surely that cannot be the exclusive measure or determinant of what delay
is reasonable in this context. Some proxy contests may require more than 35 days
to conclude; moreover, not all shareholders are insiders, institutions, or
arbitrageurs. Some proxy contests may, because of their internal dynamics, be
more protracted than others, and some shareholders may need more time than
others to become informed and to reflect upon the information provided to them.
A corporate board is entitled to consider such distinctions among shareholders
when fashioning an
38
<PAGE>
appropriate defensive response./62/
Even plaintiffs concede that a board could reasonably adopt a by-law
mandating a 35 day interval between the call and the holding of a special
meeting, but from this it does not follow that a board acts unreasonably if it
chooses a longer period. A decision of that kind is necessarily and inherently
judgmental. It requires a reasoned, good faith effort by the board to select a
delay period that will remedy the information problem without improperly
deterring a dissenting shareholder from exercising its right to wage a proxy
contest. In my view, the 90 to 100 day interval chosen by the Quickturn board,
although it arguably may approach the outer limit of reasonableness,/63/ struck
a proper balance in this specific case.
Before choosing the 90 to 100 day period, the board considered several
alternatives, which included (i) repealing altogether the original by-law that
entitled shareholders to call a special meeting, (ii) leaving that by-law
unchanged, and (iii) amending the by-law to provide for a longer (120 to 150
day) -- or shorter
- -------------------
/62/ Our Supreme Court has recognized that a board may properly conclude
that "all shareholders not alike," and that "distinctions among types of
shareholders are neither inappropriate nor irrelevant for a board of directors
to make, e.g., distinctions between long-term shareholders and short-term profit
takers, such as arbitragers, and their stockholding objectives." Unitrin, 651
-------
A.2d at 1386; Unocal, 493 A.2d at 955-56; Ivanhoe Partners v. Newmont Mining
------ ----------------------------------
Corp., Del. Supr., 535 A.2d 1334, 1341-42(1987).
- -----
/63/ See infra note 70.
---------
39
<PAGE>
(30 day)--delay interval./64/ In the end, the board selected 90 to 100 days
because that period corresponded to the mandated delay period in Quickturn's
pre-existing "advance notice" by-law, which requires (inter alia) that
----------
stockholders who seek to nominate directors at an annual or special meeting
must, at least 90 days in advance of the meeting, inform the corporation of that
fact and submit specified information about the stockholder-nominated slate./65/
That alignment of those two by-laws was reasonable, in my view, on two grounds.
First, the purpose of the advance notice by-law is to give the corporation
-----
at least 90 days' prior notice of any impending proxy contest, together with
information about the proposed opposition slate, in advance of any annual or
special meeting called by the board. The By-Law Amendment furthered that
purpose. Section 2.3 as originally drafted, stood as an apparent exception to
that
- -----------------
/64/ See DXl6 at 8; Trial Tr. at 422, 857; Alberding Dep. at 72, Antle Dep.
at 123-24, Hasler Dep. at 16-17, and Kissner Dep. at 12 and 209.
/65/ Article II, (S)2.5 of Quickturn's by-laws states in relevant part
that:
To be timely, such stockholders' notice must be delivered to or mailed
and received by the secretary of the Corporation not less than 90 days
prior to the meeting; provided, however, that in the event that not
less than 100 days notice or prior public disclosure of the date of
the meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received not later than the close
of business on the tenth day following the day on which such notice of
the date of the meeting was mailed or the public disclosure was
made....
40
<PAGE>
90 day advance notice requirement in cases where a special meeting is called by
stockholders representing 10% of the voting shares. That is because the original
(S)2.3 permitted shareholders to call a special meeting "at any time," which
arguably allowed a special stockholders meeting to be called on less than 90
days' notice. In that event it would be impossible for the dissident
shareholders to comply with the advance notice by-law.
The By-Law Amendment eliminated that apparent exception by mandating a 90
to 100 day delay period for shareholder-requested special meetings to elect
directors. That judgment was reasonable, because the need for advance notice and
information in the case of a contested election of directors called by
shareholders under (S)2.3, and the need for such notice and information in cases
covered by the advance notice by-law ((S)2.5), is the same./66/ By creating a
delay period in (S)2.3 that is essentially identical to the advance notice
period prescribed by (S)2.5, the board ensured that shareholders requesting a
special meeting under (S)2.3 would have sufficient time to comply with the
advance notice requirement./67/
- -----------------
/66/ The board could reasonably conclude that it made no sense to require
90 to 100 days advance notice of a proxy contest for all shareholders meetings,
except special meetings requested by shareholders who would likely be the very
persons initiating the proxy contest.
/67/ For these reasons, I find no merit to the claim that the board was
misinformed or uninformed, when it amended the By-Law. The plaintiffs have
failed to establish that the board violated its fiduciary duty of care in
adopting the By-Law Amendment.
41
<PAGE>
Second, advance notice by-laws mandating a 90 day minimum period of advance
------
notice, are commonplace. Daniel Burch, one of Mentor's proxy solicitors and an
expert witness at the trial, so testified,/68/ as did Professor Bernard Black, a
trial expert witness for the defense. Professor Black testified that a 1998
study by the Investor Responsibility Research Corporation revealed that of 1922
large publicly traded companies, 880 (46%) have some form of advance notice by-
law. Of those by-laws, the most common notice period (adopted by 335 companies)
is 50 to 70 days, and the second most common notice period (adopted by 223
companies) is 75 to 100 days./69/ That evidence is uncontroverted.
