Presented below is a brief survey of leading cases interpreting Pennsylvania corporate law in situations involving takeovers, proxy fights or other matters affecting corporate changes of control. This summary is by no means exhaustive. However, these are the cases that most frequently come up in our experience representing a broad range of Pennsylvania targets and bidders.1
For years, Pennsylvania takeover case law was known as a “poor man’s Delaware jurisprudence.” Like their cousins in other states, the Pennsylvania courts frequently looked to the more robust Delaware case law to address corporate control matters. Takeover battles were infrequent, and when they did occur the courts saw a mother lode of precedent in Delaware.
Matters began to change with the significant legislative overhauls of the Pennsylvania Business Corporation Law (the “BCL”) beginning in 1988. These overhauls modernized Pennsylvania’s corporate code but also represented a marked departure from the statutes and common law in Delaware.
In 1990, the dam burst for good. Governor Robert P. Casey signed into law controversial and unique takeover statutes widely hailed at the time as the toughest in the nation. With these changes and the takeover battles that followed, the Pennsylvania courts have been forced to carve out a distinctive niche in matters of state corporate case law. To be sure, the courts still look to Delaware case law to fill in the interstices where the courts are presented with novel situations, or where prior Pennsylvania precedent or existing statutes are so similar to Delaware’s that such deference makes sense. However, there is no question that on the most fundamental matters involving change of control situations, Pennsylvania case law is different—and sometimes, dimensionally so.
AMP Inc. v. Allied Signal Inc.2 On August 10, 1998, Allied Signal, Inc. commenced a hostile, all cash tender offer for all of the shares of AMP Incorporated and also commenced a consent solicitation designed to pack the AMP board with Allied Signal nominees. At the time, AMP had in place a “dead-hand” rights plan which provided that if a new majority of directors was elected in a proxy contest, only the continuing directors—that is, directors who were on the board prior to the change in majority—could vote to redeem the pill. On August 20, 1998, in response to the consent solicitation, AMP’s board amended the pill to remove the dead-hand provision and put in its place a “no-hand” provision. This made the pill non-redeemable and non-amendable should AMP’s disinterested board majority be replaced by a majority of new directors nominated by an unsolicited acquiring company—in this case, Allied Signal. The revised pill would remain non-redeemable and non-amendable until November 6, 1999, when the pill would expire. The board said it would not adopt a new rights plan for at least six months after the expiration of the no-hand pill. So AMP got breathing room, but not forever.
“The poison pill case law in Pennsylvania is a clear example where Pennsylvania’s statutory departure from Delaware’s common law has real world consequences in takeover situations.”
The federal district court held that the adoption of the no-hand pill was within the AMP board’s statutory authority and was not an ultra vires act or breach of fiduciary duty. The court cited Pennsylvania’s strong pill validation statute, BCL §2513, which authorizes “such terms as are fixed by the board.” The court further noted that BCL §1715 provides that the fiduciary duties of a board do not require it to redeem, modify or render inapplicable any rights plan adopted under BCL §2513. The pill was not ultra vires because it addressed Allied Signal’s attempt to propose a merger, and only a board may propose a merger. Under BCL §1715, the AMP board could properly consider the intent and conduct of the hostile bidder and the court was clearly concerned with the alleged conflict of interest presented by Allied Signal’s slate of affiliated, non-independent nominees. Finally, the court relied heavily on BCL §1715’s strong evidentiary deference to the business judgment of a disinterested board, and concluded that the finite nature of the pill militated against a finding of lack of good faith or self dealing under BCL §1715.
