Chesapeake Corp. v. Shore

OPINION

This case involves a contest for control between two corporations in the specialty packaging industry, the plaintiff Chesapeake Corporation and the defendant Shorewood Packaging Corporation, whose boards of directors both believe that the companies should be merged. The boards just disagree on which company should acquire the other and who should manage the resulting entity.

Shorewood started the dance by making a 41%, all-cash, all-shares premium offer for Chesapeake. The Chesapeake board rejected the offer as inadequate, citing the fact that the stock market was undervaluing its shares. Chesapeake countered with a 40%, all-cash, all-shares premium offer for Shorewood. The Shorewood board, all of whose members are defendants in this case, turned down this offer, claiming that the market was also undervaluing Shorewood.

Recognizing that Chesapeake, a takeover-proof Virginia corporation, might pursue Shorewood, a Delaware corporation, through a contested tender offer or proxy fight, the Shorewood board adopted a host of defensive bylaws to supplement Shore-wood’s poison pill. The bylaws were designed to make it more difficult for Chesapeake to amend the Shorewood bylaws to eliminate its classified board structure, unseat the director-defendants, and install a new board amenable to its offer. These bylaws, among other things, eliminated the ability of stockholders to call special meetings and gave the Shorewood board con *297 trol over the record date for any consent solicitation.

Most important, the bylaws raised the votes required to amend the bylaws from a simple majority to 66 2/3% of the outstanding shares. Because Shorewood’s management controls nearly 24% of the company’s stock, the 66 2/3% Supermajority Bylaw made it mathematically impossible for Chesapeake to prevail in a consent solicitation without management’s support, assuming a 90% turnout.

Chesapeake then increased its offer, went public with it in the form of a tender offer and a consent solicitation, and initiated this lawsuit challenging the 66 2/3% Supermajority Bylaw. Shortly before trial, the Shorewood board amended the Bylaw to reduce the required vote to 60%.

Chesapeake challenges the 60% Super-majority Bylaw’s validity on several grounds. Principally, Chesapeake contends that the Shorewood board, which is dominated by inside directors, adopted the Bylaw so as to entrench itself and without informed deliberations. It argues that the Bylaw raises the required vote to unattainable levels and is grossly disproportionate to the modest threat posed by Chesapeake’s fully negotiable premium offer. Moreover, it claims that the defendants’ argument that the Bylaw is necessary to protect Shorewood’s sophisticated stockholder base, which is comprised predominately of institutional investors and management holders, from the risk of confusion is wholly pretextua! and factually unsubstantiated.

In this post-trial opinion, I conclude that the defendants have not met their burden to sustain the Supermajority Bylaw under either the Unocal v. Mesa Petroleum Co. 1 or Blasius Indus. v. Atlas Corp. 2 standards of review. Among the reasons that support this conclusion are:

• the defendants faced only a modest threat of price inadequacy, which was adequately addressed by other defensive measures and less draconian options available to the Shorewood board;

• there was no legitimate threat of stockholder confusion to which the Su-permajority Bylaw was responsive;

• the defendants failed to consider whether any insurgent could realistically satisfy the Supermajority Bylaw in the face of management opposition, as well as several other material issues;

• there is no real-world evidence that a 60% vote is attainable by an insurgent opposed by Shorewood management;

• the defendants improperly treated themselves as “disinterested stockholders” while treating other similarly situated stockholders as “interested” and as therefore having less right to influence company policy at the ballot box;

• the defendants’ deliberative processes were grossly inadequate; and

• the defendants acted with the primary intent of changing the electoral rules so as to make it more difficult to unseat them.

In sum, the Supermajority Bylaw is a pre-clusive, unjustified impairment of the Shorewood stockholders’ right to influence their company’s policies through the ballot box.

In this opinion, I also address the defendants’ claim that the Shorewood stockholders are prohibited from voting to eliminate the company’s classified board structure and subsequently seating a new board. I *298 reject that claim as inconsistent with the plain language of 8 Del. C. § 141 and the policy of our corporation law that stockholders have the authority to determine the governance structure of their corporations in the bylaws, absent a certificate provision to the contrary.

Finally, I also reject the defendants’ argument that Chesapeake is an interested stockholder under 8 Del. C. § 203 and therefore cannot consummate a merger with Shorewood for three years.

I. The Parties

A. The Plaintiffs

Plaintiff Chesapeake is a Virginia corporation. Plaintiff Sheffield, Inc. is Chesapeake’s wholly-owned acquisition vehicle for its hoped-for purchase of Shorewood. Sheffield is a Delaware corporation.