The plaintiffs do not challenge the reasonableness of the 90 to 100 day
minimum notice requirement of Quickturn's advance notice by law, nor does the
record disclose any basis to conclude that that minimum advance notice
requirement is unreasonable. By parity of reasoning, it therefore follows that
the 90 to 100 day provision of the By-Law Amendment falls within a range of
reasonable responses to the threat perceived by the Quickturn board.
Because the board's adoption of the By-Law Amendment did not violate the
- -----------------
/68/ Trial Tr. at 274-75.
/69/ Trial Tr. at 649-50; DX287 at 14-15 (Black Report). Professor Black
also testified that some of the corporations covered in that study had longer
minimum advance notice periods, and a significant number had shorter time
periods. Trial Tr. at 650.
42
<PAGE>
fiduciary principles embodied in Unocal,/70/ that Amendment will be upheld, and
------
the challenges to it, rejected.
The remaining issue, which the Court now addresses, concerns the validity
of the DRP.
IV. ANALYSIS OF THE DELAYED REDEMPTION PLAN
---------------------------------------
A. INTRODUCTION
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 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
- -----------------
/70/ This 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. The Court's validation of the Quickturn By-Law Amendment is fact specific
to this case and should not be read as a rule of broad general application.
Conceivably a 90 to 100 day delay might not be found reasonable in other
circumstances. The legal vulnerability of a mandated delay of the kind presented
here tends to increase in proportion to the length of the delay. Without
reference to a specific fact pattern, however, it is impossible to draw a line
that categorically separates mandatory delay periods which have a basis in
reason, from those that so manifestly burden or impede the election process that
they can only be characterized as intended to entrench the incumbent board.
Accordingly, attorneys who represent corporate boards would best serve their
clients well by counseling caution and restraint in this area, rather than
seeking continually to push the time-delay envelope outwards to test its
fiduciary duty limits.
43
<PAGE>
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" rights plan. The DRP 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."/71/ 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
- -----------------
/71/ The "slow hand" or DRP feature 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.
PX68 at 5. Substantially similar provisions were added to Sections 24
("Exchange") and 27 ("Supplements and Amendments") of the Rights Plan.
44
<PAGE>
supported" the election of the new board.
The plaintiffs attack the DRP on three separate grounds. First, they claim
the DRP violated the board's fiduciary duties to Quickturn and its stockholders
by purposefully interfering with the Quickturn shareholders' right to elect a
board of their choice, without compelling justification, in derogation of the
principles articulated in Blasius. Plaintiffs argue that the DRP will coerce
-------
those Quickturn stockholders who favor the Mentor offer either to vote for the
incumbent board or to abstain from voting altogether, because only the incumbent
board would be empowered immediately to consummate a transaction with
Mentor./72/ Mentor asserts that the defendants have not shown a compelling
justification for adopting a DRP that so distorts and impedes the shareholders'
franchise.
Second, the plaintiffs claim that the DRP was a disproportionate response
to any threat reasonably perceived by the Mentor bid and, therefore, violated
the fiduciary principles articulated in Unocal and Unitrin. The plaintiffs
------ -------
contend, specifically, that the Quickturn board has failed to establish that (i)
the Mentor offer and proxy contest constituted a legally cognizable threat, (ii)
the DRP is not coercive or preclusive, and that (iii) the DRP falls within a
range of reasonable
- -----------------
/72/ Mentor's Blasius arguments are based upon the combined effects of the
-------
DRP and the By-Law Amendment. Mentor contends that the two defensive measures
create a minimum eleven month delay that will ensure to a near certainty that
Mentor will lose the election.
45
<PAGE>
potential responses to Mentor's hostile takeover efforts.
Third, the plaintiffs claim that the DRP is invalid as a matter of
statutory law. Relying upon Toll Brothers, the plaintiffs argue that the DRP,
-------------
like the "dead hand" poison pill challenged there, will impermissibly deprive
any newly elected board of its core authority to manage the corporation under 8
Del. C. (S) 141 (a). That is because (plaintiffs urge) the DRP would prevent the
- ------
new board from redeeming the pill to facilitate a transaction that would serve
the stockholders' best interests, even under circumstances where the board would
be constrained to do so because of their fiduciary duty.
The Court concludes that, in adopting the DRP, the Quickturn board, even
though motivated by a good faith belief that their actions were in the company's
best interests, nonetheless transgressed their fiduciary duties under Unocal and
------
Unitrin. Because the Court decides the validity of the DRP on that basis, it
- -------
does not reach the plaintiffs' Blasius and statutory claims./73/
-------
- -----------------
/73/ The Court acknowledges that a disposition of this issue on fiduciary,
rather than upon statutory, grounds may appear counterintuitive. In this case,
however, the statutory argument -- which appears as the last in the sequence of
arguments in Mentor's brief, and went virtually unanswered in the defendants'
briefs -- was not adequately developed by the parties. Because the briefing
focused almost entirely upon the fiduciary claims, the Court rests its DRP
ruling on those grounds as well. See infra, note 105.
