Docket No. ACE Corporation, Defendant and Petitioner, vs. Black & White, Inc., John Jones, Plaintiffs and Respondents.

Transcription

1 Docket No. IN THE SUPREME COURT OF THE STATE OF JUPITER ACE Corporation, Defendant and Petitioner, vs. Black & White, Inc., John Jones, Plaintiffs and Respondents. APPEAL FROM THE JUDGMENT OF THE DISTRICT COURT OF THE STATE OF JUPITER THE HONORABLE VIRGINIA SMITH, JUDGE DISTRICT COURT CIV. NO RESPONDENTS BRIEF Attorneys for Respondents Warning: This archival document has not been updated, and WE DO NOT KNOW IF IT IS STILL GOOD LAW. We do not warrant the accuracy or currency of the information it contains. We hope you will find it useful in evaluating the nature and quality of our work, but we ask that you not make further use of it for any other purpose. To preserve our original customer s confidences we have sanitized this document by changing names and factual details, and by deleting all references to the record.

2 TABLE OF CONTENTS STATEMENT OF FACTS...1 SUMMARY OF ARGUMENT...4 QUESTIONS PRESENTED...5 STATEMENT OF STATUTES INVOLVED...6 ARGUMENT Because the shareholders ultimately control the corporation, ACE s shareholders properly passed the shareholder rights bylaw Because the Lock-Up Agreement mandated the loss of ACE s chief asset if the deal fell through, it should be held invalid on the ground that it was coercive CONCLUSION...16 ii

3 TABLE OF AUTHORITIES CASES AC Acquisitions v. Anderson, Clayton & Co., 519 A.2d 103 (Del.Ch. 1986) Aronson v. Lewis, 473 A.2d 805 (Del. 1984)...11 In re Gaylord Container Corp. Shareholders Litigation, 753 A.2d 462 (Del.Ch. 2000) International Brotherhood of Teamsters General Fund v. Fleming Cos., 975 P.2d 907 (Okla. 1999)...7 Joseph Polchinski Co. v. Cemetery Floral Co., 79 App.Div. 648, 433 N.Y.S.2d 825 (1980)...12 Kysor Industrial Corp. v. Margaux, Inc., 674 A.2d 889 (Del.Super. 1996) Mills Acquisition Co. v. MacMillan, Inc., 559 A.2d 1261 (Del. 1989) , 15 Paramount Communications, Inc. v. Time, Inc., 571 A.2d 1140 (Del. 1990) Quickturn Design Systems, Inc. v. Shapiro, 721 A.2d 1281 (Del. 1998) ,11 Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del 1986) , 16 Smith v. Van Gorkom, 488 A.2d 858 (1985)...11 Unitrin, Inc. v. American General Corp., 651 A.2d 1361 (1995) , 9, 14 Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del.1985) , 13, 14 STATUTES Delaware Code Title 8 141(a)...12 Jupiter Business Corporation Law 16-13(a) Jupiter Business Corporation Law. 16-5(a) iii

4 Jupiter Business Corporation Law 16-5(b)...6 Jupiter Business Corporation Law Jupiter Business Corporation Law 16-13(a) New York Business Corporation Law 701 (1999) Oklahoma Statutes 1013 (1991)...7 OTHER AUTHORITY 8 WILLIAM MEADE FLETCHER, ET AL., FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS 4166 (perm. ed., rev. vol.1982)... 6,12 Jeffrey N. Gordon, Just Say Never? Poison Pills, Deadhand Pills, and Shareholder- Adopted Bylaws: An Essay for Warren Buffett, 19 CARDOZO L. REV. 511 (1997) Mark J. Loewenstein, Delaware as Demon: Twenty-Five Years after Professor Cary s Polemic, 71 U. COLO. L. REV. 497 (2000)...7, 8, 9, 11 Kate Margolis, Comment, Binding Shareholder Bylaw Amendments: An Antidote for the Poison Pill, 67 MISS. L.J. 817, 844 (1998)...13 Morgan W. Neuwirth, Comment, Shareholder Franchise No Compromise Why the Delaware Courts Must Proscribe All Managerial Interference with Corporate Voting, 145 U. PA. L. REV. 423 (1996)...7, 10 Paul F. Regan, Great Expectations? Contract Law Analysis for Preclusive Corporate Lock- Ups, 21 CARDOZO L. REV. 1 (1999)...16 Robert B. Thompson, Shareholders as Grown-Ups: Voting, Selling and Limits on the Board s Power to Just Say No, 67 U. CIN. L. REV. 999 (1999)...7, 8, 10 iv

