In re Pure Resources, Inc. Shareholders Litigation
793 A.2d 361 (2002)
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Rule of Law:
A tender offer by a controlling shareholder is not subject to the entire fairness standard but will be reviewed for coercion and adequate disclosure. To be considered non-coercive, such an offer must be subject to a non-waivable majority of the unaffiliated minority tender condition, include a promise of a prompt back-end merger at the same price, and be free of retributive threats.
Facts:
- Unocal Corporation owned 65.4% of Pure Resources, Inc.'s stock, with the remaining shares held by the public and Pure's management.
- Pure's management, led by CEO Jack Hightower, held 'Put Agreements' allowing them to sell their shares to Unocal at a formula-based price (Net Asset Value) upon certain triggering events, such as Unocal acquiring 85% of Pure's shares.
- A Business Opportunities Agreement (BOA) was in place, limiting Pure's operations to certain areas and allowing Unocal to compete directly with Pure, which created potential conflicts of interest for Unocal-affiliated directors on Pure's board.
- Pure's management began exploring a 'Royalty Trust' financing vehicle, which Unocal feared would complicate a future acquisition and potentially inflate the value of the Put Agreements.
- Unocal made a surprise exchange offer directly to Pure's minority shareholders to acquire the remaining shares it did not own.
- Pure's board formed a Special Committee to evaluate the offer, but after Unocal's designees on the Pure board intervened, the committee was denied the authority it sought to implement defensive measures like a poison pill.
- The Special Committee was unable to negotiate a higher price from Unocal and ultimately recommended that minority shareholders reject the offer.
Procedural Posture:
- Shareholders of Pure Resources, Inc. (plaintiffs) filed a lawsuit in the Delaware Court of Chancery against Unocal Corporation and the Pure Resources board of directors (defendants).
- The plaintiffs moved for a preliminary injunction to stop Unocal's pending exchange offer to acquire the minority shares of Pure Resources.
- The Court of Chancery considered the plaintiffs' motion for a preliminary injunction.
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Issue:
Is a controlling shareholder's tender offer actionably coercive and based on material misstatements and omissions when it includes management and affiliated directors in the 'majority of the minority' condition and fails to disclose the special committee's financial analyses and the full context of the committee's limited authority?
Opinions:
Majority - Strine, Vice Chancellor
Yes, the tender offer is actionably coercive and based on material misstatements and omissions. A controlling shareholder's tender offer is not subject to the strict entire fairness standard from Kahn v. Lynch. Instead, it is governed by the standard in Solomon v. Pathe, which focuses on voluntariness, meaning the absence of coercion and the presence of full disclosure. However, this standard must be enhanced with additional protections to account for the 'inherent coercion' present in controlling shareholder transactions. The offer is coercive because its 'majority of the minority' condition improperly includes shares held by Pure's management and Unocal-affiliated directors, whose incentives are not aligned with unaffiliated shareholders. The offer must also be enjoined due to material disclosure violations. The disclosure documents failed to include a fair summary of the substantive financial analyses performed by the Special Committee's investment bankers, which was critical information for shareholders. Furthermore, the documents misleadingly described the 'clarification' of the Special Committee's authority, omitting the crucial facts that the committee sought the power to block the offer and was rebuffed by Unocal's designees on the Pure board.
Analysis:
This case creates a new, hybrid standard for reviewing tender offers by controlling shareholders, bridging the gap between the stringent 'entire fairness' review for negotiated mergers (Kahn v. Lynch) and the more lenient standard for voluntary tender offers (Solomon). By rejecting entire fairness but imposing specific structural requirements for non-coercion, the court provided a clear roadmap for structuring these transactions that offers minority shareholders greater protection than previously afforded under Solomon. The decision significantly bolsters shareholder protections by mandating a majority vote of truly unaffiliated stockholders and establishing a firm rule requiring the disclosure of the substantive work of financial advisors, enhancing the 'total mix' of information available to investors.
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