Company Name: Novell, Inc.
Public Availability Date: February 14, 2000Document Sections: LETTER OF INQUIRY
APPENDIX
APPENDIX
APPENDIX
STAFF REPLY LETTER [LETTER OF INQUIRY]
November 30, 1999 VIA FEDERAL EXPRESS Securities and Exchange Commission, Division of Corporate Finance 450 Fifth Street, N.W. Washington, D.C. 20459 Re: Novell, Inc. Dear Sir or Madam: As counsel to Novell, Inc. (the "Company"), we hereby request on behalf of the
Company that the Division of Corporate Finance (the "Division") recommend no
action to the Securities and Exchange Commission (the "SEC") if management of
the Company omits from its proxy materials for its 2000 Annual Meeting of
Shareholders the shareholder proposal (the "Proposal") submitted by Martin
Glotzer ("Glotzer") attached hereto as Exhibit A, which the Company received on
September 3, 1999. The Proposal seeks to (i) force the Company to redeem the existing shareholder
rights plan; (ii) prevent the Company from adopting a shareholder rights plan
unless such plan has been approved by a majority of outstanding shares of common
stock; and (iii) prevent the amendment, modification or repeal of this proposed
bylaw unless made by a majority of outstanding shares of common stock. 1. The Proposal May Be Omitted Because It Violates Delaware Law A shareholder proposal may be omitted under Rule 14a(i)(1) if its adoption would
violate applicable law. As the attached opinion of the Delaware law firm Morris,
Nichols, Arsht & Tunnell (the "MNAT Opinion," Exhibit B) makes clear, that is
exactly this case: the proposed bylaw violates Delaware law because it purports
to delegate to shareholders authority over a rights plan which Delaware law
provides is within the exclusive province of the Company's board of directors.
This letter summarizes three of the specific ways the Proposal violates Delaware
law, while the MNAT Opinion, attached as Exhibit 2, provides a more detailed
discussion of these issues. We further note that the MNAT Opinion is consistent
with the views of virtually every other Delaware practitioner who has considered
the issue. See, e.g., Richards & Stern, "Shareholder By-laws Requiring Boards of
Directors to Dismantle Rights Plans Are Unlikely to Survive Under Delaware Law,"
54 Bus. Law. 607 (1999) ("[A] shareholder rights by-law would conflict with
fundamental principles of Delaware law"); Hammermash, "The Shareholder Rights
By-Law: Doubts from Delaware," Corp. Gov. Advisor (1997) (same). In short, and
as discussed in more detail below and in the MNAT Opinion, the Proposal may be
omitted because it conflicts with fundamental principles of Delaware law. a. Delaware Law Gives The Board Of Directors The Exclusive Authority To Manage
The Company And This Authority Cannot Be Delegated To Stockholders. Under the General Corporation Law of the State of Delaware (the "DGCL"), the
business of a corporation is to be managed by its directors. Section 141(a), a
"bedrock" provision of the DGCL, states: The business and affairs of every corporation organized under this chapter shall
be managed by or under the direction of a board of directors, except as may be
otherwise provided in this chapter or in its certificate of incorporation. 8 Del. C. § 141(a)(1998); See generally Paramount Communications, Inc. v. Time
Inc., 571 A.2d 1140, 1150 (Del. 1990)("Delaware law imposes on a board of
directors the duty to manage the business and affairs of the corporation.");
Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985) ("Under Delaware law, the
business judgment rule is the offspring of the fundamental principle, codified
in [Section] 141(a), that the business and affairs of a Delaware corporation are
managed by or under its board of directors."); Unocal Corp. v. Mesa Petroleum
Co., 493 A.2d 946, 953 (Del. 1985)("The board has a large reservoir of authority
upon which to draw. Its duties and responsibilities proceed from the inherent
powers conferred by DGCL § 141(a), respecting management of the corporation's
`business and affairs.'"); Pogostin v. Rice, 480 A.2d 619, 624 (Del. 1984) ("The
bedrock of the General Corporation Law of the State of Delaware is the rule that
the business and affairs of a corporation are managed by and under the direction
of its board."). Delaware courts have consistently protected a board's authority to manage the
affairs of a corporation and have invalidated efforts by stockholders to
encroach upon this authority. See, e.g., Abercrombie v. Davis,
123 A.2d 893
(Del. Ch. 1956)(invalidating agreement between certain board members and
stockholders that irrevocably bound directors to vote in a predetermined
manner), rev'd on other grounds, 130 A.2d 338 (Del. 1957). As the Chancery Court
stated in Abercrombie, "[Delaware] corporation law does not permit actions or
agreements by stockholders which would take all power from the board to handle
matters of substantial management policy .... So long as the corporation form is
used as presently provided by our statutes this Court cannot give legal sanction
to agreements which have the effect of removing from directors in a very
substantial way their duty to use their own best judgment on management
matters." Abercrombie, 123 A.2d at 608, 611; see also Maldonado v. Flynn, 413
A.2d 1251, 1255 (Del. Ch. 1980), rev'd on other grounds sub nom Zapata Corp. v.
