Opinion ID: 1934995
Heading Depth: 1
Heading Rank: 26

Heading: Chancery Enjoins Repurchase Program

Text: The Court of Chancery did not view either its conclusion that American General's Offer constituted a threat, or its conclusion that the poison pill was a reasonable response to that threat, as requiring it, a fortiori, to conclude that the Repurchase Program was also an appropriate response. The Court of Chancery then made two factual findings: first, the Repurchase Program went beyond what was necessary to protect the Unitrin stockholders from a low ball negotiating strategy; and second, it was designed to keep the decision to combine with American General within the control of the members of the Unitrin Board, as stockholders, under virtually all circumstances. Consequently, the Court of Chancery held that the Unitrin Board failed to demonstrate that the Repurchase Program met the second aspect or proportionality requirement of the initial burden Unocal ascribes to a board of directors. The Court of Chancery framed the ultimate question before it as follows: This case comes down to one final question: Is placing the decision to sell the company in the hands of stockholders who are also directors a disproportionate response to a low price offer to buy all the shares of the company for cash? The Court of Chancery then answered that question: I conclude that because the only threat to the corporation is the inadequacy of an opening bid made directly to the board, and the board has already taken actions that will protect the stockholders from mistakenly falling for a low ball negotiating strategy, a repurchase program that intentionally provides members of the board with a veto of any merger proposal is not reasonably related to the threat posed by American General's negotiable all shares, all cash offer. In explaining its conclusion, the Court of Chancery reasoned that: I have no doubt that a hostile acquiror can make an offer high enough to entice at least some of the directors that own stock to break ranks and sell their shares. Yet, these directors undoubtedly place a value, probably a substantial one, on their management of Unitrin, and will, at least subconsciously, reject an offer that does not compensate them for that value.... The prestige and perquisites that accompany managing Unitrin as a member of its Board of directors, even for the non-officer directors that do not draw a salary, may cause these stockholder directors to reject an excellent offer unless it includes this value in its price parameter. The Court of Chancery concluded that, although the Unitrin Board had properly perceived American General's inadequate Offer as a threat and had properly responded to that threat by adopting a poison pill, the additional defensive response of adopting the Repurchase Program was unnecessary and disproportionate to the threat the Offer posed. Accordingly, it concluded that the plaintiffs had established with reasonable probability that the [Unitrin Board] violated its duties under Unocal [by authorizing the Repurchase Program] because the Board had not sustained its burden of demonstrating that the Repurchase Program was a proportionate response to American General's Offer. Therefore, the Court of Chancery held that the plaintiffs proved a likelihood of success on that issue and granted the motion to preliminarily enjoin the Repurchase Program. [18]