The 1980s Takeover Era and Lipton’s Stockholder Rights Plan

Origins of the Rights Plan

The stockholder rights plan is the single most important tool developed to make real Lipton’s philosophy that the elected board of a company should control the company’s destiny even when facing a takeover bid.  Where Takeover Bids set forth the principles underlying Lipton’s conclusion that boards should remain active decision-makers in the face of a takeover, the stockholder rights plan provided an effective instrument for them to do so.

Although the stockholder rights plan had previously been discussed in internal memoranda, Lipton first put the rights plan on display in a memo to clients dated June 20, 1983.⁷¹  Lipton began by reaffirming the values espoused in Takeover Bids in no uncertain terms:

We believe that a corporation has the absolute right to

1. have a policy of remaining an independent entity,
   
2. have a policy of refusing to entertain takeover proposals,
   
3. reject a takeover bid,
   
4. take action to remain an independent entity, and
   
5. guarantee its shareholders a right to retain an equity interest in the corporation even if someone is successful in obtaining control and forcing a second-step merger.⁷²

Lipton then identified the core problem:  The financialization of takeover activity had created a fundamental disconnect between the corporation’s right to remain independent and resist takeover bids, and its practical ability to do so when faced with the coercive power of a hostile tender offer.  Lipton noted that it had “become virtually impossible to defend against the stampeding effect of partial and front-end loaded tender offers and assure all shareholders of fair treatment,” and that the SEC “has not recommended new rules which would redress the imbalance” between independent companies and hostile acquirors.⁷³  Lipton noted that litigation, charter amendments, legislation, counter tender offers, and capitalization changes had been successful to some degree, but that “none of these means has proven to be generally applicable and effective.”⁷⁴  Lipton also recognized that defensive measures like self-tenders that required companies to leverage up and cut future investment were unsatisfying because they compromised company focus on sustainable growth in similar ways to the bids they were developed to defeat.  What was needed was a defense that would do no harm to the company’s value and allow it to proceed with its long-term strategy to create value.

Lipton presented the rights plan as a solution to these problems, and as a way of defending against a bid while doing no harm to the company’s business strategy and balance sheet.  From the outset, however, he was clear that the rights plan “does not prevent tender offers and does not prevent a second-step merger after a raider has seized control.  All it does is assure fair treatment of all shareholders and the right of those who so desire to continue their equity interest following a takeover.”⁷⁵  In other words, the right plan fit with Lipton’s belief that the threat to be addressed was not takeovers themselves, but takeover abuses.

“The Plan is simple.”⁷⁶  Though its effects were powerful, its mechanics were straightforward, reflecting an innovative application of existing corporate finance techniques.  The first iteration of the Plan, known as a “flip-over” plan, would distribute a dividend of convertible preferred stock (and later, of purchase rights) to all common stockholders, convertible into “the same (or larger) number of shares of common as are outstanding.”  The rights were issued when the bidder, having obtained control of the target, took steps to cash out the remaining stockholders or to otherwise engage in another merger, and would dilute the acquirer substantially in comparison to the other stockholders.  Lipton counted the “flip-over” provision as among the “normal boilerplate provisions protecting the conversion rights in the event of a merger or other business combination.”⁷⁷  When such a merger occurred, “the conversion rights would flip-over to the common stock of the raider and the preferred would be convertible into the common stock of the raider.”⁷⁸  The dilutive flip-over provision formed the “essence of the Plan” by presenting “a difficult problem to a raider contemplating a hostile tender offer.  A raider must think twice about the economics of being faced with the issuance of a significant number of shares of its own common stock.”⁷⁹  The reason is simple: the flip-over when triggered would seriously dilute the acquirer, and thus strip it of much or all of the value it thought it was purchasing. 

The Plan is simple.

Importantly, the original pill did not include a so-called “flip-in” trigger.  A flip-in prevented a bidder who wished to acquire a company from exceeding a certain toe-hold (later to be commonly set between 10% and 20%) of the target’s shares without triggering the rights to be issued to other common stockholders, and massive dilution of the bidder.  A flip-in, if upheld in court, prevented an acquisition of control in the first instance and blocked even a so-called “creeping” acquisition that might be the first step in a control change.  Initially, Lipton was dubious about the validity of a flip-in and did not include it in his first rights plans, a decision that was to be useful later when the validity of the pill faced its most important initial test in the Delaware Supreme Court.⁸⁰

Recognizing that other defensive tactics had amounted to half-measures at most, Lipton placed great weight on this solution and staked his and Wachtell Lipton’s reputation on its validity, stating that “[w]e have no doubts about the legality of the plan.  More important, we are convinced of its efficacy in achieving the objectives referred to above.”⁸¹  Two months later, Lipton further emphasized the general applicability of the pill, encouraging companies to consider “implementing the Plan before a takeover situation arises,”⁸² and providing a “suggested model form” for the plan.⁸³  Lipton also noted that the Plan had been used by three companies trading on the NYSE — Bell & Howell, ENSTAR, and Lenox.  Those three pioneer plans had been adopted under “special circumstances,” but Lipton began advocating for companies to adopt plans under ordinary circumstances, before any takeover attempt had begun, foreseeing that business-judgment arguments would be more persuasive if the adoption of the rights plan had been made by the board on a clear day.⁸⁴

Although Lipton had expressed confidence in the legality of the rights plan, as an innovation, he understood it would be the subject of rigorous testing in court.  For example, Bell & Howell’s plan was challenged in the Delaware Court of Chancery in 1983, but the court refused to enjoin (on 48 hours’ notice) the issuance of preferred stock under the plan, noting that it was impossible to sufficiently consider the parties’ arguments, and that the merits would need to be considered at a later time, after the issuance, while recognizing that at that point “it may be difficult to fashion an appropriate remedy.”⁸⁵  The validity of Bell & Howell’s pill was not further litigated.  Having noted that the court’s decision would be “a major factor in determining whether to implement the Plan,”⁸⁶ the court’s refusal to enjoin the pill paved the way for further adoptions of rights plans.

It was in the context of the Lenox takeover fight that the rights plan achieved its notorious nickname, with the Wall Street Journal noting in June 1983 that the strategy being used in Lenox’s takeover battle “is being referred to on Wall Street as ‘the poison-pill defense.’”⁸⁷  Lipton would later lament the name as “a most unfortunate misnomer.  It is neither a pill nor poisonous.  It is merely a compact between a company and its shareholders designed to protect against takeover abuses and assure the shareholders of a fair price and fair treatment.”⁸⁸  Nevertheless, perhaps owing to the evocative language and its increasingly common usage, Lipton frequently embraced the usage of the “poison pill” name, including in the titles of his own memos.⁸⁹

The validity of Lenox’s and ENSTAR’s pills were likewise never decided on the merits, although in considering Lenox’s pill, the Court of Chancery noted that “the ‘poison pill’ amendments measure, enacted by the Board when ‘takeover’ fever gripped the industry, could be considered legitimate exercises of Board discretion designed to protect the stockholders against a less than arms-length sale.”⁹⁰  That early reference to the pill as a matter of board discretion would form the precursor to the most important case upholding the validity of the pill, Moran v. Household International, Inc.,⁹¹ discussed in the next section.

Moran.¹⁰⁴  Serendipitously, the validity of Lipton’s Rights Plan came before the Delaware Supreme Court while the Unocal case was under submission.  The pill case, Moran v. Household International, Inc., 500 A.2d 1346 (Del. 1985), was submitted in the Supreme Court on May 21, 1985 — five days after Unocal was submitted — and decided on November 19, 1985, some five months after the Unocal decision. 

This high-stakes drama was unusual in a couple of respects.  First, the challenge to the pill was not in the context of a pending bid, but rather in the form of what was essentially an action for a declaratory judgment that Lipton’s creation was invalid in all conceivable circumstances.  A director of Household, who was also the chairman of Household’s largest single stockholder (Dyson-Kissner-Moran Corporation) that reportedly had some interest in possibly making a future offer, was Skadden’s client.  No bid was pending.  The pill that had been adopted was the first generation “flip-over” pill, that entitled the Household stockholders, in the event of a merger with the Rights not having been redeemed by the board of directors, to purchase $200 of the common stock of the tender offeror for $100.  Notably, the Rights in the Household pill provided for the stockholders to receive a non-trivial payment for redemption ($.50 per Right) — a feature that would change in later pills so that the price of redemption was essentially costless to the company.  Most importantly, the pill had no flip-in feature.  Thus, a bidder could acquire control and live with a minority, if it was willing to forego a merger or other consolidation. 

Second, Lipton’s longtime friend and the leading lawyer for hostile bidders, Joe Flom and his Skadden firm had helped inspire the litigation, and put a full team into the battle to have the pill declared invalid under Delaware corporate law.  Lipton fielded an “A Team” of his own at Wachtell Lipton, led by his fellow founding partner, George A. Katz.

