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Corporationsâ•Flconditional Supermajority Provisions Washington Law Review Volume 56 Number 1 12-1-1980 Corporations—Conditional Supermajority Provisions: Protecting Shareholders' Interests—Seibert v. Gulton Industries, Inc., No. 5631 (Del. Ch. June 21, 1979), aff'd, No. 219 (Del. Jan. 4, 1980) Constance M. Crawley Follow this and additional works at: https://digitalcommons.law.uw.edu/wlr Part of the Business Organizations Law Commons Recommended Citation Constance M. Crawley, Recent Developments, Corporations—Conditional Supermajority Provisions: Protecting Shareholders' Interests—Seibert v. Gulton Industries, Inc., No. 5631 (Del. Ch. June 21, 1979), aff'd, No. 219 (Del. Jan. 4, 1980), 56 Wash. L. Rev. 149 (1980). Available at: https://digitalcommons.law.uw.edu/wlr/vol56/iss1/14 This Recent Developments is brought to you for free and open access by the Law Reviews and Journals at UW Law Digital Commons. It has been accepted for inclusion in Washington Law Review by an authorized editor of UW Law Digital Commons. For more information, please contact [email protected]. Corporations-Conditional Supermajority Provisions: Protecting Shareholders' Interests-Seibert v. Gulton Industries, Inc., No. 5631 (Del. Ch. June 21, 1979), affd, No. 219, 1979 (Del. Jan. 4, 1980). In Seibert v. Gulton Industries, Inc.,I the Delaware Supreme Court af- firmed the dismissal of a complaint challenging the legality of a condi- tional supermajority amendment 2 to Gulton Industries' certificate of in- corporation. The challenged amendment required the affirmative vote of eighty percent of Gulton's shareholders to approve a proposed takeover3 of Gulton by any person or entity that had acquired five percent or more of Gulton's shares prior to its proposed takeover.4 The eighty percent vote was not required if Gulton's directors had approved the proposed take- over prior to the other entity's acquisition of a five percent interest in Gulton. In such cases a simple majority sufficed. Thus, the amendment gave Gulton's directors discretion to invoke the supermajority require- ment for takeover attempts they opposed. The chancellor's decision to dismiss plaintiff's complaint was consis- tent with the enabling philosophy5 that permeates the relevant Delaware statutory and case law. Nevertheless, the decision failed to discuss the practical implications of enacting conditional supermajority require- ments. Specifically, the chancellor did not consider whether Gulton's conditional supermajority provision would adequately protect sharehold- 1. No. 5631 (Del. Ch. June 21, 1979), aff'd, No. 219, 1979 (Del. Jan. 4, 1980). 2. Delaware law ordinarily requires no more than the affirmative vote of a simple majority of shareholders to approve a merger. Supermajority provisions, in contrast, require a higher percent majority vote than is required by state law. Some supermajority provisions, as in Seibert, leave to management's discretion the decision whether to invoke the supermajority requirement. Such provi- sions are often referred to as "discretionary" or "shifting"; this note will hereafter refer to them as 'conditional" supermajority provisions. 3. A takeover occurs when an offeror purchases a controlling interest in the stock of another corporation. Takeovers may be effected through public or private offers to purchase securities. Thus, an offeror may publicly announce its intention to purchase during a fixed period all or a portion of a class or classes of securities of a publicly-held corporation at a specified price or upon specified terms for cash or securities. In so doing, the offeror has made a tender offer for the stock of the target corporation. Alternatively, an offeror may effect his purchase of the target corporgtion's stock pri- vately or on the open market. After completing a takeover, an offeror may vote to merge with the acquired target corporation. 4. A five percent acquisition triggers the disclosure requirements of the Williams Act as amended in 1970, Act of Dec. 22, 1970, Pub. L. No. 91-567, 84 Stat. 1497 (1970), and is the percentage frequently stipulated in defensive voting provisions. 5. According to the proponents of this philosophy, corporate law should merely facilitate the free, private allocation of risks, profit, and control. Latty, Why Are Business CorporationLaws Largely 'Enabling'?50 CORNELL L.Q. 599 (1965). See generally Katz, The Philosophy of Midcen- tury CorporationStatutes, 23 L. & CONTEMP. PROB. 177 (1958). Washington Law Review Vol. 56:149, 1980 ers' interests to the extent they conflict with management's interests. By dismissing the complaint, the Seibert court failed to consider whether the use of conditional supermajority provisions should be circumscribed by the courts in order to make such measures responsive to the needs of shareholders. This note examines alternatives to dismissal of the plain- tiff's complaint and recommends that corporate management be required to disclose the purposes and effects of conditional supermajority provi- sions when proposing them to shareholders for adoption. I. BACKGROUND Takeover bids are attempts to acquire control of a corporation through the purchase of its stock on the open market or through a publicized ten- der offer. 