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finding declaratory relief claim challenging the statutory validity of a rights plan to be ripe
Summary of this case from In re Allergan, Inc.Opinion
Civil Action No. 17803.
Date Submitted: September 27, 2000.
Date Decided: October 10, 2000.
Michael Hanrahan, Gary F. Traynor, and Paul A. Fioravanti, Jr., of PRICKETT, JONES ELLIOTT, Wilmington, Delaware; OF COUNSEL: Terry Rose Saunders, Chicago, Illinois, Attorneys for Plaintiff.
Jesse A. FINGER, Finkelstein and J. Travis Laster, of RICHARDS, LAYTON Wilmington, Delaware, Attorneys for Defendant.
MEMORANDUM OPINION
This lawsuit challenges a "poison pill" Rights Agreement (the "Rights Plan" or, simply, the "Plan") between defendant Hilton Hotels Corporation and ChaseMellon Shareholder Services L.L.C. adopted by the Hilton board of directors on November 29, 1999. Plaintiff Leonard Loventhal Account (the "Trust") brings the action individually and as a class action on behalf of all holders of Hilton common stock on November 29, 1999. The complaint asserts five claims related to the Rights Plan. Pending before me is defendant Hilton's motion to dismiss.
The Delaware courts first examined and upheld the right of a board of directors to adopt a poison pill rights plan fifteen years ago in Moran v. Household International, Inc. Since that decision, others have followed which affirmed the validity of a board of directors' decision to adopt a poison pill rights plan. Today, rights plans have not only become commonplace in Delaware, but there is not a single state that does not permit their adoption.
Moran v. Household International, Inc., Del. Ch., 490 A.2d 1059 (1985), aff'd, Del. Supr., 500 A.2d 1346 (1985).
See, e.g., Revlon, Inc. v. MacAndrews Forbes Holdings, Inc., Del. Supr., 506 A.2d 173 (1985).
See, e.g., Va. Code Ann. § 13.1-646 (1999); Ga. Code Ann. § 14-2-624(c) (1999); N.J. Stat. Ann. § 14A:7:7 (1999); Wis. Stat. § 180.0624 (1999); Cob. Rev. Stat. § 7-106-205 (1999); N Y Bus. Corp. Law § 505(a)(2) (Consol. 1999); Dynamics Corp. of Am. v. CTS Corp., 805 F.2d 705, 718 (7th Cir. 1986) (Indiana law); Georgia-Pacific Corp. v. Great N. Nekoosa Corp., 728 F. Supp. 807, 811 (D. Me. 1990) (Maine law); Realty Acquisition Corp. of Am. v. Property Trust of Am., [1990 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 95, 245 at 96, 081-82 (D. Md. Oct. 27, 1989) (Maryland law); Harvard Indus. v. Tyson, [1986-1987 Transfer Binder] Fed. Sec. L. Rep. (CCH) ¶ 93, 064 at 95, 294 (E.D. Mich. 1986) (Michigan law).
Plaintiff does not challenge recent innovations found in the Rights Plan, such as the flip-in feature, the grand-fathering provision, or the exchange option, all developed since the announcement of Moran fifteen years ago. Rather, plaintiff challenges five fundamental aspects of the Rights Plan, four of which have existed since the earliest days of the poison pill.
The plaintiff asserts that: (i) the Rights Plan is not a valid and enforceable contract between Hilton and Hilton's common stockholders (the "Stockholders") because the Stockholders are not a party to or bound by the Rights Plan ("Claim I"); (ii) the Rights Plan imposes transfer restrictions on Hilton common stock in violation of 8 Del. C. § 202 and Hilton's by-laws ("Claim II"); (iii) Hilton has violated section 158 of the Delaware General Corporation Law (the "DGCL"), 8 Del. C. § 158, Hilton's by-laws (the "by-laws"), and 6 Del. C. § 8-401 by not issuing "clean" and unlegended stock certificates for shares of Hilton common stock upon request ("Claim III"); (iv) the Rights Plan violates 8 Del. C. § 151 and 242 by altering all shares of Hilton common stock and the rights of the holders of those shares without an amendment of Hilton's certificate of incorporation ("Claim IV"); and, (v) the Rights Plan violates 8 Del. C. § 102 (b)(7) and 141(a) and Hilton's certificate of incorporation by attempting to eliminate any liability that may accrue to the Hilton board of directors (individually, the "Hilton Directors" and collectively, the "Hilton Board") ("Claim V").
Hilton has moved to dismiss the complaint. It relies primarily on the doctrine of stare decisis and the established line of cases beginning with Moran, discussed in greater detail below, to argue for the dismissal of Claims I, II, III, and IV. Alternatively, Hilton contends that the plaintiff fails to state a claim upon which relief can be granted. Hilton has moved to dismiss Claim V based on the approval of similar provisions by the Delaware courts. Hilton also argues that each claim is barred by the equitable doctrines of acquiescence and laches. The plaintiff has cross-moved for summary judgment on Claim I.
For reasons more fully described below, I grant Hilton's motion to dismiss in its entirety, thereby rendering plaintiffs motion for summary judgment on Claim I moot.