The Allied Signal case remains the most prominent case involving a Pennsylvania target’s use of a rights plan, in this situation as a “sword.” It forms bookends with another case, Norfolk Southern Corp. v. Conrail, Inc.,3 discussed in greater detail below. In Conrail, a federal district judge, applying Pennsylvania law, refused to require the redemption of Conrail’s dead-hand poison pill instituted in connection with Conrail’s proposed acquisition by CSX Corporation. Norfolk Southern Corporation was attempting to break up the deal through its hostile tender offer and had sued to have the pill redeemed. In this context, the Pennsylvania antitakeover statutes were employed to use a rights plan as a “shield.” The poison pill case law in Pennsylvania is a clear example where Pennsylvania’s statutory departure from Delaware’s common law has real world consequences in takeover situations. “Slow-hand” and “no-hand” pills appear to be a dead letter in Delaware.4
Lockups and Fiduciary Duties
Norfolk Southern Corp. v. Conrail, Inc.5 On October 15, 1996, Conrail and CSX executed a merger agreement under which CSX would acquire Conrail in a complex, two-tier transaction. The first tier would be a cash tender offer for 40% of Conrail’s stock, and the second tier would be a back-end stock-for-stock merger to be voted on by Conrail shareholders. In order not to trigger “fair value” cash put rights by shareholders under Subchapter E of Chapter 25 of the BCL (“Subchapter E”), which would have applied if anyone—friend or foe—acquired 20% or more of Conrail, the parties agreed to break down the tender offer into two tranches: first, CSX would tender for 19.9% of the Conrail stock and then, following a special meeting at which Conrail’s shareholders would approve a charter amendment to opt out of the put right provision, CSX would tender for an additional 20.1% of the Conrail shares. CSX was also granted an option by Conrail to buy additional shares so that, upon exercise after the tender offers, CSX’s total ownership would be approximately 50%. The ostensible purpose of the first tender offer was to better assure passage of the charter amendment, and the ostensible purpose of the stock option was to better assure approval of the merger.
In addition to the extensive protections afforded by the Pennsylvania antitakeover statutes, the Conrail-CSX merger agreement contained a number of specific lockup provisions designed to ward off any competing bids. Among other things, a no-shop or “lock-out” provision prevented Conrail's board from negotiating with third parties, terminating the CSX transaction or approving a competing transaction for 180 days from the date of the merger agreement (later extended to 270 days and then two years). Conrail agreed to keep its poison pill in place and not exempt from its terms any party but CSX. Conrail also granted CSX a $300 million break fee (approximately 3.5% of the total value of Conrail) and a stock option to acquire Conrail shares.
After the Conrail-CSX merger agreement was announced, Norfolk Southern, a competitor of CSX, commenced an unsolicited cash tender offer for all of Conrail’s shares at a higher price. CSX, raising its bid, completed its 19.9% initial tender offer. However, the Conrail shareholders rebelled en masse against what they perceived to be an inferior, cram down Conrail-CSX deal and voted down the put statute charter amendment, despite the additional voting power gained by CSX via its tender offer. After further skirmishing and rebids, the parties agreed to a settlement under which Norfolk Southern and CSX carved Conrail into pieces.
As part of its attack on the Conrail-CSX merger agreement, Norfolk Southern sought a preliminary injunction in federal court in November 1996, arguing that the transaction was illegally coercive, that the Conrail board breached its fiduciary duties by agreeing to the provisions and ignoring the Norfolk Southern bid, and that the lock-out and poison pill provisions were ultra vires. Ruling from the bench, the judge denied the motion.
The court placed heavy reliance on BCL §§1712 and 1715, the core fiduciary duty provisions governing Pennsylvania public corporations enacted as part of the 1990 antitakeover statutes. Those sections provide, among other things, that the directors’ fiduciary duties run to the corporation, not to the shareholders per se; that the directors may consider all constituencies affected by the directors’ actions, and not just the shareholders, primarily or otherwise; that the board’s fiduciary duties do not require the board to redeem, modify or render inapplicable any poison pill, or render inapplicable any of the Pennsylvania antitakeover statutes because of a takeover bid; and that, in assessing fulfillment of the board’s fiduciary duties, no higher burden of proof applies just because the applicable matter involves a change of corporate control.
“To its supporters, the bellwether Conrail decision represents a middle-of-the-fairway approach by the court in applying the 1990 antitakeover statutes…To its detractors, the decision represents an overly textualist approach to the statutes in a situation involving abdication of fiduciary duties and structural coercion of a sort never contemplated by the legislators.”