6 The use and success of tender offers increased dramatically in the United States during the 1960's, 7 producing pressure for governmen- tal regulation. 8 In 1968, the Securities Exchange Act of 1934 was amended by the Williams Act 9 to include tender offers. The purpose of the statute was to provide investors with basic substantive protections to- gether with full disclosure of the terms, conditions, and financing of the offer as well as the identity and pertinent background information regard- ing the offeror.10 In the late sixties and early seventies, many states also enacted statutes to regulate takeovers; these generally require that offerors disclose certain information to target companies and investors. 11 6. Smiley, Do Tender Offers Damage Stockholders?, in THE ATTACK ON CORPORATE AMERICA 97 (M. Johnson ed. 1978). See generally E. ARANOW & H. EINHORN, TENDER OFFERS FOR CORPO- RATE CONTROL (1973)(hereinafter cited as TENDER OFFERS). 7. TENDER OFFERS, supra note 6, at 64-65 & n.3. 8. Senator Harrison Williams of New Jersey first proposed federal regulation of cash tender of- fers in October of 1965. Regulation was designed to protect "proud old companies" from raids by "white-collar pirates." Ill CONG. REC. 28256-60 (Oct. 22, 1965)(remarks of Senator Williams on S. 2731). 9. Act of July 29, 1968, Pub. L. No. 90-439, 82 Stat. 454 (codified at 15 U.S.C. §§ 78m(d)-(e), 78n(d)-(f) (1976). For legislative history, see Hearingson S. 510 Before the Subcomm. on Sec. of the Senate Comm. on Banking and Currency, 90th Cong., 1st Sess. (1967); Hearings on H.R. 14475, S. 510, Before the Subcomm. on Commerce and Finance of the House Comm. on Inter- state and Foreign Commerce, 90th Cong., 2d Sess. (1968); H.R. REP. No. 1711, 90th Cong., 2d Sess. (1968); S. REP. No. 550, 90th Cong., 1st Sess. (1967). 10. The bill was designed to provide investors with full disclosure without favoring either the tender offerors or the management of the target company. See H.R.REP. No. 1711, 90th Cong., 2d Sess. (1968); S. REP. No. 550, 90th Cong., 1st Sess. (1967). 11. See, e.g., N.Y. Bus. CORP. LAW § 1603 (McKinney Supp. 1979-80); PA. STAT. ANN. tit. 70, § 75 (Purdon Supp. 1980-8 1). In addition, these statutes often require that offers stay open for a minimum period once made, HAWAII REV. STAT. § 417E-2(l) (1976), and that a hearing be held at which state officials review the offer and the offeror's disclosure of statutorily prescribed informa- tion, OHIO REV. CODE ANN. § 1707.04.1(B)(4) (Page 1978). Some states also regulate substantive aspects of the offer such as proration of acceptances in the event of oversubscription. VA. CODE § 13.1-530(c) (Supp. 1980); CONN. GEN. STAT. ANN. § 36-463(c) (West Supp. 1980). Conditional Supermajority Provisions Tender offers have continued to succeed despite the extensive legisla- tion, however, and vulnerable corporations have developed an array of defensive measures. 12 For example, a corporation may repurchase its own stock by an open-market purchase or by a tender offer. The target thereby reduces the number of shares available to the potential offeror and increases the price of the target corporation's stock, which may cause the offeror to look elsewhere for a better bargain. Or, a corporation may place its stock in friendly hands to discourage tender offers. Generally, such measures will either discourage future takeover bids or frustrate the success of a bid that is already in progress. 13 Because a conditional super- majority amendment both discourages future offers and frustrates offers that have been made, it is a potent antitakeover measure. II. THE SEIBERT DECISION In Seibert, plaintiff claimed that the amendment adopted by Gulton was illegal because it gave Gulton's directors discretion not authorized by Delaware law. 14 Although it is true that supermajority provisions are not specifically authorized by Delaware laws, several sections of Delaware's General Corporation Law were relevant to plaintiff's claim. Section 25 1(c) provides that a merger agreement can be approved" [i]f a majority of the outstanding stock of the corporation entitled to vote thereon shall be voted for the adoption of the agreement." 15 Section 102(b)(4) allows a certificate of incorporation to include provisions requiring the vote of a larger portion of the stock than is required by the code. 16 Finally, section 102(b)(1) allows a certificate of incorporation to include: Any provision for the management of the business and for the conduct of the affairs of the corporation, and any provision creating, defining, limiting and regulating the powers of the corporation, the directors, and the stockhold- ers, or any class of the stockholders, or the members of a non-stock corpora- tion; if suchprovisions are not contrary to the laws of this State.
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