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Timestamp: 2019-04-26 00:34:31+00:00

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Justia › US Law › Case Law › Delaware Case Law › Delaware Supreme Court Decisions › 1985 › Unocal Corp. v. Mesa Petroleum Co.
Oral Decision: May 17, 1985.
Written Decision: June 10, 1985.
We confront an issue of first impression in Delaware the validity of a corporation's self-tender for its own shares which excludes from participation a stockholder making a hostile tender offer for the company's stock.
On April 8, 1985, Mesa, the owner of approximately 13% of Unocal's stock, commenced a two-tier "front loaded" cash tender offer for 64 million shares, or approximately 37%, of Unocal's outstanding stock at a price of $54 per share. The "back-end" was designed to eliminate the remaining publicly held shares by an exchange of securities purportedly worth $54 per share. However, pursuant to an order entered by the United States District Court for the Central District of California on April 26, 1985, Mesa issued a supplemental proxy statement to Unocal's stockholders disclosing that the securities offered in the second-step merger would be highly subordinated, and that Unocal's capitalization would differ significantly from its present *950 structure. Unocal has rather aptly termed such securities "junk bonds".
On April 15, the board met again with four of the directors present by telephone *951 and one member still absent. This session lasted two hours. Unocal's Vice President of Finance and its Assistant General Counsel made a detailed presentation of the proposed terms of the exchange offer. A price range between $70 and $80 per share was considered, and ultimately the directors agreed upon $72. The board was also advised about the debt securities that would be issued, and the necessity of placing restrictive covenants upon certain corporate activities until the obligations were paid. The board's decisions were made in reliance on the advice of its investment bankers, including the terms and conditions upon which the securities were to be issued. Based upon this advice, and the board's own deliberations, the directors unanimously approved the exchange offer. Their resolution provided that if Mesa acquired 64 million shares of Unocal stock through its own offer (the Mesa Purchase Condition), Unocal would buy the remaining 49% outstanding for an exchange of debt securities having an aggregate par value of $72 per share. The board resolution also stated that the offer would be subject to other conditions that had been described to the board at the meeting, or which were deemed necessary by Unocal's officers, including the exclusion of Mesa from the proposal (the Mesa exclusion). Any such conditions were required to be in accordance with the "purport and intent" of the offer.
*952 On April 29, 1985, the Vice Chancellor temporarily restrained Unocal from proceeding with the exchange offer unless it included Mesa. The trial court recognized that directors could oppose, and attempt to defeat, a hostile takeover which they considered adverse to the best interests of the corporation. However, the Vice Chancellor decided that in a selective purchase of the company's stock, the corporation bears the burden of showing: (1) a valid corporate purpose, and (2) that the transaction was fair to all of the stockholders, including those excluded.
a) Does the directors' duty of care to the corporation extend to protecting the corporate enterprise in good faith from perceived depredations of others, including persons who may own stock in the company? b) Have one or more of the plaintiffs, their affiliates, or persons acting in concert with them, either in dealing with Unocal or others, demonstrated a pattern of conduct sufficient to justify a reasonable inference by defendants that a principle objective of the plaintiffs is to achieve selective treatment for themselves by the repurchase of their Unocal shares at a substantial premium? c) If so, may the directors of Unocal in the proper exercise of business judgment employ the exchange offer to protect the corporation and its shareholders from such tactics? See Pogostin v. Rice, Del. Supr., 480 A.2d 619 (1984). d) If it is determined that the purpose of the exchange offer was not illegal as a matter of law, have the directors of Unocal carried their burden of showing that they acted in good faith? See Martin v. American Potash & Chemical Corp., 33 Del.Ch. 234, 92 A.2d 295 at 302.
As to the third and fourth questions posed by this Court, the Vice Chancellor stated that they "appear to raise the more fundamental issue of whether directors owe fiduciary duties to shareholders who they perceive to be acting contrary to the best interests of the corporation as a whole." While determining that the directors' decision to oppose Mesa's tender *953 offer was made in a good faith belief that the Mesa proposal was inadequate, the court stated that the business judgment rule does not apply to a selective exchange offer such as this.
The board has a large reservoir of authority upon which to draw. Its duties and responsibilities proceed from the inherent powers conferred by 8 Del.C. § 141(a), respecting management of the corporation's "business and affairs". Additionally, the powers here being exercised derive from 8 Del.C. § 160(a), conferring broad authority upon a corporation to deal in its own stock. From this it is now well established that in the acquisition of its shares a *954 Delaware corporation may deal selectively with its stockholders, provided the directors have not acted out of a sole or primary purpose to entrench themselves in office. Cheff v. Mathes, Del.Supr., 199 A.2d 548, 554 (1964); Bennett v. Propp, Del.Supr., 187 A.2d 405, 408 (1962); Martin v. American Potash & Chemical Corporation, Del.Supr., 92 A.2d 295, 302 (1952); Kaplan v. Goldsamt, Del.Ch., 380 A.2d 556, 568-569 (1977); Kors v. Carey, Del. Ch., 158 A.2d 136, 140-141 (1960).