Maldonado, 430 A.2d 779 (Del. 1981) [Plaintiff's] argument in support of its
motion is based on the well settled and salutary doctrine of corporate law that
the board of directors of a corporation, as the repository of the power of
corporate governance, is empowered to make the business decisions of the
corporation. The directors, not the stockholders, are the managers of the
business affairs of the corporation."). b. The Proposal Violates The Fundamental Principle Of Delaware Law That
Questions Concerning The Adoption, Use or Redemption Of A Rights Plan Are Within
The Exclusive Province Of A Board Of Directors. Delaware courts have consistently recognized the primacy of the board in
decisions involving potential changes of control. The board's obligations in
this respect are derived "from its fundamental duty and obligation to protect
the corporate enterprise, which includes stockholders, from harm reasonably
perceived, irrespective of its source...." Unocal Corp. v. Mesa Petroleum Co.,
493 A.2d 946, 954 (Del. 1985); see also Moore Corp. v. Wallace Computer Servs.,
Inc., 907 F. Supp. 1545, 1554 (D. Del. 1995)("When a board is confronted with a
hostile tender offer, it has the obligation to determine whether the offer is in
the best interests of the corporation and its shareholders."); Unitrin, Inc. v.
American General Corp., 651 A.2d 1384 (Del. 1995); Ivanhoe Partners v. Newmont
Mining Corp., 535 A.2d 1334, 1345 (Del. 1987)(the "directors had both the duty
and the responsibility to oppose the threats presented by Ivanhoe and Gold
Fields"); Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173, 181
(Del. 1986)("The adoption of a defensive measure, reasonable in relation to the
threat posed, was proper and fully accorded with the powers, duties, and
responsibilities conferred upon directors under our law."). Shareholder rights plans emerged during the 1980s in response to the rise in
hostile offers. The rights plan offered boards additional time to not only
negotiate with the bidder but also to examine strategic alternatives for the
shareholders.1 In 1985, the Delaware Supreme Court confirmed that boards could
adopt rights plans. Specifically, the Court found that the board of directors of
a Delaware corporation has authority, under Sections 1572 and 141(a), to enact a
shareholder rights plan and that the adoption of a rights plan was a legitimate
exercise of business judgment: Having concluded that sufficient authority for the Rights Plan exists in 8 Del.
