• The Court of Chancery Rejects a Per Se Challenge to Atmel's Rights Plan
  • August 5, 2009
  • Law Firm: Richards, Layton & Finger, P.A. - Wilmington Office
  • In In re Atmel Corp. S'holders Litig., C.A. No. 4161-CC (Del. Ch. May 19, 2009), the Court of Chancery denied an application for an injunction through which the plaintiff sought to invalidate an amendment to Atmel Corporation's ("Atmel") stockholder rights plan that incorporated certain derivative positions in calculating a stockholder's total beneficial ownership for purposes of determining whether the stockholder had triggered the rights plan.

    On October 2, 2008, Microchip Technology Inc. and ON Semiconductor Corporation announced an all-cash offer to acquire Atmel. On October 29, the Atmel board of directors publicly rejected the offer as not in the stockholders' best interests. Then, on November 10 – three days after the waiting period under the Hart-Scott-Rodino Act expired, providing Microchip regulatory clearance to accumulate more than 50% of Atmel's stock – the Atmel board of directors adopted an amendment to its rights plan (i) lowering the percentage of equity ownership necessary to trigger the rights plan from 20% to 10% for any person or group of persons that made a takeover proposal on or after October 1, 2008, and (ii) expanding the definition of "beneficial ownership" to include derivative contracts that are designed to produce economic benefits and risks that correspond substantially to ownership of Atmel common shares.

    The Court stressed that the issue before it was narrow. Specifically, the plaintiff claimed that the amendment was so indefinite and uncertain in its terms that nobody (including the Atmel board, stockholders and potential acquirers) had any objective means of determining how the rights plan operates or when it is triggered. Accordingly, argued the plaintiff, the Court should invalidate the amendment because its adoption constituted a per se breach of fiduciary duty or an ultra vires act.

    In support of this position, the plaintiff made three primary arguments. First, the plaintiff argued that stockholders may be unable to determine the extent of their beneficial ownership under the expanded definition of "beneficial ownership" because a stockholder is imputed with ownership of not only the shares owned by its counterparty, but also those shares owned by its counterparty's counterparties, and so on. Second, the plaintiff argued that it would be impossible for Atmel to sort through the various layers of counterparties to determine beneficial ownership of a stockholder. Finally, the plaintiff attacked the definition of "derivatives contract," which provided that a contract "designed to produce economic benefits and risks to the receiving party that correspond substantially to the ownership by the receiving party of a number of common shares" regardless of whether the contract was settled through cash or other property, constituted a derivatives contract (and therefore was included in calculating "beneficial ownership"). The plaintiff claimed that it would be impossible to determine objectively whether a particular contract qualified as a derivatives contract under this definition, and asserted that the definition was so vague as to include interests in mutual funds with a large percentage of their holdings represented by Atmel stock because such funds "may well substantially correspond to the economic risks and benefits" of owning Atmel stock.

    The Court denied the plaintiff's motion for injunctive relief because the plaintiff had failed to carry its burden to show a reasonable probability of success on the merits. At this stage, the Court had been presented only with abstract and theoretical legal arguments based on hypothetical scenarios. The Court could not decide, for example, whether it would indeed be impossible to determine a stockholder's level of beneficial ownership under the amended definition without factual evidence or expert testimony regarding how investors in the real world will react to the language in question. Further, the delay necessary to decide this case on a more complete record would not likely cause the plaintiff to suffer irreparable harm, because the original offer to acquire Atmel had been revoked and the Court would have time to provide relief well before the deadline to make proposals at the next annual meeting.