Most prominently, the court noted BCL §1715’s presumption that any act by a board relating to matters of corporate control that has been approved by a majority of disinterested directors is presumed to comply with the standard of care unless it is proven by “clear and convincing” evidence that the disinterested directors did not act in good faith after reasonable investigation. The court also noted BCL §§1502 and 1721, which provide that, in the first instance, the decision to accept or reject a takeover rests with the board, and there is no mandatory duty to respond to a takeover proposal.
The court dismissed Norfolk Southern’s other related claims. It rejected Norfolk Southern’s coercion argument, citing the absence of case law and the options available to the Conrail shareholders with respect to the tender offers and other decisions presented in the deal. The court brushed aside Norfolk Southern’s claim that the two-tier Conrail-CSX structure took the transaction outside of the protections of the antitakeover statutes. And, with an eye to the lock-out provision, the court did not view entering into the merger agreement as an act beyond the board’s general power to enter into contracts.
In a related decision several months later addressing the extension of the lock-out period to 720 days, the court reiterated the arguments made in its earlier opinion. Interestingly, the court noted that the absence of a fiduciary duty provision did not mean one was not implicit, but that in any event there had been “no showing or claim that any situation has arisen as yet or will or is likely to arise in the future that would impose any sort of fiduciary duty upon the board of directors to disregard the lockout or the no-shop provisions.”6
The Conrail case remains the high water mark in Pennsylvania takeover case law. Prior to the decision there had been few Pennsylvania cases dealing in depth with defensive measures. The most prominent was probably Keyser v. Commonwealth Nat’l Fin. Corp.,7 where the court upheld a merger agreement’s 24.9% stock option under Pennsylvania law, noting that such “lock up provisions…are very common in bank mergers.” Another influential case prior to Conrail was Enterra Corp. v. SGS Associates,8 where the court upheld a standstill agreement between Enterra Corporation and one of its substantial shareholders under the business judgment rule and concluded that the board was not obligated to submit such shareholder’s takeover bid to the company’s other shareholders.9 These and the few other cases are largely unremarkable as to analysis or outcome.
To its supporters, the bellwether Conrail decision represents a middle-of-the-fairway approach by the court in applying the 1990 antitakeover statutes—almost as if the Pennsylvania legislators had the Conrail takeover battle in mind when crafting the provisions. To its detractors, the decision represents an overly textualist approach to the statutes in a situation involving abdication of fiduciary duties and structural coercion of a sort never contemplated by the legislators.
Despite Pennsylvania’s statutory rejection of the Revlon Inc. v. Mac Andrews & Forbes Holdings Inc.10 and Unocal Corp. v. Mesa Petroleum Co.11 doctrines in Delaware case law, members of the takeover bar still speculate how the case would have been decided under Delaware law. Although the initial Conrail-CSX proposal may have been viewed as a strategic, “non-Revlon” transaction under Delaware law, there is considerable difference of opinion as to what substantive outcomes on the defensive matters would have been different if the case had been decided in the Delaware Court of Chancery under the Unocal standards. However, the denouement of the great Conrail takeover battle points to one ineluctable conclusion reached by most sophisticated observers: the law of market forces is national in scope, and Conrail’s breathtaking dismemberment in the public square by the competing bidders is a reminder that state laws and judicial decisions are often not showstoppers in takeover battles.
Beneficial Ownership Under the Takeover Statutes
Pennwalt Corp. v. Centaur Partners.12 On January 13, 1989, Centaur Partners, a hostile bidder, began to solicit consents from the shareholders of Pennwalt Corporation to demand a special shareholders’ meeting at which the shareholders of Pennwalt would vote to replace the entire board with a slate of directors to be proposed by Centaur. Centaur’s solicitation did not solicit a proxy from the shareholders with respect to the matters to be voted on at the proposed meeting; rather, it merely solicited consent to demand the special meeting. Centaur’s solicitation included a proviso stating that if a court were to determine that any person executing a demand formed a 20% “controlling group” with Centaur under Subchapter E, that person’s demand notice would be null and void.
