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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
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Harrah's Entertainment, Inc.
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(Name of Registrant as Specified In Its Charter)
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International Union
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Contact: Matthew Walker 202-393-4373
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The Shareholder Rights By-Law: Giving Shareholders a
Decisive Voice.
By Leonard Chazen
Leonard Chazen is a partner at Howard, Darby & Levin in New York,
which represented Mr. Wyser-Pratte in connection with his Wallace
Computer Services proxy solicitation discussed in this article.
Shareholders in several companies are being asked to vote on an
innovative by-law that would give stockholders the last word on
whether the company should accept a premium takeover bid. The
"Shareholder Rights By-Law" was developed by Guy P. Wyser-Pratte,
an arbitrageur who often speaks out on corporate governance
issues. It would require anti-takeover defenses against certain
premium cash tender offers to be terminated after ninety days
unless shareholders approved the board's opposition to the offer.
It is reprinted below.
The by-law received substantial shareholder support at the
Wallace Computer Services (Wallace) annual meeting in November
1996, but it was apparently defeated when a large shareholder
switched its vote during the meeting from a vote for the by-law
to an abstention.(n1) Before the Wallace vote both Institutional
Shareholder Services ("ISS") and The Proxy Monitor recommended
that their subscribers vote in favor of the proposal at Wallace.
Wyser-Pratte has announced that he will seek to have shareholders
call a special meeting to adopt the by-law and change the board
of directors at Rexene Corporation, and he intends to propose the
Shareholder Rights By-Law at other corporations as well.
Controversy over the Legal Validity of the By-law
Wallace's initial response to the by-law proposal, articulated in
its preliminary proxy materials, was a flat statement that the
by-law proposal was "invalid"; and that if the by-law were
adopted by stockholders, it would "not be given effect by the
Company." In a subsequent filing with the SEC, however, Wallace
showed less confidence in its legal position. While still
referring to an opinion of counsel that the proposal was "invalid
as a matter of Delaware law," Wallace went on to say that "the
validity of the Tender Offer Proposal or any similar proposal
under Delaware law has not been considered or conclusively
resolved by the Delaware courts, and as such, there is a
possibility that the Company's position that the Tender Offer
Proposal is invalid would not survive a court challenge."
The revised language in the Wallace proxy statement
reflected the possibility that shareholders of Delaware
corporations have untapped powers to limit the board's authority
to pursue policies that lack shareholder support. Most corporate
lawyers are familiar with Section 141(a) of the Delaware General
Corporation Law, which gives the board authority to manage the
business and affairs of the corporation. Section 141 is
balanced, however, by Section 109 which authorizes stockholders
to adopt by-laws relating to the powers of stockholders and
directors. Whether Section 109 empowers stockholders to curb the
board's use of anti-takeover defenses depends on the relationship
between Section 109 and Section141(a), a subject that the
Delaware courts have never considered.
The well-known Delaware cases, upholding resistance by the target
company board to an unsolicited takeover bid, such as Paramount
Communications, Inc. v. Time, Inc.,(n2) did not resolve the legal
status of measures like the Shareholder Rights By-Law. None of
those cases involved a corporation whose stockholders had adopted
such a by-law nor did they consider the shareholders' authority
to take such an action. While the courts in those cases
generally showed great respect for the business judgment of the
board, they did not change the basic structure of Delaware law
under which the board exercises its authority within a framework
of statutes and a charter and by-laws that limit the powers of
the board.
The Moore Offer for Wallace
It seems appropriate that an effort to curb the board's
unilateral power to resist hostile takeover bids would come from
a stockholder of Wallace Computer Services, which rebuffed an
offer from Moore Corporation Limited last year despite the
apparent desire of a majority of the company's shareholders to
accept the Moore offer.
