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Chancellor William Chandler III of the Delaware Court of Chancery rebuffed a bid to invalidate Hilton Hotels Corp.’s “poison pill” shareholder rights plan in a ruling that should reassure the hundreds of other companies deploying similar anti-takeover defenses. Chandler found that Hilton’s poison pill plan couldn’t be attacked on contract grounds under existing Delaware case law even though shareholders had no say in setting up the defense. Most companies incorporated in Delaware use such plans to ward off hostile takeovers. The plans make such takeover prohibitively expensive. Once considered novel, poison pill plans are now commonplace, Chandler noted in his 30-page decision. They also continue to be controversial. “This dispute illustrates the intense scrutiny poison pill rights plans continue to receive, thereby insuring their vitality” Chandler said. Beverly Hills, Calif.-based Hilton was sued in February in Chancery Court in Wilmington, Del., by the Leonard Loventhal Account — a trust that holds shares of the U.S.’s third-largest hotel chain — claiming the rights plan illegally forced shareholders to accept rights they didn’t want. Hilton adopted its poison pill last year to discourage takeover attempts in anticipation of buying Promus Hotel Corp. for $3.7 billion. Hilton officials sent out a notice to shareholders in November 1999 announcing the board’s adoption of a new rights plan tailored to the Promus acquisition. The company said the rights automatically attached to Hilton shares and would accompany them if sold. Trust officials wrote to Hilton rejecting the rights and refusing to have them listed on shares the trust held. In February, Hilton sent the trust shares with an indication that they came with the poison-pill rights. CONTRACT RIGHTS VIOLATED? Trust officials argued in their suit that since the poison pill rights automatically attached to Hilton shares, shareholders’ contract rights were violated along with Delaware’s stock-transferability statutes. The trust attacked the plan on five specific grounds: 1) the plan isn’t a valid and enforceable contract between Hilton and shareholders; 2) the plan imposes transfer restrictions on the stock in violation of Delaware corporate law; and 3) the plan violates Delaware law by not allowing “clean” and “unlegended” stock certificates to be issued to Hilton holders. The trust also claimed the plan also allegedly ran afoul of Delaware law by 4) altering shareholders’ rights without amending Hilton’s certificate of incorporation; and 5) eliminating any liability of Hilton directors for violating shareholders’ legal rights. Hilton countered by filing a motion to dismiss, saying Delaware case law endorsed such rights plans. In his analysis, Chandler noted that the Delaware courts first upheld corporate directors’ right to adopt poison pill plans in Moran v. Household International Inc., Del Ch., 490 A.2d 1059 (1985), aff’d Del. Supr., 500 A.2d 1346 (1985). The court in Moran upheld the basic design of such plans and the manner of operation, Chandler said. One of those methods of operation is the power of the board to set up a plan that issues rights to buy shares at a reduced price in certain instances, he added. “The trust’s argument fundamentally misunderstands the issuance of securities in general and the operation of the rights plan in particular,” Chandler wrote in dismissing the claims. “There is simply no legal requirement that the Hilton shareholders must be a party to the rights plan or formally vote to accept the rights plan to ensure the plan is enforceable,” Chandler said. “ Moran clearly decided this issue.” NO ILLEGAL RESTRICTIONS There also aren’t any illegal restrictions placed on Hilton’s stock as a result of the rights plan, Chandler found. “At any moment that this plaintiff wishes to sell its Hilton shares on the New York Stock Exchange, there is absolutely no evidence to suggest that it will not be able to find a buyer at the then prevailing market-determined price,” the judge wrote. Chandler also found that Hilton’s notice on the shares that the rights automatically attached was an “appropriate” legend under Delaware law under prevailing case law. On the question of whether Hilton directors affected shareholders’ rights by creating the poison pill defense without amending the company’s certificate of incorporation, Chandler noted that the court in Moran said no such amendment was necessary to set up the plans. Finally, the rights plan doesn’t serve to bar legal claims against Hilton’s directors or create an exception of the board’s fiduciary duties, the judge said. The plan “affects neither the rights of Hilton shareholders in relation to the Hilton board nor the duties owed by members of Hilton board to shareholders,” Chandler concluded. Hilton is represented in the case by Jesse A. Finkelstein and J. Travis Laster of Wilmington’s Richards Layton & Finger while the trust is represented by Michael Hanrahan, Gary F. Traynor and Paul A. Fioravanti Jr. of Wilmington’s Prickett Jones & Elliott. The case is Leonard Loventhal Account v. Hilton Hotels Corp., CA No. 17803.

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