5 The court of appeals recognized that the district court s opinion, if left to stand, would prevent stockholders from realizing the value of their shares in the face of a board of directors intent on maintaining its position. The shareholders rights bylaw, preventing the directors from instituting a poison pill, is a legitimate exercise of the shareholders right to protect their investment. ACE s directors gave its stockholders a Hobson s choice between an inferior merger agreement and worthless stock. This court should therefore affirm the judgment of the court of appeals. STATEMENT OF FACTS Defendant ACE Corporation, a publicly held Jupiter corporation, manufactures cooling fans for consumer use. ACE s management regards its No Strings Attached line of cordless fans as the company s main asset. Many unaffiliated small investors own most of ACE s one million shares of common stock, but plaintiff John Jones holds a 10% stake. Since the company s 1977 initial public offering, its shares have traded between $10 and $25. Plaintiff and respondent Black & White, Inc., manufactures cooling fans for both commercial and personal use. It has traditionally held a strong market position in the cooling-fan market, but its personal cooling fans have been losing market share to ACE s No- Strings-Attached line. On March 31, 2000, Black & White bought 100 shares of ACE in an open-market transaction. ACE s directors have implemented several measures to decrease the marketability of its shares to would-be purchasers of controlling amounts of its stock. These measures include 1

6 a shareholder rights plan, more accurately a poison pill, meant to deter persons from acquiring enough shares to win control. The poison pill is not meant to grant shareholders any rights its purpose is only to inhibit their ability to sell their shares. It includes a flipin provision, triggered when any shareholder acquires more than 20% of ACE s outstanding shares. At that point all other ACE shareholders acquire one right per share to buy an additional share at one half the current market price so long as they do not tender the original shares to the potential acquiror. The flip-in provision dilutes the acquiror s stake in ACE and increases the cost of acquisition. If an acquiror manages to defeat the flip-in provision and actually obtains control of ACE, the poison pill also has a flip-over provision. Each ACE shareholder then acquires the right to buy shares in the acquiring company at half the market price. An ACE board wooed by a merger or acquisition partner it finds acceptable may redeem the plan at one cent per share at any time before the acquiror crosses the 20% threshold. At the March 2000 annual meeting, plaintiff Jones offered an antidote to the poison pill by way of a shareholder proposal to amend the Company s bylaws. The amendment would require the Board to redeem the rights in case a fully financed tender offer included a 25% premium over the current trading price. The shareholders approved the new bylaw by a 55% majority. Beginning in April 2000, plaintiff Black & White began to try to acquire ACE. Black & White s management believed it could combine ACE s No-Strings-Attached technology and brand name with its own lower production costs to offer a better product at a lower price than either company could then offer. After ACE s management individually snubbed Black 2

7 & White s inquiries, Black & White proposed a business combination by offering $30 a share for ACE stock conditioned on redemption of the poison pill. At an April 30 emergency meeting, ACE s board agreed to hire the investmentbanking firm of Ames, Badger, & Conner to evaluate Black & White s offer and other strategic options. Ames, Badger did not investigate beyond evaluating the financial statements and marketing projections the board supplied and interviewing ACE management. It reported to the board that Black & White s offer was inadequate and suggested a strategic merger with other companies. Meanwhile, ACE s outside counsel, Cravats, Tie & More, opined that the Shareholder Rights bylaw was an invalid infringement on the board s prerogatives. On further investigation, Ames, Badger identified Celsius, Inc., a manufacturer of cooling fans primarily for commercial use, as a preferred merger partner for ACE. On July 8, 2000, the two companies signed a merger agreement that, when completed, would create a new company, New Fans on the Block, Inc. ACE s key management would partake in New Fans management. The agreement contained no-shop, termination-fee, and lock-up agreements. The noshop provision limited ACE s board s ability to seek or negotiate competing transactions. Under the lock-up agreement, ACE would be required to sell Celsius the patents and technology processes for the No-Strings-Attached product line for $10 million if the merger were terminated because of a competing transaction. Defendant concedes that this price falls far short of the market price for these assets. On July 8, 2000, the date of the merger agreement, ACE s shares traded at $15. On 3