B. The Defendants

Defendant Shorewood is a Delaware corporation. The other defendants are all members of the nine-member Shorewood board of directors.

1. The Non-Outside And/Or Non-Indeipendent Shorewood Director-Defendants

Defendant Marc P. Shore is Shore-wood’s Chairman and Chief Executive Officer. He is one of the children of Paul B. Shore, founder of the company. Through personal holdings, family partnerships, and family trusts, Marc Shore owns or controls the vote of 17.38% of Shorewood’s outstanding stock.

Marc Shore receives generous compensation from Shorewood. In 1999, for example, he received a base salary of $800,000, a bonus of nearly $ 1.1 million, other compensation of nearly $150,000, restricted stock awards valued at $825,000, and an option on 350,000 Shorewood shares. 3 This compensation came in a year when Shorewood’s own share price took a beating.

On November 10, 1999, the same day that Shorewood received Chesapeake’s first acquisition offer, Shore entered into a five-year employment agreement with Shorewood, effective as of May 1998. The agreement provided for a $1 million signing bonus, an annual base salary of $800,000, and the potential for discretionary bonuses beyond Shorewood’s bonus plan, under which Shore could already receive up to $2 million annually.

Shorewood has also provided Marc Shore with less traditional financial benefits. Apparently, Shore has had difficulty managing his personal finances and has racked up $10-11 million in debts that he has been unable to handle without additional help from Shorewood. Two million dollars of this debt is actually owed to Shorewood and is due in full in May 2000. In 1998 and 1999, the Shorewood board’s compensation committee waived the mandatory pre-payments Shore owed on this debt.

In 1999, Marc Shore faced a personal liquidity crisis due to his inability to meet margin calls on the Shorewood shares pledged to support his debt. To help him deal with this problem, in the spring through the fall of 1999, the Shorewood board authorized advancements to him of $2.6 million. Things got so bad by October of 1999 that the Shorewood board voted, without seeing an appraisal, to purchase a residential property owned by Marc Shore for $3.5 million. The level of *299 the board’s understanding about the need for and the basis of this transaction was, without going into detail, insufficient. So was its consideration of other alternatives.

Although some of Shore’s fellow directors testified that they did not want Shore to have to sell company stock to meet his obligations because that would have hurt other stockholders, others candidly admitted that the board did not want Shore to have to sell his stock at a time disadvantageous to himself. Thus they were willing to buy his residence instead. Though this transaction was never ultimately consummated, it speaks volumes about the financial security Marc Shore derives from his managerial position at Shorewood and the board’s loyalty to him.

Based on Marc Shore’s managerial position, his compensation package, and the Shorewood board’s demonstrated willingness to get Shore out of financial jams, he cannot be considered an outside, independent director. 4

Defendant Howard M. Liebman is the President and Chief Financial Officer of Shorewood. He received salary, other compensation, a bonus and restricted stock awards in 1999 totaling over $1.2 million, as well as 150,000 stock options. Liebman has received loans from Shorewood and owes the company nearly $1.3 million. Also like Marc Shore, Liebman entered into a five-year employment contract last fall, effective May 1998. Given his managerial position and lucrative compensation and loan arrangements with Shorewood, Liebman cannot be considered an outside, independent director.

Defendant Andrew N. Shore is Marc Shore’s brother. He has been Vice President and General Counsel of Shore-wood since 1996, when he was hired by his brother. In that position, Andrew Shore appears to make well over $200,000 a year. Andrew Shore joined the Shorewood board in September 1999. In addition, Andrew Shore is owed a substantial sum of money by Marc Shore, and that debt is part of the reason Marc Shore needed help from Shorewood in 1999. Given his managerial position at Shorewood and his familial relationship with Marc Shore, 5 Andrew Shore cannot be considered an outside, independent director.

Defendant Leonard J. Verebay is an executive vice president of Shorewood. He receives a salary of $500,000 for which he works approximately 10 hours a week. Verebay joined the Shorewood board in February 1999 after Shorewood purchased Queens Group, Inc. Given his managerial position, Verebay cannot be considered an outside, independent director.

