Tuesday, November 15, 2011

Unocal Corp v. Mesa Petroleum Co. case brief

Unocal Corp. v. Mesa Petroleum Co.
493 A.2d 946 (Del.Supr. 1985)


FACTS
-Mesa made a hostile takeover bid (a tender offer) for Unocal for $54/share.
-Mesa stated 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 receive 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 Mesa was excluded from this 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, this deal incurred a lot of debt.
-Mesa sued, arguing that the Unocal directors were acting not in the best interest of the corporation, but instead to save their jobs as directors.
-The directors argued that their actions were covered by the business judgment rule.

PROCEDURAL HISTORY
-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 DE 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.

RULES
-When there is a takeover defense, 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.
-In order to benefit from the business judgment rule, the directors must demonstrate that they were responding to a legitimate threat to corporate policy and effectiveness, and that their actions were "reasonable in relation to the threat posed."
-Note: this is an intermediate test between the standard business judgment rule, and the entire fairness test.

ANALYSIS
-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.
-There is a two-pronged test that directors must satisfy when they take action to deter a potential hostile takeover:
1.  Directors must have reasonable grounds to believe that a danger to corporate policy and effectiveness exists, and
2.  The defensive measure adopted is proportionate to the threat posed.

Subject: Corporations.
Topics: Hostile Takeover, Business Judgment Rule, Takeover Defense

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