DealLawyers.com Blog

A few months ago, I blogged about Prof. Brian Quinn’s suggestion that new Section 122(18) of the DGCL might permit a Delaware corporation to adopt a “dead hand” poison pill. These pills were invalidated by the Delaware courts in the late 1990s, in part because they were inconsistent with the board’s authority to manage the business and affairs of the corporation under Section 141(a) of the DGCL. Since Section 122(18) says that notwithstanding Section 141(a), a corporation may enter into contracts that delegate to stockholders the kind of governance rights invalidated by the Moelis decision, Prof. Quinn asked whether the Delaware General Assembly may have resurrected the dead hand pill? Now, Vice Chancellor Laster appears to be asking the same question.

Dead hand pills were invalidated by the Chancery Court in Carmody v. Toll Bros., 723 A.2d 1180 (Del. Ch. 1998), on the basis that the adoption of such a provision involved both a violation of Section 141 of the DGCL and a breach of the directors’ fiduciary duties. Subsequently, in Quickturn Design Systems v. Shapiro, 721 A.2d 1281 (Del. 1998), the Delaware Supreme Court invalidated a “no hand” provision that contained an outright prohibition on redeeming the pill. Like the Chancery Court in Toll Bros, the Supreme Court concluded that the no hand provision “impermissibly circumscribes the board’s statutory power under Section 141(a) and the directors’ ability to fulfill their concomitant fiduciary duties.”

In a recent LinkedIn post, Vice Chancellor Laster raised the question of whether Quickturn needs to be reassessed in light of Section 122(18). His post praised Stephen Bainbridge’s blog considering the potential implications of this new statutory provision on Omnicare v. NCS Healthcare (which is “a whole ‘nother bag of snakes”) and observed:

Also worth debating whether Quickturn survives. The synopsis to the Governance Agreement Amendment attempts to exclude rights plans as not being supported by consideration (tell that to the rights agent that wants to get paid for its services), but why not enter into a governance agreement with a continuing director feature?

I guess my response to this is the same as it was to Prof. Quinn’s argument.  In Toll Bros, Vice Chancellor Jacobs didn’t just have problems with the dead hand pill under Section 141(a), but also held that in adopting it, the directors breached their fiduciary duties, and fiduciary duty claims are something that the advocates of the amendments say are unaffected by them. But this more recent LinkedIn post from Vice Chancellor Laster suggests that maybe I shouldn’t be so sanguine about the likelihood that the Delaware courts would toss such an arrangement on fiduciary duty grounds:

Here’s a quote to ponder from the Delaware Supreme Court in 2010:

“It is a well-settled principle that where a dispute arises from obligations that are expressly addressed by contract, that dispute will be treated as a breach of contract claim. In that specific context, any fiduciary claims arising out of the same facts that underlie the contract obligations would be foreclosed as superfluous.” Nemec v. Shrader, 991 A.2d 1120, 1129 (Del. 2010).

To be filed under “Do fiduciary duties really always trump contracts?”

We can probably add Vice Chancellor Laster’s statements about fiduciary duties not trumping contract rights in his recent Columbia Pipeline opinion into the mix here as well. I continue to think that a board’s decision to enter into a governance agreement incorporating a “dead hand” or “no hand” provision will be a tough sell under Unocal, but the language that the Vice Chancellor cites is a reminder that advocates for a different position have several arrows in their quiver.

– John Jenkins