Corporate Practice Series Portfolio No. 78, The Takeover Law of Delaware, analyzes Section 203 of Delaware's General Corporation Law, which was adopted to encourage fully priced tendered offers and negotiated acquisitions and discourage highly leveraged takeovers of corporations. Section 203 generally prohibits any business combination with an “interested stockholder” for a period of three years unless certain conditions are met.

Portfolio 78-1st: The Takeover Law of Delaware

I. Evolution of §203
    . Introductory Material
    A. The Need for §203
    B. Development of Second-Generation Takeover Statutes
         1. Control-share acquisition statutes
         2. Fair-price laws
         3. Control-share cash-out laws
         4. Business combination moratorium statutes
    C. Delaware’s Response to CTS
    D. Principal Controversies Surrounding §203
         1. The economic policy debate
         2. The 90 percent threshold debate
         3. The opt-out/opt-in debate

II. Analysis of §203(a)
    . Introductory Material
    A. Introduction
         1. Business combinations
         2. Interested stockholders and the three-year moratorium
    B. Prior Approval by the Board
         1. Business judgment rule or heightened duty?
         2. What constitutes prior approval?
         3. The issue of subsequent approval
    C. The 85 Percent Exception
         1. Sterilized shares: directors and employee stock plans
         2. Calculation of the 85 percent threshold
    D. Approval by Minority Stockholders

III. Section 203(b): The Seven Exemptions From §203(a)
    . Introductory Material
    A. Exclusion by Original Certificate of Incorporation
    B. The Board’s 90-Day Opt-Out Decision
    C. The Stockholders’ Power to Opt Out
         1. The 12-month waiting period
         2. Voting requirements under §203(b)(3)
    D. Non-Public Corporations
    E. Inadvertent Interested Stockholders
    F. Exemption for Competitive Offers to Acquire the Company
         1. The three prerequisites to the competitive bid exemption
         2. Types of competitive bids that trigger the exemption
         3. The 20-day notice requirement
         4. Additional issues arising under §203(b)(6)
    G. Exclusion of Transactions With Grandfathered Interested Stockholders
    H. Opting Into §203

IV. Section 203(c): Definitions
    . Introductory Material
    A. Affiliates
    B. Associates
    C. Business Combinations
         1. Mergers and consolidations
         2. Sales, leases, and other dispositions of assets
         3. Issuance or transfer of stock
         4. Other transactions that increase the interested stockholder’s proportionate stock interest
         5. Receipt by interested stockholder of indirect financial benefit
    D. Control
    E. Interested Stockholder
         1. Exceptions to interested stockholder status
         2. Additional interested stockholder issues
    F. Person
    G. Stock
    H. Voting Stock
    I. Owner
    J. Limitation on Supermajority Vote Provisions
    K. Exclusive Chancery Court Jurisdiction

V. Strategies and Techniques for Coping With §203
    . Introductory Material
    A. The Impact of §203 on Acquisition Techniques
         1. Tender offers
              a. Tender offer combined with consent solicitation
              b. Naked tender offer
              c. Foothold approach
              d. Conditional tender offers
              e. Circumventing §203 after the offer
         2. Financing arrangements
              a. Junk-bond financing
              b. Bridge financing
         3. Open market purchases
    B. The Impact of §203 on Defensive Techniques
         1. Charter and bylaw provisions
              a. Supermajority-vote provisions
              b. Fair-price provisions
              c. Business-combination provisions
              d. Classified board
              e. Voting provisions
              f. Elimination of action by written consent
              g. Bylaws controlling nominations and written consent
         2. Rights plans and poison pills
              a. Share-purchase rights plans
              b. Notes-purchase rights plans
         3. Restructuring defenses
              a. Sale of major assets
              b. Master limited partnerships
              c. Splitups and spinoffs
              d. Self-tenders
    4. Recapitalizations and reorganizations
    5. White knights and other arrangements

VI. Constitutionality of Delaware’s Takeover Statute
    . Introductory Material
    A. Edgar v. MITE Corp.: The Supreme Court Strikes Down the First Generation of Takeover Statutes
         1. Commerce clause violation
         2. Preemption ambiguity
    B. CTS Corp. v. Dynamics Corp. of America: The Supreme Court Upholds a Second-Generation Statute
         1. Lack of preemption
         2. No commerce clause violation
    C. The Delaware Takeover Statute: §203
         1. Analysis of preemption issues
         2. Analysis of commerce clause issues
         3. Retroactive application of §203
    D. The Judicial View of §203’s Constitutionality
 