I. FACTUAL BACKGROUND
The plaintiff, the Trust, has been a holder of Hilton common stock from before November 29, 1999, the date that the Rights Plan was adopted by the Hilton Board, to the present. Hilton is a Delaware corporation that owns, franchises, and manages hotels worldwide. Its total market capitalization is approximately $4 billion. The Hilton Board is composed of 14 members, all elected to 3 year terms.
The Rights Plan, adopted by the Hilton Board on November 29, 1999, is actually the third such agreement Hilton has entered into. The Hilton Board first adopted a rights plan on July 14, 1988 (the "1988 Plan"), valid for ten years until it expired on July 27, 1998. On July 9, 1998, in anticipation of the expiration of the 1988 Plan, the Hilton Board adopted a second rights plan (the "1998 Plan") that would also be valid for ten years until July 27, 2008. The 1998 Plan included among its terms a provision that the 1998 Plan would terminate if Hilton entered into a merger or other acquisition that was approved by the Hilton Board.
On September 8, 1999, Hilton announced that it had entered into an agreement and plan of merger dated September 3, 1999, with Promus Hotel Corporation ("Promus"). Under the terms of the 1998 Plan, the closing of the Hilton-Promus merger would terminate that plan. As a result, on November 29, 1999, the Hilton Board adopted the current Rights Plan. The parties to the Rights Plan were Hilton and ChaseMellon Shareholder Services L.L.C. as Rights Agent. On November 30, 1999, the stockholders of Hilton and Promus voted in favor of the merger. The merger became effective later that day.
As the popularity of the poison pill defense has grown among Delaware directors over the past fifteen years, plans once described as "novel and complicated" have become increasingly commonplace and rudimentary. Presently, practitioners can look to numerous corporation law guides and treatises for examples and explanations of the basic provisions and forms of this popular takeover defense mechanism. Claims I, II, III, and IV involve provisions of the Rights Plan that are commonly found in many, if not most, models of poison pill rights plans. Claim V challenges a provision that is less common in rights plans, but common in other types of agreements often entered into by Delaware corporations.
Moran v. Household International, Inc., Del. Ch., 490 A.2d 1059, 1065 (1985).
See 3 R. Franklin Balotti Jesse A. Finkelstein, The Delaware Law of Corporations Business Organizations at F-5-183 to F-5-184 (3d ed. 1998 and Supp. 2000); Joy Marlene Bryan, Corporate Anti-Takeover Defenses: The Poison Pill Device at 3-11, 3-73 to 3-75, 3-126 to 3-128, 3-180 to 3-181 (1999); 2 Arthur Fleischer, Jr. Alexander R. Sussman, Takeover Defense Ex. 15 at Ex. 186 to Ex. 187 (6th ed. 2000); 2 Fletcher Corporation Forms Ann. 1722.5 at 29-30 (4th ed. 1995 Supp. 2000); 5 Martin Lipton Erica H. Steinberger, Takeovers Freezeouts at H-17 to H-20 (1999).
The Rights Plan has a structure similar to many other poison pill rights plans that have been adopted since Moran. Under the Rights Plan, each shareholder receives in the form of a dividend authorized by the Hilton Board one preferred share purchase right (a "Right" held by a "Right Holder") for each share of common stock outstanding as of November 30, 1999. Initially, the Rights attach to Hilton's outstanding common shares (the "Hilton common shares"), and each Right entitles the holder to purchase for $80 one one-hundredth of a share of Series A Junior Participating Preferred Stock (the "Preferred Stock") having the rights, powers and preferences set forth in the Certificate of Designations. Upon the occurrence of certain triggering events, including the acquisition of 20 percent or more of Hilton common stock by any person or affiliated group, the Rights entitle the Right Holder to purchase two shares of Hilton common stock or other securities at half-price. This is designed to massively dilute the holdings of the unwanted, potential acquiror.
See, e.g., Bryan, The Delaware Law of Corporations Business Organizations, at 3-3 3, 3-93 to 94, 3-147, 3-196 (includes the rights plans of Cooper Tire Rubber Company, Service Merchandise Company, Inc., Ben Jerry's Homemade, Inc., and Barnes Noble, Inc.).
The genesis of this lawsuit is intriguing. It was precipitated by an exchange of correspondence following the adoption of the Rights Plan by the Hilton Board. On November 30, 1999, Steven F. Bollenbach, the president and chief executive officer of Hilton, sent a letter to each Hilton stockholder informing them of the Rights Plan (the "Bollenbach Letter") and enclosing the Summary of Rights to Purchase Preferred Shares (the "Summary of Rights"). In this letter, Bollenbach stated that the Rights Plan had been adopted by the Hilton Board and that "[t]his new plan is substantially similar to the prior plan with changes deemed appropriate as a result of the Promus merger." The letter continued,
[n]o action on your part is required at this time, and no money should be sent to Hilton. The rights will automatically attach to the shares of Common Stock you hold and will trade with them. There is no need to send in your certificates to have this reference added. You will be notified if the Rights are ever triggered and become exercisable.
Compl. Ex. C.