Reflecting the high stakes, the trial involved prominent expert witnesses from business and academia testifying about the practical and legal consequences of the pill.  For example, to defend the pill, the Wachtell Lipton litigation team put on Jay Higgins, head of the M&A department at Solomon Bros., and Raymond Troubh, a former partner of Lazard Freres with extensive firsthand experience in merger and acquisition deals.  To advance its position that the pill was a show-stopper that would improperly interfere with the rights of stockholders under Delaware law, and with their rights under the Williams Act to accept tender offers, Skadden put on Harvard Business School Professor Michael Jensen and University of Michigan Business School Professor Michael Bradley, along with Alan Greenberg, then CEO of Bear Stearns and considered by many to be the dean of arbitrageur practice.  The context of the case was helpful to Lipton and his team.  Given the prevalence of coercive, two-tiered tender offers and the need of the trial court to consider all the possible circumstances in which the pill could be used, the Skadden team found it more difficult to prove its case because without director action, there was no way to prevent coercion of stockholders by these offers, which were permissible under federal law.  Not only that, because there was no pending bid and because Skadden was attacking the validity of the pill in general and not its use in a particular situation, Skadden bore the difficult burden of showing that the pill could not be lawfully used in any circumstance.

In holding for the Household board and refusing to strike down their adoption of the pill, the Court of Chancery pointed to the bidder practices then prevalent, finding that the board had ample basis for considering Household vulnerable to a “two-tier” takeover via that coercive practice in which stockholders were forced to tender lest they be “frozen out” of any premium once the bidder acquired control.  The Court of Chancery also rejected Skadden’s arguments that the pill was impermissible because it treated the bidder, as a stockholder, differently from other stockholders, and the Rights were “sham” securities impermissible under the Delaware corporation statute.¹⁰⁵

When the decision in Unocal came down, that boded ill for the appeal of that decision.  In Unocal, it had been argued that exempting Pickens from the company’s own offer was improperly discriminatory, but the Delaware Supreme Court rejected that argument, citing with some irony to past cases permitting greenmail payments to raiders like Pickens.  Thus, the reality that once the flip-over rights were triggered, the rights plan would dilute the acquirer by granting a large amount of equity to all the other stockholders was rendered of little utility to the opponents of the pill. 

Unocal presaged the outcome in the Moran appeal in an even clearer way.  In Unocal, it had been argued that the board’s defense twisted powers given to them under the Delaware General Corporation Law beyond their intended purpose.  The Supreme Court rejected that argument in Unocal, stating:  “[O]ur corporate law is not static.  It must grow and develop in response to, indeed in anticipation of, evolving concepts and needs.”¹⁰⁶  That elemental idea well served the defenders of the pill, who argued for the acceptance of a clearly innovative interpretation of Delaware law in response to the then-prevalent, coercive tactic of the “two-tier” tender offer.

In Moran, one of the principal arguments against the poison pill was that the provisions of Delaware law that authorized boards to issue rights to stockholders was designed to permit the issuance to stockholders of rights to purchase shares of their own corporation and for financing purposes, not to give them “rights” that were only designed to thwart their ability to receive a tender offer.  The Supreme Court rejected this argument, noting that the rights issued were authorized by the plain language of the statute, and quoting its recent Unocal decision, that statutes should not be confined in their application, but be applied in accord with their language to address evolving business circumstances.¹⁰⁷  In its analysis, the Court thus held that board power to adopt a Rights Plan existed under the Delaware General Corporation Law, including by accepting that the plan was “analogous to ‘anti-destruction’ or ‘anti-dilution’ provisions which are customary features of a wide variety of corporate securities” — the very origin for the idea of the pill that Lipton has often pointed to.¹⁰⁸

Moran also applied the new Unocal intermediate standard of review in considering whether Household’s adoption of the pills was, as Chancery had found, a “legitimate exercise of business judgment.”¹⁰⁹  In affirming that finding, the Court’s opinion noted Lipton’s role in advising the Household board:

Responding to the challenge that the Rights Plan “usurped stockholders’ rights to receive trade offers,” the Court — again accepting key parts of Lipton’s pill advocacy — concluded “that the Rights Plan does not prevent stockholders from receiving tender offers” and “that the change of Household’s structure was less than that which results from the implementation of other defensive mechanisms upheld by various courts.”  Serendipity again helped Lipton and his pill defenders.  In a high-profile situation, Sir James Goldsmith had acquired control of Crown Zellerbach, which also had a flip-over pill.  Thus, the Supreme Court found that the flip-over pill was not a “show stopper” but could be gotten “around” by that and other methods by which Household could still be acquired by a hostile bidder (the Court listed tender offers conditioned on redemption of the Rights, tenders with high minimums, soliciting consents or running a proxy contest to remove the board and redeem the pill).¹¹¹ 

The odd procedural context also led to another important feature of the Moran decision.  In addition to citing the stockholders’ ability to elect a new board that could lift the pill as a way around it, the Court made clear that neither its ruling that the pill was not invalid in all circumstances nor that the pill’s initial  adoption by the Household board was proper, gave the Household board a blank check to use that pill indefinitely  against a specific future bid.  Rather, when that happened the new Unocal standard would be applied to the directors’ decision to whether to redeem (or “pull”) the pill in the heat of an actual bid with specific terms: 

Revlon.¹¹⁷  The third of the 1985-86 trilogy in Delaware turned primarily not on a takeover defense in isolation, but a “lock-up option” agreed to by a target board of directors to secure a higher-priced LBO takeover bid to block an initial hostile suitor.  In Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), the Delaware Supreme Court affirmed an injunction against a “crown jewel” lock-up option granted by the Revlon board to Forstmann Little & Co., the financial sponsor of an LBO, as part of the company’s response to the unsolicited efforts of a Ronald Perelman company (Pantry Pride, Inc.) to acquire Revlon.  

[I]t would be very helpful if statutes permitting directors to consider constituencies other than shareholders were adopted in Delaware and the other states.

Previously, in response to Perelman’s hostile bid, the Revlon board had approved — on Lipton’s advice — a Note Purchase Rights Plan under which Revlon stockholders received as a dividend one Note Purchase Right to acquire a $65 principal Revlon one-year note at 12% interest in exchange for one common share, triggered by anyone acquiring 20% or more of Revlon’s shares unless that person acquired all shares at $65 cash per share or more; as in a pill, the Rights were not available to the acquiror and could be redeemed by the board prior to a 20% triggering event.  In addition, Revlon had responded to Perelman’s $47.50 per share offer with a self-tender for up to 10 million shares, in exchange for $47.50 principal Notes and preferred stock — which was fully accepted by the Revlon stockholders.  After further bidding by Perelman, the Revlon board agreed to a $56 per share cash deal with Forstmann, with management participating in the new company, and Forstmann assuming Revlon’s debt incurred by the issuance of the Notes; as part of the deal, Revlon would redeem the Rights.  After Perelman raised to $56.25/share conditioned on the board’s removal of the Rights (and announced that he would top any Forstmann offer by a slightly higher one), Forstmann countered with a $57.25 per share offer, conditioned on receiving a lock-up option to acquire Revlon’s vision and health divisions for $525 million — which was $100.175 million below value; management would not participate, and Forstmann committed to support the par value of the Notes, which had fallen in the market, by an exchange of new notes.  The Revlon board agreed to the option, because the Forstmann bid was higher than Perelman’s and it protected the Noteholders (who had only just recently been solely stockholders of Revlon and had received the Notes in exchange for some of their Revlon shares as part of a defensive self-tender).  In response, Perelman raised to $58/share conditioned on nullification of the Rights and an injunction against the Forstmann lock-up.

In its opinion, the Supreme Court framed the issue before it as requiring decision “for the first time the extent to which a corporation may consider the impact of a takeover threat on constituencies other than shareholders,” citing Unocal.¹¹⁸  The Court approved the Revlon board’s adoption of the Note Purchase Rights Plan as “protect[ing] the shareholders from a hostile takeover at a price below the company’s intrinsic value [at that point, Perelman’s $45 bid], while retaining sufficient flexibility to address any proposal deemed to be in the stockholders’ best interests.”¹¹⁹  The Court, however, held that the “usefulness” of the Rights had become moot once the Revlon board agreed to their redemption in favor of the Forstmann white-knight transaction, thereby “moot[ing] any question of their propriety under Moran or Unocal.”¹²⁰  The Court also approved Revlon’s defensive self-tender in which its board encouraged stockholders to exchange some of their shares of Revlon for the Notes.  Nonetheless, the Court held that the Revlon board’s responsibilities changed once it authorized the negotiation of the sale of the company to Forstmann:

Institutional Investors and the Rights Plan

Outside the courtroom, the most significant debate over the rights plan occurred between Lipton and institutional investors, which had risen to power and become key participants in the 1980s takeover era.  Lipton’s engagement with the rising influence of institutional investors was initiated in his Takeover Bids article, and would continue, to this date, to be a principal focus of his concerns over whether the American corporate governance system is appropriately oriented toward sustainable wealth creation and the fair treatment of employees and other company stakeholders.