Portfolio 78-1st: The Takeover Law of Delaware

Wks. 1 Nov. 19, 1987, Exposure Draft of Section 203 of the Delaware General Corporation Law

Wks. 2 Memorandum Dated Dec. 8, 1987, from Ken Lehn and Mark Mitchell to the Commissioners of the Securities and Exchange Commission

Wks. 3 Letter Dated Dec. 8, 1987, from SEC Chairman David S. Ruder to E. Norman Veasey

Wks. 4 Letter Dated Dec. 10, 1987, from SEC Commissioner Charles C. Cox to the Council of the Corporation Law Section of the Delaware State Bar Association

Wks. 5 Letter Dated Dec. 10, 1987, from SEC Commissioner Joseph A. Grundfest to David B. Brown, Secretary, Council of the Corporation Law Section of the Delaware State Bar Association

Wks. 6 Letter Dated Dec. 18, 1987, from SEC Commissioner Joseph A. Grundfest to David B. Brown, Secretary, Council of the Corporation Law Section of the Delaware State Bar Association

Wks. 7 Letter Dated Dec. 22, 1987, from SEC Commissioner Joseph A. Grundfest to David B. Brown, Secretary, Council of the Corporation Law Section of the Delaware State Bar Association

Wks. 8 Letter Dated Dec. 31, 1987, from SEC Commissioner Joseph A. Grundfest to E. Norman Veasey

Wks. 9 Letter Dated Dec. 10, 1987, from FTC Chairman Daniel Oliver and Commissioner Terry Calvani to David B. Brown, Secretary, Council of the Corporation Law Section of the Delaware State Bar Association

Wks. 10 Letter Dated Nov. 30, 1987, from Andrew E. Bogen to Lewis S. Black, Jr., and R. Franklin Balotti

Wks. 11 Letter Dated Dec. 1, 1987, from Harold I. Kahen to Michael Goldman

Wks. 12 Letter Dated Dec. 1, 1987, from Joseph J. Basile, Jr., to Michael Hanrahan

Wks. 13 Letter Dated Dec. 7, 1987, from Kenneth J. Bialkin and Stephen B. Flood to the Council of the Corporation Law Section of the Delaware Bar Association

Wks. 14 Letter Dated Dec. 7, 1987, from Marshall L. Small to Lewis S. Black, Jr., and E. Norman Veasey

Wks. 15 House Substitute for House Bill 396 (enacted Feb. 2, 1988)

Wks. 16 The Proposed Delaware Takeover Statute— A Report to the Delaware General Assembly

Wks. 17 Statement of Michael E. Harkins, Secretary of State, Before the Delaware House and Senate Judiciary Committees, Jan. 20, 1988

Wks. 18 Statement of Irving S. Shapiro Before the Senate and House Judiciary Committees, Jan. 20, 1988

Wks. 19 Statement of Bruce Atwater Before a Joint Meeting of the Delaware Senate and House Judiciary Committees, Jan. 20, 1988

Wks. 20 Statement of Elmer W. Johnson, Executive Vice President, General Motors Corporation

Wks. 21 Statement of Victoria Frankovich, President, Independent Federation of Flight Attendants, in Support of: Proposed Takeover Statute, Delaware House of Representatives, House Bill No. 396, Jan. 20, 1988

Wks. 22 Statement of Joseph A. Grundfest, Commissioner, SEC, Before the House Judiciary Committee of the Delaware State Legislature Concerning Delaware’s Proposed Antitakeover Legislation, Jan. 20, 1988

Wks. 23 Statement of James E. Heard, Executive Director United Shareholders Association, Before the Delaware General Assembly, Jan. 20, 1988

Wks. 24 Statement of Robert A. G. Monks in Opposition to Proposed Section 203, Jan. 20, 1988

Wks. 25 Testimony of A. Gilchrist Sparks, III, Before the Delaware Senate and House Judiciary Committees, Jan. 20, 1988

Wks. 26 Testimony of Greg Jarrell Before the Delaware Senate and House Judiciary Committees, Jan. 20, 1988

Wks. 27 Testimony of Donald Margotta Before the Delaware Senate and House Judiciary Committees, Jan. 20, 1988

Wks. 28 Testimony of Ronald E. Queen Before the Delaware Senate and House Judiciary Committees, Jan. 21, 1988

Wks. 29 Statement by Governor Michael Castle Regarding House Substitute 1 for House Bill 396, Signed Feb. 2, 1988
 

Craig B. Smith
Smith, Katzenstein & Jenkins
Wilmington, Delaware