Chesapeake Corp. v. Shore

Shorewood Packaging Corporation (Shorewood) (defendant), through its board of directors (defendants), sought to acquire Chesapeake Corporation (plaintiff) through a 41 percent all-cash, all-shares premium offer. Chesapeake’s board of directors rejected the offer, claiming that the stock market undervalued the company. Additionally, Chesapeake countered with a purchase offer of their own, bidding to acquire Shorewood with a 40 percent all-cash, all-shares premium. The Shorewood board rejected Chesapeake’s offer, claiming that the stock market also undervalued Shorewood. Out of concern that Chesapeake might attempt a hostile takeover, Shorewood’s board adopted a variety of bylaws to supplement their existing poison pill. Among these bylaws, Shorewood raised the votes required to amend the bylaws again in the future from a simple majority to 66 2/3 percent of outstanding shares. Shorewood’s management controlled approximately 24 percent of shares, making it almost impossible for Chesapeake to obtain the necessary supermajority. Subsequently, Chesapeake increased its offer to purchase Shorewood, went public with a tender offer and proxy solicitation, and filed suit in the Delaware Court of Chancery, arguing that the supermajority bylaw, which was later lowered to 60 percent, should be declared invalid. Specifically, Chesapeake argued that the supermajority bylaw was a disproportionate response to Chesapeake’s offer to acquire Shorewood. Chesapeake also contended that the Shorewood board’s primary purpose behind the supermajority bylaw was to interfere with shareholders’ voting rights. In response, Shorewood and its directors argued that the supermajority bylaw was a reasonable and proportionate response to Chesapeake’s actions. Shorewood and its directors described the threat as substantive coercion because the premium over the then-market price had the potential to force Shorewood’s shareholders to make a decision without adequate time to deliberate.