I've not read Lucien's materials, but I used to write the responses to the shareholder proposals on poison pills (see EDGAR DEF14A filings for Great Lakes Chemical Corporation from 2000 to 2002).

Our argument regarding the poison pill (shareholder rights plan) was a little akin to the NRA position - poison pills don't shoot shareholders, directors do. In other words, a poison pill was not a structural impediment to a takeover, nor was it per se evidence of entrenchment. The decision whether to redeem a pill in the face of a hostile takeover was clearly within the fiduciary responsibilities of the board. Moreover, Delaware law shifted burdens on the BJR with respect to the adoption of defensive measures in the face of a hostile takeover (per Unocal). Hence, the use or misuse of the pill fell squarely within the Section 141 responsibilities of the board.

Unocal says the board has "both the power and the duty to oppose a bid it perceived to be harmful to the corporate enterprise. On this record we are satisfied that the device Unocal adopted is reasonable in relation to the threat posed...." Hence, the board is betwixt and between, because a shareholder could claim that it violated it fiduciary duties by NOT adopting a pill in the face of an unfair takeover proposal. Apart from the more difficult issue whether the defensive measure is or is commensurate with the threat, wouldn't a holding that the adoption of a pill falls on the shareholder side of the Section 141 line mean a retreat from the fairly clear holding in Unocal about the affirmative duties of the board?

I have also not studied this, but as I recall when I was in the middle of this, no rights under a rights plan had actually detached, which suggested that boards were either successfully fighting off bids without ensuing litigation, or more likely, were using the pills to leverage more money out of the bidders, and then redeeming. (That was what happened in Harvard Corp. v. Hayes-Albion Corp., E.D.Michigan, 1989, a case in which we fought off an attempt, in the midst of a bid, to invalidate a pill under Michigan law.)

Yup, this is CA's argument at pp. 17-20 of its brief.

Which causes me to wonder even more about this if the bylaw were adopted. I put myself in the position of a director who has to decide whether to adopt what appears to be an arguably unfair offer (because I know more than shareholders do about the earning power of the company). Unless the Delaware court makes it absolutely clear that I have no duty ever to consider the adoption of a pill as a defense, I must return to an assessment of what constitutes fulfillment of my fiduciary duty on an ex ante basis, not knowing how it will all shake out in the end. And now with this bylaw, the dynamic in the boardroom changes, because a single director has the power to block the exercise of the fiduciary duty of the other directors to repeal the bylaw and adopt a pill.

This has a Sarbanes-like smell about it - the attempt to square the circle with rules and algorithms when it all comes down to the exercise of fiduciary judgment. I don't think you can be half-pregnant - either pills are completely a shareholder matter or completely a board matter, but you can't direct a director HOW to exercise judgment.

By the way, if the "contract-unilateral" distinction is lame, it's because I'm not sure how, if the foregoing is right, the board can even contract away its fiduciary obligation.

"poison pills don't shoot shareholders, directors do"

Excellent!

"the use or misuse of the pill fell squarely within the Section 141 responsibilities of the board."

I don't see that as an answer to anything if the directors' 141 authority can be circumscribed by a bylaw.

"put myself in the position of a director who has to decide whether to adopt what appears to be an arguably unfair offer"

Jeff, the point here is that the directors don't decide whether to accept the offer. The stockholders do that. The directors decide whether to impede the offer, and some stockholders want the directors to get out of the way.

If the Delaware Supreme Court had followed Chancellor Allen's lead in Interco, I wonder whether things would have turned out differently.

No, Gordon, I disagree. (By the way "adopt an offer" was a typo; should have been "accept an offer.")

It's true in any acquisition that the shareholders make the decision, whether by vote to approve a statutory merger, or by tender of their shares. But that's not the question. The question is what is the board's duty in that circumstance, and it clearly is not simply "to get out of the way." The duty is to exercise judgment, to make recommendations (or not if that is the result of the judgment), and to take appropriate and measured steps, if necessary, to oppose bids it perceives "to be harmful to the corporate enterprise."

It is rare that a hostile takeover, the only kind that are subject to invocation of defenses, and the form of which would be a tender offer directly to the shareholders, is not preceded by "friendly" overtures (bearhugs, etc.) to management and board. And were the deal to proceed, the directors have to take a position, even though the shareholders will ultimately decide whether to accept. Section 251 says "The board of directors of each corporation which desires to merge or consolidate shall adopt a resolution approving an agreement of merger or consolidation and declaring its advisability."

