XXXXXXXXXXX XXXXX & XXXXXXXX Brussels
Plaza VII Chicago
00 Xxxxx Xxxxxxx Xxxxxx
Xxxxx 0000 Xxxxxxxxxxx
Xxxxxxxxxxx, XX 00000-0000
New York
(000)000-0000
FAX (000)000-0000 Paris
February 13, 1996 Saint Xxxx
Xxxxxxxxxx, D.C.
Board of Directors
Xxxx-Xxxxx Company
0000 Xxxxxx Xxxxxx Xxxxx
X.X. Xxx 000
Xxxxxxxxxxx, XX 00000-0000
Re: Stockholder Rights Agreement
Dear Board of Directors:
We have acted as legal counsel to Xxxx-Xxxxx Company, a Delaware corporation
(the "Company"), in connection with the consideration by the Board of Directors
of the Company of the advisability of authorizing and adopting a stockholders
rights plan. A special committee of the Board (the "Committee") completed its
assignment and the Committee recommended to the Board that there be authorized a
Stockholder Rights Agreement between the Company and Norwest Bank Minnesota,
N.A. (the "Agreement"). The Board authorized the Agreement at its regular
meeting on February 13,1996.
You have requested us to review the legality of the Agreement under Delaware
law. More specifically, you have requested us to address the power of the Board
to authorize the Agreement and the standard of conduct applicable to the Board
in the decision-making process with respect to such authorization.
In connection with the preparation of our opinion, we have reviewed the
Company's current Certificate of Incorporation and its current Bylaws, the
Agreement in the form in which the Board and the Committee considered it, the
decision-making process followed by the Board and the Committee in connection
with the Agreement, and such other matters and questions of law as we have
deemed necessary and relevant.
Unless otherwise defined herein, capitalized terms shall have the same meaning
as is given to them in the Agreement.
Based upon the review referred to above, it is our opinion that the Board has
the power to authorize the Agreement, and that the business judgment rule, which
protects directors against personal liability, will be applicable to the
decision by the Board to authorize the Agreement. These conclusions are
discussed below.
XXXXXXXXXXX XXXXX & XXXXXXXX LETTERHEAD
Board of Directors
Xxxx-Xxxxx Company
February 13, 1996
Page 2
POWER TO AUTHORIZE AGREEMENT
The Board has the power to authorize the Agreement if the Agreement could be
lawfully made at this time under Delaware law and the Company's current
Certificate of Incorporation and Bylaws.
STATUTE AND CHARTER
The first step in such a determination of the Board's authority to adopt the
Agreement is to review the applicable provisions of the Delaware General
Corporation Law (the "DGCL") because the Company is governed by such law. A
second step is to review the Company's current Certificate of Incorporation to
determine if it limits any of the relevant statutory provisions.
Section 141(a) of the DGCL establishes that a Delaware corporation shall be
managed by or under the direction of a board of directors, except as limited by
the DGCL or by the corporation's charter.
Section 151(a) of the DGCL establishes the power of a Delaware corporation to
issue stock and Section 161 of the DGCL provides that the directors may issue
and take subscriptions for shares of stock up to the authorized number of
shares.
Section 157 of the DGCL authorizes a Delaware corporation, subject to any
limitations in its certificate of incorporation, to create and issue, whether or
not in connection with the issue and sale of shares, rights or options entitling
the holders to purchase shares of stock from the corporation. The terms of the
rights or options are to be established by board resolution unless already
stated in the certificate of incorporation.
The Company's current Certificate of Incorporation contains no limitations on
the issuance of shares by the Board nor does it contain any provisions dealing
with rights or options.
The Agreement provides for the negation of exercise rights with respect to
Rights held by an Acquiring Person or an Adverse Person and their Affiliates and
Associates and certain other persons in the event of an applicable Flip-In
Event. Such "discrimination" provisions have been held to be impermissible in a
number of jurisdictions(1) based on the interpretation of "equality" language
---------------------
1. BANK OF NEW YORK X. XXXXXX BANK CORP., 536 N.Y.S.2d 923 (Sup. Ct. 1988)
(applying New York law, although result of this case may be different today
under amendments to N.Y. Bus. Corp. Law
(continued...)
XXXXXXXXXXX XXXXX & XXXXXXXX LETTERHEAD
Board of Directors
Xxxx-Xxxxx Company
February 13, 1996
Page 3
in relevant statutes and on the principle that, at least when stockholder
approval has not been obtained, the relevant statute does not permit
discrimination among similarly situated stockholders. Courts in other
jurisdictions(2) have found such provisions to be lawful because these flip-in
provisions discriminate among stockholders, rather than among shares of a
particular class of stock, and thus do not violate the "equality" requirements
of the relevant state law. The Delaware Supreme Court has not expressly
addressed the discrimination issue in the context of a flip-in rights plan.