Almost 75 percent of the Wallace shares were tendered to Moore,
in response to a cash tender offer at a 45 percent premium over
the previous market price of the Wallace shares. However, Moore
could not afford to close the tender offer because Wallace has a
"poison pill" which imposes unacceptable financial penalties on a
bidder who goes over a set ownership threshold without the
approval of the board of directors. Although Moore also
persuaded shareholders to elect a slate of Moore nominees to the
board of directors by a majority vote, that too did not change
control of the company. Wallace has a staggered board on which
only one third of the members come up for reelection each year;
so in addition to electing a slate of nominees at the 1995 annual
meeting, Moore would have had to repeat this feat in 1996 to
change control of the board through proxy solicitations. Moore
did try to amend the by-laws to enable shareholders to remove the
existing board and elect a new majority at a single annual
meeting, but it was unable to get the 80 percent stockholder vote
needed to make that change.
After failing to persuade the Delaware federal district court to
order the Wallace board to redeem its poison pill, Moore ended
its attempt to acquire Wallace in 1995. Some shareholders hoped
that Moore would sustain its interest for another year and make
an attempt to gain control of Wallace through a second proxy
solicitation in 1996. But on August 6, a day before the deadline
for nominating candidates to run for director at the 1996 annual
meeting, Moore announced that it was abandoning its efforts to
acquire Wallace because of a change in business strategy.
A Description of the Shareholder Rights By-Law.
It was at this point that Mr. Wyser-Pratte made his proposal to
amend the Wallace by-laws to limit the authority of the Wallace
board to carry out anti-takeover defenses if a situation like the
Moore bid arises in the future. As formulated by Wyser-Pratte,
the By-Law (see below), which he calls the Shareholder Rights
By-Law, would apply to cash tender offers for all the company's
shares at least a 25 percent premium above the average market
price of the company's shares during the preceding thirty days.
If the company received an offer to which the Shareholder Rights
By-Law applied, the by-law would prohibit the company from
continuing defensive measures against the tender offer more than
ninety days after the offer is received, unless shareholders
approved the board's opposition to the offer. To assure that all
stockholders have a fair opportunity to tender their shares into
the offer, the by-law would only apply to offers that remain open
for at least ten business days after the end of the ninety-day
period. Similarly, if the board of directors calls a
stockholders meeting to seek approval to continue defensive
measures against the offer, the record date must be at least five
business days after the company files its statement of position
on the offer with the SEC. This provision is designed to ensure
that stockholders who purchase shares after the offer is
announced have a fair opportunity to vote those shares.
To see how the Shareholder Rights By-Law would work in
practice, it is helpful to imagine what would have happened if
the by-law had been in effect when Moore made its offer for
Wallace. Clearly the Board would have had to vary from the
policy it actually followed: deciding on its own authority to
oppose the Moore offer without seeking a better alternative for
shareholders. If the Board had wanted to maintain the Company's
independence, it would have had to convince a majority of the
shareholders to support this alternative. Assuming that the
Board could not have won a referendum on a "just say no" defense,
the Board would have had to auction the company off or negotiate
the terms of an acquisition with Moore or another prospective
purchaser or provide the stockholders with equivalent value
through a recapitalization or share repurchase program.
Is the Shareholder Rights By-Law Good for Shareholders?
The Wyser-Pratte/Wallace proxy contest gave stockholders the
opportunity to hear the arguments for and against the
Shareholders Rights By-Law.
Wyser-Pratte's case for his by-law was a simple one. If a
premium offer is made to acquire a company's stock, the Board and
management should either try to get a better offer for
stockholders or stand aside and let the stockholders decide
whether or not to accept the offer. It is wrong for the board to
take this decision away from stockholders by using the poison
pill and other defenses to block the offer, particularly in a
company like Wallace which is largely immune to a proxy contest
for control because of its staggered board.
Wallace's rebuttal had two essential elements:
First, he claimed that "the by-law proposal would make it
practically impossible to keep the company independent, even if
that were the best alternative for shareholders." Wallace said
that the Board would not have a fair chance to convince
shareholders to let the company stay independent, because to do
so "the Board would almost certainly have to disclose
confidential information about future strategies and prospects
that would harm the company and benefit competitors."
This argument is hard to reconcile with the basic idea of
shareholder democracy or the right of stockholders to dispose of
their shares freely. A target company board is certainly
entitled to ask stockholders to take it on faith that the stock
is worth more than the offer price, but stockholders should at
least have the right to consider and reject the board's advice.
