Opinion ID: 1934995
Heading Depth: 1
Heading Rank: 47

Heading: Proper Proportionality Burden

Text: The Court of Chancery's legal conclusions are subject to de novo review by this Court. Merrill v. Crothall-American, Inc., Del.Supr., 606 A.2d 96, 99 (1992). The Court of Chancery's factual findings will be accepted if they are sufficiently supported by the record and are the product of an orderly and logical deductive process. Levitt v. Bouvier, Del.Supr., 287 A.2d 671, 673 (1972). We have already noted that the Court of Chancery made a factual finding unsupported by the record, i.e., that the increase in the percentage of ownership by the stockholder directors from 23% to 28%, resulting from the completed Repurchase Program, would make it merely theoretically possible for an insurgent to win a proxy contest. That finding was based upon a hypothetical risk which originated from the Court of Chancery's attribution of subjective prestige and perquisite voting motives to Unitrin's outside shareholder directors. See Stroud v. Grace, Del.Supr., 606 A.2d 75, 82 (1992). In addition, that factual finding was based upon two objective mathematically erroneous calculations regarding the relative voting strength of American General and the stockholder directors. The Court of Chancery applied an incorrect legal standard when it ruled that the Unitrin decision to authorize the Repurchase Program was disproportionate because it was unnecessary. The Court of Chancery stated: Given that the Board had already implemented the poison pill and the advance notice provision, the repurchase program was unnecessary to protect Unitrin from an inadequate bid. In QVC, this Court recently elaborated upon the judicial function in applying enhanced scrutiny, citing Unocal as authority, albeit in the context of a sale of control and the target board's consideration of one of several reasonable alternatives. That teaching is nevertheless applicable here: a court applying enhanced judicial scrutiny should be deciding whether the directors made a reasonable decision, not a perfect decision. If a board selected one of several reasonable alternatives, a court should not second guess that choice even though it might have decided otherwise or subsequent events may have cast doubt on the board's determination. Thus, courts will not substitute their business judgment for that of the directors, but will determine if the directors' decision was, on balance, within a range of reasonableness. See Unocal, 493 A.2d at 955-56; Macmillan, 559 A.2d at 1288; Nixon, 626 A.2d at 1378. Paramount Communications, Inc. v. QVC Network, Inc., Del.Supr., 637 A.2d 34, 45-46 (1994) (emphasis in original). The Court of Chancery did not determine whether the Unitrin Board's decision to implement the Repurchase Program fell within a range of reasonableness. The record reflects that the Unitrin Board's adoption of the Repurchase Program was an apparent recognition on its part that all shareholders are not alike. [35] This Court has stated that distinctions among types of shareholders are neither inappropriate nor irrelevant for a board of directors to make, e.g., distinctions between long-term shareholders and short-term profit-takers, such as arbitrageurs, and their stockholding objectives. Id. In Unocal itself, we expressly acknowledged that a board may reasonably consider the basic stockholder 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. Unocal, 493 A.2d at 955-56. See also Ivanhoe Partners v. Newmont Mining Corp., Del.Supr., 535 A.2d 1334, 1341-42 (1987). The Court of Chancery's determination that the Unitrin Board's adoption of the Repurchase Program was unnecessary constituted a substitution of its business judgment for that of the Board, contrary to this Court's range of reasonableness holding in Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d at 45-46. Its decision to enjoin the Repurchase Program as an unnecessary addition to other complementary defensive mechanisms is also inconsistent with a similar analysis in Shamrock Holdings, Inc. v. Polaroid Corp., Del.Ch., 559 A.2d 278 (1989). In Shamrock, the Court of Chancery refused to enjoin any one of a series of transactions which included a repurchase plan. With respect to a repurchase program, the Court of Chancery held that a self-tender offer and buy-back plan constituted a reasonable proportionate response to the perceived threat to Polaroid shareholders by offering some immediate value to those holders interested in cash while increasing the equity interest held by the remaining stockholders. Shamrock Holdings, Inc. v. Polaroid Corp., 559 A.2d at 290. [36] Although Shamrock dealt with an offer that did not reflect the very profitable litigation embodied in the Kodak patent case settlement and therefore implicated a potentially more serious threat than that involved here, Shamrock is nevertheless applicable considering American General's negotiable low-ball bid.