Nonetheless, based upon several Delaware Supreme Court cases(3) involving
various similar defensive plans designed to thwart hostile takeover attempts, we
believe that "discriminatory" flip-in provisions (such as those in the
Agreement) are lawful in Delaware and would be upheld, provided that in enacting
such provisions the board of directors of the corporation has met the enhanced
duty standard discussed below
---------------------
1.(continued...)
Sections 501, 505); AMALGAMATED SUGAR CO. V. NL INDUS., 644 F. Supp. 1229
(S.D.N.Y. 1986) (applying New Jersey law, although result of this case may
be different today under amendments to N.J. Stat. Xxx. Section 14A:7-7
(West 1994)), AFF'D, 825 F.2d 634 (2d Cir. 1987), CERT. DENIED, 000 X.X.
000 (1987); TOPPER ACQUISITION CORP. V. EMHART CORP., 1989 U.S. Dist.
LEXIS 9910 (E.D. Va. Mar. 23, 1989) (applying Virginia law, although result
of this case may be different today under amendments to Va. Code Xxx.
Sections 13.1-638, 13.1-646 (Xxxxxx 1993)).
2. HARVARD INDUS. X. XXXXX, [1986-87] Fed. Sec. L. Rep. (CCH) PARA 93,064
(E.D. Mich. Nov. 25, 1986) (applying Michigan law); GELCO CORP. V. CONISTON
PARTNERS, 652 F. Supp. 829 (D. Minn. 1986), AFF'D IN PART AND VACATED IN
PART, 811 F.2d 414 (8th Cir. 1987) (applying Minnesota law, although based
on finding of Delaware precedent as controlling).
3. XXXXX V. HOUSEHOLD INT'L, INC., 500 A.2d 1346 (Del. 1985) (upholding a
flip-over rights plan which, upon certain events, provided the rights
holder with the right to purchase at a discount shares of a tender
offeror); REVLON, INC. V. MACANDREWS & FORBES HOLDINGS, INC., 506 A.2d 173,
180 (Del. 1986) (stating in DICTA that Revlon's board clearly had the power
to adopt a note purchase rights plan, which provided note purchase rights
to all shareholders except the acquiror); UNOCAL CORP. V. MESA PETROLEUM
CO., 493 A.2d 946 (Del. 1985) (approving a defensive issuer self-tender
offer that excluded Mesa Petroleum, which was then making a bid for
Unocal).
XXXXXXXXXXX XXXXX & XXXXXXXX LETTERHEAD
Board of Directors
Xxxx-Xxxxx Company
February 13, 1996
Page 4
under the heading "Business Judgment Rule."(4) In the Delaware litigation
involving rights plans in the past several years, the discrimination issue has
not even been raised. Instead, the focus has been upon the duties of directors
in connection with the redemption of rights when a company is "in play."(5)
Rights plans of Delaware corporations have also been challenged in the past on
the basis of claims that they "xxxx off" all possible future advances; they are
"shams" because the rights are designed never to be exercised; they contain
"anti-dilution" clauses allowing a flip-over to shares of another corporation
which is not authorized by statute; they are inconsistent with Delaware's
business combinations statute; they are unconstitutional under the Commerce and
Supremacy clauses of the U.S. Constitution; they restrict the alienability of
shares of common stock and are illegal; and they impermissibly interfere with
the right of stockholders to mount proxy contests. All of these attacks have
failed.(6)
In our opinion, the Board has the power to authorize the Agreement by reason of
the statutory provisions referred to above and the interpretation of these
statutes by Delaware and other state and federal courts.
BUSINESS JUDGMENT RULE
Generally, the standard by which the conduct of directors is to be measured is
the business judgment rule. It 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 taken was in the best interests
of the . . ." corporation.(7) Furthermore, "a court will not substitute its
---------------------
4. UNOCAL, SUPRA note 3, at 957; CRTF CORP. V. FEDERATED DEP'T STORES, INC.,
683 F. Supp. 422, 438-39 (S.D.N.Y. 1988).
5. PARAMOUNT COMMUNICATIONS V. QVC NETWORK, 637 A.2d 34, 48 (Del. 1993)
(holding that when a corporation undertakes a transaction which will cause
a change in corporate control or a break-up of the corporate entity, the
directors' obligation is to seek the best value reasonably available to the
stockholders).
