May 20 (Bloomberg) -- Atmel Corp., a maker of microchips used in video-game controllers, defeated a challenge by investors to its so-called poison-pill takeover defense.

Delaware Chancery Court Judge William B. Chandler III concluded yesterday that Atmel’s changes to the takeover defense were properly designed to help protect the company from unwanted suitors and shouldn’t be thrown out. Some Atmel shareholders who sued over a failed buyout bid last year by Microchip Technology Inc. challenged the revisions as overly broad.

There is no evidence the changes were “fatally vague,” Chandler ruled after a hearing in Georgetown, Delaware.

Atmel, whose chips are used in household appliances and automobiles, had its biggest gain in more than seven months in Nasdaq Stock Market trading last week on speculation that Texas Instruments Inc. may make an offer for the company. Lawyers for the San Jose, California-based company said in yesterday’s court hearing that the firm’s annual meeting is set for tomorrow.

“We are pleased the court agreed that we acted in the best interest of our shareholders, and we will continue to do so,” Patrick Reutens, Atmel’s chief legal officer, said in an e- mailed statement.

In October, Microchip Technology Inc. and ON Semiconductor Corp. offered to acquire Atmel for $5 a share, or $2.3 billion. Atmel’s board rejected that offer and amended the company’s poison-pill plan to make it harder for potential suitors to use so-called derivative contracts to amass shares in a takeover fight.

Poison-Pill Defenses

Poison-pill defenses are designed to make hostile takeovers too expensive by letting existing shareholders buy stock at a discount when the bid is made. Delaware courts have found such defenses to be legal unless used to restrict a board’s power to consider buyout offers, according Larry Hamermesh, a Widener University law professor who specializes in Delaware corporate cases.

ON Semiconductor executives decided to withdraw their offer for Atmel in November, citing weakness in the industry and financial markets. Officials of Chandler, Arizona-based Microchip decided to drop their final Atmel bid in February, citing a decline in Atmel’s revenue.

A group of Atmel shareholders sued in Delaware Chancery Court, arguing the board erred in rejecting the bid and in revising the company’s anti-takeover defenses to ward off future suitors.

Trigger

Lawyers for the lead plaintiff, a Louisiana pension fund that owns Atmel shares, contend that the changes to the poison- pill plan made its terms so vague that investors and company officials couldn’t be sure what would trigger the defense.

The amendments should be nullified because they are “void for vagueness,” Stuart Grant, a Wilmington, Delaware-based lawyer for the pension fund, told Chandler.

The revisions provide a disincentive to takeover suitors, such as Microchip Technology, to launch a new bid for Atmel, which means shareholders may lose out on a lucrative offer for their stakes, Grant said.

“They don’t want to play if they don’t know what the rules of the game are going to be,” he said.

Atmel’s lawyer countered that neither Microchip Technology nor On Semiconductor cited the amended poison-pill plan as a reason they dropped their buyout bids for Atmel.

‘Nothing Sinister’

“No one has said but for these amendments” they’d make a bid for Atmel, said Theodore Mirvis, a New York-based lawyer for the company. “There’s nothing sinister” in the revisions, he added.

While he denied the Louisiana pension fund’s request to throw out the revisions of the takeover defense, Chandler acknowledged that shareholders could continue to challenge the plan.

“The complex facts of this case cry out for a trial,” the judge said.

Atmel rose 3 cents to $3.78 in trading yesterday. The stock has gained 21 percent this year.

The case is Louisiana Municipal Police Employees Retirement System v. Laub, 4161, Delaware Chancery Court (Georgetown).

To contact the reporters on this story: Jef Feeley in Wilmington at jfeeley@bloomberg.net; Phil Milford in Wilmington, Delaware, at pmilford@bloomberg.net.

Last Updated: May 20, 2009 00:01 EDT