Opinion ID: 1984316
Heading Depth: 2
Heading Rank: 3

Heading: The Reasonableness of the Board's Defensive Measures

Text: Looking only to the face of the complaint, Plaintiffs have stated a claim under Unocal. Enhanced judicial scrutiny under Unocal applies whenever the record reflects that a board of directors took defensive measures in response to a `perceived threat to corporate policy and effectiveness which touches upon issues of control.' Unitrin, 651 A.2d at 1372 n. 9 (quoting Stroud v. Grace, Del.Supr., 606 A.2d 75, 82 (1992), and Gilbert v. El Paso Co., Del.Supr., 575 A.2d 1131, 1144 (1990)). Once the plaintiff establishes that defensive measures have been employed in the context of a contest for control, the Board has the burden of showing (1) that it had reasonable grounds for believing that a danger to corporate policy and effectiveness existed, and (2) that [its] defensive response was reasonable in relation to the threat posed. Unitrin, 651 A.2d at 1373 (citing Unocal, 493 A.2d at 955). Once the Board has established the reasonableness of its perception of a threat and the proportionality of the response, it receives the protection of the business judgment rule. Id. at 1374. This case differs from cases where the presumption of the business judgment rule attaches ab initio and to survive a Rule 12(b)(6) motion, a plaintiff must allege well-pleaded facts to overcome the presumption. See, e.g., Levine v. Smith, Del.Supr., 591 A.2d 194 (1991); Grobow v. Perot, Del.Supr., 539 A.2d 180 (1988). In the case sub judice, plaintiffs have pleaded defensive measures which the Santa Fe Board undertook in the context of a battle for corporate control. The complaint states: The Individual Defendants breached their fiduciary duties of loyalty and care by proceeding with and completing the Joint Offer, which placed approximately 16% ownership in the hands of BNI, adopting the Poison Pill and applying it in a discriminatory manner by exempting its application as to one bidder but maintaining it as to all other interested parties, amending the Poison Pill to allow Allegheny to increase its ownership of Santa Fe to 14.9%, and authorizing the Repurchase Program. The complaint does not admit that the Board had proper grounds for its decision. Nor does the Board enjoy a presumption to that effect. The complaint does not adopt as true the facts set forth in the Proxy Statement. Thus, without benefit of the Joint Proxy, the Board cannot rely on any allegations of the complaint to meet its burden under Unocal and Unitrin to come forward with evidence supporting the reasonableness of its perception of the threat posed by Union Pacific and the proportionality of the response thereto. See Rule 56(e). Accordingly, when the court used the Joint Proxy for this purpose, [10] it was error. This case may very well illustrate the difficulty of expeditiously dispensing with claims seeking enhanced judicial scrutiny at the pleading stage where the complaint is not completely conclusory. It is appropriate and consistent with the just, speedy and inexpensive determination of every proceeding, Chancery Rule 1, that conclusory complaints without well-pleaded facts be dismissed early under Chancery Rule 12. But that is not this case. Here, there are well-pleaded allegations on the Unocal claim. As the terminology of enhanced judicial scrutiny implies, boards can expect to be required to justify their decisionmaking, within a range of reasonableness, when they adopt defensive measures with implications for corporate control. This scrutiny will usually not be satisfied by resting on a defense motion merely attacking the pleadings. Accordingly, we conclude that the trial court erred in dismissing the Unocal claim under Chancery Rule 12(b)(6).