---------
46
<PAGE>
B. ANALYSIS OF THE DRP UNDER UNOCAL/UNITRIN
--------------
Decisions made by a board of directors are normally subject to the business
judgment form of review, which is a "presumption that in making a business
decision, the directors of a corporation acted on an informed basis, in good
faith and in the honest belief that the action was taken in the best interest of
the Company."/74/ Under that form of review, the burden to rebut that
presumption rests on the party that challenges the board's decision, and a court
will not substitute its judgment for that of the board if the decision is
attributable to a "rational business purpose."/75/
But where a board of a Delaware corporation takes action to resist or
defend against a hostile bid for control, the review standard is quite
different. In that case the target company board's defensive actions are
subjected to "enhanced" judicial scrutiny, because of the "omnipresent specter"
that the board may be acting in its own interests rather than the interests of
the corporation or its unaffiliated stockholders./76/ For a target board's
actions to be entitled to business judgment rule protection, the target board
must first establish that (i) it had reasonable
- -----------------
/74/ Unitrin, 651 A.2d at 1373 (quoting Aronson v. Lewis, 473 A.2d 805, 812
------- ----------------
(1984)).
/75/ Id. (citing Sinclair Oil Corp. v. Levien, Del. Supr., 280 A.2d
-- ----------------------------
717,720 (1971)).
/76/ Id. (quoting Unocal, 493 A.2d at 954).
-- ------
47
<PAGE>
grounds to believe that the hostile bid constituted a threat to corporate policy
and effectiveness, and (ii) that the defensive measures adopted were
"proportionate," that is, reasonable in relation to the threat that the board
reasonably perceived./77/ The DRP is reviewed under that standard.
1. THE REASONABLY PERCEIVED THREAT
-------------------------------
The parties first dispute whether the Quickturn board has established the
existence of a legally cognizable threat. On that issue, the board may satisfy
its burden by showing that it conducted a reasonable investigation and took
defensive action in good faith. That proof is enhanced if a majority of the
board that approved the defensive measures were outside independent
directors./78/ Although Mentor contends that its offer did not pose a legally
cognizable threat, I conclude otherwise, for the reasons that follow.
A. THE NATURE OF THE THREAT
A major point of contention (and confusion) concerns what precisely the
Quickturn board perceived to be threat posed by Mentor's hostile bid. Our
Supreme Court has recognized that three categories of threats normally arise in
the
- -----------------
/77/ Unocal, 493 A.2d at 955; See also Unitrin, 651 A.2d at 1372 (1995);
------ ----------------
Paramount Communications, Inc. v. Time Inc., Del. Supr., 571 A.2d 1140,
- -------------------------------------------
1152 (1990) ("Time").
----
/78/ Unitrin, 651 A.2d at 1375; Unocal, 493 A.2d at 955.
------- ------
48
<PAGE>
corporate takeover context:
(i) opportunity loss...[where] a hostile offer might deprive
----------------
target shareholders of the opportunity to select a superior
alternative offered by target management [or, we would add, offered by
another bidder]; (ii) structural coercion,...the risk that disparate
-------------------
treatment of non-tendering shareholders might distort shareholders'
tender decisions; and...(iii) substantive coercion,...the risk that
--------------------
shareholders will mistakenly accept an underpriced offer because they
disbelieve management's representations of intrinsic value./79/
Mentor contends that because its combined tender offer and proxy contest
does not fit into any of these three categories, they cannot constitute a
legally cognizable threat that would justify defensive board action. I disagree.
Although concededly the defendants' presentation on this issue is diffuse and at
times even confusing,/80/ the record fairly establishes that the threat amounted
to substantive
- -----------------
/79/ Unitrin, 651 A.2d at 1384; see also Ronald J. Gilson & Reinier
------- --------
Kraakman, Delaware's Intermediate Standard for Defensive Tactics: Is There
----------------------------------------------------------------
Substance to Proportionality Review?, 44 Bus. Law. 247,267 (1989).
- ------------------------------------
/80/ The defendants' post-trial briefs do not articulate the DRP-related
threat in a comprehensive, consistent way. Instead they splinter the threat into
its various elements, emphasizing some elements in one brief (or portions
thereof) and highlighting others in later briefs. The resulting impression is
kaleidoscopic -- of constantly shifting interpretations that obfuscate rather
than clarify the analysis. For example, the August 21, 1998 board minutes recite
that the board concluded that Mentor's offer was:
inadequate and not in the best interests of the Company's stockholders,
that the Offer does not fully reflect the long-term value of the Company,
and that the stockholder's interests would be better served by the Company
continuing to pursue its business plan. DX16 at 4.
49
<PAGE>
coercion.
Despite the defendants' diverse characterizations of the threat, 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
- -----------------
The August 21 minutes then go on to enumerate eight separate factors (including
in one case eleven sub-factors) which led the board to that conclusion. DX16 at
4-6.
Then, in their opening post trial brief, defendants characterize the threat
that warranted adopting the DRP somewhat differently:
the board was concerned that Mentor's inadequate offer had been carefully
orchestrated to allow Mentor to acquire Quickturn at a time when
Quickturn's stock price was artificially low and before the benefits of
Quickturn's new products, a rebound in the Asian market and patent
litigation with Mentor could be realized.
