## Facts

- A Toll Brothers stockholder filed a putative class action against Toll Brothers, Inc. and its directors challenging the board’s adoption of a shareholder rights plan.
- Toll Brothers is a Delaware corporation headquartered in Pennsylvania, publicly traded, and engaged in building and marketing luxury homes.
- On June 12, 1997, the board adopted a rights plan that distributed one preferred stock purchase right per common share.
- The rights became exercisable if a person or group acquired, or commenced a tender offer to acquire, 15% or more of the company’s common stock.
- Upon triggering, the rights functioned as a dilutive “flip-in/flip-over” mechanism allowing non-acquirers to buy stock at a discount.
- The plan was redeemable and set to expire in 2007 unless earlier redeemed.
- The challenged feature was a “dead hand” provision, alleged to allow redemption only by the directors who adopted the plan (and certain designated successors), preventing later-elected “non-continuing” directors from redeeming it.
- The complaint alleged the dead-hand provision improperly entrenched incumbents by reducing the practical effect of replacing directors through a stockholder vote.

## Issues

1. Whether the complaint stated a claim that the dead-hand redemption restriction was ultra vires under the Delaware General Corporation Law by impermissibly limiting the statutory authority of future directors.
2. Whether the complaint stated fiduciary-duty claims that the dead-hand feature unlawfully interfered with the stockholder franchise and constituted an unreasonable defensive measure under Delaware takeover-defense standards.
3. Whether, on a Rule 12(b)(6) motion, the dead-hand provision was “subject to legal challenge” on statutory and equitable grounds.

## Decision

- The Court of Chancery denied the defendants’ Rule 12(b)(6) motion to dismiss.
- The court held that the dead-hand feature, as pleaded, was subject to legal challenge on both statutory (DGCL) and fiduciary-duty grounds.
- The court emphasized it was not making a final merits determination on the plan’s validity; it held only that the complaint alleged legally cognizable claims.

## Legal Principles

- On a motion to dismiss, well-pleaded allegations are accepted as true, and dismissal is improper if the complaint states a plausible claim for relief.
- The DGCL contemplates that corporate power is exercised by the board as constituted from time to time; an arrangement that effectively creates unequal authority among directors may be vulnerable absent charter authorization.
- A board action that has the primary purpose or effect of impeding the stockholder vote can trigger Blasius review, requiring a compelling justification.
- Defensive measures adopted in the takeover context are subject to Unocal enhanced scrutiny, requiring a reasonable perception of a threat and a response that is not disproportionate to that threat.
- A rights plan feature that prevents a newly elected board majority from redeeming the pill can plausibly be characterized as entrenching and may raise both statutory authority and fiduciary-duty concerns at the pleading stage.

## Conclusion

The court allowed the case to proceed, holding that allegations challenging a dead-hand poison pill as beyond statutory board authority and as an entrenching interference with stockholder voting and takeover-defense norms were sufficient to survive dismissal.


Carmody v. Toll Bros., Inc., 723 A.2d 1180 (Del. Ch. 1998)