It is worth remembering, however, that the paternalistic
justification for anti-takeover defenses was endorsed by the
court that upheld Wallace's defenses against the Moore offer in
1995. See "How Shareholder Rights By-Law fits into the Delaware
System of Corporate Law," below.
Wallace's second argument against the By-Law is that it would
undermine the board's bargaining power with a hostile bidder,
resulting in a sale of the company at an inadequate price.
Wallace claimed that if the by-law were adopted, a bidder would
make its offer at or slightly above the by-law's 25% threshold:
just enough to attract a majority of the company's shares. The
company would not be able to induce the bidder to increase its
price, because the bidder would only have to wait out the
ninety-day period to be able to proceed with the offer without
interference from the company.
This argument ignores the competitive forces that operate in the
acquisition market. If a company is about to be bought at a
bargain price, alternative buyers normally appear to make
competing bids. While Wallace claimed that ninety days is not
enough time to shop the company and attract competing offers, ISS
agreed with Wyser-Pratte that this is generally an adequate time
period. Extraordinary circumstances may arise in which a
ninety-day time limit on defenses would be harmful to
shareholders: there may be only one logical buyer for the target
company or the board may need more than ninety days to complete
the bidding process. But then the board could ask shareholders
to authorize the continuation of defensive measures past the
ninetieth day: a request that is likely to be granted if
shareholders are convinced that the board is converted to the
cause of maximizing current value and has a good reason why it
needs more time or more leverage.
Perhaps a board committed to the goal of maximizing shareholder
value could obtain a higher price in a sale of the company if it
were not constrained by the Shareholder Rights By-Law. But, as
Wyser-Pratte has pointed out, the Shareholder Rights By-Law would
never be proposed in a company with that kind of board. It only
surfaces in companies like Wallace and Rexene where maximizing
the current value of the stock is clearly not the board's top
priority and the board must be neutralized if the company is to
be sold.
The Legal Validity of a Shareholder Rights By-Law.
There appear to be two principal bases for the Wallace Board's
position that the Shareholder Rights By-Law is legally invalid.
One is the language of Section 141(a) of the Delaware Corporation
Law which provides that "the business and affairs of every
corporation organized under this chapter [i.e. the Delaware
General Corporation Law] 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."
The other is the line of cases, including Moore v. Wallace,(n3)
which have taken the view that even where a majority of the
shares have been tendered into an offer, the board is entitled to
take reasonable defensive measures against the offer, provided
that, in good faith and upon reasonable investigation, the
directors believe that the offer poses a danger to corporate
policy and effectiveness.(n4)
This analysis overlooks a third dimension of the law that
bears on the validity of the Shareholder Rights By-Law. Section
109(a) of the Delaware Corporation Law gives stockholders the
power to adopt, amend or repeal corporate by-laws. Section
109(b) states:
The bylaws may contain any provision, not inconsistent
with law or with the certificate of incorporation, relating to
the business of the corporation, the conduct of its affairs, and
its rights or powers or the rights or powers of its stockholders,
directors, officers or employees. (Emphasis added.)
To determine the validity of the Shareholder Rights By-Law
it is necessary to harmonize Sections 141(a), Section 109 and the
cases interpreting the powers and duties of stockholders and
directors. The first step toward this understanding is to
establish the relationship between Section 141(a) and Section
109. A reading of the two sections does not support the view
that Section 141(a) overrides or negates the grant of authority
in Section 109(b). While Section 109(b) only permits by-laws to
contain provisions that are "not inconsistent with law or with
the certificate of incorporation," Section 141(a) avoids such
inconsistency by qualifying any exclusive grant of authority to
the board of directors with the phrase "except as may be
otherwise provided in this chapter..." This savings clause
leaves room for by-laws adopted by stockholders pursuant to
Section 109(b). Moreover, the broad language of Section 109(b)
would be meaningless if Section 141(a) were read as reserving for
the board of directors exclusive power over the business and
affairs of the corporation, except for matters explicitly made
subject to a stockholder vote in other parts of the statute
(e.g., the provision for a stockholder vote on mergers in Section
251).