Defendants' Opening Post Trial Brief at 43.
Next, in their post trial reply brief, defendants identify four perceived
----
DRP-related threats: (i) the threat resulting from the opportunistic timing of
Mentor's bid; (ii) the threat resulting from the inadequate Mentor tender offer;
(iii) the threat resulting from Mentor's effort to end Quickturn's corporate
strategy and policy of leveraging its patent portfolio and avoid patent damages;
and (iv) the threat to Quickturn's employees in the event of a Mentor takeover.
Defendants' Post Trial Reply Brief at 20-23.
Finally, (and apart from the briefs) the Quickturn directors' testified
that the DRP-related threat was that any newly elected board would prematurely
sell the company without full knowledge of Quickturn's true value and before
Quickturn shareholders could consider other options. The board believed that "a
new board" would need some time to "get to know the company, the industry, [and]
the market potential of then new products that are just coming on stream, before
trying to make a decision as to the fair value of the company." See Hasler Dep.
---
29-30.
50
<PAGE>
adequately inform itself of Quickturn's fair value and before the shareholders
could consider other options./81/ In so finding, I reject the effort by
Quickturn's attorneys to characterize the threat differently in their briefs as
follows:
Mentor's nominees...would immediately seek to close a deal with Mentor, at
-------- -----------
a time when Quickturn's stock price was artificially low and before the
benefits of Quickturn's new products, rebounding Asian Market and patent
litigation with Mentor could be realized. Mentor's action also created the
threat that its nominees, if elected, would enter into an immediate deal
with Mentor without understanding and/or caring about the potential
-----------
benefits to Quickturn stockholders./82/
b. THE PLAINTIFFS' COUNTERARGUMENTS
In their briefs the plaintiffs advance several factual arguments designed
to underscore the absence of evidence supporting a legally cognizable threat. I
have considered all those arguments and conclude that they are not supported by
the
- -----------------
/81/ The August 21 board minutes establish that the board found that
Mentor's $12.125 per share offering price was inadequate. In arriving at this
conclusion, the board considered the financial analyses performed by H&Q, as
well as: (i) Quickturn's market and the potential for growth in that market;
(ii) the strength of Quickturn's patent portfolio, and the unique position of
Quickturn in the market as a result of that position; (iii) the ongoing patent
litigation with Mentor; (iv) the potential strength of Quickturn's new products
(most notably, the Mercury product); (v) the market in Asia, and the belief that
Quickturn would again see sales growth there; and (vi) the effect, on
Quickturn's employees and customers, of a combination of the two companies in a
hostile takeover. (DX16). The directors were also concerned that a new board
might, without adequate knowledge of the true value of the company or before
shareholders could consider other options, prematurely sell the company for an
inadequate price. Hasler Dep. at 29-30.
/82/ Defendants' Opening Post Trial Brief at 3 (emphasis added).
51
<PAGE>
weight of credible evidence. To avoid overburdening an already lengthy opinion,
I confine myself to the plaintiffs' three principal arguments.
(i) THE BOARD'S DISINTERESTEDNESS
-----------------------------
The plaintiffs first contend that the board did not consider Mentor's offer
in good faith, because the entire board had a conflict of interest. The record
shows otherwise. Only Mr. Lobo, Quickturn's President and CEO, was an "inside"
director with a financial interest to protect. The remaining directors were
outside, independent directors, i.e., were not employees or members of
----
management,/83/ or in any significant way financially beholden to Lobo or
Quickturn.
(ii) SHAREHOLDER IGNORANCE OF QUICKTURN'S VALUE
------------------------------------------
Plaintiffs next argue that while there is some evidence that Quickturn's
directors were concerned that a newly elected board would sell the company
- ---------
precipitately and in ignorance of Quickturn's true value, there is no evidence
that Quickturn's shareholders would be similarly uninformed and as a result,
------------
endorse an underpriced offer and by proxy vote to transfer control of the
company to Mentor.
Although the record does not contain testimony specifically articulating
that
- -----------------
/83/ See Grobow v. Perot, Del. Supr., 539 A.2d 180, 184, n.1 (1988);
-------------------
Aronson, 473 A.2d at 816.
- -------
52
<PAGE>
concern, clearly that was implicit in the board's skepticism about the timing of
the Mentor takeover bid. The board recognized that Mentor's offer and related
actions were timed to strike at Quickturn while its stock price was at a
temporary low and before Quickturn's new products, a rebound in Asia, and the
patent litigation could favorably impact Quickturn's earnings and its stock
price. The board, aided by the advice of Quickturn's management and financial
advisors, had sufficient opportunity to evaluate these favorable prospects and
consider their potential impact, before concluding that Quickturn's then-current
market price (and Mentor's offer) did not reflect the company's intrinsic worth.
Because the shareholders as a group did not have a similar foundation of
knowledge or opportunity for reflection, there is a basis in the record for the
board to have regarded the risk of shareholder ignorance of Quickturn's
intrinsic value as an element of the threat posed by Mentor's hostile bid.
(iii) THE INADEQUACY OF MENTOR'S OFFER
--------------------------------
Mentor's third counterargument is that there is insufficient evidence to
support the board's conclusion that Mentor's offer was inadequate in relation to
Quickturn's intrinsic value. Plaintiffs point out that H&Q's valuation of
Quickturn was based upon management's projections of future earnings which,
plaintiffs say, were unrealistically aggressive, contrary to historical
experience,
53
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and manufactured to justify a conclusion the board had already reached.