Notwithstanding this disclaimer, Pennwalt sued Centaur in federal court, claiming that Centaur and the signing shareholders had in fact formed a “controlling group” under Subchapter E, and the demand was therefore void by its own terms. The court agreed, reasoning that Centaur and the other shareholders acted in concert to demand a special meeting to effect a “control transaction” under Subchapter E, and if such special meeting were held, the group would have voting power over an aggregate of at least 20% of the outstanding shares entitled to vote. Centaur argued that the statute was not applicable to proxy solicitations. The court rejected Centaur’s argument by holding that Centaur’s solicitation was not a proxy solicitation for purposes of the statute.
Centaur alternatively argued that Subchapter E was not applicable to its solicitation where a person holds voting power as an agent for one or more beneficial owners. The court rejected this argument because the Centaur solicitation stated that consent to it would not affect the signing shareholder’s ability to vote at the proposed meeting (i.e., it did not constitute a proxy). Thus, on the one hand, the court found that Centaur would not obtain voting power through the solicitation as an agent or otherwise. And, on the other hand, the court found that the solicitation gave Centaur voting power of at least 20%. The court granted Pennwalt a preliminary injunction preventing the dissident group from holding a special meeting.
Norfolk Southern Corp. v. Conrail, Inc.13 Norfolk Southern, in yet another attempt to foil the Conrail-CSX deal discussed above, argued that CSX and certain of Conrail’s directors and officers formed a “controlling group” under Subchapter E, thereby triggering the shareholders’ fair value cash put rights. CSX, after completing its initial tender offer, held slightly less than 20% of Conrail’s outstanding stock. The court determined that although Conrail’s board and officers would most likely continue to support the merger and vote their shares in its favor, there was no evidence of an express or implied agreement that these persons in their individual capacity would vote those shares in lockstep with CSX. Furthermore, the court found that even if CSX had gone over the 20% threshold, CSX did so inadvertently within the meaning of the inadvertence exception to the statute, and CSX had promptly reduced its Conrail position after becoming aware of the allegation that it was over the threshold. As a result, the court denied Norfolk Southern’s request for a preliminary injunction to prohibit Conrail from holding a shareholders’ meeting to consider opting out of Subchapter E.
Control Share Acquisitions
AMP Incorporated v. AlliedSignal Corp.14 As discussed above, in August 1998, Allied Signal announced a tender offer for all outstanding shares of common stock of AMP. After AMP’s board rejected the offer, Allied Signal amended its offer to reduce the number of shares sought to approximately 9.1% of the outstanding shares, an amount below the threshold that would trigger AMP’s pill. In an attempt to block Allied Signal from voting its shares, AMP argued that the shares were “control shares” under Subchapter G of Chapter 25 of the BCL (“Subchapter G”), which may not be voted without shareholder approval if the acquiring person’s holdings pass any of the 20%, 33 1/3% and 50% control share acquisition voting power thresholds specified in the statute.
Under Subchapter G, control shares include shares that were purchased with the intent of making a control share acquisition or purchased within 180 days before a control share acquisition. The district court initially ruled that Allied Signal’s shares were control shares because they were purchased with the intention of buying additional shares to make a control share acquisition.
“The courts have been inconsistent in their interpretations regarding beneficial ownership under Pennsylvania’s antitakeover laws and many of the decisions in this area have been controversial.”
That ruling was reversed by the Third Circuit, which concluded that shares acquired with the intention of making a control share acquisition are not control shares immediately upon their acquisition, but rather, are only control shares when the acquiring person’s holdings pass the next percentage threshold specified in the statute. In essence, the shares retroactively become control shares when aggregated with later-purchased shares that bring the acquiring person’s total holdings over the applicable percentage threshold. Allied Signal’s total holdings never passed the 20% threshold, so its voting shares could not be disenfranchised prospectively, even though it intended to complete a control share acquisition in the future.