In response to this letter and the attached Summary of Rights, the Trust wrote back to Bollenbach in a letter dated January 18, 2000 (the "Trust Letter") to inform Hilton that the Trust "does not accept these rights that Hilton is attempting to attach to the Trust's shares of Hilton common stock. The Trust does not consent to being deemed or treated as an owner of rights and does not agree that the rights may be attached to or trade with the shares of Hilton common stock that the Trust owns." The Trust Letter further asserted that the Trust refused to be treated as an owner of rights associated with the Rights Plan, to have its Hilton share certificates evidence the Rights or be deemed "Rights Certificates," or to have a legend relating to the Rights placed on any stock certificates for shares owned by the Trust or any transferee of the Trust. The Trust separately requested that 100 shares of Hilton common stock owned by the Trust be registered in record in the name of the Trust.
Compl. Ex. D.
On February 16, 2000, the Trust received from Hilton a stock certificate (the "Certificate") with a legend incorporating the terms of the Rights Plan and indicating that the Certificate evidences Rights that are attached to the shares of Hilton common stock. On February 20, 2000, the Trust filed the current action against Hilton.
II. ANALYSIS
A. The Legal Standard on a Motion to Dismiss
A motion to dismiss under Court of Chancery Rule 12(b)(6) will be granted where it appears with "reasonable certainty" that the plaintiff could not prevail on any set of facts that can be inferred from the pleadings. The plaintiff, however, is entitled to all reasonable inferences that can be drawn from the complaint.
Solomon v. Path Communications Corp., Del. Supr., 672 A.2d 35, 38 (1996) (citing In re USA Cafes, L.P. Litig., Del. Ch., 600 A.2d 43, 47 (1991)).
Id. (citing In re USA Cafes, 600 A.2d at 47).
The plaintiff has moved for summary judgment on Claim I. Summary judgment will only be granted where the moving party demonstrates the absence of genuine issues of material fact and that it is entitled to judgment as a matter of law. On any application for summary judgment, the Court must view all of the evidence in the light most favorable to the non-moving party. The fact that the parties have filed cross motions does not alter that standard. The Court retains the discretion to deny both motions if it decides that the record requires a more thorough development to clarify the law or its application to the case.
Ch. Ct. R. 56(c); Gilbert v. El Paso Co., Del. Supr., 575 A.2d 1131, 1142 (1990).
Brown v. Ocean Drilling Exploration Co., Del. Supr., 403 A.2d 1114, 1115 (1979).
Bethany Village Owners Ass'n, Inc. v. Fontana, Del. Ch., C.A. No. 15539, mem. op. at 12, Chandler, C. (Jan. 10, 2000).
See Alexander Indus., Inc. v. Hill, Del. Supr., 212 A.2d 917, 918-19 (1965).
With those standards in mind, I turn to the issues involved in this case. Each of the plaintiffs five claims attacks different aspects of the Rights Plan. As such, I will analyze each claim in turn after a brief discussion of the stare decisis doctrine.
B. The Doctrine of Stare Decisis
The Delaware Supreme Court has described the stare decisis doctrine as follows:
when a point has been once settled by decision it forms a precedent which is not afterwards to be departed from or lightly overruled or set aside. . . . This rule [of stare decisis] is grounded upon public policy and should be followed except for urgent reasons and upon clear manifestation of error. Its support rests upon the vital necessity that there be stability in our courts in adhering to decisions deliberately made after careful consideration.
Oscar George, Inc. v. Potts, Del. Supr., 115 A.2d 479, 481 (1955) (citations omitted).
As a general rule, the doctrine of stare decisis is applicable "[t]o a decision of a court higher in rank, or of the same rank, but not to a decision of a court lower in rank than the court in which the decision is cited as precedent." The Court of Chancery has also discussed stare decisis and held that "[t]he prerequisites necessary for the application of the doctrine . . . are: a judicial opinion by the court, on a point of law, expressed in a final decision."
20 Am. Jur. Courts § 201 (1965).
State v. Phillips, Del. Ch., 400 A.2d 299, 308 (1978).
The United States Supreme Court has stated that the following questions are applicable when a court considers the application of stare decisis:
whether related principles of law have so far developed as to have left the old rule no more than a remnant of abandoned doctrine; or whether facts have so changed or come to be seen so differently, as to have robbed the old rule of significant application or justification.
Planned Parenthood v. Casey, 112 S.Ct. 2791, 2808-09 (1192) (citations omitted).
Hilton argues that Moran considered and upheld the basic concept of a stockholder rights plan, including its core elements and the manner in which it operates. Nearly identical challenges to fundamental attributes of rights plans that existed in the Household rights plan are foreclosed by the powerful effect of Moran and stare decisis. I agree.
Stare decisis is not merely a narrow legal principle that can be avoided by slight adjustments to legal arguments that have previously been made in depth and definitively ruled upon. Stare decisis is not a strictly theoretical concept without important practical applications. Rather, stare decisis is founded on public policy. It forms arguably the most important tenet upon which legal reasoning rests. As the Delaware Supreme Court noted, the practical administration of justice requires that this policy be followed absent "urgent reasons and clear manifestations of error."
Additionally, plaintiff can make no tenable argument disputing the enduring vitality of Moran. More than 2,300 rights plans currently in effect attest to the continuing application and relevance of that decision fifteen years ago. In this case, the plaintiff has challenged several provisions and aspects of the Hilton Rights Plan that were not only contained in the Household rights plan, but figured prominently in the litigation that led to the decisions of the Delaware courts. This case therefore provides this Court the opportunity to reaffirm the basic principles of stare decisis and apply it to several of the issues in dispute.