Defendant R. Timothy O’Donnell has had a long relationship with Shore-wood, dating back to when he was the leader of a PaineWebber team that helped take Shorewood public. Since 1989, *300 O’Donnell has been president and principal stockholder of Jefferson Capital Group, Ltd., an investment banking firm. Over the years, Jefferson Capital has received millions of dollars in fees for work for Shorewood. It has also been retained by Shorewood in connection with its current tangle with Chesapeake and is currently consulting with Shorewood on other projects. O’Donnell admits that he cannot be classified as a “disinterested director” in light of Jefferson Capital’s substantial work for Shorewood. Moreover, O’Donnell is a close personal friend of Marc Shore. O’Donnell is the leading member of the board’s compensation committee and has spearheaded the board’s efforts to help Marc Shore with his financial problems. He cannot be considered an independent director.

Defendant Virginia A. Kamsky is the founder, CEO, and principal stockholder of Kamsky Associates, Inc., a business consulting firm specializing in advice to companies that want to do business in the People’s Republic Of China. 6 Kamsky joined the Shorewood board on June 8, 1999. For the past three years, Kamsky has been advising Shorewood regarding its investment in a manufacturing facility in China. Her firm receives a $25,000 monthly retainer from Shorewood, plus 5% of the net profits from the operations or sale of the China facility. At the time she joined the board, the board was informed by management that Kamsky’s contractual arrangements with Shorewood rendered her ineligible to serve on the board’s compensation or audit committees. Given her firm’s substantial financial interests in Shorewood’s business, Kamsky cannot be considered an independent director.

2. The Other Director-Defendants

Defendant Kevin J. Bannon heads the investment management group at Bank of New York. Bannon joined the Shorewood board in 1992 at the request of Paul Shore, who was at that time Bannon’s client. The Bank Of New York has loaned Shorewood $25 million as part of a lending syndicate and acts as Shorewood’s transfer agent. Moreover, Bannon executed a written consent ratifying the original Su-permajority Bylaw challenged in this case, even though he did not participate in the board meeting at which these were discussed. Despite these facts, I cannot conclude that Bannon is not an independent director. There has been no showing that the work Bank of New York has done for Shorewood is material to it, and that work appears to be done by departments in that Bank unrelated to Bannon’s employment there. Furthermore, although Bannon’s decision to execute the consent is questionable, he did participate in other meetings, and without more evidence, a credible finding of lack of independence cannot be made.

Defendant Sharon R. Fairley is a top marketing executive at a major pharmaceutical company. She joined the Shore-wood board on September 2, 1999. There is no credible evidence that Fairley’s independence is compromised.

Defendant William P. Weidner is President and CEO of Las Vegas Sands, Inc., a hotel and casino developer in Las Vegas, Nevada. No challenge to Weidner’s independence has been made.

II. The Defendants’ Unusual Presentation Of Their Case And Reliance On Evidentiary Privileges

Before discussing the facts, it is important for the reader to understand two factors that have limited my ability to deter *301 mine the course of events as precisely as I would have liked.

First, the defendants chose not to have any of the key insiders at Shorewood testify at trial. In particular, the company’s CEO Marc Shore did not testify on the defendants’ behalf.

In lieu of such testimony, the defendants relied on the testimony of directors Kamsky and Fairley. As of the time of trial, Kamsky and Fairley had less than a year’s worth of Shorewood board experience between them. Although both Kamsky and Fairley are intelligent and accomplished in their fields, they obviously lacked the depth of experience with and hands-on responsibility at Shorewood possessed by directors like Marc Shore and Howard Liebman. In essence, I never got to hear the “Shorewood board’s story” from its leader, Marc Shore, or one of its top managers. 7

Second, the Shorewood board has invoked the business strategy and attorney-client privileges whenever it could do so. As a result, virtually all of the professional advice given to the Shorewood board has been kept from Chesapeake and its counsel — and thus the court.

During the litigation, the defendants have attempted to use some of this concealed advice as a sword. For example, the defendants have attempted to establish that they have hired reputable investment bankers to look at strategic alternatives. Yet the defendants refused to allow Chesapeake to inquire even as to the basic nature of those alternatives. They stood by this position throughout the trial.

As a result, the only fair way to proceed is not to give any weight to any advice of this nature or to the defendants’ supposed search for alternatives. The potential for abuse is simply too great. For example, the defendants could be looking only at strategic alternatives that involve the continuation in office of Shorewood’s management. Having denied Chesapeake and the court any opportunity to determine whether this is so, the defendants cannot use their hiring of advisors as evidence that they are willing to sell Shorewood at the right price to a party who intends to replace the Shorewood board and management. To allow the defendants to do so would be inequitable. 8

*302 With this background in mind, I turn to the facts leading to this dispute.

