Opinion ID: 1952721
Heading Depth: 1
Heading Rank: 25

Heading: Enhanced Scrutiny Generally

Text: In Paramount v. QVC , this Court identified the key features of an enhanced judicial scrutiny test. The first feature is a judicial determination regarding the adequacy of the decisionmaking process employed by the directors, including the information on which the directors based their decision. [35] The second feature is a judicial examination of the reasonableness of the directors' action in light of the circumstances then existing. [36] We also held that the directors have the burden of proving that they were adequately informed and acted reasonably. [37] In QVC, we explained that the application of an enhanced judicial scrutiny test involves a judicial review of the reasonableness of the substantive merits of the board's actions. [38] In applying that standard, we held that a court should not ignore the complexity of the directors' task in the context in which action was taken. [39] Accordingly, we concluded that a court applying enhanced judicial scrutiny should not decide whether the directors made a perfect decision but instead should decide whether the directors' decision was, on balance, within a range of reasonableness. [40] In Unitrin, we explained the  ratio decidendi for the `range of reasonableness' standard [41] when a court applies enhanced judicial scrutiny to director action pursuant to our holding in Unocal. [42] It is a recognition that a board of directors needs latitude in discharging its fiduciary duties to the corporation and its shareholders when defending against perceived threats. [43] The concomitant requirement is for judicial restraint. [44] Therefore, if the board of directors' collective defensive responses are not draconian (preclusive or coercive) and are within a `range of reasonableness,' a court must not substitute its judgment for the board's [judgment]. [45] The same ratio decidendi applies to the range of reasonableness when courts apply Unocal's enhanced judicial scrutiny standard to defensive devices intended to protect a merger agreement that will not result in a change of control. A board's decision to protect its decision to enter a merger agreement with defensive devices against uninvited competing transactions that may emerge is analogous to a board's decision to protect against dangers to corporate policy and effectiveness when it adopts defensive measures in a hostile takeover contest. In applying Unocal's enhanced judicial scrutiny in assessing a challenge to defensive actions taken by a target corporation's board of directors in a takeover context, this Court held that the board does not have unbridled discretion to defeat perceived threats by any Draconian means available. [46] Similarly, just as a board's statutory power with regard to a merger decision is not absolute, a board does not have unbridled discretion to defeat any perceived threat to a merger by protecting it with any draconian means available. 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. [47] In applying enhanced judicial scrutiny to defensive actions under Unocal, a court must evaluate the board's overall response, including the justification for each contested defensive measure, and the results achieved thereby. [48] If a 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. [49] Therefore, in applying enhanced judicial scrutiny to defensive devices designed to protect a merger agreement, a court must first determine that those measures are not preclusive or coercive before its focus shifts to the range of reasonableness in making a proportionality determination. [50] If the trial court determines that the defensive devices protecting a merger are not preclusive or coercive, the proportionality paradigm of Unocal is applicable. The board must demonstrate that it has reasonable grounds for believing that a danger to the corporation and its stockholders exists if the merger transaction is not consummated. [51] That burden is satisfied by showing good faith and reasonable investigation. [52] Such proof is materially enhanced if it is approved by a board comprised of a majority of outside directors or by an independent committee. [53] When the focus of judicial scrutiny shifts to the range of reasonableness, Unocal requires that any defensive devices must be proportionate to the perceived threat to the corporation and its stockholders if the merger transaction is not consummated. Defensive devices taken to protect a merger agreement executed by a board of directors are intended to give that agreement an advantage over any subsequent transactions that materialize before the merger is approved by the stockholders and consummated. This is analogous to the favored treatment that a board of directors may properly give to encourage an initial bidder when it discharges its fiduciary duties under Revlon. Therefore, in the context of a merger that does not involve a change of control, when defensive devices in the executed merger agreement are challenged vis-à-vis their effect on a subsequent competing alternative merger transaction, this Court's analysis in Macmillan is didactic. [54] In the context of a case of defensive measures taken against an existing bidder, we stated in Macmillan: In the face of disparate treatment, the trial court must first examine whether the directors properly perceived that shareholder interests were enhanced. In any event the board's action must be reasonable in relation to the advantage sought to be achieved [by the merger it approved], or conversely, to the threat which a [competing transaction] poses to stockholder interests. If on the basis of this enhanced Unocal scrutiny the trial court is satisfied that the test has been met, then the directors' actions necessarily are entitled to the protections of the business judgment rule. [55] The latitude a board will have in either maintaining or using the defensive devices it has adopted to protect the merger it approved will vary according to the degree of benefit or detriment to the stockholders' interests that is presented by the value or terms of the subsequent competing transaction. [56]