C. Is Hilton's Poison Pill Rights Plan Enforceable Against Common Stockholders Who Are Not a Party to that Plan?
The plaintiff Trust does not challenge the Hilton Board's statutory authority to adopt the Rights Plan, but rather asserts that the Rights Plan "is not a contract with or enforceable against the Hilton Stockholders." The Trust bases this claim on four separate contentions: (i) the Hilton stockholders are not a party to the Rights Plan; (ii) there is no mutuality of obligation and no consideration between Hilton and the Hilton stockholders with respect to the Rights Plan; (iii) the Rights Plan is an unconscionable contract of adhesion; and, (iv) the Rights Plan is an illusory contract.
The Trust specifically points to section 16 of the Rights Plan ("section 16") as evidence that the Plan purports to create a direct agreement between Hilton and the Hilton stockholders. The Trust challenges the ability of Hilton to enforce section 16 of the Rights Plan against the Hilton stockholders without a formal acceptance of the Rights Plan by the Hilton stockholders. Section 16 states:
AGREEMENT OF RIGHT HOLDERS. Every holder of a Right by accepting the same consents and agrees with [Hilton] and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of the [Hilton common stock]; (b) as of and after the Distribution Date, the Right Certificates are transferable only on the registry books of the Rights Agent if surrendered at the office of the Rights Agent designated for such purpose, duly endorsed or accompanied by a proper instrument of transfer with all required certifications completed; and (c) [Hilton] and the Rights Agent may deem and treat the Person in whose name the Right Certificate (or, prior to the Distribution Date, the associated [Hilton common stock] certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Right Certificates or the associated [common stock] certificate made by anyone other than the Company nor the Rights Agent) for all purposes whatsoever, and neither [Hilton] nor the Rights Agent shall be affected by any notice to the contrary.
Rights Plan, 25-26.
The Trust's argument fundamentally misunderstands the issuance of securities in general and the operation of the Rights Plan in particular. Under Moran and Revlon, the Hilton Board has the power to adopt the Plan under 8 Del. C. § 141 and 122 (13). As Moran clearly held, the power to issue the Rights to purchase the Preferred Shares is conferred by 8 Del. C. § 157
Moran, 500 A.2d at 1353; Revlon, 506 A.2d at 180. Section 141(a) states in relevant part: The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. 8 Del. C. § 141 (a). The pertinent part of § 122 states: Every corporation created under this chapter shall have the power to: (13) Make contracts, including contracts of guaranty and suretyship, incur liabilities, borrow money at such rates of interest as the corporation may determine, issue its notes, bonds, and other obligations, and secure any of its obligations by mortgage, pledge or other encumbrance of all or any part of its property, franchises, and income,. . . ." 8 Del. C. § 122 (13).
Moran, 500 A.2d at 1351 n. 7. 8 Del. C. § 157 explains in relevant part: Subject to any provisions in the certificate of incorporation, every corporation may create and issue, whether or not in connection with the issue and sale of any shares of stock or other securities of the corporation, rights or options entitling the holders thereof to purchase from the corporation any shares of its capital stock of any class or classes, such rights or options to be evidenced by or in such instrument or instruments as shall be approved by the board of directors.
Here, each common shareholder has been issued a dividend properly authorized by the Hilton Board. The dividend received by each Hilton common shareholder contains a validly issued Right that attaches to and trades along with each share of Hilton Common Stock then outstanding until the occurrence of certain triggering events detailed in the Rights Plan. Moran specifically approved this mechanism. The Hilton Board validly relied on its business judgment to adopt the Rights Plan. There is simply no legal requirement that the Hilton shareholders must be a party to the Rights Plan or formally vote to accept the Rights Plan to ensure that the Plan is enforceable. Moran clearly decided this issue.
Moran, 500 A.2d at 1353.
The Trust points to the existence of section 16 as evidence that the Rights Plan requires the agreement of the Hilton stockholders. Section 16, however, is virtually identical — except for certain cosmetic changes — to section 16 of the Household rights plan litigated and ruled upon in Moran. Regardless of whether the Supreme Court made explicit reference to section 16 of the Household rights plan in Moran, stare decisis encompasses the evidentiary effect of that provision. Moran ruled upon the same legal issues as presented in Claim I, and section 16 existed in the Household rights plan in virtually the identical form as it exists today in Hilton's Plan. Section 16, therefore, does not alter the application of stare decisis to Claim I. The motion to dismiss Claim I is, therefore, granted. D. Has Hilton Imposed An Impermissible Transfer Restriction On Its Common Stock In Connection With the Adoption of the Rights Plan?
Section 16 of the Household Plan reads as follows: AGREEMENT OF RIGHT HOLDERS. Every holder of a Right by accepting the same consents and agrees with [Hilton] and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of the Common Stock; (b) after the Distribution Date, the Right Certificates are transferable only on the registry books of the Rights Agent if surrendered at the principal office of the Rights Agent, duly endorsed or accompanied by a proper instrument of transfer; and (c) the Company and the Rights Agent may deem and treat the Person in whose name the Right Certificate (or, prior to the Distribution Date, the associated Common Stock Certificate) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Right Certificates or the associated Common Stock Certificate made by anyone other than the Company nor the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent shall be affected by any notice to the contrary.
