Unocal Corporation v. Mesa Petroleum Co.
493 A.2d 946 (1985)
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Rule of Law:
When a board of directors implements a defensive measure in response to a perceived takeover threat, its actions are protected by the business judgment rule only if the board can demonstrate that it had reasonable grounds for believing a danger to corporate policy and effectiveness existed, and that the defensive measure is reasonable in relation to the threat posed.
Facts:
- Mesa Petroleum Co. (Mesa), a 13% stockholder in Unocal Corporation, initiated a hostile two-tier cash tender offer for 37% of Unocal's stock at $54 per share.
- The 'back-end' of Mesa's offer was to acquire the remaining Unocal shares through an exchange for highly subordinated securities, or 'junk bonds,' also purportedly valued at $54 per share.
- Unocal's board, consisting of a majority of independent directors, met to evaluate the offer.
- Financial advisors from Goldman Sachs opined that Mesa's offer was 'wholly inadequate' and that Unocal's liquidation value was at least $60 per share.
- The Unocal board determined that Mesa's two-tier offer was a coercive tactic designed to force shareholders to tender at the front end to avoid being stuck with the inferior 'junk bonds' at the back end.
- In response, Unocal's board approved a self-tender offer for its own shares, offering to exchange senior debt securities valued at $72 per share for 49% of the outstanding stock.
- This self-tender offer was contingent on Mesa acquiring a certain number of shares and specifically excluded Mesa from participation (the 'Mesa exclusion').
Procedural Posture:
- Mesa Petroleum Co. sued Unocal Corporation in the Delaware Court of Chancery to challenge Unocal's defensive exchange offer.
- Mesa moved for a temporary restraining order in response to Unocal's announcement of its exchange offer.
- The Court of Chancery (the trial court) granted a temporary restraining order, temporarily preventing Unocal from proceeding with its exchange offer unless it included Mesa.
- After a preliminary injunction hearing, the Vice Chancellor granted Mesa's motion for a preliminary injunction, holding that a selective exchange offer was legally impermissible.
- Unocal filed an interlocutory appeal of the preliminary injunction to the Delaware Supreme Court.
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Issue:
Does a target corporation's defensive self-tender offer, which excludes the hostile bidder from participation, violate the board of directors' fiduciary duties?
Opinions:
Majority - Moore, Justice
No. A target corporation's defensive self-tender offer that excludes a hostile bidder does not violate the board's fiduciary duties if it is a reasonable response to a perceived threat. A board of directors has the power and duty to oppose a takeover threat it reasonably perceives as harmful to the corporate enterprise. When evaluating such a defensive measure, courts apply an enhanced standard of review, requiring directors to show: 1) they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed, which is satisfied by showing good faith and a reasonable investigation; and 2) the defensive measure was reasonable in relation to the threat posed. Here, the Unocal board, comprised of a majority of independent directors, reasonably concluded after a proper investigation that Mesa’s inadequate and coercive two-tier tender offer was a threat to the corporation and its shareholders. The selective exchange offer was a proportionate response designed to protect the remaining 49% of shareholders from being forced to accept 'junk bonds' in a coercive back-end merger. Excluding Mesa was necessary to achieve this goal, as allowing Mesa to participate would effectively finance its own hostile and inadequate bid.
Analysis:
This landmark decision establishes the 'Unocal test,' a standard of enhanced judicial scrutiny for corporate takeover defenses that falls between the deferential business judgment rule and the stringent entire fairness test. It empowers boards to adopt defensive measures against perceived threats, including discriminatory tactics that treat a hostile bidder differently from other shareholders. The ruling legitimized proactive defensive strategies beyond simply paying 'greenmail' and significantly shaped the legal landscape of mergers and acquisitions by giving target boards considerable authority to resist hostile bids, provided their actions are proportionate to a reasonably perceived threat.
