Opinion ID: 1934995
Heading Depth: 1
Heading Rank: 50

Heading: Range of Reasonableness

Text: In assessing a challenge to defensive actions by a target corporation's board of directors in a takeover context, this Court has held that the Court of Chancery should evaluate the board's overall response, including the justification for each contested defensive measure, and the results achieved thereby. Where all of the target board's defensive actions are inextricably related, the principles of Unocal require that such actions be scrutinized collectively as a unitary response to the perceived threat. Gilbert v. El Paso Co., Del.Supr., 575 A.2d 1131, 1145 (1990). Thus, the Unitrin Board's adoption of the Repurchase Program, in addition to the poison pill, must withstand Unocal 's proportionality review. Id. In Unocal, the progenitor of the proportionality test, this Court stated that the board of directors' duty of care extends to protecting the corporation and its [stockholders] from perceived harm whether a threat originates from third parties or other shareholders. Unocal, 493 A.2d at 955. We then noted that such powers are not absolute. Id. Specifically, this Court held that the board does not have unbridled discretion to defeat any perceived threat by any Draconian means available. Id. Immediately following those observations in Unocal, when exemplifying the parameters of a board's authority in adopting a restrictive stock repurchase, this Court held that the directors may not have acted solely or primarily out of a desire to perpetuate themselves in office (preclusion of the stockholders' corporate franchise right to vote) and, further, that the stock repurchase plan must not be inequitable. Unocal, 493 A.2d at 955 (emphasis added). [37] An examination of the cases applying Unocal reveals a direct correlation between findings of proportionality or disproportionality and the judicial determination of whether a defensive response was draconian because it was either coercive or preclusive in character. In Time, for example, this Court concluded that the Time board's defensive response was reasonable and proportionate since it was not aimed at cramming down on its shareholders a management-sponsored alternative, i.e., was not coercive, and because it did not preclude Paramount from making an offer for the combined Time-Warner company, i.e., was not preclusive. See Paramount Communications, Inc. v. Time, Inc., Del.Supr., 571 A.2d 1140, 1154-55 (1990) (citing for comparison as coercive or preclusive disproportionate responses Mills Acquisition Co. v. Macmillan, Inc., Del. Supr., 559 A.2d 1261 (1989), and AC Acquisitions Corp. v. Anderson, Clayton & Co., Del. Ch., 519 A.2d 103 (1986)). This Court also applied Unocal's proportionality test to the board's adoption of a poison pill shareholders' rights plan in Moran v. Household Int'l, Inc., Del.Supr., 500 A.2d 1346 (1985). After acknowledging that the adoption of the rights plan was within the directors' statutory authority, this Court determined that the implementation of the rights plan was a proportionate response to the theoretical threat of a hostile takeover, in part, because it did not strip the stockholders of their right to receive tender offers and did not fundamentally restrict proxy contests, i.e., was not preclusive. Id. at 1357. More than a century before Unocal was decided, Justice Holmes observed that the common law must be developed through its application and cannot be dealt with as if it contained only the axioms and corollaries of a book of mathematics. Oliver Wendell Holmes, Jr., The Common Law 1 (1881). As common law applications of Unocal's proportionality standard have evolved, at least two characteristics of draconian defensive measures taken by a board of directors in responding to a threat have been brought into focus through enhanced judicial scrutiny. In the modern takeover lexicon, it is now clear that since Unocal, this Court has consistently recognized that defensive measures which are either preclusive or coercive are included within the common law definition of draconian. If a defensive measure is not draconian, however, because it is not either coercive or preclusive, the Unocal proportionality test requires the focus of enhanced judicial scrutiny to shift to the range of reasonableness. Paramount Communications, Inc. v. QVC Network, Inc., Del.Supr., 637 A.2d 34, 45-46 (1994). Proper and proportionate defensive responses are intended and permitted to thwart perceived threats. When a corporation is not for sale, the board of directors is the defender of the metaphorical medieval corporate bastion and the protector of the corporation's shareholders. The fact that a defensive action must not be coercive or preclusive does not prevent a board from responding defensively before a bidder is at the corporate bastion's gate. [38] The ratio decidendi for the range of reasonableness standard is a need of the board of directors for latitude in discharging its fiduciary duties to the corporation and its shareholders when defending against perceived threats. The concomitant requirement is for judicial restraint. Consequently, if the board of directors' defensive response is not draconian (preclusive or coercive) and is within a range of reasonableness, a court must not substitute its judgment for the board's. Paramount Communications, Inc. v. QVC Network, Inc., 637 A.2d at 45-46.