C. § 157, we note the inherent powers of the Board conferred by 8 Del. C. §
141(a), concerning the management of the corporation's "business and affairs"
(emphasis added), also provides the Board additional authority upon which to
enact the Rights Plan. Moran v. Household International, Inc., 500 A.2d 1346, 1353 (Del. 1985)(citation
and footnote omitted). Since that time the Delaware Supreme Court has consistently refused to interfere
with a board of directors' discretion in implementing or maintaining a rights
plan. In so doing, Delaware courts have recognized that "prudent deployment of
the pill proved to be largely beneficial to shareholder interests; it often
resulted in a bidding contest that culminated in an acquisition on terms
superior to the initial hostile offer." Carmody v. Toll Bros., Inc., 723 A.2d
1180, 1185 (Del. Ch. 1998)(acknowledging legitimacy of defenses that would give
the board time to explore transactional alternatives but rejecting "dead hand"
provisions in a rights plans because, rather than serve to delay proxy contests,
they served to deter them altogether); see also Moore Corp. v. Wallace Computer
Servs., Inc., 907 F.Supp. 1545, 1560-62 (D. Del. 1995)(summarizing legitimate
functions poison pills serve which create no fiduciary duty issues). Moreover, Delaware courts have routinely ruled in favor of preservingand
protectingthe board's exclusive authority in this arena. In Quickturn Design
Systems, Inc. v. Shapiro,
721 A.2d 1281 (Del. 1998), the Court invalidated a
rights plan under which directors were prohibited from redeeming the plan to
facilitate a transaction with a person who had supported the election of a new
board during the prior six months (the "Delayed Redemption Provision"). The
Court found that such a provision, although narrowly drafted, was impermissible
because it: would prevent a newly elected board of directors from completely discharging its
fundamental management duties to the corporation and its stockholders for six
months. While the Delayed Redemption Provision limits the board of directors'
authority in only one respect, the suspension of the Rights Plan, it nonetheless
restricts the board's power in an area of fundamental importance to the
shareholdersnegotiating a possible sale of the corporation. Quickturn, 721 A.2d at 1291-92. The Court explained that limits on a board's power to exercise its discretion
with respect to a rights plan would deprive the board of its statutory authority
to manage the corporation, under Section 141(a), as well as prohibit the board
from fully satisfying its concomitant fiduciary duty pursuant to that statutory
mandate. Since the Delayed Redemption Provision would tie a newly-elected
board's hands for six months, it "tends to limit in a substantial way the
freedom of [newly elected] directors' decisions on matters of management
policy.'" Id. at 1292 (quoting Abercrombie v. Davies, 123 A.2d 893, 899 (Del.
1956), rev'd on other grounds, 130 A.2d 338 (Del. 1957)). The Proposal here seeks to limit the board more drastically than the provision
invalidated in Quickturn. The Quickturn provision only imposed a temporary
restriction on the board's ability to redeem a rights plan. In contrast, the
Proposal here would require the Company's board to immediately terminate the
shareholder rights plan. Moreover, the Proposal would prevent the Company's
board from implementing a new rights planeven in connection with a hostile bid
or an attempt to auction the Company to the highest bidder. See Revlon Inc. v.
MacAndrews & Forbes Holding, 506 A.2d 173, 181 (Del. 1986) (properly implemented
rights plan "spurred the bidding to new heights, a proper result of its
implementation"); CRTF Corp. v. Federated Department Stores, Inc., 683 F. Supp.,
422, 439 (S.D.N.Y. 1988) (rights plan "provides the directors with a shield to
fend off coercive offers, and with a gavel to run an auction"). By tying the directors' hands in managing the Company in accordance with their
fiduciary duties, the Proposal removes from directors "the ultimate
responsibility" for managing the corporation and restricts the board's power in
an area of "fundamental importance to the shareholdersnegotiating a possible
sale of the corporation." The Proposal is thus contrary to Quickturn and
Delaware law. Accord, Grimes v. Donald, 673 A.2d 1207, 1214 (Del. 1996) ("A
court `cannot give legal sanction to agreements which have the effect of
removing from directors in a very substantial way their duty to use their own
best judgment on management matters.'")(quoting Abercrombie v. Davies, 123 A.2d
893, 899 (Del. 1956), rev'd on other grounds, 130 A.2d 338 (Del. 1957));
Paramount Communications, Inc. v. QVC Network, 637 A.2d 34, 51 (Del.