In the 1980s, Lipton viewed institutional investors as responsible for much of the focus on short-term financial results that had fueled the financialization of takeovers.  Lipton viewed the nation as having entered the “the age of finance corporatism, which is dominated by the institutional investor and the professional investment manager.  The existence of large pools of capital managed to maximize short-term performance has fueled a wave of highly leveraged takeovers that threatens a variety of constituencies, including shareholders, employees, customers, suppliers, and communities, as well as the economy as a whole.”¹⁵⁶  Of institutional investors, Lipton observed:  “Never in the history of our modern economic development has so much economic power been held by so few.”¹⁵⁷  

Never in the history of our modern economic development has so much economic power been held by so few.

Institutional investors’ focus on short-term financial results at the expense of society was antithetical to Lipton’s beliefs, arising from his studies under Adolph Berle, in the “enterprise theory — the concept that corporations should be managed not just in the interests of the shareholders, but in the interests of the enterprise as a whole, which includes, of course, the employees, customers, suppliers, and the community in which a corporation lives.”¹⁵⁸  As Lipton observed, “the shareholders-only view ignores the reality that other constituencies both share the risk and are vital to the success of corporate activity.”¹⁵⁹  Lipton wrote that “management historically pursued socially beneficial objectives such as expanding the enterprise, improving productivity, and cultivating planning, research, and development.  In contrast, the new control persons — the institutional investors — share none of these social goals.”¹⁶⁰  As to institutional investors’ support for takeovers, Lipton did not mince words in sounding the alarm, writing that institutional investors “are using their power to force corporations to focus on short-term profits rather than long-term growth” and “forcing massive reductions in research and development and capital investment.”¹⁶¹  As a result, “institutional investors are not just insisting on a takeover premium when a company is put in play, they are actively promoting takeovers.”¹⁶²  He regarded institutional investors as agents that “have gained control of virtually every major company” and “show no restraint and no regard for the public good,” and cautioned that they “must be policed. . . .  We must mandate that they be long-term investors not short-term speculators and promoters of takeovers.”¹⁶³

[T]he shareholders-only view ignores the reality that other constituencies both share the risk and are vital to the success of corporate activity.

As to the deteriorating relationship between management and institutional investors, Lipton’s view was bleak:

Lipton described the susceptibility of management to takeovers resulting from the pressures imposed by institutional investors:

Underlying the short-term pressures imposed by institutional investors lay an important question — why were these investors so susceptible to the temptations of short-termism and takeovers?  Quoting Warren Buffett, Lipton noted the irony that institutional investors, “which should have the longest investment perspective, have been transformed by the competitive race on Wall Street into some of the most speculative players around.”¹⁶⁶  As Lipton noted, “competitive pressures also drove many of the fiduciaries that hold most of the country’s private capital, including pension funds, into the [takeover] game.”¹⁶⁷  

Lipton observed that these competitive pressures were driven by the short-term pressures placed on fund managers, whose interests were not necessarily aligned with the institutional investor, much less the companies in which they were invested:

Despite his pessimistic appraisal of the short-term philosophy of institutional investors, Lipton recognized that, if their incentive problems could be corrected, the rising prominence of institutional investors could present “a unique opportunity to bridge the corporate governance gap between ownership and control”:

If these fund managers’ incentive problems could be cured, Lipton saw institutional investors as potentially being recalibrated “to provide ‘patient’ capital to permit management to make the long-term investments that are essential for a strong economy.  We must develop long-term relationships between companies and their institutional investors, with the investors being committed to support management’s long-term business plans.”¹⁷⁰  Doing so would allow institutional investors to support long-term economic growth:

Institutions will best serve their beneficiaries by shifting their focus from short-term trading strategies to policies that encourage corporations to seek long-term growth.  This is the only way in which all investors and citizens benefit.

Lipton advocated for solving the institutional incentives problem by encouraging long-term investment through “a tax on institutional investors which takes away all profit on stock held less than one year and most of the profit on stock held less than five years.”¹⁷²  But although he noted that “the need for legislation is clear,” Lipton recognized that congressional action and tax policy change was not likely, and therefore reiterated that “it is essential that the poison pill — which is the only effective brake on the takeover frenzy — be sustained.”¹⁷³  It is against this backdrop that institutional investors mounted their campaigns against the rights plan.

In the Wake of CTS, Lipton Embraces the Flip-In and Recommends It to Clients 

With the rights plan having proved successful both in the courts and at annual meetings, Lipton wrote a memo in July 1987 that introduced a new and more powerful “second-generation” rights plan.  Lipton surveyed the effects of and challenges to pills over the previous years, noting that it “has proved to be the most effective protection against abusive takeover tactics,” “has been upheld by most courts that have considered it,” and “has been adopted by over 400 companies.”¹⁹²  At the same time, Lipton noted that the takeover frenzy had continued, with a litany of takeover abuses from the corporate raider’s “extensive arsenal of powerful takeover weapons,” including, among other abuses, the raider’s ability to “ignore moral obligations to employees, customers, suppliers and communities and bust up a target,” and to “take over a target through a creeping or partial tender offer and then take advantage of the public minority shareholders through self-dealing and conflict transactions,” to “mobilize institutional shareholders to attack any attempt by a target to defeat a takeover and remain an independent company,” and to “usurp the traditional functions of a board of directors to act and negotiate on behalf of the shareholders in a merger.”¹⁹³  In other words, despite the initial success of the first-generation rights plan, takeover proponents continued to threaten both the enterprise theory of the corporation and the model of board-centric determinism Lipton endorsed in Takeover Bids.  

Recognizing both the success of the original pill and the continued effectiveness of the weapons of hostile acquirors, Lipton proposed that “this is clearly an appropriate time to reexamine the pill.”  In his second-generation rights plan, Lipton finally advocated for “a flip-in at the 20% acquisition threshold,”¹⁹⁴ whether or not there was a threat of self-dealing.  That provision would thereby “give[] shareholders of the target, other than the raider, the right to cause unacceptable dilution of the raider’s holdings in the target.”¹⁹⁵  It would prevent raiders from acquiring a controlling position through open market purchases, regardless of their subsequent intentions, and would protect shareholders from the possibility that a raider would “avoid[] the effect of the flip-over by not doing a second-step merger after acquiring control.”¹⁹⁶

Cognizant of the potential for judicial skepticism over such a potent flip-in provision, and in order to maintain a balance between preventing takeover abuses and allowing shareholders to consider acquisition proposals, Lipton tempered the new proposal by “providing for a shareholder vote if a non-abusive takeover is proposed.”¹⁹⁷  The second-generation pill would include a new provision:

The shareholder meeting to vote on the proposed transaction would level the playing field by allowing both the bidder and company’s management to submit information concerning the fairness of the potential bid and alternatives thereto.¹⁹⁹  And if “a majority of the company’s outstanding shares vote in favor of the resolution at the special shareholder meeting, the pill would be redeemed so as to permit consummation of the bidder’s proposal or a competing better proposal.”²⁰⁰  The new plan would also “assure sufficient time to consider the bidder’s proposal and to seek and evaluate alternatives,” by requiring the meeting to be held between 90 and 120 days after the bidder’s request.²⁰¹  This proposal was built on key premises of the U.K. Approach to takeovers, which prevented boards from interfering with the ability of stockholders to accept fully financed, all shares, non-coercive bids, while building on Lipton’s view that a shareholder vote was less coercive than a tender offer.  Thus, the stockholders would vote first to redeem the pill without fearing that a no vote would have any effect on their ability to tender if the majority of stockholders voted to redeem the pill.  Lipton advocated for Congress to adopt legislation regulating the form of takeover bids along similar lines, and argued that if Congress adopted legislation like that, pills would not be needed.²⁰²

By providing for a stockholder vote, after full disclosure and deliberation, in exchange for the robust protections of the flip-in provision, Lipton’s second-generation plan struck a careful balance between shareholder democracy and preventing takeover abuses:

Lipton viewed this as a worthwhile compromise, recognizing that if “the new pill channels takeover activity into the special shareholder meeting procedure, it will be more effective than the original pill in discouraging abusive takeover tactics and will provide more time for a target to deal with the cash offer for all shares against which there is today no practical defense other than drastic restructuring.”²⁰⁴  Lipton “recognize[d] that the new pill assures a raider that it can obtain a shareholder vote on a proposed takeover, and, therefore, might be said to promote takeovers,” on balance, “if universally adopted, the new pill would decrease substantially hostile takeover activity.”²⁰⁵

Thus, despite the potency of the new rights plan, its careful balancing of interests reflected the same intentions that had inspired the original rights plan years earlier:

As he did with Takeover Bids nearly a decade before, Lipton also took the opportunity to introduce real-world data he viewed as supporting the adoption of rights plans.  His memorandum detailing the second-generation rights plan included an appendix showing 36 acquisitions of targets that had adopted first-generation rights plans, which featured an aggregate increase in consideration of $4.7 billion versus the initial bids made for those companies.²⁰⁷  Thus, although Lipton acknowledged that certain studies had found short-term reductions in stock prices associated with adopting rights plans, Lipton opined that “the plan clearly serves its principal objectives — protection against abusive tactics and increased bargaining power resulting in higher prices for shareholders.”²⁰⁸

In response to the stock market crash of October 1987, Lipton wrote that “[t]he overleveraged takeover and the short-term oriented speculative activity associated with the takeover frenzy of the eighties were, predictably, significant factors leading to the crash.”²⁰⁹  He nonetheless warned clients of additional creeping tender offers through open market accumulations of control positions, and noted that “[t]he best immediately available defense against a creeping takeover is the second generation share purchase rights plan with a 20% flip-in provision that may be amended to 15% or 10% to meet specific threats.  We recommend that all of our clients consider substituting the new plan to achieve this important protection for their shareholders.”²¹⁰  In addition, he noted that the stock market decline “lowered stock market prices to a level where [companies] became attractive to corporate strategic buyers,” noting that the retreat of corporate raiders to the sidelines and lower market prices had “combined to make hostile bidders of acquirors who previously would undertake only a negotiated acquisition.”²¹¹

With his embrace of the flip-in pill, Lipton crossed another threshold.  Moving from an earlier reluctance to say that a target board could prevent stockholders from deciding for themselves whether to accept a non-coercive bid solely on the grounds that the board thought the price was too low, Lipton began to adopt a philosophy — using a coinage from First Lady Nancy Reagan’s anti-drug campaign — that boards should be able to use a pill to “Just Say No” on just that ground.  Thus, while retaining his long-standing view that a board should be able to block a bid that threatened the company’s workers, stakeholders or communities of operation, Lipton also now voiced the view that they could protect the stockholders from accepting a bid that the board viewed as undervaluing the company.    

With the Delaware courts having already held that the pill could be used to prevent a structurally coercive bid, this question of how far a board could go to use a pill to block a non-coercive, all shares offer would soon be the subject of great focus as the decade waned.

Time/Warner and QVC:  The Delaware Supreme Court Speaks²²⁶

It was not only Lipton who was frustrated by their having been no appeals in the Interco and Pillsbury cases.  According to a controversial article that contained quotations, on and off the record, from members of the Court of Chancery and the Delaware Supreme Court, some members of the Supreme Court were disappointed they had not had a chance to speak to the question of whether a board could use a pill to block a bid solely on price grounds and because the board believed that another strategic option was preferable.  In the article, Lipton’s frustrations over Interco and Pillsbury were recounted.²²⁷

In the following spring and summer of 1989, the Delaware Supreme Court would find an opportunity to have its say, albeit in a case that did not turn on the use of a poison pill.  The case involved a challenge to a proposed merger in which Time Inc. — the iconic publisher of Time Magazine and formerly of Life Magazine and by the 1980s, also of People Magazine — sought to merge with Warner Communications.  The merger was the product of an extensive study by Time’s board, which had looked at other alternatives, and involved the view that Time needed scale and to have content not just in the print space, but in the movie, television, and music space, and to take advantage of that content on Time’s cable television markets.  Time’s board was populated with blue-chip members of America’s business and academic establishment.

When the merger was announced, the markets liked it and Time’s price rose, even though it was using its stock to acquire Warner and paying a premium to market.  In its announcement of the deal, Time lauded that one of the major values of the transaction was that it did not increase the company’s debt and that the resulting combined company could invest more substantially in future growth.  But then things got interesting.  Another industry player and competitor of Warner’s, Paramount Communication, offered to buy Time itself for $175 per share, nearly $50 a share over the price at which the stock market was valuing the Time-Warner combination.  Paramount then raised its bid to $200 per share.

The Time board refused to even negotiate with Paramount and stuck to its view that a combination with Warner was the optimal path.  To defeat the Paramount offer, Time recut its deal with Paramount so that it was paying cash to Warner’s stockholders, a 56% premium that resulted in the company having to take on substantial leverage and erasing the debt-free benefits for the original transaction form.  The reason for the change was simple and singular — Time’s stockholders had to vote on the original stock-for-stock transaction under the rules of the New York Stock Exchange — and the board of Time knew they could not obtain approval because of stockholder appetite to accept Paramount’s bid.  And to get Warner’s stockholders to accept cash rather than stock, Time was asked to pay a much higher premium and it agreed to do so.

Paramount sued in Chancery seeking to enjoin the newly cut merger under the Revlon and Unocal doctrines.  In a nuanced decision, Chancellor Allen found that Revlon was not implicated because Time was acquiring Warner in a merger in which there would be no resulting change of control, and that control of Time would continue to rest “in a large, fluid, changeable and changing market.”  For that reason, Chancellor Allen held that Time’s board was under no duty to accept the alternative that would produce the highest immediate value, as would have been the case if Time were engaging in a change of control transaction, but could govern the company with the view to the stockholders’ long-term best interests.  He also rejected the Unocal claim that the board’s reaction to the Paramount offer to recut the Warner merger was unreasonable.²²⁸

Chancellor Allen found that the Time board had studied the merger with Warner long before any threat of a bid came on the scene, that the board was independent and believed that the merger would be more valuable in the long-run than the $200 bid.  He ruled that because the board was merely reacting to the threat of the Paramount bid by acting to consummate a transaction within the board’s statutory power, its actions were reasonable and survived Unocal scrutiny, despite the stark gap between the board’s view of value and that of the stock market.   Suggesting that he was more than a little aware of the large gap between the board’s view of value and that of most objective observers, Chancellor Allen noted that the projection by the company’s bankers that Time-Warner shares would trade between $ 208 and $402 in the out years, after the merger was a “range that a Texan might feel at home on.”²²⁹

In his ultimate ruling, Chancellor Allen stressed that under corporate law, directors had broad leeway to exercise their powers in good faith while in office, and that although the results may not always turn out optimally, there were advantages to this system:  “[J]ust as the Constitution does not enshrine Mr. Herbert Spencer’s social statics, neither does the common law of directors’ duties elevate the theory of a single, efficient capital market to the dignity of a sacred text.  Directors may operate on the theory that the stock market valuation is ‘wrong’ in some sense, without breaching faith with shareholders.”²³⁰

The Chancellor also noted that for diversified investors, much of the value they received depended on managerial innovation and risk-taking and that courts should be reluctant to intrude upon it:

At the same, in ruling for Time, Chancellor Allen was careful to note that for reasons of timing, the poison pill that Time had in place was not the focus of his decision and not at issue.  To Chancellor Allen, a board’s decision to pursue a merger for business reasons stood on a different and more legitimate footing than the use of a rights plan, the only utility of which was to block stockholders from accepting a bid, especially one that was, in the case of Paramount’s, all-cash, all-shares, and thus non-coercive.  Thus, Chancellor Allen ended his opinion with a key footnote caveat:  “[I]n my view, a decision not to redeem a poison pill, which by definition is a control mechanism and not a device with independent business purposes, may present distinctive considerations than those presented in this case.”²³² 

On appeal, the Delaware Supreme Court issued a less nuanced opinion that contained several stark pronouncements.²³³

The Supreme Court affirmed Chancellor Allen’s Revlon ruling, albeit on other grounds.  The Court held that Time’s agreement to the Warner merger did not trigger any Revlon duty to seek short-term value, noting that Revlon was implicated only if the corporation initiated a bidding process to sell itself or effect “a clear break-up of the company,” or chose to abandon a long-term strategy in favor of an alternative that involves the break-up of the company.²³⁴

Turning to Unocal, the Supreme Court also affirmed but for reasons that went well beyond Chancellor Allen’s carefully cabined words.  The Supreme Court declared that the board’s statutory mandate to manage the business and affairs of the corporation “includes a conferred authority to set a corporate course of action, including time frame, designed to enhance corporate profitability.”²³⁵  Under the Supreme Court’s analysis, if a corporate plan was determined by directors in good faith and advisedly to be in the corporation’s best interests, the directors seemingly could never be obliged to set it aside in favor of short-term higher values.