Opponents of the Shareholder Rights By-Law may suggest one
way of reconciling Section 109 and Section 141 that would tend to
invalidate the Shareholder Rights By-Law. The only proper
subjects for by-laws, they may suggest, are organizational or
procedural matters, such as the number of directors on the board
or the rules for setting a record date for a shareholders
meeting, while substantive business decisions, like whether to
oppose a takeover bid, are reserved for the board of directors
under Section 141 unless there is a specific provision for
shareholder action in the statute or certificate of
incorporation. This is basically an argument from custom since
organizational and procedural matters are what by-laws
customarily address. However, the language of Section 109(b)(2)
dealing with the proper subject of a by-law argues forcefully for
a broader interpretation of the shareholders by-law powers. The
pertinent phrase is "relating to the business of the corporation,
the conduct of its affairs, and its rights or powers or the
rights or powers of its stockholders, directors, officers or
employees." Such a broad grant of authority does not comfortably
co-exist with the idea that by-laws may only deal with
organizational or procedural subjects such as the date of the
annual meeting.
The meager case law on point does not support a narrow view
of Section 109(b)(2) that would invalidate the Shareholder Rights
By-Law. The Delaware Courts have said that there are some
matters that shareholders must leave to directors, but they have
given little guidance as to what those matters are.(n5) In a 1985
case, the Delaware Supreme Court upheld a series of by-laws
adopted by stockholders in order to prevent the board of
directors from issuing stock to an employee stock ownership plan,
which would have diluted the holdings of a stockholder who had
recently acquired a 51 percent position and would have blocked
the stockholder from taking control of the corporation.(n6)
Opponents of the Shareholder Rights By-Law will point out that
the by-laws in question dealt with classic organizational
matters, such as the vote needed for action by directors.
However, the shareholders were using these rules to facilitate a
change in control of the corporation, so these could hardly be
considered mere organizational by-laws. Also of interest is
Securities and Exchange Commission v. Transamerica Corp.,(n7)
affirming the SEC position that, under Delaware law, stockholders
properly could propose a by-law requiring the employment of
independent auditors. These cases, read together with the
language Section 109(b)(2), suggest that shareholders have some
power to enact by-laws dealing with substantive questions of
business policy. One sensible way of drawing the line is that
shareholders may adopt by-laws dealing with major business policy
issues, but may not use by-laws to manage the day-to-day business
of the company. Under this interpretation the Shareholder Rights
By-Law would be a valid exercise of the shareholders' by-law
amendment powers.
This interpretation would not require an overhaul of the
Delaware case law dealing with defensive measures by the board of
directors against hostile takeover bids: a line of cases that
ends with Moore v. Wallace and includes such important Delaware
decisions as Unitrin, Inc. v. American Gen. Corp.,(n8) Paramount
Communications, Inc. v. Time, Inc.,(n9) and Unocal Corp. v. Mesa
Petroleum Co.(n10) Each of these cases focused on whether the
directors had met their fiduciary duties to the company's
stockholders in taking defensive measures against a hostile
takeover bid. None of the target companies in those cases had a
shareholder-adopted by-law which would have limited the
directors' authority to resist a takeover bid; nor did the court
in any of the cases consider the stockholders' authority to adopt
such a by-law. The Delaware courts have recognized that their
customary deference to the business judgment of the board of
directors may be out of place when that judgment comes into
conflict with the exercise of shareholder rights. In Blasius
Industries v. Atlas Corp.,(n11) for example, Chancellor Allen
observed that the business judgment rule (or even the more
demanding Unocal standard) does not apply to efforts by the board
to interfere with a shareholder vote because such action
"involves allocation, between shareholders as a class and the
board, of effective power with respect to governance of the
corporation."(n12) The same observation might be made about an
attempt by the board to maintain anti-tender offer defenses in
violation of a by-law duly adopted by shareholders.