At trial the bona fides of the projections were hotly contested and the
----------
subject of considerable exploration. The evidentiary conflict on that issue
persuades me that reasonable men could differ about whether the projections were
(or were not) unduly optimistic. Having heard Quickturn's witnesses and
considered their credibility on this issue, I cannot conclude (as plaintiffs
insist) that the projections were phony or so unrealistic that they could not
have been arrived at with due care or in good faith. The board did consider and
question management about their projections, and in the end the board was
satisfied that those projections were sufficient as a basis to test the adequacy
of Mentor's offer. I find as fact that the projections represented a reasonable
and good faith effort by the board to estimate the company's near term future
performance.
2. PROPORTIONALITY
---------------
Having concluded that the board reasonably perceived a cognizable threat,
the issue then becomes whether the board's response -- the DRP -- was reasonable
in relation to that threat. In assessing a challenge to defensive measures taken
by a target board in response to an attempted hostile takeover, this Court must
evaluate the board's justification for each contested defensive measure and its
concomitant
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<PAGE>
results./84/ The board's power to respond is not absolute. A board "'does not
have unbridled discretion to defeat any perceived threat by any Draconian means
available.'"/85/ Accordingly, our law requires that Quickturn's board establish
that the DRP was proportional to the threat posed by Mentor's offer./86/ For the
reasons next discussed, the Court concludes that the DRP was disproportionate,
because although the DRP is neither coercive nor preclusive in these particular
circumstances, it does fall outside the range of reasonable responses to
Mentor's hostile bid.
a. WHETHER THE DRP IS COERCIVE AND PRECLUSIVE
The issues under this heading are: (i) is the DRP coercive because it will
improperly influence the shareholder vote, and (ii) is the DRP preclusive
because it would unduly delay, and thereby ultimately prevent, the consummation
of Mentor's offer if Mentor's nominees successfully acquire control of the board
in the proxy contest? In the Court's view, the answer to both questions is no.
Mentor claims that the DRP is impermissibly coercive because it will induce
a significant percentage of Quickturn's stockholders who favor a sale of
- -----------------
/84/ Unitrin, 651 A.2d at 1387.
-------
/85/ Id. at 1387 (quoting Unocal, 493 A.2d at 955).
-- ------
/86/ Unitrin, 651 A.2d at 1388.
-------
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<PAGE>
Quickturn to Mentor to abstain from voting or vote for the incumbent Quickturn
board./87/ The argument is that because the DRP would prevent the new board from
immediately delivering the premium price offered by Mentor, a substantial
percentage of stockholders will vote, contrary to their preference, to maintain
in office the only board that would be empowered to conclude an immediate, value
maximizing transaction./88/ The percentage of votes "coerced" in this manner,
plaintiffs argue, would be enough to assure Mentor's defeat in the proxy
contest. For support, the plaintiffs rely upon the testimony of Daniel Burch,
one of Mentor's proxy solicitors, that "ten to twenty percent of the outstanding
stock will vote for management who would otherwise, given a free choice...have
voted for Mentor."/89/ Plaintiffs also rely upon the testimony of Christopher
Varelas, one of Mentor's investment bankers, to the same effect./90/
Mentor goes on to argue that the coercion caused by the DRP is
impermissible because the Delaware decisions that have upheld rights plans have
grounded their validity determination upon the stockholders' ultimate right to
vote
- -----------------
/87/ Mentor bases this argument on Toll Brothers, supra, and Bank of New
------------- ----- -----------
York Co. v. Irving Bank Corp., N.Y. Supr., 528 N.Y.S.2d 482, 484 (1988).
- -----------------------------
/88/ Plaintiffs' Post Trial Reply Brief at 20.
/89/ Trial Tr. at 233-34; see also Trial Tr. at 202, 204, 227-28, 264; PX
--------
81 at 6-7.
/90/ Trial Tr. at 293-95.
56
<PAGE>
out incumbent directors who have deployed the pill to oppose a hostile
acquisition bid, and replace those incumbents with directors willing to
dismantle the pill immediately to facilitate the bid./91/ It is argued that by
-----------
preventing a new board from immediately redeeming the rights to facilitate the
Mentor offer, the DRP forecloses this option.
The plaintiffs also contend that the DRP is preclusive because it burdens
the acquisition process by preventing any newly elected board from concluding a
transaction with Mentor for six months. Given the uncertainties of the financial
markets and the economy as a whole, plaintiffs argue that a delay of that
magnitude virtually guarantees that Mentor would withdraw its offer before the
six month nonredemption period expires.
Having considered the evidence presented on these issues, I conclude that
the testimony of both sides' experts is plausible in a purely theoretical sense.
I also conclude that in different circumstances a delayed redemption provision
of the kind at issue here might have the coercive or preclusive effects that
Messrs. Burch and Varelas ascribe to it. In these unique circumstances, however,
I remain unpersuaded that the Quickturn DRP will operate in a manner that is
coercive or
- -----------------
/91/ See Toll Brothers, supra note 3, at 32; Unitrin, 651 A.2d at 1383;
----------------- ----- -------
Unocal, 493 A.2d at 959; Moran, 500 A.2d at 1355; see also Trial Tr. at 202,
- ------ ----- --------
204, 227-28, 264; PX8l at 6-7.
