Unocal Corp. v. Mesa Petroleum Co. Case Brief: Defensive Measures and the Authority of Corporate Boards Against Hostile Takeovers

Case Brief: Unocal Corp. v. Mesa Petroleum Co.

Court: Supreme Court of Delaware
Citation: Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985)
Decided: February 21, 1985

Facts

In 1985, Mesa Petroleum Company (Mesa), led by corporate raider T. Boone Pickens, launched a hostile takeover bid for Unocal Corporation (Unocal). Mesa's bid offered $54 per share, which represented a significant premium over Unocal’s market value at the time. In response, Unocal's board of directors, concerned about the undervaluation of their company and the potential for a hostile takeover, implemented a shareholder rights plan (commonly known as a "poison pill") designed to dilute the value of shares acquired by Mesa if they exceeded a certain percentage without board approval.

The plan allowed existing shareholders (except for Mesa) to purchase additional shares at a discount, effectively increasing the number of shares outstanding and making it more expensive for Mesa to acquire control of Unocal.

Issues

1. Defensive Measures: Did Unocal's board have the authority to implement defensive measures in response to a hostile takeover bid, and were those measures justified under Delaware law?
2. Business Judgment Rule: Did the board act within its rights under the business judgment rule to protect the company from a potentially harmful takeover?

Holding

The Delaware Supreme Court upheld the actions of Unocal's board, ruling that the board had the authority to implement the poison pill and that its actions were a legitimate response to the hostile takeover bid.

Reasoning

1. Board Authority: The court recognized the right of the board to protect the corporate entity from threats posed by hostile takeovers. It emphasized that boards are not only entitled to act when they believe their company's survival is at stake but also when they think a hostile takeover may threaten the corporate policy or effectiveness.

2. Justification of Defensive Measures: The court ruled that Unocal's defensive measures were appropriate given the circumstances, where the takeover bid was seen as potentially coercive. The board provided evidence that Mesa’s offer undervalued Unocal, which justified their actions in implementing the poison pill.

3. Business Judgment Rule: The court reinforced the business judgment rule, which gives directors discretion to make decisions in the best interest of the corporation, provided those decisions are made in good faith and with reasonable care. Unocal's board demonstrated that they acted with due diligence in assessing the impact of the takeover bid.

4. Precedent: The ruling established a critical precedent in corporate law, affirming that a board's actions to protect corporate policy and long-term viability can be justified even in the face of shareholder dissatisfaction with defensive tactics.

Conclusion

Unocal Corp. v. Mesa Petroleum Co. set a pivotal precedent for the rights of corporate boards to enact defensive measures against hostile takeovers. The ruling clarified the standards under which boards could operate to protect their companies, reinforcing the notion that directors have broad authority to make decisions in the interest of long-term shareholder value.

List of Cases Cited

• Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985) - Addressed the duty of care that corporate directors owe to shareholders when making business decisions.
• Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) - Discussed the obligations of a board of directors in the context of a sale of control and the duty to maximize shareholder value.
• Dodge v. Ford Motor Co., 204 Mich. 459, 170 N.W. 668 (1919) - Established the principle that corporations should operate primarily for the profit of shareholders.

Similar Cases

• Air Products and Chemicals, Inc. v. Airgas, Inc., 16 A.3d 48 (Del. 2011) - Confirmed the board's authority to resist hostile takeovers, emphasizing long-term corporate strategy over immediate shareholder profit.
• Citizens United v. Federal Election Commission, 558 U.S. 310 (2010) - Discussed the influence of corporate governance principles and shareholder interests.
• In re Toys "R" Us, Inc. Shareholder Litigation, 877 A.2d 975 (Del. Ch. 2005) - Addressed board duties regarding strategic decisions and shareholder interests.