1993)(invalidating a "no-shop" provision in the Paramount-QVC merger agreement,
stating, "To the extent that a contract, or a provision thereof, purports to
require the board to act or not to act in such a fashion as to limit the
exercise of fiduciary duties, it is invalid and unenforceable.").3 c. The Proposal Violates Delaware Law Because It Purports To Require the
Expenditure of Corporate Funds. The Proposal violates Delaware law for a third reason: `insofar as it purports
to require the Company, upon the adoption of the Proposal, to immediately redeem
each outstanding right at a price of $0.01 per right, and therefore would
require the Company to expend $3,265,939.11 plus legal and administrative
expenses. The Delaware Court of Chancery has recognized, in connection with a
stock repurchase, that the expenditure of corporate funds clearly falls within
the directors' exclusive authority: To grant emergency relief of this kind, while possible, would represent a
dramatic incursion into the area of responsibility created by Section 141 of our
law. The directors of [the corporation], not this court, are charged with
deciding what is and what is not a prudent or attractive investment opportunity
for the company's funds. UIS, Inc. v. Walbrow Corp., C.A. No. 9323, slip. op. at 7-8 (Del. Ch. Oct. 6,
1987). See also Radiation Care (December 22, 1994) (providing no-action relief
in connection with proposal to adopt by-law authorizing the expenditures of
corporate funds); Pennzoil Co. SEC No-Action Letter, 1993 WL 52187, at *31-32
(Feb. 24, 1993). The expenditure of such funds without Board approval is not a
proper subject for stockholder action and clearly violates Section 141(a). In sum, the Proposal may be properly omitted under Rule 14a(i)(1) because it
contravenes Delaware law, and we hereby request that the Division recommend no
action to the SEC if the Company omits the Proposal from its proxy materials.
Very truly yours, WILSON SONSINI GOODRICH & ROSATI Professional Corporation David J. Berger -----FOOTNOTES----- 1 For general discussion, see Charles F. Richards, Jr.&Robert J. Stearn, Jr.,
Shareholder By-Laws Requiring Boards of Directors to Dismantle Rights Plans Are
Unlikely To Survive Scrutiny Under Delaware Law, 54 Bus. Law. 607 (Feb. 1999). 2 Section 157 authorizes a board of directors to issue rights or options
entitling the holders to purchase from the corporation any shares of its capital
stock. Unlike other DGCL provisions, such as amendments to the certificate of
incorporation, mergers, sales of assets, and dissolution, this provision does
not specifically set forth the shareholders' powers. Nor is it subject to
limitation by the company's bylaws. Thus, the issuance of rights and options, as
well as the redemption of any rights or options, are determined by the board,
not by the shareholders or the bylaws. 3 See also In re Bally's Grand Derivative Litig., Cons. Civ. A. No. 14644, slip
op. at 9-10 (Del. Ch. June 4, 1997)("The board must retain "the ultimate freedom
to direct the strategy and affairs of the Company.")(quoting Grimes v. Donald,
673 A.2d at 1215)); Canal Capital Corp. v. French, Civ. A. No. 11764, slip op.
at 6 (Del. Ch. July 2, 1992)("[A] director breaches his fiduciary duty of care
if he abdicates his managerial duties."); Lehrman v. Cohen, 222 A.2d 800, 808
(Del. 1966)("It is settled, of course, as a general principle that directors may
not delegate their duty to manage the corporate enterprise."). [APPENDIX]
September 1, 1999 RESOLUTION Resolved: that pursuant to [text illegible] (Management is requested to fill in
the number) of the Delaware General Corporate Law, the shareholders of Novell,
Inc. hereby amend the Company's Bylaws to add the following Bylaw (Management is
requested to furnish the proper number) which shall take affect immediately upon
approval by the shareholders, either in person or by proxy, at the meeting of
shareholders at which such resolution is proposed. SHAREHOLDERS RIGHTS PLAN "Bylaws: The Company shall not adopt any shareholder rights plan, share purchase
rights plan or similar rights agreement, commonly referred to as a "poison
pill," which is designed to impede, at has the effect of impeding, the
acquisition of a block of stock in excess of a specified threshold and/or merger
or other [text illegible] between a significant shareholder and the Company,
unless such plan or agreement has previously been approved by holders of a
majority of the outstanding shares of stock at a general or special meeting of
shareholders, and the Company shall redeem any such plan or agreement in effect
as of the date adoption of this Bylaw, including without limitation the
shareholder rights plan that was adopted by the Company in 1988. Notwithstanding
any other provision of those Bylaws, this Bylaw may not be amended, modified or
repealed, except by holders of a majority of the outstanding shares of stock."