It is inherent in the Delaware system of corporate law that a
board is entitled to exercise its judgment in responding to a
tender offer or other takeover bid, but the board must do so
within the framework of statutes, charter provisions and by-laws
which may limit the actions the directors can take. Thus, a
board may believe that a defensive merger is the best way to
resist a takeover bid that the board opposes; but if the board
cannot find a way around the statutory shareholder voting
requirement for mergers-- as some target boards have in the
past-- then the board must submit the transaction to a
shareholder vote, even if it jeopardizes the board's ability to
resist the takeover bid. The Shareholder Rights By-Law would
supplement the framework within which the board must operate by
setting a time limit on certain defensive actions by the board
unless approved by stockholders. This time limit would be
separate and distinct from the board's fiduciary duties under
Delaware case law; and the board would not be excused from
compliance with the by-law merely because it had met the
requirements of Unocal or any other case relating to fiduciary
duties.
Scope of Obligation to Refrain from Defensive Measures.
While the Shareholder Rights By-Law is aimed principally at the
Poison Pill, its prohibitions reach all "defensive measures."
This is a term the Delaware courts should not have difficulty
interpreting since they have made it the touchstone for applying
the Unocal doctrine. In particular, the courts have felt
competent to distinguish the elements in a transaction that are
primarily designed to defeat a competing bid from those that have
other business purposes.(n13) However, the adoption of the
Shareholder Rights By-Law would not cause all defenses to
terminate after ninety days without shareholder approval. Any
defenses imposed by statute or the certificate of incorporation,
which are both higher authorities than a mere by-law, would
probably survive the enactment of the Shareholder Rights By-Law.
An example is Section 203 of the Delaware General Corporation Law
(the "Business Combination Statute") which prevents someone who
acquires 15 percent or more of a company's stock (thereby
becoming an "Interested Stockholder") from engaging in a business
combination with the company for three years after passing this
ownership threshold, but grants several exceptions to this rule
including one for an Interested Stockholder whose initial
acquisition of shares was approved by the board of directors.
Bidders commonly make their offer conditional on receiving an
approval from the board that would put their subsequent
second-stage merger outside the scope of the Business Combination
Statute.
It is questionable how formidable an obstacle the Business
Combination Statute would be in the absence of a poison pill.
Bidders routinely make offers conditional on obtaining exceptions
from the board of directors to these obstacles to a second-stage
merger, because they have to make the offer conditional on
redemption of the poison pill--which is a true show stopper-- and
as long as the offer includes one condition that requires board
action, there is no reason not to add everything else the bidder
would want the board to do in a negotiated acquisition.
If, however, the poison pill were swept away by the Shareholder
Rights By-Law or similar provision, a condition requiring the
board to grant an exemption from the three-year waiting period
for second-stage mergers would materially weaken a hostile tender
offer; and bidders might find other ways of dealing with the
Business Combination Statute. They might, for example, make the
offer conditional on acquiring 85% of the outstanding shares in
the offer, which would also exempt the bidder from the three-year
waiting period. While this would be a material condition, it
would be less damaging to the offer than having to get an
exemption from an unfriendly board. Some bidders might be
prepared to go ahead without any exemption from the Business
Combination Statute and either be prepared to live with a
minority for three years or count on approval of the second-stage
merger by two-thirds of the outstanding minority shares, which
would be another basis for an exemption from the three-year
waiting period.(n14)
How the Shareholder Rights By-Law fits into the Delaware System
of Corporate Law.
Given the absence of ruling precedents or dispositive statutory
language, corporate governance philosophy is likely to play a
major role in determining how the courts rule on the validity and
scope of the Shareholder Rights By-Law. The opinion in Moore v.
Wallace shows how paternalistic a view the courts can take of the
relationship between boards of directors and stockholders. The
court found that "the Moore tender offer pose[d] a threat to
Wallace that shareholders, because they are uninformed, will cash
out before realizing the fruits of the substantial technological
innovations achieved by Wallace," and that the board response to
this threat of shareholder action was reasonable because
"shareholders, at the time of the Moore offer, [were] unable to
appreciate the upward trend in Wallace's earnings..." It should
be noted that at the time the court made this statement the Moore
bid had been on the table for almost four months, during which
the board had the opportunity to make its case against the Moore
offer to the Wallace shareholders. The court also found that the
board's refusal to redeem the poison pill was not coercive or
preclusive, because the board's decision did not discriminate
among shareholders and "would have no effect on the success of
the proxy contest." If the court was saying that a proxy contest
gave Moore and the Wallace shareholders an adequate remedy for
the poison pill, it might have explained how they could be
expected to overcome Wallace's staggered board which made it
impossible to use a proxy contest as an effective referendum on
the sale of the company.
