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									Client Advisory
August 1998

Dead Hand Walking: Delaware Court Decides Important Poison Pill Case
On July 24, 1998, the Delaware Court of Chancery handed down its first decision addressing the legitimacy of “dead hand” provisions in rights plans. In Carmody v. Toll Brothers, Inc., the Court refused to dismiss a claim attacking a rights plan containing a dead hand provision. A dead hand provision prevents any directors, except those who adopted the rights plan or their designated successors, from redeeming the rights distributed under the plan. The Court found that dead hand provisions give certain directors powers that other directors do not have—the power to redeem the rights. In Delaware, such discrimination among directors is allowable only if it is authorized in the company’s charter. The Court also found that dead hand provisions impermissibly limit new directors’ powers to manage the corporation’s affairs. The Court additionally held that by adopting the provision, the board violated its fiduciary duties because it effectively disenfranchised the stockholders. The Court stated that the provision is coercive in that it forces stockholders to vote for incumbent directors, and that it is preclusive because it makes wagering and winning a proxy contest “realistically unattainable.” Prior to the Toll Brothers decision, courts interpreting only New York and Georgia law had ruled on the legality of dead hand provisions. In Bank of New York Co. v. Irving Bank Corp. (1988), the New York Supreme Court held that a dead hand provision was invalid because it discriminated among different classes of directors and that it limited the powers of future boards. To be valid, the Court stated that such distinctions must be provided for in the company’s charter. On the other hand, in Invacare Corp. v. Healthdyne Technologies, Inc. (1997), a federal court applying Georgia law upheld a dead hand provision on the basis that, unlike New York, Georgia had no statutory requirement mandating that limitations on directors’ power be expressed in the certificate of incorporation. Because of the influence of the New York and Delaware courts, dead hand provisions may not be enforceable. The Toll Brothers Court explicitly stated that it did not address the legality of dead hand provisions of a limited duration, also known as delayed or deferred redemption provisions. Such provisions function to limit a new board’s ability to redeem the rights for a fixed period of time (e.g., six months). Given the breadth of the Court’s attack on the unlimited dead hand provision in Toll Brothers, however, it appears that the legality of limited dead hand provisions is uncertain under Delaware law. The adoption of a limited duration dead hand provision may more likely be sustained in the context of an actual takeover attempt, where the delayed redemption feature can be carefully tailored as a specific response

to an actual threat. However, because of this uncertainty, a staggered board coupled with a stockholders’ rights plan will provide a board with a level playing field to protect stockholder interests. When a company has a staggered board, a hostile raider would only be able to elect some portion of, but not an entire board, to redeem the rights. Companies contemplating an initial public offering should include mechanisms such as a staggered board in their charter because they are more easily instituted when a company is private rather than when it has public stockholders. ********** If you would like to discuss the Toll Brothers case or its implications to your organization, please contact Herbert S. Wander at (312) 902-5267, David J. Kaufman at (312) 902-5564 or Andrew A. Block at (312) 902-5332.

Published for clients as a source of information about current developments in the law. The material contained herein is not to be construed as legal advice or opinion. © 1998 Katten Muchin Zavis. All rights reserved.

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