8 July 13, Black & White made a tender offer for ACE at $32 a share, conditioned on a majority of ACE s shareholders tendering their shares before the offer s expiration, the redemption of the poison pill, and the termination of the lock-up and merger agreements. The tender offer satisfied the terms of the Shareholder Rights Bylaw. ACE s stock rose to $29 a share on Black & White s offer. Yet Ames, Badger still maintained that the price was inadequate, and ACE s board rejected it the next day. On August 29, Black & White and Jones filed separate actions against ACE seeking to compel the Board to redeem the poison pill, and to enjoin the termination fee and lock-up agreement. Those cases were consolidated, and the next day ACE answered and counterclaimed for a declaration that the Shareholder Rights Bylaw is invalid. On September 5 the district court, the Hon. Virginia Smith presiding, granted ACE s motion for summary judgment, finding that the bylaw infringed on the board s statutory obligation to manage the company s business and affairs and finding the merger agreement and lock-up agreements a proportionate response to the threat Black & White posed. On September 8, the court of appeals, on expedited review, reversed. The majority, by Torquemada, C.J., found the Shareholder Rights Bylaw valid; it did not reach the issue of the merger agreement s validity. Concurring in the judgment, Moses, J., would have found the bylaw invalid but the merger agreement a violation of the board s fiduciary duties. SUMMARY OF ARGUMENT The bylaw is a valid albeit novel exercise of shareholder supremacy. ACE s shareholders are sufficiently sophisticated to determine when they do not need protection 4

9 against takeovers the board deems hostile. The notion that shareholders are too unsophisticated to vote in their own best interest is inimical to the entire system of negotiable securities, which assumes that shareholders will trade their shares in response to the company s profitability. The lock-up agreement violated the board s fiduciary duty because it effectively barred the shareholders from any merger partner other than the one the board had chosen. Any other merger partner would acquire a company that has been only lightly compensated for the loss of its most valuable asset. Although a lock-up agreement may have an acceptable function in inducing another company to enter into a merger and to compensate it for its lost time and opportunity cost if that merger were to fall through, the termination-fee agreement already performs those functions. This lock-up agreement, in addition, does more than compensate Celsius: it strips ACE of any marketability whatsoever. Finally, the fact that the lock-up agreement s triggering event is not the failure of the merger with Celsius but the acquisition by another shows that the agreement s real purpose has less to do with compensating Celsius than it has to do with prohibiting a merger with Black & White. QUESTIONS PRESENTED 1. May a company s shareholders determine when a poison pill may be redeemed? 2. May a board of directors enter into a lock-up agreement that (a) effectively strips the corporation of its assets even though the merger agreement also calls for a termination fee and (b) is triggered by another company s acquisition, not the merger s failure? 5

10 STATEMENT OF STATUTES INVOLVED The following sections of the Jupiter Business Corporation Law are involved in this case, and are set forth at length in the attached Appendix: Jupiter Bus. Corp. Law 16-5 Bylaws Jupiter Bus. Corp. Law Authority of Directors ARGUMENT 1. Because the shareholders ultimately control the corporation, ACE s shareholders properly passed the shareholder rights bylaw. Bylaws are the rules and regulations whereby a corporation governs its own actions and affairs. 8 WILLIAM MEADE FLETCHER, ET AL., FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS 4166, at 591 (perm. ed., rev. vol. 1982). In Jupiter, they may contain any provision, not inconsistent with the law, relating to the corporation s business, the conduct of its affairs, and the rights or powers of its stockholders and directors. Jupiter Bus. Corp. Law 16-5(b). The power to adopt, amend, or repeal bylaws shall be in the shareholders, unless the certificate of incorporation provides otherwise. Jupiter Bus. Corp. Law 16-5(a). Because the Shareholder Rights Bylaw governs the corporation s own actions and affairs, it is completely consistent with Jupiter Business Corporation Law 16-5(b). Last year, in International Brotherhood of Teamsters General Fund v. Fleming Cos., International Brotherhood of Teamsters General Fund v. Fleming Cos., 975 P.2d 907, (Okla. 1999), the Oklahoma Supreme Court held that a similar rights plan was a valid 6

