Mesa made a hostile takeover
bid (aka a tender offer) for Unocal
for $54 a share.
Mesa warned that if people
didn't take the offer, and Mesa got control of Unocal, Mesa would
forcibly cash-out all those who wouldn't sell, but instead of cash they'd
get risky junk bonds in exchange for their stock.
In response, Unocal's
directors offered to repurchase its stock from shareholders for $72 a
share (aka a self-tender offer),
but excluded Mesa from the offer.
Since shareholders would
rather sell their stock to Unocal for $72 than Mesa for $54, the deal
ensured that Unocal would not be owned by Mesa. However it did incur a
lot of debt.
Mesa sued.
Mesa argued that the Unocal
directors were acting not in the best interest of the corporation, but
solely to save their jobs as directors.
The directors argued that
their actions were covered by the business judgment rule.
The Trial Court found for Mesa.
The directors appealed.
The Trial Court found that a
selective exchange (aka offering
to buy stock from everyone except Mesa) was not allowed under Delaware
law because it discriminates among existing shareholders and that fails
the fairness test.
The Delaware Supreme Court
reversed.
The Delaware Supreme Court
noted that there is an inherent conflict of interest when directors use a
takeover defense to stop someone
like Mesa from taking over the corporation.
The Court found that when
there is a takeover defense, the
directors are under an "enhanced duty" to show that their
decisions are meant to further the welfare of the corporation and not
just to protect their jobs.
Basically, in order to
benefit from the business judgment rule, the directors must demonstrate that it was responding to a
legitimate threat to corporate policy and effectiveness, and that its
actions were "reasonable in relation to the threat posed."
Note that this is an
intermediate test partway between the standard business judgment rule, and the entire fairness test.
See Weinberger v. UOP,
Inc. (457 A.2d 701 (1983)).
In this case, the Court
found that Unocal's directors had reasonable grounds for believing that
Mesa represented a danger to the continued existence of Unocal, and if
Mesa took over, there would be a serious risk to the shareholders.
Therefore their takeover defense
was allowed under the "enhanced duty" business
judgment rule.
Basically, this case said that
there is a two-pronged test that directors must satisfy when they take
action to deter a potential hostile takeover:
They must have reasonable
grounds to believe that a danger to corporate policy and effectiveness
exists, and
That the defensive measure
adopted is proportionate to the threat posed.