While a similar view of the stockholder-board relationship can be
found in Delaware Supreme Court takeover defense cases,(n15)
Delaware court opinions dealing with other issues show a much
higher regard for the intelligence of shareholders and a much
less permissive attitude toward the board of directors. For
example, the Delaware courts have protected the right of
shareholders to conduct proxy contests or consent solicitations
to gain control of the board of directors, stepping in to prevent
the board from manipulating the size of the board or meeting and
record dates in ways that deny shareholders a fair chance to gain
control of the corporation through the exercise of their voting
rights.(n16)
The courts have also been quite restrictive toward boards of
directors conducting a sale of the company: they have imposed
sales guidelines designed to assure that the company is exposed
to the marketplace and have required the board to seek the
transaction that produces the highest current market value for
shareholders, regardless of the values that the directors may
perceive in the securities being offered to acquire the
company.(n17) Therefore, the anti-takeover defense cases do not
necessarily represent the Delaware courts' complete view of the
relationship between shareholders and boards of directors, and
litigation about the Shareholder Rights By-Law or similar
provisions, which require the courts to examine the
shareholder-board relationship in a new context, could provide an
occasion for the courts to rethink the basic idea that
stockholders should be wards of the board in hostile takeovers.
A New Approach to Corporate Governance.
The Shareholder Rights By-Law may also offer a solution to some
of the practical problems that have been encountered by the
movement for reform of corporate governance. For all the
interest in corporate governance that has emerged in the 1990s,
there has been little progress toward the goal of assuring that
stockholders have the decisive voice if their company becomes the
target of a takeover bid. The basic problem is that under the
existing system of corporate governance, the board of directors
makes the key decisions regarding the sale of the company; and
institutional investors do not find it cost-effective to seek and
retain board seats, given the size of the investments that most
institutions have in any one company and the small likelihood
that the company will ever receive a takeover bid in which
shareholder interests would diverge from those of management and
the board.
Wyser-Pratte's by-law proposal offers a way for stockholders
to gain control over the corporate sale decision without getting
entangled in all the commitments and obligations of board
membership. The by-law would function as a safety-valve,
allowing management and the existing board to continue running
the company but giving shareholders the ability to step in and
make the key decisions if the company is presented with an
attractive takeover bid.
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Exhibit I
TEXT OF WYSER-PRATTE SHAREHOLDER RIGHTS BY-LAW
'If a fully financed tender offer is made to purchase all
the Company's outstanding shares of Common Stock for cash at a
price that is at least 25% greater than the average closing price
of such shares on the New York Stock Exchange during the 30 days
prior to the date on which such offer is first published or sent
to security holders and the Board of Directors opposes such
offer, the Board of Directors shall terminate all defensive
measures against such offer at the end of the ninetieth day after
such offer is first published or sent to security holders, unless
the Board of Directors' policy of opposition to such offer is
approved by a vote of a majority of the shares of Common Stock
present and entitled to vote on the subject matter at a meeting
of stockholders which is held on or before such ninetieth day and
at which a quorum is present; provided, however, that the Board
of Directors shall not be required to terminate defensive
measures against such offer at the end of such ninetieth day
unless at such time the offer has an expiration date which is at
least ten business days thereafter. Notwithstanding anything to
the contrary contained in Section 2.5 of the by-laws, unless the
record date for such stockholders meeting was set prior to the
date on which such offer was first published or sent to security
holders, the record date for such meeting shall be at least five
business days after the date on which the Company files its
statement of position with respect to such offer in accordance
with Rule 14e-2 of the Securities Exchange Act of 1934, as
amended. At such time as it is required, pursuant to the first
sentence of this by-law, to terminate defensive measures against
such offer, the Board of Directors shall redeem the outstanding
Rights under the Rights Agreement dated as of March 14, 1990
between the Company and Harris Trust and Savings Bank, as Rights
Agent, or any successor agreement. Prior to the end of such
ninetieth day, unless the Board's policy of opposition to such
offer has been approved by a stockholder vote as provided in this
by-law, the Board of Directors shall take such reasonable actions
as are necessary to preserve the possibility of satisfying the
conditions to such offer after such ninetieth day. This Section
7.8 may only be amended or repealed by a stockholder vote
pursuant to Section 7.1 of the By-Laws.'