III. Findings of Fact

A. Shorewood And Chesapeake Each Identify The Other As An Acquisition Candidate

As of early 1999, the logic of combining Shorewood’s and Chesapeake’s assets into one company appealed to the management of both companies. Under a new management team, Chesapeake had been divesting itself of capital-intensive, commodity businesses so that it could concentrate on being a provider of high-end specialty packaging and merchandising services. The money it obtained through divestiture was being used to purchase businesses that would fit Chesapeake’s new strategy. In 1998, Chesapeake identified Shorewood as a desirable acquisition target.

For its part, Shorewood is a provider of high quality printing and paperboard packaging for the computer software, cosmetics, food, home video, music, tobacco and general consumer markets in North America and China. Beginning in February 1999, Shorewood began purchasing Chesapeake stock, supposedly for “investment purposes only” because Shorewood believed that Chesapeake’s value was not recognized in the market. But on March 2, 1999, Shorewood’s CEO Marc Shore received a memorandum from his fellow director and key financial advisor Tim O’Donnell outlining the logic and possible financial benefits of a strategy whereby Shorewood and a paper company would buy Chesapeake and divvy up its assets.

On June 4 and August 17, 1999, Marc Shore and Chesapeake CEO Thomas H. Johnson met in New York City. Shore instigated this set of meetings. According to Johnson, who testified about the meetings, Shore was quite vague in his overtures, but seemed to want to engage in some sort of joint venture. During the meetings, Shore assured Johnson that Shorewood (which by July owned 4.6% of Chesapeake’s shares) had purchased stock in Chesapeake as an investment only. This was, of course, not strictly true since Shore and O’Donnell had been having “general conversations” about whether Shorewood would actually try to buy Chesapeake. 9

But then again, Johnson was hardly effusive about his own intentions. Apparently, he never told Shore that Chesapeake had been analyzing an acquisition of Shorewood since 1998.

The two meetings went nowhere. The two acquisition-hungry CEOs retired to their headquarters to plot their next moves.

B. Shorewood Strikes First

Seizing upon a sharp decline in the market price of Chesapeake’s stock, Marc Shore and O’Donnell came up with a plan to acquire Chesapeake for $40 a share, a 41% premium to the then prevailing market price — which Shorewood admits was depressed. 10 At an October 26, 1999 Shorewood board meeting, Shore obtained the board’s support for this plan. The board’s deliberations were not extensive, and they received no written analysis of the proposed acquisition.

The same day Marc Shore called Chesapeake’s CEO Johnson and told him that a letter containing an acquisition proposal would be forthcoming. Johnson told him that Chesapeake was not for sale but that Chesapeake would consider whatever pro *303 posal Shorewood made. After Johnson received Shore’s letter containing the precise terms of the offer, Johnson again informed Shore that Chesapeake was not for sale, but that its board would analyze the offer and respond to Shore no later than November 5,1999.

By that time, Johnson had already reached a personal conclusion that the offer was a not a fair price for Chesapeake. According to his testimony, however, he had an open mind and wanted to hear from his fellow directors and professional financial advisors. On November 3, 1999, the Chesapeake board met for that purpose. Thereafter, the Chesapeake board unanimously voted that the Shorewood offer was inadequate and authorized Johnson to communicate that position to Shorewood. The Chesapeake board did not consider whether to negotiate with Shorewood to obtain a higher bid.

C. Chesapeake Responds In Kind With A Bid To Acquire Shorewood

Johnson then called Shore to set up a meeting for November 10, 1999. Johnson could do so with rather absolute confidence that he could block a hostile acquisition of Chesapeake by Shorewood. As a Virginia corporation, Chesapeake is authorized to— and does — have in place iron-clad defenses, including a so-called “dead-hand poison pill” and a staggered board. The Chesapeake board never considered lowering these defenses to allow Shorewood to take its offer to the Chesapeake shareholders. Thus its decision effectively precluded Shorewood from presenting its offer to them. 11

At the November 10, 1999 meeting, Johnson told Shore that Chesapeake had rejected the Shorewood offer, but was interested in a transaction whereby Chesapeake would purchase all of Shorewood for $16.50 a share. This price constituted a 40% premium over the current trading levels of Shorewood, but was below Shore-wood’s trailing 12-month closing high of $20.63 per share. 12 Johnson gave Shore a letter in which he stressed that Chesapeake could finance such a transaction without difficulty and that Chesapeake was prepared to negotiate with Shorewood. At the same meeting, Johnson explained that the strength of Chesapeake’s antitakeover defenses made it virtually impossible for Shorewood to acquire Chesapeake without its board’s support.