Committee for New Management of Guaranty Bancshares Corporation v. Dimeling.15 The Committee for New Management of Guaranty Bancshares Corporation, an association of several shareholders of Bancshares, waged a proxy contest to elect its own slate of directors to Bancshares’ board at the 1990 annual shareholders’ meeting. The proxy card circulated by the Committee included, in addition to the specific items to be acted upon described on the card, a grant of discretionary authority to vote on any other business presented at the meeting. The Committee would have won the election except that the judge of elections disenfranchised the Committee votes as control shares under Subchapter G. Although BCL §2563(b)(3) provides an exception to the disenfranchisement of Subchapter G for voting power acquired through a revocable proxy, that exception does not apply if the proxy empowers the holder to vote on matters other than “the specific matters described in such proxy…in accordance with the instructions of the giver of such proxy.” The judge of elections determined that this exception was not applicable to the Committee’s revocable proxies because they included a grant of discretionary authority.
The Committee argued that the proxy card fell within the exception because it did not empower the holders to bring new proposals before the meeting, but the court ruled that this was irrelevant. The Committee also argued that Subchapter G does not apply to proxy contests at all because there is no permanent acquisition of voting power, but the court ruled that the revocable proxy exception would be unnecessary if that were the case. Finally, the Committee argued that the legislature did not intend for the statute to prohibit revocable proxies that grant discretionary authority unless the proxy contest is accompanied by a takeover attempt. Based on principles of statutory construction, the court rejected any inquiry into legislative intent because it found the text of the statute to be unambiguously applicable to all proxy contests. Accordingly, the court ruled that the votes of the Committee were properly disenfranchised. Nevertheless, the court ruled that the election was invalid because, although the shares represented by the Committee proxy were disenfranchised as control shares under Subchapter G, such shares still count as outstanding shares entitled to vote for purposes of determining whether a quorum was established. With the number of outstanding shares entitled to vote not reduced by the Committee’s proxy shares, the percentage of shares present was not sufficient to establish a quorum.
The courts have been inconsistent in their interpretations regarding beneficial ownership under Pennsylvania’s antitakeover laws and many of the decisions in this area have been controversial. For different statutes, and sometimes for different parts of the same statute, the courts have applied different principles and different levels of textualism. Sometimes these decisions comport with classic interpretations of beneficial ownership under federal securities laws and sometimes they do not. As a result, although some precise questions are now settled in this area, it is difficult to extract a unifying theme which one can apply to the next set of facts in an effort to anticipate the outcome should the need for adjudication arise. Without question, this area of Pennsylvania jurisprudence is a trap for the unwary.
Scheduling Shareholder Meetings
Norfolk Southern Corporation v. Conrail, Inc.16 As noted, part of Conrail’s and CSX’s strategy in securing their deal was for Conrail to hold a special shareholders’ meeting for the purpose of approving a charter amendment to opt out of Subchapter E, effectively paving the way for CSX’s tender offer and merger with Conrail without triggering the shareholder put option. To ensure passage of the opt-out amendment, Conrail planned to adjourn or postpone the special meeting until it anticipated receiving the required vote. The court granted Norfolk Southern a preliminary injunction to prevent the non-convening, postponing or adjourning of the special shareholders’ meeting, holding that Conrail’s potential rolling adjournment of the meeting would disenfranchise shareholders and be “fundamentally unfair” to those shareholders who may oppose the deal.
Jewelcor Management, Inc. v. Thistle Group Holdings, Co.17 On January 20, 2002, the board of directors of Thistle Group Holdings, Co. determined that its 2002 annual shareholders’ meeting would be held on April 17, 2002. On February 13, 2002, Jewelcor Management, Inc., a stockholder of Thistle, notified Thistle that it would be nominating three directors for election to the board. JMI prepared a proxy solicitation schedule based on the April 17 meeting date, with responses to be received on April 4 at the earliest. Thistle’s board then met to authorize moving the meeting to April 3, 2002, thereby protecting its own slate of nominees from potential ouster by the insurgents.
“[T]arget boards can expect that actions that significantly thwart the exercise of shareholder voting rights will receive intense scrutiny in Pennsylvania.”
