Judicial Review of Defensive Tactics in Proxy Contests: When is Using a Rights Plan Right?

Abstract

Incumbent management has long enjoyed broad discretion in its use of Rights Plans in proxy contests and joint offers. Legal scholars have accepted the justifications for permitting incumbents such latitude with little comment. The courts also have largely deferred to management's decisions about how they use Rights Plans against dissident shareholder groups. The analysis presented here argues that courts should apply stricter standards. A more stringent balancing test that forces incumbents to justify the use of Rights Plans by explaining how the Rights Plan prevents a specific harm to their shareholders would better protectshareholders from abusive defensive tactics. For any particular defensive tactic, a court must question the explanations offered by incumbents and place the burden of persuasion on management to show that they are acting in shareholders' best interest. The courts should invalidate without further judicial inquiry those provisions of Rights Plans that are directed primarily toward impeding dissidents' proxy campaigns. Courts should permit Rights Plans in proxy contests only when the incumbents can show that the contests are necessary parts of the company's tender offer defense, that their impact on the outcome of a proxy contest will be minimal, and that direct benefits to the target company shareholders justify their adverse effects on dissidents' election campaigns. To determine the impact of particular defensive measures on the outcome of proxy contests, the courts should demand that the parties submit statistical evidence and expert testimony about the effects of Rights Plans on the outcome of the proxy contest. Only after examining the impact of the defensive tactic on the outcome of the proxy contests, and finding it justified by the benefit to the target company's shareholders, should a court approve any use of Rights Plans in proxy contests. When the incumbents fail to carry this burden, then the court should strike down these defenses and permit shareholders to exercise their vote in corporate elections freely and without restraint.