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<PAGE>
preclusive in this particular case.
In Davis Acquisition Inc. v. NWA Inc. ("NWA"),/92/ this Court was asked to
--------------------------------- ---
considered the alleged coercive and preclusive effects of a delayed redemption
provision upon a forthcoming contested election of directors. In NWA, unlike
---
this case, both competing slates were running on a platform to sell the company,
but only the incumbent slate could redeem the rights immediately. Former
Chancellor Allen was "rather unimpressed that plaintiff's fear that the Delayed
Redemption Provision will be a material factor to those NWA stockholders who
might otherwise vote for the slate is well grounded."/93/ He observed that had
the incumbent board not announced itself willing to consider a value enhancing
transaction:
I would feel more confident that the real issue facing the shareholders is
whether they want the company sold now or not. In that context, the issue
would have been clearly joined and the Delayed Redemption Provision would
have seemed a relatively insignificant cloud."/94/
That observation -- hypothetical in NWA-- is realistic here, because an
---
issue Quickturn shareholders must decide is "whether they want the company sold
- -----------------
/92/ De1. Ch., C.A. No. 10761, Allen, C. (Apr. 25, 1989).
/93/ Id. at 12.
--
/94/ Id.
--
58
<PAGE>
now or not." Once that issue is articulated and joined, any cloud cast by the
DRP would seem "relatively insignificant." But even if (as Mentor claims) the
DRP would coerce 10 to 20 percent of the voting shares to be cast in favor of
the incumbents, Mentor has offered no persuasive evidence that that would
guarantee Mentor's defeat in the proxy contest. Moreover, the argument that the
DRP is coercive is undercut by a critical development: stockholders representing
a majority of Quickturn's shares have now tendered their shares to Mentor./95/
If there is "coercion," it appears to have operated in Mentor's favor. And while
the record does not disclose whether Mentor has yet received proxies
representing a majority vote in favor of its slate, there is no evidentiary
basis to conclude that the same shareholders that tendered their shares to
Mentor would, as "contrarians," do an about-face and deny Mentor their proxies.
Nor am I persuaded, as a factual matter, that the DRP would preclude the
consummation of Mentor's offer by guaranteeing its withdrawal before the six
month delay period expires. The overwhelming weight of the evidence shows that
- -----------------
/95/ The parties agree that the court may take judicial notice of Amendment
Nos. 19 and 23 to Mentor's Schedule 14D-1, wherein Mentor announced in public
filings with the S.E.C. that it had received tenders of Quickturn which,
together with the shares Mentor already owns, represent over 51% of Mentor's
voting shares. See In Re Santa Fe Pacific Shareholder Litigation, Del. Supr.,
--- ---------------------------------------------
669 A.2d 59, 69-70 (1995) (citing Kramer v. Time Warner, Inc., 937 F.2d 767, 774
---------------------------
(3d Cir. 1991)); Southmark Prime Plus, L.P. v. Falzone, 776 F.Supp. 888,
-------------------------------------
892-93 (D. Del. 1991).
59
<PAGE>
for Mentor to survive in the emulation business, it must compete in the U.S.
market. At present that is legally impossible because of the recent court
decisions enforcing Quickturn's patents and enjoining Mentor from selling its
Meta products in the United States. To ensure Mentor's ability to grow in the
emulation market (and not incur damage liability for patent infringement),
Mentor must acquire Quickturn's patents or the power to direct their
nonenforcement, which means that Mentor must acquire Quickturn. To achieve that
goal, Mentor has obtained a secure financing commitment that is effective for
three years -- a period far longer than the six month delay that the DRP will
occasion.
I do not mean to suggest (nor do I adjudicate) that Mentor will not under
any circumstances withdraw its offer before July 1999. Mentor is the master of
its offer, and could withdraw it at any time it chooses, consistent with the
terms of that offer. I also agree with the plaintiffs that the additional six
month delay in accepting and closing the Mentor offer will tend to increase the
risk of its nonconsummation. Despite that, however, Mentor's powerful motivation
to acquire Quickturn, and its having secured financing that will be available
until approximately July 1999, tend to offset that risk. Another significant
risk-offsetting factor is that a newly elected board could, immediately after
taking office, cause Quickturn to enter into a legally binding agreement with
Mentor to
60
<PAGE>
acquire Quickturn in a transaction that would close six months later, in July
1999./96/ Given these unique circumstances, it is far from certain that the six
month delay imposed by the DRP will preclude Mentor from acquiring Quickturn if
Mentor's nominees become the new board majority.
Because the DRP is found to be neither coercive nor preclusive in this
specific case, the final Unocal/Unitrin inquiry becomes whether the DRP falls
--------------
within a "range of reasonableness." For the following reasons, I conclude that
it does not.
b. WHETHER THE DRP FALLS WITHIN THE RANGE OF REASONABLENESS
To conduct a "proportionality" analysis of the DRP, the Court must first
resolve a threshold issue: what was the board's rationale for adopting the DRP
as a response to the perceived threat? To say it differently, why did the board
believe that the DRP was a reasonable response to the threat that a newly
elected board would sell Quickturn for an inadequate price without properly
informing itself of Quickturn's intrinsic value? That issue arises because the
directors' testimony supports one rationale for adopting the DRP, while their
attorneys' characterization of that testimony in their briefs points to another.
