721 A.2d 1281 (Del. 1998)
Mentor Graphics Corporation is an Oregon corporation headquartered in Wilsonville, Oregon that manufactures, markets, and supports electronic design automation software and hardware.1 Quickturn Design Systems, Inc. is a Delaware corporation headquartered in San Jose, California with 17,922,518 outstanding shares of common stock traded on NASDAQ; it invented logic emulation technology and controls an estimated 60% of the worldwide emulation market along with the largest intellectual property portfolio in the industry.2
Quickturn's board consists of eight members, seven of whom are outside independent directors with distinguished careers and significant technological experience who collectively own approximately one million shares or about 5% of Quickturn's common stock.3 Since 1996 Mentor and Quickturn have been engaged in patent litigation that resulted in Mentor being enjoined from selling, manufacturing, or marketing its emulation products in the United States until at least April 28, 2009, following orders from the International Trade Commission that were affirmed by the Federal Circuit.4
Mentor began exploring the possibility of acquiring Quickturn in 1997, retaining Arthur Andersen to prepare the Project Velocity report in October 1997 and Salomon Smith Barney as financial advisor in December 1997.5 After Quickturn's stock price declined in 1998 due to the downturn in the Asian semiconductor market, Mentor announced on August 12, 1998 an unsolicited cash tender offer for all Quickturn shares at $12.125 per share, representing an approximate 50% premium over the immediate pre-offer price, to be followed by a second-step merger at the same price, together with a proxy contest to replace the Quickturn board at a special stockholders meeting.6
Quickturn's board met on August 13, 17, and 21, 1998, retained Hambrecht & Quist as its financial advisor, received valuation analyses showing Quickturn's standalone value higher than the tender offer price under most methodologies, and concluded that Mentor's offer was inadequate based on the temporary business trough, Quickturn's technology leadership and market share, projected growth especially in Asia, the value of the patent litigation, and problems that would arise for customers, employees, and technology from a hostile combination.7
At the August 21 meeting the board amended Quickturn's bylaws to require that any special meeting requested by shareholders holding 10% or more of the stock be held not less than 90 nor more than 100 days after validation of the request.8 The board also amended Quickturn's shareholder rights plan by replacing its continuing director feature with a Delayed Redemption Provision under which a newly elected board cannot redeem the rights for six months if the purpose or effect would be to facilitate a transaction with an Interested Person such as Mentor.9
Mentor filed suit in the Court of Chancery on August 12, 1998 seeking declaratory and injunctive relief against both defensive measures.10 After a trial held on October 19, 20, 23, 26, and 28, 1998, the Court of Chancery upheld the By-Law Amendment but invalidated the Delayed Redemption Provision.11 Quickturn appealed the invalidation ruling; during the litigation Mentor obtained tenders representing over 51% of Quickturn's outstanding stock and the special meeting was noticed for January 8, 1999.12
Whether the Delayed Redemption Provision adopted by Quickturn's board of directors is valid under Delaware law?13
Under Delaware law, the board of directors has the ultimate responsibility for managing the business and affairs of a corporation pursuant to 8 Del. C. § 141(a), which requires that any limitation on the board's authority be set out in the certificate of incorporation.14 A provision that prevents a newly elected board from discharging its fundamental management duties and fiduciary obligations is invalid.15
No.16 The Delayed Redemption Provision prevents a newly elected board of directors from completely discharging its statutory authority under 8 Del. C. § 141(a) to manage Quickturn by redeeming the Rights Plan for six months after taking office if the redemption would facilitate a transaction with an Interested Person such as Mentor.17 Quickturn's certificate of incorporation contains no provision limiting the board's authority.
The DRP restricts the board's power in an area of fundamental importance to the shareholders.18 It prevents the board from fulfilling its fiduciary duties to protect the interests of Quickturn and its stockholders.19
The Delayed Redemption Provision is invalid under Delaware law.20