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Carmody v. Toll Brothers, Inc.

Delaware Court of Chancery
723 A.2d 1180 (1998)


Toll Brothers, Inc. concluded in the late 1990s that it had become an attractive takeover candidate. In June 1997, the company adopted a poison pill defense plan (the Rights Plan). Toll Brothers was not facing a specific threat, but stated that it wanted to protect its shareholders from coercive or unfair tactics that might accompany a takeover bid. The Rights Plan granted options to all shareholders that would trigger the dilution of the company’s stock if any acquiror obtained or made a tender offer to obtain 15 percent of Toll Brothers’ stock. The Rights Plan was accompanied by a dead hand provision, which stated that the Rights Plan could not be redeemed by anyone other than the current board members or their designated successors. Toll Brothers’ certificate of incorporation did provide that directors may have varying degrees of voting authority. A Toll Brothers shareholder (plaintiff) sued the company and its board members, arguing that the dead hand provision unlawfully restricted the power of future boards and was therefore invalid as ultra vires. The shareholder claimed in the alternative that the directors breached their duty of loyalty by approving the dead hand provision because it violated the Blasius rule and the Unocal test. The board members moved to dismiss the complaint for failure to state a claim.

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