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ENDNOTES
1 - In December, 1996 Wyser-Pratte was investigating the
circumstances surrounding the vote change.
2 - 571 A. 2d 1140 (Del. 1989).
3 - 907 F. Supp. 1545 (D. Del. 1995).
4- The Wallace proxy materials also state that the Shareholder
Rights By-law is inconsistent with Wallace's charter which
provides that a special stockholders meeting may be called only
by the board of directors. Wallace reasons that the charter
"vests in the Wallace board the exclusive, discretionary
authority to determine whether to call a special meeting if the
Board determined that resisting a takeover threat was in the best
interests of Wallace and its stockholders" and therefore bars a
by-law that would "require the Wallace Board to call a special
meeting if the Board determined that resisting a takeover threat
was in the best interests of Wallace and its stockholders."
However, the Shareholder Rights by-law would not force the board
to call a special meeting. The Board would always have the
option of not calling a stockholders meeting and allowing
defensive measures to lapse after ninety days (or if the timing
is right, to ask stockholders to approve the Board's policy of
opposition to a tender offer at an annual meeting). To find an
inconsistency between the Charter and the Shareholder Rights
By-Law, it is necessary to read the Charter provision as barring
stockholders, not only from calling a special meeting, but from
even creating a situation in which the Board may find it
necessary to call a stockholders meeting in order to pursue
policies favored by the Board. This seems a far-fetched reading
of a Charter provision that merely says that "special meetings of
stockholders of the corporation may be called only by the Board
of Directors pursuant to a resolution approved by a majority of
the entire Board of Directors."
5 - See, e.g. Abercrombie v. Davies, 123 A. 2d 892 (Del. Ch.
1956).
6 - Frantz Manufacturing Co. v. EAC Indus., 501 A.2d 401 (Del.
Supr. 1985)
7 - 163 F.2d 511, 517 (3rd Cir. 1947).
8 - 651 A. 2d 1361 (D. Del. 1995)
9 - 571 A. 2d 1140 (Del. 1989)
10 - 493 A. 2d 946 (Del. 1985).
11 - 564 A.2d 651 (Del. Ch. 1988).
12 - Id. At 660.
13 - Unocal Corp. v. Mesa Petroleum Co., 493 A. 2d 946 (Del.
1985). Compare Revlon, Inc v. MacAndrews & Forbes Holdings,
Inc., 506 A. 2d 173 (Del. 1986) with Citron v. Fairchild Camera &
Instrument Corporation, 569 A. 2d 53 (Del. 1989).
14 - Wyser-Pratte proposed that the Wallace stockholders adopt a
by-law opting out of the Business Combination Statute, as is
permitted by the statute. He did not claim that the Business
Combination Statute is an insurmountable obstacle, like the
poison pill, but he did argue that it discourages acquisition
bids and that the protections it offers are superfluous. Whether
or not the Business Combination Statute applied, minority
stockholders would be protected in a second-stage merger by the
Delaware "entire fairness test" which is commonly satisfied by
conditioning a second-stage merger on approval by a majority of
the minority stockholders. This proposal received substantially
less support than did the Shareholder Rights By-law and was not
adopted.
15 - Unitrin, Inc. v. American Gen. Corp., 651 A.2d. 1361 (Del.
1995); Paramount Communications, Inc. v. Time, Inc., 571 A. 2d
1140 (Del. 1989).
16 - Schnell v. Chris-Craft Industries, Inc., 285 A. 2d 437 (Del.
1971); compare Blasius Industries, Inc., 564 A. 2d 651 (Del. Ch.
1988) with Frantz Manufacturing Co. v. EAC Indus., 501 A. 2d 401
(Del. 1985).
17 - Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506
A.2d 173 (Del. 1986); Paramount Communications, Inc. v. QVC
Network Inc., 637 A. 2d 34 (Del. 1993).
12