The court issued an injunction rescheduling the meeting for no earlier than April 17, 2002. The court noted that Thistle’s actions were not illegal, as BCL §1755 provides that an annual shareholders’ meeting will be held at a time fixed in accordance with a company’s bylaws, and Thistle had set the meeting for April 3 in accordance with its bylaws. However, the court found that the board intentionally manipulated the election to perpetuate its control of the company. Furthermore, the court ruled that because the right to vote one’s shares is one of the most fundamental rights of ownership, where the board’s intent is to manipulate that right, the conduct need not be illegal for the court to prohibit it.18
In granting the injunction, the court noted that precedent from other states lent strong support to its decision. The court took particular instruction from the Delaware Court of Chancery, which has held that when a board acts to impede shareholder voting, it “bears the heavy burden of demonstrating a compelling justification for such action.”19
Although Pennsylvania courts have not explicitly adopted a Blasius-type “compelling interest” standard, they are clearly sensitive to defensive actions that touch upon the corporate voting franchise and have shown a willingness to follow the approach taken by Delaware courts in several instances. Accordingly, target boards can expect that actions that significantly thwart the exercise of shareholder voting rights will receive intense scrutiny in Pennsylvania.
Bylaw Advance Notice Provisions
High River Ltd. Partnership v. Mylan Labs20 (“High River 1”) and High River Ltd. Partnership v. Mylan Labs21 (“High River 2”). In July 2004, Mylan announced the proposed acquisition of another pharmaceutical company, King Pharmaceuticals, Inc. The proposal prompted a firestorm of protest from a number of Mylan shareholders, including High River, which announced that it would oppose the deal when it came up for a shareholder vote. Mylan subsequently restructured the proposed deal to avoid the need for a shareholder vote. High River responded in August 2004 by announcing a proxy contest at the upcoming annual meeting. On February 18, 2005, after a series of acrimonious exchanges between Mylan and High River, the Mylan board amended the company’s bylaws to require that director nominations be submitted by February 28, 2005—rather than March 31, 2005, as provided under the old bylaws—and rescheduled the annual meeting in 2005 from its customary date of July 29 to October 28. High River immediately objected and eventually sought injunctive relief on the grounds that the amendment was an improper attempt to obstruct the election of new directors and entrench the current board. High River argued that as a result of new February 28 nomination date, it had only five business days to submit its director slate when accounting for intervening weekends and holidays. And, as a result of the new October 28 meeting date, the amended bylaws changed the period for advance notice from four to eight months.
“It is fair to say that in both [Pennsylvania and Delaware] the area remains somewhat terra incognita.”
In High River 1, the court rejected the temporary restraining order sought by High River and found that High River suffered no irreparable harm. It stated that High River could comply with the new February 28 nomination deadline or wait until a later date, relying on expected judicial relief. In effect, the court did not conclude that the truncated nomination period was per se inequitable, but it did not conclude that the period was “fair and reasonable” either. High River subsequently withdrew its complaint, put in its slate of board nominees before the deadline, and refiled a complaint requesting invalidation of the bylaw amendments and imposition of a new nomination period which would accommodate additional dissident nominees.
In High River 2, the court held that the facts underlying High River’s injunctive claims represented a cognizable violation of Pennsylvania law. BCL §1758 allows corporations to enforce advance notice provisions that are “fair and reasonable” in light of corporate needs. The court held that there was no indication that the extension of the advance notice period to eight months was necessary to allow the company to prepare proxy statements, verify qualifications of proposed nominees or take any other action related to the meeting agenda.
While bylaw advance notice periods frequently converge around the 60-120 day period preceding the meeting date, they can sometimes be longer. Indeed, some Pennsylvania companies’ bylaws are keyed off of the prior proxy statement’s mailing date as opposed to the meeting date, thus extending the advance notice period. Unlike Delaware’s corporate code, the BCL sets out an explicit imprimatur for advance notice bylaw provisions applicable to nominations and other business in §1758(e).22 The High River cases were in a preliminary setting and their analysis was relatively undeveloped, so the contours of the “fair and reasonable” standard under the statute have not been elucidated. In addition, the extension of the advance notice period by the target was taken in the heat of battle, and a court might approach its analysis differently if the advance notice period was long-standing and shareholders had adequate notice.
