Monday, November 14, 2011

Unocal Corp. v. Mesa Petroleum Co. case brief (493 A.2d 946)

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

-Plaintiff corporation was headed by a well-known corporate raider.
-Plaintiff offered a two-tier tender offer: the first tier would allow for shareholders to sell at $54 per share and the second tier would be subsidized by securities that the court equated with “junk bonds”. -The threat was that shareholders would rush to sell their shares for the first tier because they did not want to be subject to the reduced value of the back-end value of the junk securities.
-Defendant directors met to discuss their options. They came up with an alternative that would have Defendant corporation repurchase their own shares at $72 each.
-The Directors decided to exclude Plaintiffs from the tender offer because it was counterintuitive to include the shareholder who initiated the conflict.
-A minority shareholder making a hostile tender offer for company's stock filed a complaint to challenge decision of board of directors to effect a self-tender offer by corporation for its own shares. -The Court of Chancery entered a preliminary injunction requested by minority shareholder, and corporation appealed.

1. Was the minority shareholder's two-tier "front loaded" cash tender offer for 37% of the corporation's stock at a price of $54/share fair?
2. Can D exclude P from participating in D's self tender?

1. No, the Supreme Court held that board of directors, having acted in good faith and, after reasonable investigation, found that minority shareholder's two-tier “front loaded” cash tender offer for approximately 37% of corporation's outstanding stock at a price of $54 per share was both inadequate and coercive, was vested with both power and duty to oppose same and, hence, to effect a self-tender by corporation for its own shares which excluded particular stockholder's participation and which operated either to defeat inadequate tender offer or, in event offer still succeeded, to provide 49% of shareholders, who would otherwise be forced to accept junk bonds, with $72 worth of senior debt.
2. Yes, D could exclude P from the repurchase of its own shares. The directors for D corporation have a duty to protect the shareholders and the corporations, and one of the harms that can befall a company is a takeover by a shareholder who is offering an inadequate offer. The directors’ decision to prevent an offer such as the one at issue should be subject to heightened scrutiny since there is a natural conflict when directors are excluding a party from acquiring a majority control. Here the directors met their burden. Evidence existed to support that the company was in reasonable danger: the outside directors approved of their self-tender, the offer by Plaintiff included the junk bonds, the value of each share was more than the proposed $54 per share, and Plaintiff was well-known as a corporate raider.

-Directors have a duty to protect the corporation from third party/shareholder injury, which grants directors the power to exclude some shareholders from a stock repurchase.
-A court will not substitute its judgment for that of the board of directors of a corporation if the judgment can be attributed to any rational business purpose.
-A board of directors addressing a pending takeover bid has an obligation to determine whether the offer is in the best interest of the corporation and its shareholders and, in that respect, its decision is no different from any other responsibility it shoulders and should be no less entitled to the respect it otherwise would be accorded in the realm of business judgment.
-There is an enhanced duty which calls for judicial examination at the threshold before the protections of the business judgment rules may be conferred upon a decision of the board of directors to purchase a stockholder's shares with corporate funds, and this entails an examination of whether the directors have shown that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed because of shareholder's stock ownership.
-The burden of a board of directors to show that a purchase of shares with corporate funds was required to remove a threat to corporate policy is satisfied by showing good faith and reasonable investigation.
-Corporate directors have a fiduciary duty to act in the best interest of the corporation's stockholders and this duty extends to protecting the corporation and its owners from perceived harm whether a threat originates from third parties or other shareholders.
-Standard of proof for determining whether purchase of shares with corporate funds was designed as a defensive measure to thwart or impede a takeover is whether purchase was motivated by good faith concern for welfare of corporation and its stockholders, which in all circumstances must be free of any fraud or other misconduct.

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