The Time/Warner fact pattern did not involve a poison pill but it did present what the Supreme Court called “structural safety devices” more commonly known as deal protections, such as a no-shop and a mutual share-exchange premium that were subject to Unocal review.  It was on this point that the Supreme Court spoke most favorably to director power and entitlement.  Canvassing Chancery’s development of Delaware doctrine in the preceding period, the Supreme Court focused on Chancery’s embrace of the proposition that an all-cash, all-shares tender at a price that shareholders might find attractive could not constitute a Unocal threat sufficient to justify much in the way of a defensive response.  That perspective — which underlay Interco and Pillsbury — was unequivocally rejected by the Supreme Court as “narrow and rigid” — as a “fundamental misconception of our standard of review under Unocal principally because it would involve the court in substituting its judgment as to what is a ‘better’ deal for that of a corporation’s board of directors.”  The Court stated it rejected Interco “and its progeny.”²³⁶  This scathing statement, while dictum and arguably not accounting for the actual reasoning of those decisions, sent a huge message.  Notably, the Court chose to characterize those decisions as improperly involving the “the court” in deciding what was the “‘better’ deal” while Chancery’s opinions in those cases had held that stockholders(not the court) should decide after a target board presented with a non-coercive offer had adequate time to develop alternatives and tell its story.   

The Supreme Court’s view, simply stated, was that a board could foreclose stockholder choice and pursue its own strategic direction — perhaps the strongest statement from Delaware of a director-centric view of corporate power.  Indeed, the Supreme Court took the view that it was legitimate for the Time board to take into account that the Time stockholders might decide to tender “in ignorance or a mistaken belief of the strategic benefit which a business combination with Warner might produce.”²³⁷  The Court viewed this threat of self-inflicted stockholder error as somehow separate from the board’s view that the $200 offer was too low and did not point to any lack of available information that could render stockholders unable to choose.  Rather, the Court took the position that the Board could take the paternalistic perspective that it knew best.  The argument that it was an unreasonable response to preclude stockholder choice was dispatched as “a fundamental misunderstanding of where the power of corporate governance lies” — which the Court held included the duty of “selection of a time frame for achievement of corporate goals.”²³⁸  In a ringing endorsement of director prerogatives, the Court stated:  “Directors are not obliged to abandon a deliberately conceived corporate plan for a short-term shareholder profit unless there is clearly no basis to sustain the corporate strategy.”²³⁹

Lipton, understandably, applauded the Time/Warner opinion that embedded so much of his fundamental concepts into Delaware doctrine.  In a brief memo the day after the opinion — entitled “Delaware Says Yes To Just Say No” — Lipton elided over the absence of a pill in the case, taking what may have been dicta, strictly speaking, as the new Delaware paradigm:

The Time/Warner opinion and the reach of its dictum would remain important to the evolution of Delaware’s takeover/fiduciary duty doctrine.

The next major case in which the Delaware Supreme Court spoke to takeovers underscored Lipton’s pragmatism.  The Revlon doctrine, while strongly critiqued by Lipton when the case was first decided, had become entrenched.  By the 1990s, structurally coercive bids were rare, and most M&A resulted from voluntary decisions of management to sell the company or (as in Time-Warner) to do a strategic merger.  Lipton’s basic view of director prerogatives readily encompassed about mergers motivated by directorial/managerial beliefs that the entities involved would improve their performance in combination.

And so the next case to come before the Delaware Supreme Court saw Lipton and Wachtell Lipton representing a topping bidder in a situation when a target company had already voluntarily entered into a merger agreement that would dramatically change the profile of the company and alter its board’s (and its stockholders’) ability to chart its future.  In 1994, Wachtell Lipton represented Barry Diller’s QVC in making an interloping offer to buy Paramount, which had already signed a merger agreement to combine with Sumner Redstone’s Viacom.  Paramount was the same company that lost in Time-Warner and it was not to end up any happier this time around.²⁴¹

Paramount had structured its deal with Viacom seemingly to take advantage of the supposedly narrowed view of Revlon’s applicability that the Supreme Court had relied upon in Time/Warner.  Because the Paramount stockholders would receive stock, and because the Paramount board had carefully studied the deal with Viacom and thought it would provide great long-term value to the Paramount stockholders, Paramount took the position that it did not have to sell to the highest bidder because Revlon was not applicable.  QVC argued to the contrary, stressing the reasoning of Chancellor Allen’s trial-level decision in Time, and the fact that the combined company would have a controlling stockholder because Redstone, the controller of Viacom, would own a majority of the voting stock.  With a controlling stockholder, QVC argued through Wachtell Lipton, control of Paramount was shifting from the public stockholders to a particular controller, and thus Revlon applied.   

In ruling in favor of QVC, the Supreme Court brushed aside Paramount’s reliance upon its Time/Warner opinion and its assertion that the transaction was a strategic merger not subject to Revlon review because it involved no corporate breakup or decision to sell, but was a strategic, stock-for-stock merger.  The Court (affirming Chancery’s conclusion that Revlon applied) found the Paramount board’s process “deficient” and labeled their Time/Warner defense an “empty rationalization.”²⁴²  The Court held that the Paramount-Viacom combination was a sale of control, distinguishing Time as a circumstance where there was no change of control in the original stock-for-stock merger agreement between Time and Warner given that the resulting combined company “would be owned by a fluid aggregation of unaffiliated stockholders.”²⁴³  Thus, the QVC Supreme Court embraced Chancellor Allen’s reasoning in Time/Warner.  Because Viacom’s controlling stockholder (Redstone) would end up with control of the combined company, relegating the Paramount stockholders to minority status in a company with a controlling stockholder.  As a result, the Court reasoned:  “Irrespective of the present Paramount Board’s vision of a long-term strategic alliance with Viacom, the proposed sale of control would provide the new controlling stockholder with the power to alter that vision.”²⁴⁴  The Paramount board, at bottom, had made a category error by thinking that Time/Warner shielded its actions.

The rest of the QVC decision followed logically from that critical shift from a context where the board was empowered to decide what was best in the long-term, from one where the board had to seek the highest value reasonably attainable.  Rather than responding to QVC’s interloping, topping bid by trying to put Viacom and QVC on a level playing field and seeking to extract the highest price, Paramount had reacted by extracting a higher price from Viacom but also simultaneously agreeing to a host of very strong deal protection measures that, instead of facilitating competition, were designed to block QVC and ensure that the favored bidder, Viacom, would succeed.  The Court thus found the defensive measures unreasonable under Unocal, and affirmed the Court of Chancery’s injunction of the stock option and break-up fees.  In so ruling, the Supreme Court stressed that neither Revlon nor Unocal prevented boards from exercising their reasonable judgment about the use of deal protection measures, and that a variety of potential course of action could be reasonable.²⁴⁵  In underscoring the connection between the business judgment rule and heightened scrutiny, the Court took a view Lipton had strongly advocated:  that directors in the M&A context had to be allowed the freedom to make difficult judgments, and that if they did so in good faith and reasonably, the courts should defer.  Here, because the deal protections were used to end, rather than facilitate, the Paramount board’s duty under Revlon to seek the highest immediate value reasonably attainable, the Court could not defer.  After the injunction, the bidding process continued in see-saw fashion between QVC and Viacom.  Ultimately, Viacom triumphed albeit at a much higher price that QVC chose not to exceed. 

The QVC opinion provoked some consternation over whether Delaware was now tilting in a pro-bidder path, and, in particular, whether that movement had been as a result of Wachtell Lipton’s successful litigation on behalf (unusually) of a deal-jumping unsolicited bid.  Lipton issued a memo within days of QVC (February 7, 1994) — entitled “Ten Questions Raised by Paramount.”²⁴⁶  The memo dissected the opinion to underscore that, in fact, Delaware had not moved in a pro-bidder or anti-board direction:

Market dynamics proceeded to respond to the development of Delaware takeover doctrine.  The Delaware courts had signaled that deal protections even in stock-for-stock mergers were subject to Unocal review, and it became clear that the sell-side stockholders would not typically vote for a lower priced transaction when a higher bid was available.  Companies themselves become the primary initiators of M&A, and the announcement of voluntary mergers invited, a la QVC, other interested bidders to come forward and top.  As a century ended, most mergers were motivated by strategic business advantages and not by financial gimmickry, and boards of directors, and not financially motivated raiders, were the driving force for most transactions.  Director power had been vindicated by the courts, but increasingly that power was wielded to do deals, not fight them.