- -----------------
/96/ The Court also notes that while Mentor has suggested in its briefs
that the delay will guarantee the withdrawal of its offer, it has not
represented unequivocally that if the DRP is upheld Mentor will withdraw its
offer.
61
<PAGE>
The record discloses that individual Quickturn board members gave the
following justification(s) for the DRP:
August 21, 1998 Minutes: "[S]uch a provision would give a new board
-----------------------
time to become familiar with the Company and its business before the
Rights Agreement was redeemed, as well as allowing shareholders to
consider alternatives."/97/
Hasler: To permit "a new board" the time to "get to know the company,
-------
the industry, the market potential of the new products that are just
coming on stream, before trying to make a decision as to the fair
value of the company."/98/
D'Amour: "[A]ny board making a decision on the rights agreement should
-------
have plenty of time to understand the business and decide on its
value..."/99/
Antle: "[A] new board" needs "time to evaluate what should be done
-----
with the company."/100/
Kissner: "[A] subsequent board...need[s] some time to begin to
-------
understand the business before they had to act one way or another on
something." "My understanding is that there's nothing specific [in the
DRP] to Mentor."/101/
Alberding: "The new board" should "reflect on the acquired company,
---------
its values, its assets, its future possibilities as seen from the
- -----------------
/97/ DX16 at 9.
/98/ Hasler Dep. at 29-30.
/99/ D'Amour Dep. at 17.
/100/ Antle Dep. at 134.
/101/ Kissner Dep. at 211, 213.
62
<PAGE>
inside versus the outside."
The directors' testimony sharply contrasts with what their lawyers contend
in their briefs was the board's justification for the DRP: to enable Mentor's
--------
handpicked nominees to take the time to become informed about Quickturn and its
value before redeeming the pill and selling the company to Mentor. This "Mentor-
------
exclusive" justification is newly-minted and cannot be squared with the
directors' testimony, which is that the DRP was intended to prevent any newly
---
elected board from prematurely selling Quickturn to any acquiror. This is no
---
mere semantic quibble because the DRP in fact operates to delay a transaction
only with Mentor, but not with a third party-acquiror.
- ----------------
Under Unocal, the target company board must shoulder the burden of
------
justifying the reasonableness of its defensive response. Given that burden, it
is not asking too much to require the directors to articulate their
justification for the defensive measure with specificity. The Quickturn board
consists of experienced, talented businessmen who are represented by a highly
prominent law firm. The directors were fully capable of testifying that the DRP
was intended to be Mentor-exclusive if that, in fact, was their intent. They did
not so testify, and accordingly the Court must take the directors at their word.
As between the directors' actual testimony and their lawyers' revisionist
"spin," the former must control.
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<PAGE>
The record establishes, and I therefore find, that the board's
justification or rationale for adopting the DRP was to force any newly elected
---
board (as distinguished from only a Mentor-nominated 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.
---
Unfortunately, that justification renders the DRP a disproportionate
response, because the justification is at war with how the DRP, as adopted by
the board, would actually operate. The DRP does not create a six month pill
redemption delay in all cases where a newly elected, Mentor-nominated board
seeks to sell the company to any bidder. It creates such a delay only if a newly
elected board seeks to sell Quickturn to an "Interested Person," which in this
case is Mentor. It is undisputed that under the terms of the DRP, a new board
could sell the company to anyone other than Mentor on its very first day in
office, or at any time during the six month nonredemption period.
An example of the inconsistency between the theory (the directors'
justification for the DRP) and the reality (how the DRP would actually operate)
makes the point. Suppose that the day after the new Mentor-nominated board takes
office, a third party makes a $14 per share offer, which tops Mentor's $12.125
bid. An auction then ensues. Mentor decides to increase its offer to $15,
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<PAGE>
and becomes the high bidder. Under the DRP, the new board could redeem the pill
and accept the $14 bid immediately, but could not accept Mentor's $15 bid for
six months. There is no evidence that when it decided to adopt that defensive
measure the board considered that the DRP could operate in this way. Because the
operative terms of the DRP cannot be reconciled with the directors' stated
justification for adopting it, the board has not carried its burden of
demonstrating that the DRP is reasonable in relation to the perceived threat.
The defendants have also failed to carry their burden because they are
unable to articulate a cogent reason why a six month delay period is reasonable.
The board did discuss alternate time periods,/102/ but it ultimately settled on
six months because that period was "reasonable" and the "minimum" time a newly
elected board would need to become sufficiently informed about Quickturn,/103/
- -----------------
/102/ See Kissner Dep. at 210 (noting that the board had a "fairly
---
open...discussion about a lot of different options in terms of time period.");
but see Hasler Dep. at 33-34 (recalling an "extensive discussion" on the time
- -------
period issue that did not include "specific alternative periods."). Apparently,
the board members received only legal advice on this issue. See Hasler Dep. at
---
34.