REASONS At last year's meeting shareholders owning over 56% of the shares voted at the
meeting supported a resolution recommending that the Board of Directors redeem
Novell's shareholder rights plan, or else put the existence of this "poison
pill" to vote of the shareholders. I believe that institutional shareholders
voted a good share of the over 56% "YES" votes. Nonetheless, the Board of Directors did not follow this recommendation, a stance
that I believe dishonors shareholder views, particularly when one considers that
Novell's "poison pill" was adopted without prior shareholder approval. I believe many shareholders find this lack of concern for shareholder views to
be troubling. Accordingly, I submit this bylaw amendment, which would allow Novell, Inc to
adopt a "poison pill", but only with the affirmative support of its
shareholders. PLEASE VOTE "YES" FOR THIS PROPOSAL. Sincerely yours, Martin Glaeser cc: S.B.C. Washington, D.C. 20549 Dr. Schmidt [APPENDIX]
September 1, 1999 Mr. David R. Bradford Corporate Secretary Novell, Inc. 1555 North Technology Way Orem, Utah 84057 Dear Mr. Bradford: Pursuant to Rule Y-14 of the Securities and Exchange Commission; this letter is
formal notice to the management of Novell, Inc. that at the coming Annual
Meeting of 2,000 Martin Glotzer, who is the owner of 212 shares of stock, will
cause to be introduced from the minor the following resolution. As shown by the
books and records of the Company I have been the owner for over one year and
have attended annual meetings in the part. The stock will be retained past the
meeting date. However, circumstances arising after such date any change the
holdings. I ask that, if the management intends to oppose this resolution, my name and
address as above, together with the number of shares owned and represented by as
as recorded on the stock ledger of the Corporation be printed in the proxy
statement together with the text of the resolution and the statement of reasons
for its introduction. I also ask that the substance of the resolution be
included in the notice of the annual meeting. THE PROPOSAL AND THE REASONS ARE FOUND ON PAGE 2 [APPENDIX]
November 30, 1999 Novell, Inc. 122 East 1700 South Provo, UT 84606 Ladies and Gentlemen: You have requested our opinion as to whether a stockholder proposal (the
"Proposal") submitted to Novell, Inc. (the "Company") by Martin Glotzer may be
omitted from the Company's proxy statement and form of proxy for its 2000 annual
meeting of stockholders pursuant to Rule 14a-8 under the Securities Exchange Act
of 1934 (the "Exchange Act"). The Company is a Delaware corporation. It is our opinion that the Proposal may be omitted because, as a matter of
Delaware law (1) it is not a proper subject for stockholder action and (2) the
Proposal violates Delaware law because if the by-laws of the Company (the
"By-Laws") were amended as set forth in the Proposal, the Company would be in
violation of the Delaware General Corporation Law (the "DGCL"). Additionally,
the Proposal violates the Company's certificate of incorporation (the
"Charter"). The reasons for our opinion are set forth below. I. THE PROPOSAL. The Proposal reads as follows: RESOLVED: That pursuant to sections (Management is requested to fill in the
number) of the Delaware General Corporate Law, the shareholders of Novell, Inc.