Shore told Johnson that the Shorewood board would consider the $16.50 offer, but made clear his own view that the offer was inadequate and the likelihood that his board would reach the same conclusion. As Shore apparently put it, “if Shore-wood’s 41% premium wasn’t good enough for Chesapeake’s shareholders, why should *304 Chesapeake’s 40% premium be good enough for Shorewood’s?”

D. The Shorewood Board Rejects Chesapeake’s Offer As Inadequate

On November 16, 1999, the Shorewood board convened by telephone to consider the $16.50 per share offer. At the meeting, the board received no written materials and no advice from any outside financial advisor, although it did receive advice from the law firm of Bryan Cave, LLP. Shorewood has blocked any inquiry into the nature of the legal advice given to its board and therefore the director-defendants cannot rely upon that advice to support their position in this litigation.

The bulk of the meeting was dominated by a discussion of the background and adequacy of the offer by Marc Shore and O’Donnell. They emphasized that the offer, while a premium to Shorewood’s current market price, was low compared to the Shorewood’s historical prices and the prices at which other specialty packaging companies had been purchased. 13 The favorable prospects for earnings under Shorewood’s existing strategy were also stressed. O’Donnell opined that the $16.50 offer represented “a substantial discount to the Company’s true value based on both its historical multiples and market multiples.” 14

The board concluded that it did not need any additional financial advice to determine whether the Chesapeake offer was inadequate. It appears that the issue of inadequacy was not even a close question for most of the directors, many of whom found the offer so low as to indicate either a lack of good faith or seriousness on Chesapeake’s part. No one on the board thought the offer was inviting enough to serve as the basis for further discussions with Chesapeake; indeed, this option was not even discussed.

Moreover, several members of the board viewed O’Donnell as a relevant source of expertise, given the regular financial advisory services he provided to Shorewood. O’Donnell did not view himself as giving a “fairness opinion,” something Jefferson Capital has never done, a fact unknown to at least some members of the board. Nor had O’Donnell yet been retained as a financial advisor regarding the Chesapeake situation. Given how regularly he did financial advisory services for the company, it is clear, however, that both he and the board thought he was speaking both as a financial advisor to the company and as a director.

Although the board viewed the Chesapeake offer as grossly inadequate, the board felt it could not react supinely to the Chesapeake offer given the depressed level at which Shorewood’s stock was trading. The board therefore chewed on several options, including stepping up Shorewood’s own efforts to acquire Chesapeake, dropping the matter and hoping that Chesapeake would do the same, and publicizing the as-yet non-public Shorewood offer for Chesapeake.

According to the November 16 meeting minutes, the board resolved to make public the interplay between Shorewood and Chesapeake. Most significantly for present purposes, the board appears to have asked outside counsel to review the company’s defenses and recommend any mea *305 sures necessary to strengthen them in the face of Chesapeake’s bid. No substantive discussion of such measures occurred at the November 16 meeting.

E. The Shorewood Board Meets By Phone To Adopt A Package Of Defensive Measures

On November 18, 1999, the Shorewood board met telephonically for thirty minutes to consider a package of defensive bylaw changes. Directors Verebay and Bannon did not attend. The only outside advisors present were lawyers from Bryan Cave, whose advice has been withheld on grounds of attorney-client privilege. 15 The text of the bylaw changes being proposed was not provided to the board.

Marc Shore opened the meeting by explaining that the meeting’s purpose was “to consider certain amendments to the Corporation’s Bylaws that might better enable the Board to defend the Company against a hostile takeover attempt which might not be in the best interests of the Corporation’s stockholders.” 16 He then expressed the view that the Chesapeake’s most recent letter “could only be understood as a threat of an [sic] hostile tender offer and proxy fight and that he understood that the Corporation’s ability to defend against threats to its stockholders’ interests, such as Chesapeake’s grossly inadequate offer of $16.50 per share, were weaker than they needed to be.” 17

Marc Shore and the other insiders were primarily concerned about bylaw amendments to eliminate the company’s classified board structure, which would open the way to the removal of the sitting board and the installation of a new board. The package of amendments (the “Defensive Bylaws”) included the following measures designed to make that possibility less likely:

• the elimination of the right of stockholders to call special meetings;

• the elimination of the ability of stockholders to remove directors without cause;

• the adoption of procedures regulating the consent solicitation process, which gave the board significant leeway to determine a record date;

• the elimination of the stockholders’ ability to fill board vacancies; and

• the imposition of a supermajority voting requirement for stockholder-initiated bylaw changes (the “Super-majority Bylaw”).

