Opinion ID: 1934995
Heading Depth: 1
Heading Rank: 45

Heading: American General's Threat

Text: This Court has recognized the prerogative of a board of directors to resist a third party's unsolicited acquisition proposal or offer. Paramount Communications, Inc. v. QVC Network, Inc., Del.Supr., 637 A.2d 34, 43 n. 13 (1994). The Unitrin Board did not have unlimited discretion to defeat the threat it perceived from the American General Offer by any draconian [34] means available. See Unocal, 493 A.2d at 955. Pursuant to the Unocal proportionality test, the nature of the threat associated with a particular hostile offer sets the parameters for the range of permissible defensive tactics. Accordingly, the purpose of enhanced judicial scrutiny is to determine whether the Board acted reasonably in relation ... to the threat which a particular bid allegedly poses to stockholder interests. Mills Acquisition Co. v. Macmillan, Inc., Del.Supr., 559 A.2d 1261, 1288 (1989). The obvious requisite to determining the reasonableness of a defensive action is a clear identification of the nature of the threat. Paramount Communications, Inc. v. Time, Inc., Del.Supr., 571 A.2d 1140, 1154 (1990). Courts, commentators and litigators have attempted to catalogue the threats posed by hostile tender offers. Id. at 1153. Commentators have categorized three types of threats: (i) opportunity loss ... [where] a hostile offer might deprive target shareholders of the opportunity to select a superior alternative offered by target management [or, we would add, offered by another bidder]; (ii) structural coercion, ... the risk that disparate treatment of non-tendering shareholders might distort shareholders' tender decisions; and (iii) substantive coercion, ... the risk that shareholders will mistakenly accept an underpriced offer because they disbelieve management's representations of intrinsic value. Id. at 1153 n. 17 ( quoting Ronald J. Gilson & Reinier Kraakman, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, 44 Bus.Law. 247, 267 (1989)). This Court has held that the inadequate value of an all cash for all shares offer is a legally cognizable threat. Paramount Communications, Inc. v. Time, Inc., 571 A.2d at 1153. In addition, this Court has specifically concluded that inadequacy of value is not the only legally cognizable threat from an all-shares, all-cash offer at a price below what a target board in good faith deems to be the present value of its shares. Id. at 1152-53. In making that determination, this Court held that the Time board of directors had reasonably determined that inadequate value was not the only threat that Paramount's all cash for all shares offer presented, but was also reasonably concerned that the Time stockholders might tender to Paramount in ignorance or based upon a mistaken belief, i.e., yield to substantive coercion. The record reflects that the Unitrin Board perceived the threat from American General's Offer to be a form of substantive coercion. The Board noted that Unitrin's stock price had moved up, on higher than normal trading volume, to a level slightly below the price in American General's Offer. The Board also noted that some Unitrin shareholders had publicly expressed interest in selling at or near the price in the Offer. The Board determined that Unitrin's stock was undervalued by the market at current levels and that the Board considered Unitrin's stock to be a good long-term investment. The Board also discussed the speculative and unsettled market conditions for Unitrin stock caused by American General's public disclosure. The Board concluded that a Repurchase Program would provide additional liquidity to those stockholders who wished to realize short-term gain, and would provide enhanced value to those stockholders who wished to maintain a long-term investment. Accordingly, the Board voted to authorize the Repurchase Program for up to ten million shares of its outstanding stock on the open market. In Unocal, this Court noted that, pursuant to Delaware corporate law, a board of directors' duty of care required it to respond actively to protect the corporation and its shareholders from perceived harm. Unocal, 493 A.2d at 955. In Unocal, when describing the proportionality test, this Court listed several examples of concerns that boards of directors should consider in evaluating and responding to perceived threats. Unitrin's Board deemed three of the concerns exemplified in Unocal relevant in deciding to authorize the Repurchase Program: first, the inadequacy of the price offered; second, the nature and timing of American General's Offer; and third, 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. Accord Ivanhoe Partners v. Newmont Mining Corp., Del.Supr., 535 A.2d 1334, 1341-42 (1987). The record appears to support Unitrin's argument that the Board's justification for adopting the Repurchase Program was its reasonably perceived risk of substantive coercion, i.e., that Unitrin's shareholders might accept American General's inadequate Offer because of ignorance or mistaken belief regarding the Board's assessment of the long-term value of Unitrin's stock. See Shamrock Holdings, Inc. v. Polaroid Corp., Del.Ch., 559 A.2d 278, 290 (1989). In this case, the Unitrin Board's letter to its shareholders specifically reflected those concerns in describing its perception of the threat from American General's Offer. The adoption of the Repurchase Program also appears to be consistent with this Court's holding that economic inadequacy is not the only threat presented by an all cash for all shares hostile bid, because the threat of such a hostile bid could be exacerbated by shareholder ignorance or ... mistaken belief. Paramount Communications, Inc. v. Time, Inc., 571 A.2d at 1153.