Let's assume the stock is trading at $30 per share. I, as a director, have just reviewed, cross-examined, and satisfied myself as to the reasonable of a three-year strategic plan suggesting the inherent earning power of the company, presently valued, is $50 per share. The chairman gets a call in which the bidder offers $33 (a ten percent premium) that he and the board view as grossly inadequate. The obligation is not to get out of the way. If they were to accept it they would have to explain why. If they reject it, and bidder starts a hostile, the board is under more than an obligation to get out of the way of a $32 bid, and it doesn't have to start an auction or put the company in play to do so.

Again, somebody made the valid point that if 141 and 109 are in a dewloop, you have to step out of the closed system to resolve the issue. Maybe that's the point of the CA distinction between a "contract" and a unilateral bylaw: maybe as a director I can delegate some of my duties to protect the corporate enterprise back to the shareholders, but shareholders can't take them from me.

BTW, I'm not sure if textual analysis gets us there, but it's not quite a dewloop between 141(a) and 109. Section 141 shall the business and affairs shall be managed...unless otherwise provided in this chapter or in the C/I." Section 109 permits the adoption of bylaws not inconsistent "with this chapter or the C/I." The most mandatory provision in all of that is the SHALL in the board's obligation; you need two levels of bootstrapping to say that the adoption of a non-mandatory bylaw under Section 109 is something "provided in this chapter."

That raises the question whether you could draft or amend a charter to divest the board of its management obligations. Obviously to some extent you could, or the provision would be meaningless. But notwithstanding the literal language of the statute, could a board recommend a charter change, or could the incorporators adopt from an outset a charter provision that says management has no authority whatsover to manage, and all decisions will be carried out by shareholder vote? I suspect not.

The statute appears to say you could have a charter provision in which you provide (a la the Bebchuk proposal) that all board decisions must be unanimous. Martin Lipton's memo (linked on Bebchuk's site) raises the same question I did - yes, the statute appears to say that literally, but would a court of equity really tolerate the tyranny of the minority, and ensuing deadlock, that could create? Effectively in that situation, the board could not operate qua board, and hence could not fulfill its obligation to manage.

The point is that the directors can never just "get out of the way" and still fulfill their duties. That's not the role the statute or the case law envisions for them.

Jeff, Looks like you have a jump on your next article! ;-)

By suggesting that directors should "get out of the way," I wasn't implying that they are never in the way, just that they need to move at some point. That was the thrust of Allen's opinion in Interco: pills are ok for awhile -- the board sometimes needs time to gather its wits and construct a response -- but at some point the shareholders need to decide. In my view, the purpose of Lucian's bylaw is to create that situation, with one year as the specified time during which the board can respond. After that, the shareholders get to decide. Seems like a pretty good balance to me, especially if the shareholders vote for the bylaw.

When the choice is watch Tiger blow up at the US Open, or write long comments, my natural verbosity takes over. Tigers-Cubs starts in thirty minutes, and then I'm out of here. (You are my muse; I think responding to one of your posts was responsible for the last article.)

You, of course, provoked me at least to skim the "sacred space" article. I agree they need to move, but not necessarily to get out of the way. I don't think the shareholders ought to have an inherent right to vote on a coercive bid. But as a normative manner I would also be comfortable stripping away the 102(b)(7) protection, and having directors put their money (or their insurance) where their mouths are if they've breached their duties by not getting out of the way. (I may have just ended any chance that I will ever be a GC again.)

I'd agree this is a spot for good empirical work, because my intuition is that bad cases (greedy managers a la WorldCom, Adelphia, Tyco) make bad law, and there is less "inherent entrenchment" and more sincere "other-regarding" (as Lynn Stout would say) interest in maximizing shareholder value than one might think or can model easily using the usual individual wealth maximizing assumptions.

Is this an opportunity for the old Clark v. Dodge case to make a comeback? A bylaw can slightly impinge on the Board's power, but may not sterilize the Board? The preceding is stated only half in jest.

How did Bebchuk get standing? Did he make a corporation?

Oh, never mind, Larry's post explains.

Paul, Bebchuk owns 140 shares of CA.

Harry, I always liked Clark v. Dodge. Why not?