6. XXXXX, SUPRA note 3, at 1350-55, and the cases cited therein.
7. XXXXXXX X. XXXXX, 473 A.2d 805, 812 (Del. 1984).
XXXXXXXXXXX XXXXX & XXXXXXXX LETTERHEAD
Board of Directors
Xxxx-Xxxxx Company
February 13, 1996
Page 5
judgment for that of a board if the latter's decision can be 'attributed to any
rational business purpose'."(8)
Under the business judgment rule, in the corporate control context, however, the
directors of a corporation owe an "enhanced duty" of loyalty(9) and,
consequently, in a legal proceeding challenging the actions of the directors,
the directors must show "that they had reasonable grounds for believing that a
danger to corporate policy and effectiveness existed" and that "the defensive
measures adopted were reasonable in relation to the threat posed."(10) The
first part of this burden is placed on the directors to show that they acted in
good faith and made a reasonable investigation of the relevant facts before
acting on the matter in question. If this burden is met, then the party
attacking the action of the directors must carry the ultimate burden of
proof.(11) Based on this formula, it seems clear that a carefully handled
business decision will be protected under Delaware law if there is a sound,
reasonable business purpose for the action.(12) By "carefully handled", we
refer to the necessity of studiously attending to the "good faith" and
"reasonable investigation" requirements of the business judgment rule.
Pursuant to Section 141(e) of the DGCL, a director, in discharging his or her
duties, "will be fully protected in relying in good faith" upon corporation
books and records and upon "information,
---------------------
8. UNOCAL, SUPRA note 3, at 954 (citing XXXXXXXX OIL CORP. X. XXXXXX, 000 X.0x
000, 000 (Xxx. 1971)).
9. UNOCAL, SUPRA note 3, at 954.
10. XXXXX, SUPRA note 3, at 1356; UNOCAL, SUPRA note 3, at 955.
11. UNOCAL, SUPRA note 3, at 958; XXXXX, SUPRA note 3, at 1356. SEE ALSO GELCO
CORP., SUPRA note 2, 652 F. Supp. at 845.
12. SEE, E.G., PARAMOUNT, SUPRA note 5, at 45 ("[A] court applying enhanced
judicial 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 business judgment for that of the directors, but will
determine if the directors' decision was, on balance, within a range of
reasonableness.")
XXXXXXXXXXX XXXXX & XXXXXXXX LETTERHEAD
Board of Directors
Xxxx-Xxxxx Company
February 13, 1996
Page 6
opinions, reports or statements" of officers or employees of the corporation,
board committees, and experts as to matters which the directors reasonably
believe are within the professional competence of the expert. Because of
Section 141(e), a director may delegate much of the investigatory work necessary
with respect to a particular business matter. There are various tasks, however,
which, as a matter of reasonableness, should not be delegated. For example, a
director should, in our opinion, read all significant documentation related to
the matter in question rather than delegating that task and relying only on
summaries.
It is quite clear that the steps leading to adoption of a rights plan or a
significant amendment to a plan will be carefully scrutinized in any legal
challenge to determine whether the good faith and reasonable investigation
requirements have been met and whether the plan or amendment has a rational
business purpose. The following factors are significant in this regard:
1. The decision to adopt a plan or amendment as a defense mechanism to
xxxx off possible future advances will be given more deference by a
court where the decision is made prior to any hostile act by an
acquiror.(13)
2. It is more likely that a plan will be upheld if it is approved by a
board of directors, the majority of whom consist of persons who are
outside, independent directors.(14)
3. A plan must be tailored to meet the perceived negative consequences of
certain types of takeovers and cannot be so draconian that it, in
effect, prohibits all takeovers.(15)
There are a number of recent lawsuits in which stockholder rights plans have
been upheld under Delaware law(16) and several cases where
---------------------
13. XXXXX, SUPRA note 3, at 1350.
14. ID. at 1356; PARAMOUNT, SUPRA note 5, at 44; IN RE DESOTO, INC. SHAREHOLDER
LITIG., [1989-90] Fed. Sec. L. Rep. (CCH) PARA 94,964 (Del. Ch. Feb. 5,
1990).