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⁶¹ Martin Lipton, ‘Greenmail’ Is a Corporate Disgrace, N.Y. Times, Apr. 15, 1984 (quoting Lipton’s Congressional testimony from March 1984).
⁶² Martin Lipton & Andrew R. Brownstein, Takeover Responses and Directors’ Responsibilities: An Update 8-1(Dec. 1983).
⁶³ Martin Lipton & Patricia A. Vlahakis, Securities Regulation Institute, Takeover Responses – 1984 Developments, U.C. San Diego Sec. Reg. Inst. 1 (Nov. 1984).
⁶⁴ The Effect of Mergers on Management Practices, Cost, Availability of Credit, and the Long-Term Viability of American Industry: Hearing, Before the S. Subcomm. on Sec. of the Banking, Hous., & Urban Affairs, 99th Cong. 8 (1985) (statement of Martin Lipton).
⁶⁵ Statement of Martin Lipton, 99th Cong. 8, 15.
⁶⁶ Takeover Tactics and Public Policy: Hearings on H.R. 2371, H.R. 5250, H.R. 5693, H.R. 5694, H.R. 5695, and H.R. 5696 Before the H.R. Subcomm. on the Telecomm., Consumer Prot., & Fin. of the Comm. on Energy & Commerce, 98th Cong. 157 (1984) (statement of Martin Lipton).
⁶⁷ Statement of Martin Lipton, 98th Cong. 160.
⁶⁸ Martin Lipton, Takeover Bids in the Target’s Boardroom, 35 Bus. L. 101, 109-12 (1979).
⁶⁹ Statement of Martin Lipton, 98th Cong. 156.
⁷⁰ See Statement of Martin Lipton, 98th Cong. 157 (proposing solution to takeover abuses “based in large measure on the rules of the City Takeover Panel in the United Kingdom”); see also Statement of Martin Lipton, 99th Cong.; Tender Offer Reform Act of 1987: Hearing on H.R.1601 Before the H. Subcomm. on Telecomm. & Fin. of the H. Comm. on Energy & Commerce, 100th Cong. (1987) (statement of Martin Lipton).
⁷¹ Memo: Takeovers: The Convertible Preferred Stock Dividend Plan (June 20, 1983). This first version of the plan was structured as a preferred stock dividend, but was functionally similar to later versions that issued rights, rather than preferred stock, as dividends.
⁷² Memo: Takeovers: The Convertible Preferred Stock Dividend Plan (June 20, 1983), at 1.
⁷³ Memo: Takeovers: The Convertible Preferred Stock Dividend Plan (June 20, 1983), at 1-2.
⁷⁴ Memo: Takeovers: The Convertible Preferred Stock Dividend Plan (June 20, 1983), at 1.
⁷⁵ Memo: Takeovers: The Convertible Preferred Stock Dividend Plan (June 20, 1983), at 3.
⁷⁶ Memo: Takeovers: The Convertible Preferred Stock Dividend Plan (June 20, 1983), at 5.
⁷⁷ Memo: Takeovers: The Convertible Preferred Stock Dividend Plan (June 20, 1983), at 6.
⁷⁸ Memo: Takeovers: The Convertible Preferred Stock Dividend Plan (June 20, 1983), at 6.
⁷⁹ Memo: Takeovers: The Convertible Preferred Stock Dividend Plan (June 20, 1983), at 8.
⁸⁰ Memo: Flip-In Rights Plans (May 30, 1986). (noting that Wachtell Lipton has not recommended flip-in pills “out of fear that a court would find that it was illegal and that it tainted the validity of the whole rights plan”).
⁸¹ Memo: Takeovers: The Convertible Preferred Stock Dividend Plan (June 20, 1983), at 2.
⁸² Memo: Takeovers: The Convertible Preferred Stock Dividend Plan (Aug. 17, 1983), at 1 (emphasis added) The early version of the plan, which was effected via an issuance of preferred stock with a “flip-over” provision, soon evolved into a similar plan in which the same protections “can be achieved by the declaration of a dividend consisting of rights to purchase common stock,” which rights “have a ‘flip-over’ provision similar in concept to that of the ‘poison pill’ convertible preferred stock.” Lipton & Vlahakis, Securities Regulation Institute, Takeover Responses – 1984 Developments, at 32-33.
⁸³ Memo: Takeovers: The Convertible Preferred Stock Dividend Plan (Aug. 17, 1983), at 1, Annex II.
⁸⁴ Memo: Takeovers: The Convertible Preferred Stock Dividend Plan (Aug. 17, 1983)
⁸⁵ Nat’l Educ. Corp. v. Bell & Howell Co., 1983 WL 18035, at *5 (Del. Ch. Aug. 25, 1983).
⁸⁶ Memo: Takeovers: The Convertible Preferred Stock Dividend Plan (Aug. 17, 1983), at 1. The Court later denied a motion to dismiss the litigation for failure to join the owners of the issued shares as necessary parties, noting that doing so would unjustly “insulate the provisions of such preferred stock from judicial attack by the simple expediency of issuing them pro rata to common shareholders as a stock dividend before the matter could be presented to a court for a determination.” Nat’l Educ. Corp. v. Bell & Howell Co., 1983 WL 8946, at *2 (Del. Ch. Dec. 13, 1983).
⁸⁷ Frank Allen & Steve Swartz, Lenox Rebuffs Brown-Forman, Adopts Defense, Wall St. J., June 16, 1983.
⁸⁸ Memo: Share Purchase Rights Plan: An Update and a New Plan (July 24, 1987), at 1.
⁸⁹ See, e.g., Memo: Poison Pills – Flip-Ins (Apr. 18, 1986); Memo: Poison Pill Again Upheld (Nov. 11, 1986); Memo: The Attack on the Poison Pill (Nov. 24, 1986); Memo: The Pill in Action (Mar. 14, 1988); Memo: Progenitor’s Retrospective – The Poison Pill at Five (Jan. 10, 1989).
⁹⁰ Huffington v. ENSTAR Corp., 1984 WL 8209, at *3 (Del. Ch. Apr. 25, 1984).
⁹¹ Moran, 500 A.2d 1346 (Del. 1985).
⁹² For more information about the litigation of Unocal and the remembrances of key participants in the litigation, see the narrative video on the case, recorded interviews of participants, and opinions, briefs, and other materials from the case, at Unocal Video, Penn Law, The Delaware Corporation Law Resource Center.
⁹³ Unocal, 493 A.2d at 949.
⁹⁴ Unocal, 493 A.2d at 949.
⁹⁵ Unocal, 493 A.2d at 954.
⁹⁶ Unocal, 493 A.2d at 954 (contrasting the position the Court was taking from that of scholars like Easterbrook and Fischel).
⁹⁷ Unocal, 493 A.2d at 954 n.8.
⁹⁸ Unocal, 493 A.2d at 954 n.9.
⁹⁹ Unocal, 493 A.2d at 954.
¹⁰⁰ Unocal, 493 A.2d at 954.
¹⁰¹ Unocal, 493 A.2d at 955.
¹⁰² Unocal, 493 A.2d at 955 (“[S]uch proof is materially enhanced . . . by the approval of a board comprised of a majority of outside independent directors who have acted in accordance with the foregoing standards”).
¹⁰³ Unocal, 493 A.2d at 955-56 & n.11 (citing Martin Lipton, Takeover Bids in the Target’s Boardroom, 35 Bus. Law. 101, at 113-14 (1979)).
¹⁰⁴ For more information about the litigation of Moran and the remembrances of key participants in the litigation, see the narrative video on the case, recorded interviews of participants, and opinions, briefs, and other materials from the case, at Moran, Penn Law, The Delaware Corporation Law Center.
¹⁰⁵ Moran v. Household Int’l, Inc., 490 A.2d 1059 (Del. Ch. 1985).
¹⁰⁶ Unocal, 493 A.2d at 957.
¹⁰⁷ Moran v. Household Int’l, Inc., 500 A.2d 1346, 1352 (Del. 1985) (citing Unocal, 493 A.2d at 957).
¹⁰⁸ Moran, 500 A.2d at 1352.
¹⁰⁹ Moran, 500 A.2d at 1348.
¹¹⁰ Moran, 500 A.2d at 1349.
¹¹¹ Moran, 500 A.2d at 1354.
¹¹² Moran, 500 A.2d at 1354-57.
¹¹³ Memo: Share Purchase Rights Plans (“Poison Pills”) (Nov. 21, 1985).
