## Facts

- Mentor Graphics Corp. and its acquisition subsidiary launched an unsolicited all-cash tender offer for all shares of Quickturn Design Systems, Inc., a competitor.
- Mentor paired the tender offer with a proxy contest aimed at electing a new board that would redeem Quickturn’s poison pill and permit the acquisition.
- Quickturn’s board concluded Mentor’s bid was inadequate and opportunistic and urged shareholders to reject it.
- Quickturn adopted defensive measures, including:
  - A bylaw amendment delaying shareholder-requested special meetings for at least three months after a request.
  - A modified rights plan that replaced a prior “dead-hand” feature with a Deferred Redemption Plan (DRP) (“no-hand/slow-hand” pill).
- Under the DRP, for six months after a new board took office, newly elected directors could not redeem or modify the pill to facilitate a transaction with an “Interested Person,” defined to include Mentor.
- Mentor sued in the Delaware Court of Chancery seeking declaratory and injunctive relief invalidating and enjoining enforcement of the DRP and related measures.

## Issues

1. Whether Quickturn’s board had reasonable grounds to believe Mentor’s tender offer and proxy contest posed a threat to corporate policy and effectiveness under Unocal’s first prong.
2. Whether the DRP/no-hand pill and related defensive measures were reasonable in relation to the threat, or instead were preclusive/coercive by disabling a newly elected board and impairing the shareholder franchise under Unocal’s second prong.

## Decision

- The court held Quickturn satisfied Unocal prong one: the board reasonably perceived Mentor’s offer as a threat based on a good-faith view that the price was inadequate and timed to exploit a market downturn.
- The court held Unocal prong two was not satisfied: the DRP/no-hand pill and associated measures were disproportionate and impermissibly interfered with shareholders’ ability to effect change through a proxy contest.
- The court invalidated the DRP structure that prevented a newly elected board from redeeming or amending the pill for six months in a Mentor-related transaction.
- The court granted injunctive relief limiting enforcement of the challenged defenses to permit an effective proxy contest and potential redemption of the pill by a properly elected new board.

## Legal Principles

- Under Unocal enhanced scrutiny, takeover defenses receive business judgment deference only if (1) the board shows reasonable grounds for perceiving a threat to corporate policy and effectiveness and (2) the response is reasonable in relation to the threat.
- A board may treat an inadequate-price tender offer as a cognizable threat under Unocal, if supported by good-faith, informed decisionmaking.
- A rights plan mechanism that disables a newly elected board from redeeming or modifying the pill for a fixed period, based on the bidder associated with the election, can be disproportionate and preclusive because it neutralizes the practical effect of the shareholder vote.
- Defensive measures that materially impair the shareholder franchise and constrain the statutory authority of the sitting board are invalid under Delaware law, even when adopted in response to a perceived threat.

## Conclusion

The court upheld Quickturn’s ability to identify an inadequate-price bid as a threat, but struck down a no-hand/slow-hand pill that bound the hands of a newly elected board for six months, holding the defense package disproportionate under Unocal because it undermined effective shareholder choice and board authority after a valid election.


Mentor Graphics Corp. v. Quickturn Design Sys., Inc., 728 A.2d 25 (Del. Ch. 1998)