Before analyzing whether the Rights Plan contains a permissible transfer restriction under § 202, the Court must first consider whether the Rights Plan actually contains a transfer restriction at all. The Trust presents three arguments in support of the existence of such a restriction: (i) the Rights Plan prevents the transfer of Hilton common stock apart from its associated Rights; (ii) Hilton attempted, albeit unsuccessfully, to comply with § 202, by stapling the Summary of Rights to the common stock certificates, legending the common stock certificates, incorporating the Rights Plan by reference into the common stock certificates, and including section 16 in the Rights Plan which purports to create an agreement concerning the Rights among Hilton and the Hilton common stockholders; and, (iii) Hilton's refusal to register for transfer and transfer shares of Hilton common stock without a concomitant transfer of the accompanying Rights amounts to de facto proof of a transfer restriction.
(1) Does the Doctrine of Stare Decisis Bar This Claim?
First, I must question whether the Trust has effectively distinguished this claim from the transfer restriction claim brought and ruled upon in Moran. The transfer restriction argument was put forward, fully litigated, and definitively ruled upon in Moran. This Court wrote in Moran:
[p]laintiffs argue that if the effect of the Rights Plan is to restrict alienability of shares already issued it runs afoul of § 202(b) of the [DGCL] which prohibits restrictions on the transfer or registration of securities without the consent of the holders thereof. But, . . . the Rights Plan does not affect the trading of Household shares or the registration of shares once traded. The negotiability of shares is not conditioned and shares remain freely transferable as provided by § 159 of the. . . . The Household Rights Plan has no [significantly restrictive] effect on the common shares to which it attaches.
Moran, 490 A.2d at 1079.
Moran, 490 A.2d at 1079, aff'd, 500 A.2d 1346.
This Court has recognized that since Moran, corporate boards have inserted new provisions into rights plans that require judicial scrutiny. The Trust does not argue, however, that the alleged transfer restriction involves any innovations or devices that were not also present in Household's rights plan. In fact, no substantive factual difference exists between the relevant aspects of the Household rights plan and the Hilton Rights Plan with regard to this claim. Instead, the Trust asserts that it challenges aspects of the Rights Plan "based on legal theories not considered or determined in [ Moran]."
Mentor Graphics Corp. v. Quickturn Design Systems, Inc., Del. Ch., 728 A.2d 25, 27 (1998), aff'd, Del. Supr., 721 A.2d 1281 (1998).
Pl.'s Br. in Opp'n, 42.
The doctrine of stare decisis cannot be defined so narrowly. The plaintiff in Moran directly challenged the Household rights plan as imposing an impermissible transfer restriction on Household common stock under § 202(b), just as this plaintiff attempts to do before this Court. Moran ruled conclusively on this issue and this claim is properly barred by stare decisis. (2) Even if Stare Decisis Is Not Applicable Here, Should This Claim Still Be Dismissed?
Statutorily speaking, 8 Del. C. § 202 defines what constitutes a transfer restriction on stock under Delaware law. More generally, one set of commentators has defined transfer restrictions as "provisions which prevent or establish preconditions for the disposition by stockholders of their stock or other securities." The Trust's arguments supporting the existence of a transfer restriction can be summarized as (i) the Rights Plan prevents the transfer of Hilton common stock apart from the Rights regardless of the desire of the Right Holder to sell his shares of common stock separately; (ii) Hilton's attempts to comply with § 202 evidence their recognition of the transfer restriction; and (iii) Hilton's refusal to transfer shares of Hilton common stock without a concomitant transfer of the accompanying Rights amounts to de facto proof of a transfer restriction.
2 David A. Drexler, Lewis S. Black, Jr., A. Gilchrist Sparks, III, Delaware Corporation Law and Practice § 22.01 (1999).
Regardless of whether Moran bars this Claim due to stare decisis, I still find the Moran reasoning persuasive. As the Moran Court noted in assessing the effects of the rights plan on the price of Household common stock:
The Rights Plan does not destroy the assets of the corporation. The implementation of the Plan neither results in any outflow of money from the corporation nor impairs its financial flexibility. It does not dilute earnings per share and does not have any adverse tax consequences for the corporation or its stockholders. The Plan has not adversely affected the market price of Household's stock.
Moran, 500 A.2d at 1354.
The plaintiff has never asserted that its common stock is inalienable because of the Rights Plan. At any moment that this plaintiff wishes to sell its Hilton shares on the New York Stock Exchange, there is absolutely no evidence to suggest that it will not be able to find a buyer at the then prevailing market determined price. Further, Hilton has not imposed a restriction of any kind that limits the pool of potential buyers or this seller's ability to sell at any time to any of those potential buyers. The motion to dismiss Claim II is, therefore, granted.
E. Has Hilton Unlawfully Legended the Hilton Common Shares?
The Trust's third claim alleges that Hilton has violated 8 Del. C. § 158, 6 Del. C. § 8-401, and sections 24 and 25 of Hilton's by-laws by altering and legending the certificates for Hilton common stock and restricting the registration or transfer of Hilton common stock.