hereby amend the Company's Bylaws to add the following Bylaw (Management is
requested to furnish the proper number) which shall take effect immediately upon
approval by the shareholders, either in person or by proxy, at the meeting of
shareholders at which such resolution is proposed. SHAREHOLDER RIGHTS PLAN Bylaw (__). The Company shall not adopt any shareholder rights plan, share
purchase rights plan or similar rights agreement, commonly referred to as a
"poison pill," which is designed to impede, or has the effect of impeding, the
acquisition of a block of stock in excess of a specified threshold and/or merger
or other transaction between a significant shareholder and the Company, unless
such plan or agreement has previously been approved by holders of a majority of
the outstanding shares of stock at a general or special meeting of shareholders,
and the Company shall redeem any such plan or agreement in effect as of the date
of the adoption of this Bylaw, including without limitation the shareholder
rights plan that was adopted by the Company in 1988. Notwithstanding any other
provision of these Bylaws, this Bylaw may not be amended, modified or repealed,
except by holders of a majority of the outstanding shares of stock. The Proposal seeks to implement a new by-law that may be broken into three
component parts. The first component (the "Stockholder Delegation Provision")
prohibits the Company from adopting a stockholder rights plan or similar
agreement unless the plan or agreement has been approved by a majority of the
Company's stockholders. The Stockholder Delegation Provision gives the
stockholders of the Company the right to determine whether the Company may adopt
or maintain a stockholder rights plan. The second component of the Proposal (the "Redemption Provision") requires the
Company to redeem its current stockholder rights plan (the "Rights Plan"). The
Redemption Provision may require the Company to expend $3,265,939.11, plus legal
and administrative expenses, to cause a redemption of the rights issued pursuant
to the Rights Plan (the "Rights") pursuant to Section 23 thereof, which permits
the board of directors to redeem the rights at a cost of $0.01 per right. The third component of the Proposal (the "Amendment Provision") prohibits the
new by-law from being amended other than by a majority vote of the stockholders.
The Amendment Provision effectively prohibits the board of directors of the
Company (the "Board") from acting to amend or repeal the Proposal. II. DISCUSSION. A. The Delaware Statute. 1. Section 109 Of The DGCL. Section 109 of the DGCL, entitled "By-laws," addresses the adoption and
amendment of corporate by-laws, as well as the permitted content of those
by-laws. Paragraph (b), in particular, governs the content of by-laws: The by-laws may contain any provision, not inconsistent with law or with the
certificate of incorporation, relating to the business of the corporation, the
conduct of its affairs, and its rights or powers or the rights or powers of its
stockholders, directors, officers or employees. 8 Del. C. § 109(b) (1998) (emphasis added). Thus, a by-law that is inconsistent either with law or with the Company's
certificate of incorporation is invalid. As discussed below, the Proposal
violates both the DGCL and the Charter. 2. Section 141 Of The DGCL. Section 141(a) of the DGCL is a "bedrock" provision of the DGCL. It provides
that the business of a corporation is to be managed by its directors: The business and affairs of every corporation organized under this chapter shall
be managed by or under the direction of a board of directors, except as may be
otherwise provided in this chapter or in its certificate of incorporation. 8 Del. C. § 141(a) (1998); Poqostin v. Rice, 480 A.2d 619, 624 (Del. 1984) ("The
bedrock of the General Corporation Law of the State of Delaware is the rule that
the business and affairs of a corporation are managed by and under the direction
of its board."); Smith v. Van Gorkom, 488 A.2d 858, 872 (Del. 1985) ("Under
Delaware law, the business judgment rule is the offspring of the fundamental
principle, codified in 8 Del. C. § 141(a), that the business and affairs of a
Delaware corporation are managed by or under its board of directors.") The Proposal would require the Company to redeem the rights or terminate its
rights plan and prohibit it from adopting another such plan without stockholder
approval. These matters are clearly within the purview of the Board under
Section 141(a), which cannot be circumvented by a by-law. Accordingly, the
Proposal is not a proper subject for action by the stockholders of the Company
and, if implemented, would violate Delaware law. B. The Proposal Is Inconsistent With The Delaware General Corporation Law. 1. The Stockholder Delegation Provision And The Redemption Provision
Impermissibly Interfere With The Directors' Power To Manage The Company. In 1985, the Delaware Supreme Court held that the board of directors of a
Delaware corporation has authority under Section 157 of the DGCL (governing
options) and Section 141(a) to enact a stockholder rights plan: Having concluded that sufficient authority for the Rights Plan exists in 8 Del.