Finally, the board's power to act derives from its fundamental duty and obligation to protect the corporate enterprise, which includes stockholders, from harm reasonably perceived, irrespective of its source. See e.g. Panter v. Marshall Field & Co., 646 F.2d 271, 297 (7th Cir.1981); Crouse-Hinds Co. v. Internorth, Inc., 634 F.2d 690, 704 (2d Cir.1980); Heit v. Baird, 567 F.2d 1157, 1161 (1st Cir.1977); Cheff v. Mathes, 199 A.2d at 556; Martin v. American Potash & Chemical Corp., 92 A.2d at 302; Kaplan v. Goldsamt, 380 A.2d at 568-69; Kors v. Carey, 158 A.2d at 141; Northwest Industries, Inc. v. B.F. Goodrich Co., 301 F. Supp. 706, 712 (M.D.Ill. 1969). Thus, we are satisfied that in the broad context of corporate governance, including issues of fundamental corporate change, a board of directors is not a passive instrumentality.
When a board addresses a pending takeover bid it has an obligation to determine whether the offer is in the best interests of the corporation and its shareholders. In that respect a board's duty is no different from any other responsibility it shoulders, and its decisions should be no less entitled to the respect they otherwise would be accorded in the realm of business judgment.See also Johnson v. Trueblood, 629 F.2d 287, 292-293 (3d Cir.1980). There are, however, certain caveats to a proper exercise of this function. Because of the omnipresent specter that a board may be acting primarily in its own interests, rather than those of the corporation and its shareholders, there is an enhanced duty which calls for judicial examination at the threshold before the protections of the business judgment rule may be conferred.
*955 We must bear in mind the inherent danger in the purchase of shares with corporate funds to remove a threat to corporate policy when a threat to control is involved. The directors are of necessity confronted with a conflict of interest, and an objective decision is difficult.
A further aspect is the element of balance. If a defensive measure is to come within the ambit of the business judgment rule, it must be reasonable in relation to the threat posed. This entails an analysis by the directors of the nature of the takeover bid and its effect on the corporate enterprise. Examples of such concerns may include: inadequacy of the price offered, nature and timing of the offer, questions of illegality, the impact on "constituencies" other than shareholders (i.e., creditors, customers, employees, and perhaps even the community generally), the risk of nonconsummation, and the quality of securities being offered in the exchange. See Lipton and Brownstein, Takeover Responses and Directors' Responsibilities: An Update, p. 7, ABA National Institute on the Dynamics of Corporate Control (December 8, 1983). While not a controlling factor, it also seems to us that a board may reasonably consider the basic stockholder *956 interests at stake, including those of short term speculators, whose actions may have fueled the coercive aspect of the offer at the expense of the long term investor. Here, the threat posed was viewed by the Unocal board as a grossly inadequate two-tier coercive tender offer coupled with the threat of greenmail.
Thus, we are satisfied that the selective exchange offer is reasonably related to the threats posed. It is consistent with the principle that "the minority stockholder shall receive the substantial equivalent in value of what he had before." Sterling v. Mayflower Hotel Corp., Del.Supr., 93 A.2d 107, 114 (1952). See also Rosenblatt v. Getty Oil Co., Del.Supr., 493 A.2d 929, 940 (1985). This concept of fairness, while stated in the merger context, is also relevant *957 in the area of tender offer law. Thus, the board's decision to offer what it determined to be the fair value of the corporation to the 49% of its shareholders, who would otherwise be forced to accept highly subordinated "junk bonds", is reasonable and consistent with the directors' duty to ensure that the minority stockholders receive equal value for their shares.
*958 Nor does this become an "interested" director transaction merely because certain board members are large stockholders. As this Court has previously noted, that fact alone does not create a disqualifying "personal pecuniary interest" to defeat the operation of the business judgment rule. Cheff v. Mathes, 199 A.2d at 554.
In this case that protection is not lost merely because Unocal's directors have *959 tendered their shares in the exchange offer. Given the validity of the Mesa exclusion, they are receiving a benefit shared generally by all other stockholders except Mesa. In this circumstance the test of Aronson v. Lewis, 473 A.2d at 812, is satisfied. See also Cheff v. Mathes, 199 A.2d at 554. If the stockholders are displeased with the action of their elected representatives, the powers of corporate democracy are at their disposal to turn the board out. Aronson v. Lewis, Del.Supr., 473 A.2d 805, 811 (1984). See also 8 Del.C. §§ 141(k) and 211(b).

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