The Trust first contends that Hilton has violated 8 Del. C. § 158 by withholding from the Trust a proper certificate that does not contain the inappropriate legend referring to the Rights. Section 158 provides in relevant part:
The shares of a corporation shall be represented by certificates. [E]very holder of stock represented by a certificate and upon request every holder of uncertificated shares shall be entitled to a have a certificate signed by, or in the name of the corporation. representing the number of shares registered in certificate form.
The plaintiff relies on Bender v. Memory Metals, Inc. to support this claim. In Bender, the CEO of Memory Metals, Neil Rogen, sold 100,000 shares in the company to Susan Bender in a private transaction for disputed consideration. Because the 100,000 shares sold to Bender were not registered under the Securities Act of 1933 (the "1933 Act"), the certificate representing her shares was imprinted with a restrictive legend thereby limiting the negotiability of the shares unless they were either sold under an effective registration statement or, in the opinion of counsel acceptable to Memory Metals, exempted from registration under the 1933 Act.
Bender v. Memory Metals, Inc., Del. Ch., 514 A.2d 1109 (1986).
Bender sought to sell the shares, but Memory Metals refused to provide an opinion that the transfer was exempt under the 1933 Act. Bender sued Memory Metals arguing that Memory Metals owed her a duty to register the transfer and as a precondition of transfer, to issue a "clean" certificate pursuant to UCC § 8-401 and § 158 of the DGCL. Registration of the transfer would have entailed the issuance of new certificates without the restrictive legend. Memory Metals argued that the transfer was not "rightful" under § 8-401(1)(e) because it was not exempt under the 1933 Act because of the dispute over the original transfer to Bender. The Court granted summary judgment in favor of Bender in holding that the transfer at issue was exempt under the 1933 Act given the undisputed facts and because there was no "valid issue" as to whether the transfer was rightful. The Court observed:
what the defendant has attempted to do is to contrive an issue of 'rightfulness' under UCC § 8-401(e), not in order to protect legitimate interests of its own, but to further the individual interests of its Chief Executive Officer and largest shareholder, Rogen.Bender is easily distinguished from the present case. Bender considered a transfer restriction imposed by the defendant under § 202(c)(5). The legend that the Trust challenges refers not to a § 202 transfer restriction, but to a § 157 legend pertaining to the existence of the Rights. As discussed above, Hilton has not imposed a transfer restriction on the Hilton common shares.
Id. at 1117.
Further, Bender actually supports the arguments put forward by Hilton, not the Trust. In Bender, the Court recognized that 8 Del. C. § 158 "includes the right to a proper certificate without a legend or restriction, where such a legend is no longer appropriate." Here, the legend placed on the certificate is authorized by § 157 of the DGCL and was validly approved by the Hilton Board in accordance with the Delaware Supreme Court's ruling in Moran. The legend continues to evidence the validly issued Rights and is therefore "appropriate."
Id. at 1115 (emphasis added).
The Trust next argues that Hilton has violated sections 24 and 25 of its bylaws by altering the certificate without authorization to evidence a new security containing the Rights. Section 24 of Hilton's by-laws provides that "[e]very holder of stock in a [sic] Corporation shall be entitled to have a certificate . . . certifying the number of shares owned by the holder in such Corporation." Section 25 of Hilton's by-laws provides:
Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books.
These provisions confer "a right to a certificate." The Trust argues that section 24 "does not say that Hilton may have the certificate also evidence some other security." The Trust also contends that section 25 "makes no provision for Hilton to add a legend incorporating into the new certificate the terms of an agreement governing some other security." Yet, sections 24 and 25 also say nothing that prevents Hilton from placing a legend on its shares. The legend in question is in compliance with DGCL § 157 in a form specifically endorsed by Moran. The plaintiffs arguments are without merit.
Pl.'s Reply Br., 14.
Pl.'s Reply Br., 14-15.
Moran, 500 A.2d at 1351-1354.
The Trust finally argues that Hilton has violated 6 Del. C. § 8-401 (1) by failing to register the transfer of a certificated security when presented with a request to register transfer. Section 8-401 (UCC § 8-401) states in relevant part that:
The Court recognized in Bender that "it is reasonable to construe the term "register to transfer,' as used in § 8-401 of the UCC, to include those ministerial acts that normally accompany such registration [of transfer], including, where applicable, the issuance of a new certificate." Bender v. Memory Metals, Inc., 514 A.2d at 1115.
(1) If a certificated security in registered form is presented to the issuer with a request to register transfer or an instruction is presented to the issuer with a request to register transfer, pledge or release, the issuer shall register the transfer, pledge, or release as requested if:
(a) The security is indorsed or the instruction was originated by the appropriate person or persons (Section 8-308);
(b) Reasonable assurance is given that those indorsements or instructions are genuine and effective (Section 8-402);
(c) The issuer has no duty as to adverse claims or has discharged the duty (Section 8-403);
(d) Any applicable law relating to the collection of taxes has been complied with; and
(e) The transfer, pledge or release is in fact rightful or is to a bona fide purchaser.