11 exercise of the shareholders authority under an Oklahoma statute identical to Oklahoma Statutes 1013 (1991). The court pointed out that, although the corporation is under the board s general direction and management, subdivision (b) recognizes shareholder oversight. Teamsters v. Fleming Cos., at 911. Thus, although the directors manage the corporation s business and affairs (Jupiter Bus. Corp. Law 16-13), that management is subject to the shareholders ultimate control. Ibid. The shareholders ability to control the corporation s affairs comports with traditional concepts of shareholder democracy and recognizes the realities of today s corporate markets. See Mark J. Loewenstein, Delaware as Demon: Twenty-Five Years after Professor Cary s Polemic, 71 U. COLO. L. REV. 497, (2000); Robert B. Thompson, Shareholders as Grown-Ups: Voting, Selling and Limits on the Board s Power to Just Say No, 67 U. CINC. L. REV. 999, (1999); Morgan W. Neuwirth, Comment, Shareholder Franchise No Compromise: Why the Delaware Courts Must Proscribe All Managerial Interference with Corporate Voting, 145 U. PA. L. REV. 423 (1996). Teamsters v. Fleming recognized that shareholders are capable of acting in their own best interests a proposition consistent with the Delaware and Jupiter codes, which express a preference for shareholder rule-making. See Loewenstein, 71 U. COLO. L. REV. at Those codes limit only the directors, not shareholders, in their ability to adopt, amend, or repeal bylaws. Id. at 535. Even articles that give directors power over bylaws do not diminish that same power in the shareholders. Id. at In fact, in the takeover context the Delaware courts have placed primacy on shareholder voting over shareholders ability to sell their stock. See Thompson, Shareholders 7

12 as Grown-Ups, 67 U. CINC. L. REV. at In Unitrin, Inc. v. American General Corp., 651 A.2d 1361, (Del. 1995), the court recognized that the legitimacy of management s defensive measures rested in part on the acquiror s ability to wage a proxy contest. There is no logic to the argument that management has an unfettered right to protect shareholders from their own reckless desire to sell in a tender offer but that it must protect their right to make the same bad decision in a proxy contest. See Thompson, 67 U. CINC. L. REV. at ; Jeffrey N. Gordon, Just Say Never? Poison Pills, Deadhand Pills, and Shareholder-Adopted Bylaws: An Essay for Warren Buffett, 19 CARDOZO L. REV. 511, 530 (1997). Professor Loewenstein notes that Fleming is also consistent with economic efficiency: Just as investors value corporate governance features in assessing a company s value, they would only vote for corporate governance proposals that enhance the value of their investment. If one is willing to trust shareholders on the investment side, then one must trust them even more so on the voting side. An investor may purchase shares despite dissatisfaction with one or more terms of governance, but a rational investor will not vote for a discrete proposal that disadvantages his or her investment. Loewenstein, supra, 71 U. COLO. L. REV. at 536. Granting shareholders the ability to determine whether an anti-takeover device is in the corporation s interest diminishes the inefficiencies inherent in litigation or statutory regulation. Id., at 532, 536. The Delaware Supreme Court has recognized that anti-takeover devices create a conflict of interest in the board. These devices may do more to entrench a takeover target s board and management than they do to protect the corporation s shareholders from a coercive threat. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 8