In Delaware, litigation over advance notice provisions has been more commonplace. However, to date, there has been surprisingly little case law demarcating the outer bounds of what constitutes a valid pre-meeting time period, as compared to other interpretative issues such as the types of shareholder business that are included under the advance notice provisions.23 In one recent case, the Delaware Court of Chancery denied a motion for a preliminary injunction and held that it was unlikely that a 150-day advance notice period for shareholder proposals, which was adopted by the board on a “clear day,” was unreasonably long or unduly restrictive.24 It is fair to say that in both jurisdictions the area remains somewhat terra incognita.
Cuker v. Mikalauskas.25 Cuker involved a garden variety shareholder derivative suit claim with respect to alleged financial mismanagement at a public utility, PECO Energy Company. PECO set up a special committee of independent directors which eventually found that the complaint lacked merit. The lower court held that as a matter of public policy the company lacked the power to terminate pending derivative litigation. The Pennsylvania Supreme Court reversed, holding that the business judgment rule permits a board to terminate such proceedings pursuant to BCL §1721, which vests general powers in the board. In so ruling, the Pennsylvania Supreme Court adopted §§7.02-7.13 of the American Law Institute Principles of Corporate Governance, which set forth a comprehensive mechanism to address shareholder derivative suits by companies acting through independent directors (typically “special litigation committees”). Unlike in Delaware, where a shareholder can either make a demand on the board of a company to file suit or file a suit on its own if the complaint pleads with particularity acts that show demand on the board would be futile, in Pennsylvania a shareholder claimant must make a demand on the board and cannot sue claiming “demand futility.”
“The synergistic effects of the 1990 Pennsylvania antitakeover statutes when combined with Cuker’s teachings provide a powerful deterrent against shareholder derivative claims in takeover litigation in Pennsylvania.”
Under Cuker, the actions of a special litigation committee in dismissing a derivative suit typically will be covered by the business judgment rule unless the shareholder can prove to a court that the special litigation committee was not disinterested, was not assisted by counsel, did not prepare a written report, lacked independence, did not perform an adequate investigation, or did not act in good faith.
The synergistic effects of the 1990 Pennsylvania antitakeover statutes when combined with Cuker’s teachings provide a powerful deterrent against shareholder derivative claims in takeover litigation in Pennsylvania.26 The broad constituency provisions, heavy burden on challenging independent directors’ actions and rejection of Delaware’s heightened duties on directors in takeover situations under BCL §1715 lay down a heavy gauntlet for strike suitors to overcome. As discussed above, BCL §1717 provides further that the duty of the board of directors is solely to the corporation and cannot be enforced directly by shareholders. As a result, these actions get funneled into Cuker’s panoply of procedural requirements and its deference to special litigation committees under the business judgment rule.
Crane Co. v. Lam.27 Pennsylvania adopted the Takeover Disclosure Law28 in 1976, a typical first-generation antitakeover statute. It put in place disclosure requirements for takeover bidders including, among other things, the obligation to file a registration statement with the Pennsylvania Securities Commission at least 20 days prior to making a takeover offer. The Crane court enjoined enforcement of the 20-day waiting period of the statute on the grounds that the provision is preempted by federal law.
“[A]s in other states, compliance with the Takeover Disclosure Law has become an unremarkable procedural hurdle in effecting hostile bids in Pennsylvania.”
Hostile bidders who are seeking control of a Pennsylvania corporation may still have to contend with other aspects of the Takeover Disclosure Law, but they are no longer required to file a registration statement with the Pennsylvania Securities Commission 20 days prior to a takeover offer. Post-Crane, the Commission has agreed to court orders enjoining enforcement of statutory provisions which conflict with federal laws regarding hostile tender offers. The Takeover Disclosure Law does impose additional disclosure requirements apart from those required by the federal tender offer rules. However, as in other states, compliance with the Takeover Disclosure Law has become an unremarkable procedural hurdle in effecting hostile bids in Pennsylvania.