6 Del. C. § 8-401 (UCC § 8-401).
HIlton, however, has never attempted to restrict the alienability of the shares by refusing to register a proposed transfer. Hilton rsponded to the plaintiff's request to transfer by issuing a legended certificate for Hilton common stock. Hilton has only attempted to register a transfer in accordance with the terms of the Rights Plan, 157 of the DGCL, and Moran. HIlton's placement of an "appropriate legend on a share certificate upon transfer does not constitute a refusal to register that transfer. Accordingly, each of the Trust's arguments with regard to Claim III are without merit and, therefore, the motion to dismiss Claim III is granted.
F. Has the Rights Plan Impermissibly Altered Hilton's Common Stock Without an Amendment to the Hilton Certificate of Incorporation?
In Claim IV, the plaintiff asserts that, through the Rights Plan, Hilton has impermissibly altered the Hilton common stock and the rights of its holders without the required stockholder-approved amendment to Hilton's certificatte of incorporation in violation of 8 Del. C. § 151 and 242. This issue was raised, analyzed, and rejected by this Court in its Moran decision. Vice Chancellor (now Justice) Walsh wrote that, "the Rights Plan [is not] invalid because it . . . attains the same end as a fair price amendment that would have equired shareholder approval. Under the doctrine of "independent legal significance' if an action can be accomplished under one section of the [DGCL] it need not satisfy the requirements of another section which permits the same result." Amazingly, the plaintiff actually calls attention to this language.
Moran, 490 A.2d at 1077-78, accord 500 A.2d at 1351-54.
Moran, 490 A.2d at 1077 (citations omitted).
Pl.'s Reply Br., n. 32, p. 26 ("[ Moran] make[s] clear [that] use of a board of directors' power to amend the certificate of incorporation through the issuance of blank check preferred that is not a sham can supply the necessary amendment to the certificate required to validate the board's action.").
With regard to the need of an amendment to Hilton's certificate of incorporation, the action taken by the Hilton Board was precisely the same as that taken by the Household board of directors. Both boards adopted rights plans that included the issuance of rights in the form of junior preferred stock validly issued pursuant to §§ 151 and 157 of the DGCL. In Moran, no amendment was necessary. Correspondingly, no charter amendment is required here either. Stare decisis firmly applies and the motion to dismiss Claim IV is, therefore, granted.
Moran, 500 A.2d at 1351-54.
G. Is Section 31 of the Rights Plan Invalid Under Delaware Law?
In the plaintiffs fifth and final claim, the Trust seeks declaratory relief that section 31 of the Rights Plan ("section 31") violates 8 Del. C. § 102 (b)(7) and 141(a) as well as the Hilton certificate of incorporation.
Section 31 states:
DETERMINATION AND ACTIONS BY THE BOARD OF DIRECTORS. The Board of Directors of the Company shall have the exclusive power and authority to administer this Agreement and to exercise the rights and powers specifically granted to the Board of Directors of the Company or to the Company, or as may be necessary or advisable in the administration of this Agreement, including, without limitation, the right and power to (i) interpret the provisions of this Agreement, and (ii) make all determinations deemed necessary or advisable for the administration of this Agreement (including a determination to redeem or not redeem the Rights or to amend this Agreement). All such actions, calculations, interpretations and determinations (including for purposes of clause (y) below, all omissions with respect to the foregoing) that are done or made by the Board in good faith, shall (x) be final, conclusive and binding on the Company, the Rights Agent, the holders of the Rights, as such, and all other parties, and (y) not subject the Board to any liability to the holders of the Rights.(1) Is This Claim Ripe for Adjudication?
The principal purpose of the Delaware Declaratory Judgment statute, 10 Del. C., ch. 65, is to enable the courts to adjudicate a controversy prior to the time when a remedy is traditionally available and, thus, to advance the stage at which a matter is traditionally justiciable. While courts will not entertain suits seeking an advisory opinion or an adjudication of hypothetical questions, the courts will entertain declaratory judgment actions only where the alleged facts are such that an 'actual controversy' exists and eventual litigation appears to be unavoidable. Delaware's adoption of the uniform act in 1981 does not invalidate this condition for the applicability of declaratory relief.
Rollins International, Inc. v. International Hydronics Corp., Del. Supr., 303 A.2d 660, 662 (1973).
Id.
Stroud v. Milliken Enterprises, Inc., Del. Supr., 552 A.2d 476, 479 (1989).
The standard for recognizing that an 'actual controversy' exists for the purposes of seeking declaratory relief was definitively announced by the Delaware Supreme Court in Rollins and confirmed by Stroud:
(1) It must be a controversy involving the rights or other legal relations of the party seeking declaratory relief; (2) it must be a controversy in which the claim of right or other legal interest is asserted against one who has an interest in contesting the claim; (3) the controversy must be between parties whose interests are real and adverse; (4) the issue involved in the controversy must be ripe for judicial determination.
Rollins, 303 A.2d at 662-663 (citations omitted); Stroud, 552 A.2d at 479-480.
The only issue under the 'actual controversy' standard in this case concerns whether this claim is "ripe for judicial determination." In determining whether a given claim is indeed ripe,
. . . a practical evaluation of the legitimate interest of the plaintiff in a prompt resolution of the question presented and the hardship that further delay may threaten is a major concern. Other necessary considerations include the prospect of future factual development that might affect the determination to be made; the need to conserve scarce resources; and a due respect for identifiable policies of the law touching upon the subject matter of the dispute.