C. § 157, we note the inherent powers of the Board conferred by 8 Del. C. §
141(a), concerning the management of the corporation's "business and affairs"
(emphasis added), also provides the Board additional authority upon which to
enact the Rights Plan. Moran v. Household International, Inc., 500 A.2d 1346, 1353 (Del. 1985)
(citation and footnote omitted). In a recent decision, the Delaware Supreme Court held that, because of the
"fundamental importance" of rights plans, Section 141 prohibited limits on
director power with respect to such plans. Quickturn Design Systems, Inc. v.
Shapiro, 721 A.2d 1281 (Del. 1998). In Quickturn, the Court invalidated a rights
plan that prohibited the directors from redeeming the rights to facilitate a
transaction with a person who had supported the election of a new board during
the prior six months (the "Delayed Redemption Provision"). The Court found that
such a provision, although narrowly drafted, was impermissible because it
circumscribed the power of directors in a fundamental area of corporate
management: The Delayed Redemption Provision, however, would prevent a newly elected board
of directors from completely discharging its fundamental management duties to
the corporation and its stockholders for six months. While the Delayed
Redemption Provision limits the board of directors' authority in only one
respect, the suspension of the Rights Plan, it nonetheless restricts the board's
power in an area of fundamental importance to the shareholdersnegotiating a
possible sale of the corporation. Therefore, we hold that the Delayed Redemption
Provision is invalid under Section 141(a), which confers upon any newly elected
board of directors full power to manage and direct the business and affairs of a
Delaware corporation. Id. at 1291-92 (footnote omitted).1 The Court went on to explain the policy behind its ruling, suggesting that
limits on a board's power to exercise its discretion with respect to a rights
plan would prohibit the board from fully satisfying its fiduciary duties: The Delayed Redemption Provision "tends to limit in a substantial way the
freedom of [newly elected] directors' decisions on matters of management
policy." Therefore, "it violates the duty of each [newly elected] director to
exercise his own best judgment on matters coming before the board." .... ... Because the Delayed Redemption Provision impermissibly circumscribes the
board's statutory power under Section 141(a) and the directors' ability to
fulfill their concomitant fiduciary duties, we hold that the Delayed Redemption
Provision is invalid. Id. at 1292-93 (alterations in original) (footnotes omitted). The Proposal seeks to limit the Board in a far more drastic manner than did the
provision invalidated in Quickturn. The Quickturn provision only imposed a
temporary restriction on the board's ability to redeem a rights plan in limited
circumstances. In contrast, the Redemption Provision requires the Board to
terminate the Rights Plan. The Stockholder Delegation Provision then prohibits
the Board from implementing a new rights planeven in connection with a hostile
bid or an attempt to auction the Company to the highest bidder. See Revlon Inc.
v. MacAndrews & Forbes Holding, 506 A.2d 173, 181 (Del. 1986) (properly
implemented rights plan "spurred the bidding to new heights, a proper result of
its implementation"); CRTF Corp. v. Federated Department Stores, Inc., 683 F.