13 954 (Del. 1985). Management s attempt to perpetuate itself in office is an inequitable use of the corporate machinery and corporations law. Unitrin v. American General, 651 A.2d at 1378, To the extent that shareholders are disadvantaged by the unilateral action of their board of directors, they should be given the means to make changes. See Loewenstein, 71 U. COLO. L. REV. at 532. So long as shareholders can undo value-decreasing corporate governance structures, or implement value-enhancing provisions, they can minimize the impact of statutory law. Id. at 536. The changing nature of corporate shareholding also supports the stockholders ability to enact limitations on poison pills. Shareholders have traditionally relied on the Wall Street Rule to restrain management: if they do not like what it is doing, they will sell, and free transferability is assumed. See Thompson, Shareholders as Grown-Ups, 67 U. CINC. L. REV. at But the rise of the institutional investor has weakened the Wall Street Rule while increasing the need for corporate democracy. From 1950 through 1995, the percentage of equity interests owned by institutional investors grew from 8% to 54.2%. See Comment, Shareholder Franchise No Compromise, 145 U. PA. L. REV. at In 1989, the fifty largest investors held 27% of all public U.S. equities. Id. at 433. These investors massive holdings have substantially decreased their shares s liquidity, with the resulting necessity of expressing dissent through shareholder voting. Ibid.; see Thompson, Shareholders As Grown-Ups, 67 U. CINC. L. REV. at The changing nature of shareholding has meant that electoral contests have changed as well, reflecting the institutional investor s increased sophistication: although most contests once were started by small shareholders with a political or social cause to advance, now they concern corporate governance and enjoy 9

14 substantial shareholder support. See Comment, Shareholder Franchise No Compromise, 145 U. PA. L. REV. at Shareholder restraints on directors through the bylaws are consistent with Delaware law. In Quickturn Design Systems, Inc. v. Shapiro, 721 A.2d 1281, (Del. 1998), the Delaware Supreme Court upheld a delayed-redemption plan in part because it interfered with an acquiror s right to elect a new board. The shareholder rights plan in Quickturn provided that, if a majority of the board of directors were replaced by stockholder action, the newly elected board could not redeem the rights for six months if the purpose would be to facilitate a transaction with an interested person such as an acquiring corporation. Thus, for six months a newly elected board of directors could not completely discharge its fundamental management duties to the corporation and the stockholders. Id. at Both Quickturn and Fleming support the removal of barriers in the market for corporate control. See Loewenstein, 71 U. COLO. L. REV. at 535. The Quickturn court held that the board could not impair the authority of future boards, and thereby limited Draconian antitakeover measures. Ibid. Fleming upheld the shareholders attempt to limit the board s authority to enact a Draconian measure. Ibid. Quickturn and other cases have superficially stated that the board has the ultimate responsibility for managing the corporation s business and affairs. See Quickturn, 721 A.2d at 1291; Paramount Communications, Inc. v. Time, Inc., 571 A.2d 1140, 1154 (Del. 1990), citing Smith v. Van Gorkom, 488 A.2d 858, 873 (Del. 1985); Mills Acquisition Co. v. MacMillan, Inc., 559 A.2d 1261, 1280 (Del. 1989); Aronson v. Lewis, 473 A.2d 805, 811 (Del. 1984). But in none of these cases was the court upholding the board s right to act over 10

15 the shareholders statutory right to enact bylaws governing the corporation. Thus Quickturn prevented a present board from limiting the actions of a future elected board. Paramount Communications, Inc. v. Time, Inc. upheld defensive measures to forestall a takeover threat that would undermine its right to determine corporate goals. Mills Acquisition Co. v. MacMillan, Inc. and Smith v. Van Gorkom, rather than upholding the board s right to determine corporate policy over shareholder interference, held that directors had violated their fiduciary duty of loyalty in connection with an acquisition. Aronson v. Lewis discussed when a shareholder had sufficiently alleged futility before bringing a derivative action. Each of these cases relied on 8 Delaware Code 141(a), identical to Jupiter Business Corporation Law 16-13(a), which requires that a board manage the corporation s business and affairs except as may be otherwise provided in this chapter or in its certificate of incorporation. None of the cases upheld the directors prerogative in the face of a statutorily authorized bylaw that 141(a) itself implicitly exempts from its coverage. In fact, Aronson recognized that an aggrieved shareholder could rely on besides a derivative action the machinery of corporate democracy. Finally, the Fletcher treatise s reference to the invalidity of bylaws that impede director action does not apply in Jupiter. See 8 FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE CORPORATIONS, supra, 4166, at 592 & n. 12. The New York case Fletcher cites, Joseph Polchinski Co. v. Cemetery Floral Co., 79 App.Div. 648, 433 N.Y.S.2d 825, 826 (1980), relied on a statutory scheme that differs from Delaware s and Jupiter s. The New York law specifically allows only the articles of incorporation to limit directorial discretion. See New York Bus. Corp. Law 701. But in allowing that discretion to be limited as may 11