15. UNOCAL, SUPRA note 3, at 955.
16. IN RE XXXXX FARMS CORPORATION SHAREHOLDERS LITIG., 564 A.2d 342 (Del. Ch.
1989); XXXX & XXXX, PLC X. XXXXXX CONTINENTAL,
XXXXXXXXXXX XXXXX & XXXXXXXX LETTERHEAD
Board of Directors
Xxxx-Xxxxx Company
February 13, 1996
Page 7
various plan provisions or entire plans have been found invalid under the laws
of other jurisdictions.(17) There has also been extensive litigation, much of
it under Delaware law, regarding the duty of a board to redeem rights when
certain events have occurred.(18) Substantially all of this litigation has
involved interpretation of the business judgment rule of the jurisdictions in
question.
Our understanding of the actions taken by the Board to discharge its duties may
be summarized as follows. At its November 1995 meeting, the Board considered
background materials prepared by this firm and appointed the Committee to make
its recommendation to the Board. The Committee met on at least three separate
occasions and received background materials from this firm and from its
independent investment banking advisors, Xxxxx Xxxxxxx Inc. The Committee has
given its recommendation to the Board to authorize and adopt the Agreement. The
Board received background information and presentations from this firm and from
Xxxxx Xxxxxxx Inc. at the meeting of the Board held on February 13, 1996. We
also understand that no information has come to the attention of the Board or
the
---------------------
16.(...continued)
INC., [1987-88] Fed. Sec. L. Rep. (CCH) PARA 93,764 (Del. Ch. May 9, 1988).
17. BANK OF NEW YORK, SUPRA note 1, at 925 (again, the outcome of this case may
be different if brought today); WEST POINT-PEPPERELL INC. X. XXXXXX INC.,
711 F. Supp. 1088 (N.D. Ga. 1988) (outcome of this case may be different if
brought today under amended Ga. Code Xxx Section 14-2-601 (Xxxxxx 1994));
AVON PRODS., INC. V. CHARTWELL ASSOCS. L.P., 738 F. Supp. 686 (S.D.N.Y.)
(holding plan at issue, while scrutinized under amended sections 501 and
505 of the N.Y. Bus. Corp. Law, did not fall within the statutory
exceptions), AFF'D, 907 F.2d 322 (2d Cir. 1990).
18. IN RE DESOTO, INC. SHAREHOLDER LITIG., [1989-90] Fed. Sec. L. Rep. (CCH)
PARA 94,964 (Del. Ch. Feb. 5, 1990); XXXXX V. APPLE BANCORP, INC., [1990]
Fed. Sec. L. Rep. (CCH) PARA 95,412 (Del. Ch. Aug. 9, 1990); XXXXXX
ACQUISITION CORP. V. UNIVERSAL FOODS CORP., 708 F. Supp. 984 (E.D. Wis.)
(applying Wisconsin law, although looking to Delaware law as precedent),
AFF'D, 000 X.0x 000 (0xx Xxx.), XXXX. DENIED, 000 X.X. 000 (1989); CITY
CAPITAL ASSOCS. V. INTERCO INC., 551 A.2d 787 (Del. Ch. 1988); GRAND METRO.
PUB. LTD. X. XXXXXXXXX CO., 558 A.2d 1049 (Del. Ch. 1988); IN RE XXXXX
FARMS CORPORATION SHAREHOLDERS LITIGATION, SUPRA note 16.
XXXXXXXXXXX XXXXX & XXXXXXXX LETTERHEAD
Board of Directors
Xxxx-Xxxxx Company
February 13, 1996
Page 8
Company to the effect that any person or group is interested in acquiring the
Company's shares other than for investment purposes.
In our view, the Board, after the presentations made today by the legal and
investment banking experts, will be in a reasonable position to make final
determinations and a decision on authorizing the Agreement.
CONCLUSION
Based upon and subject to the foregoing, it is our opinion that the Board has
the power to authorize the Agreement, and that the Delaware business judgment
rule will be applicable to protect the Board in connection with a decision by it
to authorize the Agreement.
Any future action or inaction by the Board with respect to the exercise of
discretion under the Agreement will be judged in light of all the relevant facts
and circumstances and the state of the law then applicable. No opinion is
expressed with respect to such future action or inaction.
Although we are not licensed to practice law in the State of Delaware, we
consider ourselves to be knowledgeable in matters of Delaware statutory and case
law as it relates to rights plans such as the Agreement.
Our opinion is solely for the benefit of the Board and each of its members and
may not be relied upon in any manner or for any purpose by any other person or
entity. This opinion speaks only as of the date above written, and we hereby
expressly disclaim any duty to update any of the statements made herein.
Very truly yours,
/s/ XXXXXXXXXXX XXXXX & XXXXXXXX
XXXXXXXXXXX XXXXX & XXXXXXXX