Each proposal was considered individually. There is no evidence that the directors considered their cumulative impact.

The board’s deliberations regarding the Supermajority Bylaw appear to have been quite truncated and perfunctory. Presented with a choice between an 80% Superma-jority Bylaw and a 66 2/3% Supermajority Bylaw, the board chose the latter option as less extreme.

Yet the information the board used to determine whether to adopt any superma-jority bylaw at all appears to have been grossly inadequate. The board appears to have failed to even discuss, among other things, much less give adequate consideration to the following factors:

• the likely voter turnout in the event of a consent solicitation;

*306 • the composition of the Shorewood electorate, including the proportion of Shorewood shares held by institutional investors and by Shorewood insiders;

• whether it was reasonable to expect that anyone could obtain 66 2/3% of the outstanding shares in a consent solicitation without the support of the Shore family shares and the other shares controlled by Shorewood insiders; and

• whether the Shorewood board faced a realistic prospect of losing a consent solicitation battle with Chesapeake without a supermajority bylaw.

A simple mathematics exercise is the best way to illustrate the deficiencies in the board’s process. At the time of the November 18, 1999 meeting, Shorewood management insiders had the ability to control nearly 24% of Shorewood’s outstanding shares. 18 Assuming a 90% turnout and the opposition of these managers to seeing themselves turned out of the board room, it was mathematically impossible for an insurgent to prevail in a consent solicitation under the 66 2/3% Super-majority Bylaw. Quite obviously, the 80% option was the ultimate defense, because it gave the Shorewood board a guarantee of victory with a turnout of 100%.

Furthermore, the reality was that historical voting turnout at Shorewood elections had been in the 75-80% range and that shares held by institutional investors comprised the great majority of those left after subtracting insider holdings. Marc Shore and the other management members of the board possessed this information but did not present it to the board in any way that related those facts to the propriety of adopting the Supermajority Bylaw. Several of the directors appear to have been ignorant of these facts.

Nor did the board consider whether the .perquisites of their positions might lead the management-stockholders to vote differently than stockholders without any other financial relationship with Shore-wood. At least one of the outside directors, Ms. Fairley, did not see this information as relevant.

F. The “Threats” Identified At The November 16 and 18 Shorewood Board Meetings

In this case, the defendants have relied for the most part on two related threats posed by Chesapeake’s $16.50 offer. First, the defendants claim that the $16.50 offer was grossly inadequate and thus Shorewood stockholders faced great harm if they sold their stock at that price. Second, the defendants assert that there was a danger that Shorewood stockholders would be confused about the intrinsic value of the company, fail to understand management’s explanation as to why the market was undervaluing their stock, and mistakenly tender consents to Chesapeake to facilitate its unfair offer.

While there is strong evidence that the board focused on price inadequacy as a key threat at the November board meet *307 ings, the minutes and contemporaneous notes of those board meetings are devoid of the mention of the latter threat. This is quite curious, given the enormous importance the defendants place on this threat in the litigation.

According to the defendants’ deposition and trial testimony, they were concerned as early as the November board meetings that the market would not understand: (1) the value of Shorewood’s investment in a plant in China; (2) the efficiencies that Shorewood would achieve due to certain investments and plant closures; (3) the synergies associated with Shorewood’s acquisition of Queens Group and two smaller companies; and (4) Shorewood’s attempt to position itself to take advantage of an international trend towards use of a smaller group of packaging suppliers by manufacturers.

As a matter of chronology, I believe that the “confusion” threat was not identified until December. The absence of a discussion of these issues in the minutes or the contemporaneous notes is one critical reason I believe this to be so. The other is the fact that some of the record evidence on this point had to be elicited through leading questioning of defendants by their own counsel at depositions, using a Shore-wood 14D-9 that was not created until December.

In any event, regardless of when the confusion threat was identified, that threat hardly emerges as a particularly dangerous one. The defendants admit that the company had disclosed all material information regarding the business factors they felt the stockholders could not understand.

And in deposition and trial testimony, several of the defendants were able to describe these factors in lucid and understandable terms. For example, Kamsky testified as to the value of the China initiative, which involves a manufacturing plant in China owned by Shorewood in a 55%-45% joint venture with Westvaeo, a leading industry player. Kamsky noted that Shorewood has a huge competitive advantage because it has been permitted to proceed without the usual Chinese requirement to have a state-owned joint venture partner, thus saving enormous operating expenses and bureaucratic red tape. Moreover, she pointed out that Shore-wood’s plant has obtained a rare exclusive license to conduct business in three key provinces strategically located near manufacturers who can use the plant’s services. Not only that, the plant has been qualified to do work for the Malaysia facility of Phillip Morris, a Shorewood customer in other parts of the world. Given this positioning and the huge potential for growth in consumer demand in that part of the world, Kamsky expects the plant to generate substantial profits in the near future. In fact, Shorewood’s prospects in China are so good it got Westvaeo to pay $22.7 million for its 45% share of the plant, which represents a $5 million premium over Shorewood’s cost of construction.