Supp., 422, 439 (S.D.N.Y. 1988) (rights plan "provides the directors with a
shield to fend off coercive offers, and with a gavel to run an auction"). By tying the directors' hands in managing the Company in accordance with their
fiduciary duties, the Proposal removes from directors "the ultimate
responsibility" for managing the corporation, and restricts the Board's power in
an area of "fundamental importance to the shareholdersnegotiating a possible
sale of the corporation." The Proposal is thus contrary to Quickturn and
Delaware law. 2. The Redemption Provision Impermissibly Requires the Expenditure of Corporate
Funds. The Redemption Provision would require the Company, upon the adoption of the
Proposal, to redeem each outstanding right at a price of $0.01 per right. This
would require the Company to expend $3,265,939.11 plus legal and administrative
expenses.2 The expenditure of such funds without board approval is not a proper
subject for stockholder action and clearly violates Section 141(a). The Delaware
Court of Chancery has recognized, in connection with a stock repurchase, that
the expenditure of corporate funds clearly falls within the directors'
discretion: To grant emergency relief of this kind, while possible, would represent a
dramatic incursion into the area of responsibility created by Section 141 of our
law. The directors of [the corporation], not this court, are charged with
deciding what is and what is not a prudent or attractive investment opportunity
for the company's funds. UIS, Inc. v. Walbrow Corp., C.A. No. 9323, slip op. at 7-8 (Del. Ch. Oct. 6,
1987). See also Radiation Care (available December 22, 1994) (providing
no-action relief in connection with proposal to adopt by-law authorizing the
expenditures of corporate funds). C. The Proposal Constitutes An Invalid By-Law Because It Is Inconsistent With
The Charter. Article SIXTH of the Charter provides that the Board of Directors may amend the
By-Laws of the Company: The Board of Directors shall have the power, in addition to the stockholders, to
make, alter, or repeal the By-Laws of the corporation. The Amendment Provision of the Proposal, which purports to reserve to
stockholders the sole right to amend the by-law implemented by the Proposal, is
inconsistent with Article SIXTH, and therefore in violation of the Section 109
prohibition on by-laws that are inconsistent with the certificate of
incorporation. See Centaur Partners, IV v. National Intergroup, Inc.,
582 A.2d 923 (Del. 1990). In Centaur, the Delaware Supreme Court invalidated a by-law
that restricted board power to amend the by-law itself. The Court found that the
restriction was "inconsistent" with the grant of power in the charter to amend
the By-laws, and therefore in violation of Section 109: "Because the provision
is `inconsistent with' the directors' power to enlarge the board without limit,
it would be a nullity if adopted." Id. at 929. See also Radiation Care, Inc.
(available Dec. 22, 1994) (granting no-action relief where there was
"substantial question as to whether, under Delaware law, the directors may adopt
a by-law provision that specifies that it may be amended only by shareholders");
Pennzoil Corporation (available March 22, 1993) (same). *** Accordingly, for the reasons expressed above, it is our opinion that the
Proposal may be omitted from the Company's proxy materials because, as a matter
of Delaware law, (1) it is not a proper subject for stockholder action, (2) it
violates Sections 141(a) and 109 of the DGCL, and (3) it violates Article SIXTH
of the Charter. Very truly yours, -----FOOTNOTES----- 1 The Court expressly noted that Section 141(a) required that "any limitation on
the board's authority be set out in the certificate of incorporation."
Quickturn, 721 A.2d at 1291. The certificate of incorporation of the Company
does not contain any such limit. 2 Alternatively, the Company could attempt to amend the Plan to provide for
termination without the payment of the redemption price, but such a course would
present novel legal issues, which would have their own expenses.
[STAFF REPLY LETTER]
February 14, 2000 Response of the Office of Chief Counsel Division of Corporation Finance Re: Novell, Inc. Incoming letter dated November 30, 1999 The proposal would amend Novell's bylaws to prohibit adoption of any shareholder
rights plan without prior shareholder approval and to require redemption of any
existing shareholder rights plan. There appears to be some basis for your view that Novell may exclude the
proposal under rule 14a-8(i)(1). We note that in the opinion of your Delaware
counsel, Morris, Nichols, Arsht & Tunnell, implementation of the proposal would
be an improper subject for shareholder action under Delaware law. Accordingly,
we will not recommend enforcement action to the Commission if Novell omits the
proposal from its proxy materials in reliance on rule 14a-8(i)(1). Sincerely, Michael Ferraro Attorney-Advisor
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