Chesapeake Corp. v. Shore
771 A.2d 293 (Del.Ch. 2000)
Shorewood was a Delaware
corporation that made an offer to buy a Virginia corporation called
Chesapeake. Chesapeake's directors rejected Shorewood's offer because they
felt it was too low. In response, they made an offer to buy Shorewood.
Shorewood rejected Chesapeake's offer for the same reason.
Shorewood was worried that
Chesapeake might try a hostile takeover, so they amended their bylaws in a
number of ways to make it more difficult.
They already had a poison
pill, but added a few other things,
including a bylaw that required a supermajority of shareholder votes to
further amend the bylaws.
Chesapeake made a public tender
offer for Shorewood. They also sued
Shorewood's directors to invalidate the supermajority requirement.
Chesapeake argued that the
supermajority requirement was a breach of fiduciary duty on the part of
Shorewood's directors because it was done solely so they wouldn't lose
That's a breach of the duty
Chesapeake argued that Blasius
Industries, Inc. v. Atlas Corp. (564
A.2d 651 (1988)) required Shorewood's directors to have a compelling
justification for their actions because the directors' primary
purpose in amending the bylaws was to impede the stockholders from
exercising their franchise.
Shorewood's directors argued
that the bylaw was a perfectly legitimate takeover defense as described in Unocal Corp. v. Mesa
Petroleum Co. (493 A.2d 946 (1985)).
Unocal said that when there is a takeover
defense, the directors are under an "enhanced duty"
to show that their decisions are meant to further the welfare of the
corporation and not just to protect their jobs.
The Trial Court found for
The Trial Court found that
they should examine the problem in two steps:
First they would look at
the bylaw under the Unocal
standard to see if the supermajority requirement was a reasonable and
proportionate takeover defense considering the threat
Second, after assessing
whether the bylaw was a proportionate response under Unocal, they would determine whether Blasius'compelling justification standard
would be applicable.
The Court applied Unocal and found that inadequacy of Chesapeake's bid
posed a legitimate threat to Shorewood.
So it met the first prong
of Unocal, which asks if there
is a legitimate threat.
Then they found that the
bylaw was not reasonable in relation to the threat that Unocal posed.
So it failed the second
prong of Unocal.
The Court applied the Blasiuscompelling justification test
and found that the primary purpose of the supermajority requirement was
to interfere with or impede the shareholders. Therefore there was not compelling
justification for the bylaw and it
fails the compelling justification test.