The directors of Shorewood not only can explain factors like these in understandable terms, but according to them, they do it with the analyst community on a regular basis. As Ms. Kamsky testified at her deposition:

I’ll tell you, just along those fines, if you speak to the investment houses’ analysts about the value of Shorewood’s stock, they place the stock considerably higher than what we were faced with. Interestingly, it includes Goldman Sachs, who is advising Chesapeake.

I have listened in on the phone calls that Marc and Howard hold with the investment community where they call in and one thing that I find very refreshing about the Shorewood board and particularly about Marc and Howard is that, if *308 anything, they underplay the conservative. They don’t overplay. They don’t underplay earnings, but they are conservative and they don’t go out to the Street and say, you know, we’re the hundred pound gorilla and we should be at $40 a share.

But if you listen to the analysts when Marc is talking and Howard is talking, they will consistently come back and they will say, “This year you had extraordinary capital expenditures. You had China. You had Queens. You have money for acquisitions, technology. That’s a one-time hit. So that means that next year you’re not going to have that hit, which will translate into a $22 per share price.”

Now, this is public record and these are well-informed analysts from the top institutions. 19

Indeed, the factors identified by the Shorewood directors as not being adequately reflected in the company’s market price are all discussed in industry analyst reports from respected investment banks like Lehman Brothers and Goldman Sachs. These reports set one-year price targets for Shorewood’s stock which exceeded Chesapeake’s $16.50 a share offer by as much as $7.50 a share.

Undermining the risk of confusion is Marc Shore’s and Liebman’s belief that Shorewood management has strong credibility with the investment community. In that regard, Shore testified at his deposition that Shorewood could have beaten off Chesapeake’s $16.50 per share offer, because the company would have been able to convince its stockholders that Shore-wood was worth more than that. For his part, director O’Donnell said that Shore-wood can communicate anything to its stockholders, given enough time.

The most the Shorewood directors are able to credibly say is that stockholders will never understand the relevant information as deeply as the directors do or that the stockholders might choose to blind themselves to it in favor of a short-term return. Some of the directors, e.g., Andrew Shore, also attributed the possibility for confusion to “securities laws” that supposedly inhibit the directors from being as optimistic publicly as they are privately.

In sum, the evidence is insubstantial that would support any conclusion that, as of the end of November 1999, there was a real risk that the Shorewood stockholders would not be able to grasp the information necessary to make an informed judgment about whether to sell their stock or to execute a consent on behalf of Chesapeake. Given the fact that at that time over 80% of Shorewood’s shares were held by management and institutional holders, the board’s own ability to undertake more vigorous communication efforts, and the fact that reputable analysts were already tracking the stock, the risk of confusion was at best quite a weak one. As important, I reiterate that I believe it is more likely that the board did not in fact focus on this particular threat until later board meetings.

G. How The 66 2/3% Supermajority Bylaw Supposedly Addressed These Threats

The reasons the Shorewood board believed that the 66 2/3% Supermajority Bylaw addressed the threats of price inadequacy and stockholder confusion are less than clear. At the core, these reasons center on the word “focus.” During this litigation, many of the Shorewood directors have echoed the concept that the 66 2/3% Supermajority Bylaw was responsive to *309 the threats of price inadequacy and stockholder confusion because the Bylaw engendered greater “focus.” Marc Shore, for example, testified at deposition that “the key to the super majority was to get the majority of the stockholders to focus on what the issues were and ... the value of what Chesapeake was offering.” 20 According to him, under the old bylaws a minority could change how the company was could run, and he wished to change that. Apparently, Shore was referring to the fact that before the Defensive Bylaws were adopted, Shorewood stockholders could call a special meeting at which the majority of a quorum could amend the bylaws. In any consent solicitation, a majority of all outstanding shares was required by statute, the Shorewood bylaws notwithstanding. 21

But directors Kamsky and Fairley articulated the concept of “focus” in a manner more consistent with the 66 2/3% Super-majority Bylaw. They testified that the board wanted more than a majority of the shares to decide issues as important as the ones likely to be at stake in a contested consent solicitation or proxy fight to amend the Shorewood bylaws. As Fairley put it, the board felt that “major action ... should be the result of the considered focus of a broad number of stockholders, [a] considered consensus ....” 22