16 be otherwise provided in this chapter, that statute does not subject the directors to the shareholders plenary power to enact bylaws. Some commentators have decried anti-pill bylaws as infringements on the board s traditional prerogative to manage the corporation. Kate Margolis, Comment, Binding Shareholder Bylaw Amendments: An Antidote for the Poison Pill, 67 MISS. L. J. 817, 844 (1988). But those commentators seem to be opposed to the measures only because they interfere with the delicate balance of power between the board and the shareholders.... Ibid. (calling for a legislative rather than judicial response to anti-pill bylaws). A measure s novelty does not render it a violation of the corporations codes. Unocal, 493 A.2d at The corporate law is not static but grows and develops in response to and in anticipation of evolving concepts and needs. Ibid. The law s silence on a specific matter does not render it prohibited. Ibid. 2. Because the Lock-Up Agreement mandated the loss of ACE s chief asset if the deal fell through, it should be held invalid on the ground that it was coercive. Recognizing the directors inherent conflict of interest during contests for corporate control, the Delaware Supreme Court has held that a board enacting defensive measures is entitled to the benefits of the business-judgment rule if it can show that its actions reasonably responded to a threat they reasonably believed existed to corporate policy and effectiveness. Unitrin v. American General, 651 A.2d at 1673, citing Unocal v. Mesa Petroleum, 493 A.2d at The business-judgment rule is a presumption that, in making a business decision, a corporation s directors acted on an informed basis, in good faith, and in an honest belief 12

17 that the action taken served the company s best interest. Unocal, 493 A.2d at 944. But the courts have an enhanced duty of judicial examination before the directors are entitled to the presumption s benefit. Ibid. Once the board identifies a threat, it does not have the unlimited discretion to defeat it by any Draconian means available. Unitrin, 651 A.2d at Instead, the response must be proportional to the threat, and the board must have acted reasonably in relation to the threat a particular bid poses to stockholder interests. Ibid. When all of the target boards defensive actions are inextricably related, they must be scrutinized as a single response to the perceived threat. Ibid. A defensive response that is either coercive or preclusive is Draconian and disproportionate to the threat. Id. at A coercive response is one that cram[s] down a management-sponsored alternative on its stockholders. Ibid. A preclusive response prohibits a hostile acquiror from making an offer for the company. Ibid. Defensive measures that are neither preclusive or coercive will be upheld if they fall within a range of reasonableness. In re Gaylord Container Corp. Shareholders Litigation, 753 A.2d 462, 480 (Del.Ch. 2000), citing Unitrin, 651 A.2d at A defensive measure is coercive or preclusive if no rational shareholder could afford to refuse the board s choice. AC Acquisitions v. Anderson, Clayton & Co., 519 A.2d 103, 113 (Del.Ch. 1986), cited at Unitrin, 651 A.2d at Thus a coercive measure requires that the shareholders comply on pain of losing a substantial portion of their investment. Id. at Under the circumstances of this case, granting the lock-up option was coercive. Lock- 13

18 ups are not per se invalid. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 181 (Del. 1986). They can entice other bidders to enter a contest for control of the corporation, maximizing shareholder profit. Ibid. But although those lock-ups that draw bidders to the corporation benefit shareholders, the ones that foreclose further bidding harm them. Ibid. The court must scrutinize a lock-up even more closely when the assets involved are the corporation s crown jewels. Mills Acquisition v. MacMillan, 559 A.2d at ACE s board is not acting as an auctioneer as were those in Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. and Mills Acquisition v. MacMillan with its sole fiduciary duty being to maximize the price that stockholders would receive for their shares. Here the lock-up agreement was coercive. No rational shareholder would approve an acquisition by anyone else but Celsius; in fact, no other company would even seek to acquire it. Any company that acquired ACE would find that it had lost its most important asset its crown jewels for a price that fell far below its value. The nature of the lock-up agreement shows that its purpose is to preclude other companies from making an offer rather than to entice a white knight into a deal. A lock-up agreement s purpose is to compensate the board s favored acquiror for the risks and costs involved. Revlon, Inc., 506 A.2d at 182. Contracting parties spend enormous resources bargaining for acquisitions. Paul F. Regan, Great Expectations? Contract Law Analysis for Preclusive Corporate Lock-Ups, 21 CARDOZO L. REV. 1, 113 (1999). These transaction costs include substantial out-of-pocket expenses and opportunity costs, including forgoing other transactions and dedicating senior management resources to the acquisition. Ibid. The suitor incurring these costs in the face of significant risks that the transaction will not be 14