Schick, Inc. v. Amalgamated Clothing and Textile Workers Union, Del. Ch., 533 A.2d 1235, 1238 (1987) (footnote omitted).
Applying those criteria as well as weighing the harms and benefits that may or may not accrue from a declaratory judgment, I conclude that Claim V is ripe for adjudication. Corporate fiduciaries must be given clear notice of what conduct is and is not allowed. No beneficial purpose is served by uncertainty with regard to fiduciary obligations. Further, this claim directly addresses the fundamental policy concerning "the accountability of directors to shareholders for breaches of fiduciary duty. The importance of this policy strongly counsels that issues in Claim V be decided promptly. (2) Is Section 31 Valid and Enforceable?
Siegman v. Tri-Star Pictures, Del. Ch., C.A. No. 9477, Jacobs, V.C. (May 30, 1989).
Id.
Claim V challenges the facial validity of section 31 under § 102 (b)(7) and § 141(a). The plaintiff asserts that section 31 violates § 102(b)(7) in three ways: (i) section 31 eliminates liability for breach of fiduciary duty through a contract unilaterally created by the Hilton Directors, not a certificate provision approved by the Hilton stockholders; (ii) section 31 eliminates the non-monetary liability of the Hilton Directors; and, (iii) section 31 eliminates liability beyond the duty of care for offenses such as breaches of the duty of loyalty, intentional misconduct, and other improper actions.
8 Del. C. § 102 (b)(7) states in relevant part that: (b). . . the certificate of incorporation may also contain any or all of the following matters: . . . (7) A provision eliminating or limiting the personal liability of a director to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, provided that such provision shall not eliminate or limit the liability of a director: (i) for any breach of the director's duty of loyalty to the corporation or its stockholders; (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (iii) [for unlawful payment of dividends or unlawful stock purchase or redemption]; or (iv) for any transaction from which the director derived an improper personal benefit. 8 Del. C. § 141(a) states in relevant part that:
The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation.
The defendant argues that "[t]he provision only applies to the Company, the Rights Agent, "the holders of the rights, as such' and other 'parties' to the agreement. Section 31 thus is not an attempt to limit liability to stockholders generally but rather only addresses claims brought under the [Rights Plan]" At oral argument, defendant's counsel further asserted that the Rights Plan only affects the rights of Hilton Shareholders/Right Holders as Right Holders and has no effect whatsoever on their rights as Hilton shareholders. The practical effect of these statements is that section 31 in no way bars any claims Hilton stockholders may bring with regard to the Rights Plan and the Hilton Board's continuing fiduciary obligations to them as shareholders. Practically speaking, therefore, section 31 has no legal significance whatsoever. Plaintiffs challenge to section 31 is, therefore, rendered moot. As such, it is unnecessary to analyze Claim V further.
Def.'s Reply Br., 29. (citations omitted).
Nevertheless, I will take this opportunity to reaffirm the principle set forth in Moran that the members of the Hilton Board, like members of every other board of directors, may not insulate themselves from liability that may accrue to them from decisions made concerning the Rights Plan, including the decision whether or not to redeem the Rights. The Moran Court noted:
[T]he Rights Plan is not absolute. When the Household Board of Directors is faced with a tender offer and a request to redeem the Rights, they will not be able to arbitrarily reject the offer. They will be held to the same fiduciary standards any other board of directors would be held to in deciding to adopt a defensive mechanism, the same standard as they were held to in originally approving the Rights Plan.
Moran, 500 A.2d at 1354. See also Unocal Corp. v. Mesa Petroleum Co., Del. Supr., 493 A.2d 946, 954-55, 958 (1985).
Regardless of section 16's affect on the rights of Hilton shareholders as Right Holders, section 16 does not affect their rights as Hilton shareholders.
I will grant the defendant's motion to dismiss Claim V, but the Order accompanying the dismissal must include explicit language that section 31 affects neither the rights of the Hilton shareholders in relation to the Hilton Board nor the duties owed by the members of the Hilton Board to the Hilton shareholders.
III. CONCLUSION
The plaintiff has failed in its attempt to overturn several of the fundamental underpinnings of the Moran decision by interpreting the doctrine of stare decisis so narrowly as to render it almost completely ineffectual. Like the Moran decision itself, stare decisis remains a powerful and enduring jurisprudential force in Delaware corporation law.
This dispute also illustrates the intense scrutiny poison pill rights plans continue to receive since Moran, thereby ensuring their vitality. Notwithstanding the clear validity of poison pill rights plans though, as the Moran Court noted, "nothing [I] say here relieves [directors] of their fundamental duties to the corporation and its stockholders. [The] use of the Plan will be evaluated when and if the issue arises." That statement remains as true today as the day it was written.
Moran, 500 A.2d at 1357.
Defendant Hilton's motion to dismiss is granted in its entirety. Counsel shall confer and agree upon an appropriate implementing Order.
The Court need not analyze the defendant's arguments that this lawsuit is barred by either the doctrine of acquiescence or laches. The plaintiff's motion for summary judgment is also rendered moot by the above-described conclusions.