¹¹⁴ Memo: Share Purchase Rights Plans (“Poison Pills”) (Nov. 21, 1985).
¹¹⁵ Et Tu, Delaware?, Wall St. J., Nov. 21, 1985, at 30
¹¹⁶ Memo: Share Purchase Rights Plans (“Poison Pills”) (Nov. 21, 1985), at 1.
¹¹⁷ For more information about the litigation of Revlon and the remembrances of key participants in the litigation, see the narrative video on the case, recorded interviews of participants, and opinions, briefs, and other materials from the case, at Revlon, Penn Law, The Delaware Corporation Law Resource Center.
¹¹⁸ Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 176 (Del. 1986).
¹¹⁹ Revlon, 506 A.2d at 181.
¹²⁰ Revlon, 506 A.2d at 181.
¹²¹ Revlon, 506 A.2d at 182.
¹²² Revlon, 506 A.2d at 182.
¹²³ See Takeover Boom of the 1980’s Narrative Video, Penn Law, at 57:38, The Delaware Corporation Law Resource Center.
¹²⁴ Revlon, 506 A.2d at 182.
¹²⁵ Memo: Takeover Issues for 1987 (Oct. 13, 1986), at 2.
¹²⁶ For a discussion of second generation state takeover laws following Revlon, see Martin Lipton & Morris Panner, Takeover Bids and United States Corporate Governance, in Contemporary Issues in Corporate Governance 123-26 (D.D. Prentice & P.R.J. Holland eds., 1993).
¹²⁷ Memo: Lockups (Jan. 8, 1986).
¹²⁸ William Meyers, Showdown in Delaware: The Battle to Shape Takeover Law, Institutional Inv., Feb. 1989, at 71.
¹²⁹ Memo: Takeovers – Where Do We Go From Here (June 18, 1986), at 2.
¹³⁰ Memo: Takeover Issues for 1987 (Oct. 13, 1986).
¹³¹ Memo: The Poison Pill on the First Anniversary of Household (Nov. 19, 1986), at 1.
¹³² Memo: A Second Generation Share Purchase Rights Plan (July 14, 1987), at 1.
¹³³ Memo: Takeover Response Checklist (Nov. 23, 1988), at 1.
¹³⁴ Memo: Flip-In Rights Plans (May 30, 1986).
¹³⁵ Memo: Flip-In Rights Plans (May 30, 1986).
¹³⁶ Memo: Flip-In Rights Plans (May 30, 1986).
¹³⁷ Martin Lipton & Andrew R. Brownstein, Takeover Responses: An Update, 24th Annual Corporate Counsel Institute (Oct. 9-10, 1985), at 44.
¹³⁸ Lipton & Brownstein, Takeover Responses: An Update, at 45
¹³⁹ Amalgamated Sugar Co., LLC v. NL Indus., Inc., 644 F. Supp. 1229, 1234 (S.D.N.Y. 1986).
¹⁴⁰ Amalgamated Sugar Co., LLC v. NL Indus., Inc., 644 F. Supp. 1229, 1237, 1238 (S.D.N.Y. 1986).
¹⁴¹ Memo: Shareholder Rights Plans After NL (Aug. 14, 1986).
¹⁴² Memo: Takeover Issues for 1987 (Oct. 13, 1986), at 2.
¹⁴³ Memo: Shareholder Rights Plans After NL (Aug. 14, 1986).
¹⁴⁴ Memo: Takeover Issues for 1987 (Oct. 13, 1986), at 2.
¹⁴⁵ Memo: Shareholder Rights Plans After NL (Aug. 14, 1986).
¹⁴⁶ Dynamics Corp. of Am. v. CTS Corp., 805 F.2d 705 (7th Cir. 1986).
¹⁴⁷ Memo: Basic Concept of Poison Pill Sustained in Second CTS Case (Nov. 6, 1986).
¹⁴⁸ Richard A. Posner, Economic Analysis of the Law (1st ed. 1973).
¹⁴⁹ Martin Lipton, Corporate Governance: Major Issues for the 1990s, Address to the Third Annual Corporate Finance Forum (Apr. 6, 1989).
¹⁵⁰ The Effect of Mergers on Management Practices, Cost, Availability of Credit, & the Long-Term Viability of American Industry: Hearing Before the S. Subcomm. on Sec. of the Comm. On Banking, Hous. & Urban Affairs, 99th Cong. 26 (1985) (statement of Martin Lipton).
¹⁵¹ Memo: The Poison Pill on the First Anniversary of Household (Nov. 19, 1986), at 1.
¹⁵² Memo: Basic Concept of Poison Pill Sustained in Second CTS Case (Nov. 6, 1986).
¹⁵³ Dynamics Corp. of Am, 805 F.2d at 708, 716.
¹⁵⁴ Memo: Poison Pill Again Upheld (Nov. 11, 1986), at 1.
¹⁵⁵ Memo: The Poison Pill on the First Anniversary of Household (Nov. 19, 1986), at 1.
¹⁵⁶ Martin Lipton, Corporate Governance in the Age of Finance Corporatism, 136 U. Penn. L. Rev. 1, 5-6 (1987).
¹⁵⁷ Martin Lipton, Corporate Governance: Major Issues for the 1990s, Address to the Third Annual Corporate Finance Forum, at 4 (Apr. 6, 1989).
¹⁵⁸ Martin Lipton, Directors’ Responsibilities with Respect to Takeovers (1987), at 30.
¹⁵⁹ Lipton, 136 U. Pa. L. Rev. at 37.
¹⁶⁰ Lipton, 136 U. Pa. L. Rev. at 8-9.
¹⁶¹ Memo: The Investment Manager Attack on Shareholder Rights Plans (Nov. 4, 1986), at 1.
¹⁶² Memo: The Takeover Frenzy (Mar. 31, 1988), at 5.
¹⁶³ Memo: Is This The End of Takeovers (Oct. 28, 1988), at 1.
¹⁶⁴ Memo: Takeovers (Nov. 4, 1989).
¹⁶⁵ SEC Major Issues Conference, June 28-29, 1984 (Digest of Lipton’s panel remarks).
¹⁶⁶ Memo: Institutional Shareholder Resolutions Seeking Referendum on Share Purchase Rights Plans (Dec. 18, 1986) (quoting Warren E. Buffett, How to Tame the Casino Society, Wash. Post, Dec. 4, 1986); see also Memo: The Proxmire Takeover Bill (June 8, 1987).
¹⁶⁷ Memo: The Attack on the Poison Pill (Nov. 24, 1986).
¹⁶⁸ Martin Lipton, Takeover Abuses Mortgage the Future, Wall St. J., Apr. 5, 1985.
¹⁶⁹ Tender Offer Reform Act of 1987: Hearing on H.R.1601 Before the H. Subcomm. on Telecomm. & Fin. of the H. Comm. on Energy & Commerce, 100th Cong. 44-45 (1987) (statement of Martin Lipton).
¹⁷⁰ Martin Lipton Corporate Governance: Major Issues for the 1990s, Address to the Third Annual Corporate Finance Forum, at 9 (Apr. 6, 1989).
¹⁷¹ Martin Lipton, Mileposts on the Takeover Trail – From Chicago to Delaware, at 9-10 (1989).
¹⁷² Memo: Is This the End of Takeovers (Oct. 28, 1988).
¹⁷³ Memo: The Investment Manager Attack on Shareholder Rights Plans (Nov. 4, 1986).
¹⁷⁴ Memo: The Poison Pill on the First Anniversary of Household (Nov. 19, 1986).
¹⁷⁵ Memo: The Investment Manager Attack on Shareholder Rights Plans (Nov. 4, 1986).
¹⁷⁶ Memo: The Investment Manager Attack on Shareholder Rights Plans (Nov. 4, 1986).
¹⁷⁷ Memo: Shareholder Referendum on Rights Plans (Nov. 13, 1986).
¹⁷⁸ Memo: Shareholder Referendum on Rights Plans (Nov. 13, 1986).
¹⁷⁹ Memo: Shareholder Referendum on Rights Plans (Nov. 13, 1986).
¹⁸⁰ Memo: Shareholder Referendum on Rights Plans (Nov. 13, 1986).
¹⁸¹ Martin Lipton, Corporate Governance in the Age of Finance Corporatism, 136 U. Penn. L. Rev. at 33 (Nov. 1987).
¹⁸² Martin Lipton, Corporate Governance: Major Issues for the 1990s, Address to the Third Annual Corporate Finance Forum, at 5-6 (Apr. 6, 1989).
¹⁸³ Martin Lipton, A Sensible Deterrent to Takeover Mania, N.Y. Times, Dec. 14, 1986.
¹⁸⁴ Memo: Poison Pills: The CREF Shareholder Resolution is Defeated (Apr. 15, 1987).
¹⁸⁵ Memo: Pill 31- Institutions 0: CALPERS and CREF Shut Out (May 26, 1987).
¹⁸⁶ Memo: Pension Funds return with Anti-Pill Proxy Resolutions (Nov. 20, 1987).
¹⁸⁷ Memo: The Takeover Frenzy (Mar. 31, 1988), at 4.
¹⁸⁸ Memo: Anti-Poison Pill Resolutions Fail (May 13, 1988).
¹⁸⁹ Memo: Anti-Poison Pill Resolutions Fail (May 13, 1988).
¹⁹⁰ Memo: Pill Proxy Resolutions Defeated (June 10, 1988) (attaching Georgeson & Company, Inc.: Increased Vote for Poison Pill Rescission Proposals in 1988 Reflects Selective Targeting by Proponents; Vote Declines for Repeat Proposals (June 10, 1988)).