19 consummated will insist on provisional compensation for those transaction costs. Id., at But if the transaction falls through, the acquiror has sustained these costs whether or not another entity acquires the target corporation. Thus the trigger would ordinarily be the acquisition s failure, not a third party s acquisition. See id., at 114 (lock-up or termination agreements exercisable if the acquisition proposal fails). Yet Celsius s acquisition proposal became exercisable only if someone else acquired ACE. That particular trigger demonstrates that the lock-up agreement s purpose was not to compensate Celsius for the costs of negotiating the merger agreement, but rather to prevent anyone else including Black & White from acquiring ACE. It was not meant to entice Celsius, it was intended to preclude any further acquisition. Thus the agreement is not subject to the business-judgment rule. The existence of the termination agreement alongside the Draconian lock-up agreement further demonstrates coercion. A termination fee is also meant to reimburse the prospective buyer for its expenditures in pursuing the transaction and for its opportunity costs. Kysor Industrial Corp. v. Margaux, Inc., 674 A.2d 889, 897 (Del.Super. 1996). Although provision for both a termination fee and an asset lock-up does not necessarily violate a board s duties under Unocal, the sheer size of the lock-up here would make the termination fee redundant. The termination fee s existence demonstrates that the lock-up was meant to preclude any other offers rather than to compensate Celsius. 15

20 CONCLUSION The Shareholder Rights Bylaw s novelty does not render it illegal. Shareholder limitations on boards defensive measures recognize the importance of sophisticated shareholders in corporate governance. They also recognize that a dissenting institutional investor s shares are not sufficiently liquid to allow it simply to sell. The Shareholder Rights Bylaw allows investors to maximize their investment on their own terms just like the Wall Street Rule had done and to determine when a board s defensive measure served the directors rather than the shareholders. By enacting the lock-up agreement with Celsius, ACE s directors violated their fiduciary duties. No company would acquire ACE with an agreement in place that would immediately destroy its investment. Because the agreement absolutely precluded any other corporation s acquisition, it is invalid. This court should therefore uphold the court of appeals reversal of the district court s order. Dated: Respectfully submitted, Attorneys for Respondents 16

21 APPENDIX Jupiter Business Corporation Law Bylaws. (a) The original or other bylaws of a corporation may be adopted, amended or repealed by the incorporators, by the initial directors if they were named in the certificate of incorporation, or, before the corporation has received any payment for its stock, the power to adopt, amend or repeal bylaws shall be in the stockholders entitled to vote, or, in the case of a nonstock corporation, in its members entitled to vote; provided, however, any corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors or, in the case of a nonstock corporation, upon its governing body by whatever name designated. The fact that such power has been so conferred upon the directors or governing body, as the case may be, shall not divest the stockholders or members of the power, nor limit their power to adopt, amend or repeal bylaws. (b) 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 the rights of its stockholders, directors, officers or employees. Jupiter Business Corporation Law (a) The business and affairs of a corporation shall be managed by or under the direction of its 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. (b) A director shall perform his or her duties as a director in good faith, in a manner he or she reasonably believes to be in or not opposed to the best interests of the corporation. (c) For purposes of this section, a director, in determining what he or she reasonably believes to be in the best interests of the corporation, shall consider the interests of the corporation s shareholders and, in his or her discretion, may consider any and all of the following: (1) the interests of the corporation s employees, suppliers, creditors, and customers; (2) community and societal interests; and (3) the long-term, as well as short-term, interests of the corporation and its shareholders. 17