At other times, however, Shorewood directors suggested that their concentration on “focus” was based on their desire to see the stockholders focus on the important issues to be decided. For example, both Marc Shore and Verebay say that the Su-permajority Bylaw would and was intended to make Shorewood stockholders “focus on the issues.” 23 Some of the directors simply blended these different rationales. Bannon testified the board “wanted to make certain that there was a very informed, focused consensus among the shareholders in terms of understanding the company’s potential so that they could make the best possible decision.” 24

During this litigation, the defendants and their lawyers have advanced no rational explanation of how the supermajority voting requirement serves to make voters more focused. Thus that purpose cannot sustain the Supermajority Bylaw and I will therefore give it no further consideration.

Rather, I will assume that the Shore-wood board felt that it was desirable that something close to a consensus of stockholders decide any consent solicitation or proxy fight to amend the bylaws and that the board believed that the 66 2/3% Super-majority Bylaw would require that consensus.

It is clear, in that regard, that the principal bylaw amendment feared by the board — particularly by Marc Shore and the other insiders — was the elimination of the company’s classified board structure, which would allowT the subsequent removal of the incumbent board. Put in plain terms, the board’s desire for a “focused consensus” could be called a euphemism for greatly increasing the number of votes the stockholders needed to unseat the directors. In combination with the elimination of stockholder-called special meetings, the 66 2/3% Supermajority Bylaw raised that bar substantially.

H. Shoreivood Goes Public With Its Battle With Chesapeake

After the November 18 board meeting, Shorewood issued a press release in which *310 it announced that its board had rejected Chesapeake’s heretofore non-public $16.50 per share offer, and that Chesapeake’s board had likewise rejected Shorewood’s non-public $40 per share offer.

Chesapeake responded with a November 22, 1999 public letter from Johnson to the Shorewood board, in which Johnson emphasized Chesapeake’s willingness to negotiate and possibly to “increase our offer with appropriate due diligence and access to your [Shorewo'od’s] business plan. We [Chesapeake] also stand ready to discuss alternatives to an all-cash structure that may offer a tax-advantaged alternative for your stockholders.” 25 Shorewood responded with a communication emphasizing the gross inadequacy of Chesapeake’s bid and the fact that the company was not for sale.

I.The Shorewood Board Executes A Written Consent Adopting The Bylaw Amendments

The Shorewood board supposedly voted to approve the bylaw amendments at their phone meeting on November 18. But the directors subsequently executed a written consent confirming the adoption of the bylaw amendments. At the time they were asked to execute the consent, the directors had not been provided with a text of the amendments. Yet the board members signed anyway, including Bannon and Ver-ebay, who had not attended the November 18 meeting.

J.Shorewood Hires An “A Team” Of Advisors

After the November 18 board meeting, Marc Shore and Kamsky began to be concerned about whether Shorewood had the advisors necessary to see them through the Chesapeake situation. They wanted an “A Team.” Thus, Kamsky offered to go out and shop for investment bankers and private investigators. Eventually, the Bryan Cave firm was supplemented by Skadden, Arps, Slate, Meagher & Flom; Shorewood also engaged Bear, Stearns & Co. Inc., Jefferson Capital, and Greenhill & Company as investment bankers; and Innisfree M & A Incorporated was retained as proxy solicitor for Shorewood.

K.Chesapeake Buys H.9% of Shore-wood’s Stock From Shorewood’s Largest Shareholder

An obvious target in the Chesapeake/Shorewood struggle was Ariel Capital Management, Inc., an investment advisory firm that was Shorewood’s single largest stockholder. Ariel owned over 20% of Shorewood’s shares and had owned a substantial block of shares in the company during the entire 1990s. Ariel’s position equaled 5.6 million shares of Shore-wood stock, which Ariel held on behalf of its clients. Ariel had “sole voting power” regarding the shares. As one would expect, Ariel views itself as having a fiduciary duty to maximize the total return for its clients.

Given Ariel’s interests, it was logical for both the Shorewood and Chesapeake boards to find out Ariel’s view of the now public situation involving the two companies. Indeed, it is clear that communication with Ariel was an early agenda item for Shorewood insiders after receiving the Chesapeake offer. 26

Chesapeake contacted Ariel on November 19, 1999 and arranged a meeting for November 28. At the meeting, Johnson *311 and other members of