/103/ See e.g., Alberding Dep. at 78, 81 ("[S]ix months seemed to be a
--------
reasonable number of months"); Antle Dep. at 134 ("We felt that six months was a
minimum amount of time that any board would need."); D'Amour Dep. at 18 (noting
that "six months would be a minimum" and "appropriate period of time"); Lam
Dep. at 118-19 (noting that six months "was not unreasonable"); Hassler Dep. at
30 (six months is "a reasonable period of time").
The board's stated justification for the six month delayed redemption
period is also inconsistent with the fact that on their first day in office as
directors, Messrs. Hasler and Kissner had no difficulty deciding that the
employees' stock options should be repriced at $7.43; and
65
<PAGE>
based upon their own experience as to how long they, as directors, needed to
learn about the company./104/
Undoubtedly a board is entitled to rely upon its experience when making a
business decision, but when the decision is of a kind that is subject to
enhanced judicial scrutiny, the board must articulate a reason more specific and
nonconclusory than a statement such as "six months was reasonable." When it
amended the By-Law to impose a 90 to 100 day delay period the board had an
objective basis for doing so. That amendment brought the By-Law into alignment
- ---------
and congruence with the 90 to 100 day minimum notice period of Quickturn's
advance notice by-law. In contrast, for adopting the six month nonredemption
period in the DRP, the board has offered no justification that is anchored to
any objective fact or criterion.
Finally, the DRP cannot pass the proportionality test because its
articulated purpose -- to give a newly elected board time to inform itself of
Quickturn's value -- would already have been achieved by the conclusion of the
three month delay period imposed by the By-Law Amendment. The purpose of the
Amendment is to
- -----------------
only two months later, they were quite capable of concluding, together with
Quickturn's other directors, that Mentor's $l2.l25 per share offering price was
inadequate.
/104/ See e.g. D'Amour Dep. at 19 ("personally, it's taken me some years to
--------
understand [the company], and I'm still learning every day.")
66
<PAGE>
give shareholders 90 to 100 days' time to make an informed decision about which
slate to vote for. The DRP would protract the delay by another six months,
purportedly to enable the newly elected board to educate itself about
Quickturn's value before committing to a sale of the company.
The problem with this rationale is that the subject matter about which the
shareholders would be informing themselves during the By-Law Amendment 90 to 100
day delay period, and the subject about which a new board would be informing
itself during the six month DRP nonredemption period, is the same: should the
company be sold and, if so, when and at what price? If three months is an
adequate time for shareholders to become informed, why should a new board
require six months? More fundamentally, why would the Mentor director nonimees
be unable to inform themselves on that issue (as the Quickturn shareholders
must) during the three month period imposed by the Amended By-Law? There is no
evidence that the board considered this issue, and the defendants offer no
answers to these questions. The conclusion that must be drawn is that the board
has failed to show why the additional six month delay imposed by the DRP is
necessary to achieve the board's stated purpose for its adoption.
For these reasons the DRP cannot survive scrutiny under Unocal and must
------
67
<PAGE>
be declared invalid./105/
V. CONCLUSION
----------
For the reasons set forth in this Opinion, the Court will enter an order
granting final judgment in favor of the plaintiffs and against the defendants
with respect to the plaintiffs' claim that the DRP is invalid; and in favor of
the defendants and against the plaintiffs with respect to the plaintiffs' claim
that the
- -----------------
/105/ By way of postscript, this Court is mindful that higher level issues
lurk behind the factual shadows of this dispute, issues that are not addressed
in this Opinion. In this ever-changing area of the law where there is a
potential (and, perhaps, also the need) to afford guidance to the corporate bar
in the form of bright-line standards, for a Court to adjudicate the validity of
a innovative takeover defense on the basis of equitable and fiduciary principles
that by their nature are highly fact specific and particularized, is admittedly
unsatisfying. That there are underlying policy issues is inevitable, given the
tension between the directors' acknowledged authority to manage the affairs of
the corporation, and the shareholders' independent right and authority to choose
the corporation's ultimate destiny, whether by approving or disapproving a
fundamental transaction or by electing a new board committed to a direction the
shareholders think desirable. In a contest for corporate control where the
incumbent board adopts a poison pill and an insurgent slate of board candidates
vow to redeem it, should the target company shareholders have the final word on
whether or not the pill should be redeemed? To express the question in fiduciary
terms, should a proxy contest in this setting be viewed as a referendum on
whether the company should be sold, and if so, should the board of directors be
allowed to delay the effect of that referendum? To pose the issue in statutory
terms, should a delayed redemption provision be found invalid under 8 Del. C.
--
(S) 141(a) because it temporarily deprives a newly elected insurgent board of a
portion of its core authority that the board arguably may need (or have a
fiduciary duty) to exercise during the period of deprivation? In the context of
this specific case, if Quickturn's shareholders cast their vote for Mentor by
voting to install Mentor's nominees, should that shareholder vote terminate the
incumbent board's power to delay the redemption of a pill?
To craft a principle, or "bright line" test, that will readily enable a
court to determine the validity of a limited duration "no hand" poison pill,
would require a court to address issues of this kind. This Opinion does not meet
that challenge, in part because the briefs, though skillfully drafted, did not
raise or develop these issues. Hopefully, future cases will provide the occasion
to develop that jurisprudence.
68
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By-Law Amendment is invalid. Counsel shall promptly confer and submit an
appropriate form of implementing order.
69