¹⁹¹ Memo: Pill Proxy Resolutions Defeated (June 10, 1988).
¹⁹² Memo: A Second Generation Share Purchase Rights Plan (July 14, 1987).
¹⁹³ Memo: Share Purchase Rights Plans: An Update and a New Plan (July 24, 1987).
¹⁹⁴ Memo: A Second Generation Share Purchase Rights Plan (July 14, 1987), at 2.
¹⁹⁵ Martin Lipton, Corporate Governance in the Age of Finance Corporatism, 136 U. Penn. L. Rev. at 70 (Nov. 1987).
¹⁹⁶ Memo: A Second Generation Share Purchase Rights Plan (July 14, 1987).
¹⁹⁷ Memo: A Second Generation Share Purchase Rights Plan (July 14, 1987), at 3.
¹⁹⁸ Memo: A Second Generation Share Purchase Rights Plan (July 14, 1987), at 3.
¹⁹⁹ See Memo: A Second Generation Share Purchase Rights Plan (July 14, 1987), at 4.
²⁰⁰ Memo: A Second Generation Share Purchase Rights Plan (July 14, 1987), at 5.
²⁰¹ Memo: A Second Generation Share Purchase Rights Plan (July 14, 1987), at 4-5.
²⁰² See Beneficial Ownership, Takeover and Acquisitions by Foreign and Domestic Persons: Public Investigation Hearing Before Sec. & Exch. Comm’n, 149-298, 161 (1974) (statement of Martin Lipton); Takeover Tactics and Public Policy: Hearing on H.R. 2371, H.R. 5250, H.R. 5693, H.R. 5694, H.R. 5695 and H.R. 5696: Hearings Before the H. Subcomm. on Telecomm., Consumer Prot. & Fin. of the H. Comm. on Energy & Com., 98th Cong. 98-142, 157 (1984) (statement of Martin Lipton); Impact of Corporate Takeovers: Hearings Before the H. Subcomm. on Sec. of the H. Comm. on Banking, Hous., & Urb. Affs., 98th Cong. 99-187, 10-12, 25, 142 (1985) (statement of Martin Lipton).
²⁰³ Martin Lipton, Corporate Governance in the Age of Finance Corporatism, 136 U. Penn. L. Rev. at 71 (Nov. 1987).
²⁰⁴ Memo: A Second Generation Share Purchase Rights Plan (July 14, 1987), at 6.
²⁰⁵ Memo: A Second Generation Share Purchase Rights Plan (July 14, 1987), at 7.
²⁰⁶ Memo: A Second Generation Share Purchase Rights Plan (July 14, 1987), at 6.
²⁰⁷ Memo: Share Purchase Rights Plans: An Update and a New Plan (July 24, 1987), at D-4.
²⁰⁸ Memo: Share Purchase Rights Plans: An Update and a New Plan (July 24, 1987), at 20.
²⁰⁹ Martin Lipton, Corporate Governance in the Age of Finance Corporatism, 136 U. Penn. L. Rev. at 72 (Nov. 1987).
²¹⁰ Memo: The Creeping Tender Offer Is Still Alive (Nov. 4, 1987).
²¹¹ Memo: The Takeover Frenzy (Mar. 31, 1988), at 3-4.
²¹²For more information about the litigation of Interco and other poison pill cases in Delaware after Moran, and the remembrances of key participants in those cases, see the narrative video on the cases, recorded interviews of participants, and opinions, briefs, and other materials from the cases, at Interco & Moran Videos, Penn Law, The Delaware Corporation Law Resource Center.
²¹³Interco Inc., 551 A.2d 787 (Del. Ch. 1988).
²¹⁴Memo: Is this the End of Takeovers? (Oct. 28, 1998).
²¹⁵Interco, 551 A.2d at 790.
²¹⁶Interco, 551 A.2d at 795.
²¹⁷Interco, 551 A.2d at 796.
²¹⁸Interco, 551 A.2d at 799-800.
²¹⁹ Grand Metro. Pub. Ltd. v. Pillsbury Co., 558 A.2d 1049 (Del. Ch. 1988).
²²⁰ Memo: The Interco Case (Nov. 3, 1988). Chancellor Allen’s opinion itself suggests that the Chancellor viewed the objective evidence as indicating that the restructuring offered less value at more risk than the bid by the Rales, but that the stockholders, and not the court, should decide that issue for themselves as the ones bearing the primary risk of that decision.
[R]ecognizing the relative closeness of the values and the impossibility of knowing what the stub share will trade at, the board, having arranged a value maximizing restructuring, elected to preclude shareholder choice. It did so not to buy time in order to negotiate or arrange possible alternatives, but asserting in effect a right and duty to save shareholders from the consequences of the choice they might make, if permitted to choose.
Without wishing to cast any shadow upon the subjective motivation of the individual defendants . . . . I conclude that reasonable minds not affected by an inherent, entrenched interest in the matter, could not reasonably differ with respect to the conclusion that the CCA $74 cash offer did not represent a threat to shareholder interests sufficient in the circumstances to justify, in effect, foreclosing shareholders from electing to accept that offer. Interco, 551 A.2d at 799-800.
²²¹ Memo: You Can’t Just Say No in Delaware No More (Dec. 17, 1988).
²²² Leo E. Strine, Jr., The Story of Blasius Industries v. Atlas Corp.: Keeping the Electoral Path Clear in J. M. Ramseyer, Corporate Law Stories, 275 (2009).
²²³ William Meyers, Showdown in Delaware: The Battle to Shape Takeover Law, Institutional Inv., Feb. 1989, at 64, 75.
²²⁴ Memo:  Share Price Protection Repurchase Rights (Dec. 1, 1988). See also Memo:  Takeover Response Checklist (Nov. 23, 1988) (advocating adoption of updated firm pill and Share Price Protection Rights Plan). 
²²⁵ Memo: Progenitor’s Retrospective: The Poison Pill at Five (Jan. 10, 1989).
²²⁶ For more information about the litigation of the Time/Warner and QVC cases, and the remembrances of key participants in those cases, see the narrative video on the cases, recorded interviews of participants, and opinions, briefs, and other materials from the cases, at Time Warner and QVC Videos, Penn Law, The Delaware Corporation Law Center.
²²⁷ William Meyers, Showdown in Delaware: The Battle to Shape Takeover Law, Institutional Inv., Feb. 1989, at 64.
²²⁸ In re Time Inc. S’holder. Litig., 1989 WL 79880 (Del. Ch. July 14, 1989).
²²⁹ In re Time-Warner, 1989 WL 79880, at *13
²³⁰ In re Time-Warner, 1989 WL 79880, at *19.
²³¹ In re Time-Warner, 1989 WL 79880, at *30.
²³² In re Time-Warner, 1989 WL 79880, at *30 n.22.
²³³ Paramount Commc’ns, Inc. v. Time, Inc., 571 A.2d 1140 (Del. 1990).
²³⁴ Paramount, 571 A.2d at 1150.
²³⁵ Paramount, 571 A.2d at 1150.
²³⁶ Paramount, 571 A.2d at 1152-53. This characterization of Interco, as involving the courts in picking which bid was best, was objectively inaccurate. Chancellor Allen’s decision was that the stockholders, not the board, much less the court, should decide if a non-coercive bid should be accepted, once the target board had the time to tell its story, negotiate a higher price, or develop a higher valued alternative. Pillsbury took the same position.
²³⁷ Paramount, 571 A.2d at 1153.
²³⁸ Paramount, 571 A.2d at 1154.
²³⁹ Paramount, 571 A.2d at 1154.
²⁴⁰ Memo: Delaware Says Yes to Just Say No (Feb. 27, 1990).
²⁴¹ Paramount Commc’ns, Inc. v. QVC Network, Inc., 637 A.2d 34 (Del. 1994).
²⁴² Paramount, 637 A.2d 34.
²⁴³ Paramount, 637 A.2d at 46-47.
²⁴⁴ Paramount, 637 A.2d at 43.
²⁴⁵ Paramount, 637 A.2d at 44-46
²⁴⁶ Memo: Ten Questions Raised By Paramount (Feb. 7, 1994).
²⁴⁷ Memo: Ten Questions Raised By Paramount (Feb. 7, 1994).