From the time of the Delaware Supreme Court’s 1985 decision in the case of Unocal Corporation v. Mesa Petroleum Co., the word ‘Unocal’ has taken on a meaning of its own. Once simply the name of a corporation, it now signifies the test or principle developed in that case to wit: because of the omnipresent spectre of self-interest where the board of directors of a corporation adopts a defensive response to a hostile takeover offer, in order to be afforded the protection of the business judgment rule, the directors of such a company must have clearly identified that the offer posed a threat to corporate policy and effectiveness and such defensive response must be reasonable in relation to the threat posed. Prior to Unocal, and as re-stated in Unocal, in the face of an inherent conflict, “the directors must show that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed because of another’s stock ownership.” The innovation of Unocal therefore was the introduction of the further aspect of “the element of balance” as the Delaware Supreme Court described it in the case, or “proportionality” as it is now widely described and understood. It is this proportionality element that is the subject of this paper. Likewise, it has been the topic of much academic discussion, and for good reason. The development of the proportionality prong since Unocal has been lopsided, making it hard to settle on a bright-line rule of application. For instance, in Unocal itself, a discriminatory self-tender offer was found to be a reasonable response by the Supreme Court, yet in AC Acquisitions Corp. v. Anderson, Clayton & Co., decided shortly after Unocal, the Delaware Chancery held a self-tender offer to be an unreasonable response to a hostile takeover bid. This could easily be explained by the fact that the proportionality of a defensive measure often turns on the facts of each case. What cannot easily be explained is the consistency with which the most commonly used defensive measures have been found to be reasonable in respect of a wide range of threats, so much so that it now appears that as long as a threat is reasonably identified, a defensive measure is likely to be found to be reasonable, at least as far as the Delaware Supreme Court is concerned. I posit that the reason for this is the underlying principle of corporate law in Delaware as well as many other U.S. states, i.e., “[t]he business and affairs of every corporation . . . shall be managed by or under the direction of a board of directors, except as may be otherwise provided . . . . ” The courts have held that in the broad context of corporate governance, a board of directors “is not a passive instrumentality,” and therefore has “both the power and duty to oppose a bid it perceive[s] to be harmful to the corporate enterprise.” To my mind therefore, the case law suggests that in their review, the courts are more concerned with whether the board has determined that a bid is harmful to the corporate enterprise. This is the burden which the directors have to discharge, after which the response is almost certain to be sanctioned as reasonable. If this is the reality, then why do the Delaware courts go through the mechanics of a two-step analysis? Can a case be made for a single-step analysis that turns on establishing by a heightened burden on the target company’s board of directors that a proposed bid is harmful to the corporate enterprise, or in the alternative that they have a plan for the company which is superior to that which will result from the bid?
- Corporate Governance
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