Introduction
The decision of a company’s board of directors to defend against a hostile takeover bid is a complex and multifaceted process. It requires careful consideration of legal, strategic, and fiduciary obligations. At the heart of these decisions lies the board’s fiduciary duty to act in the best interests of the company and its shareholders. This article delves into the intricacies of hostile takeovers, focusing on the pivotal role of fiduciary duties and the landmark case that established a framework for evaluating these responsibilities.
The Unical Case: A Defining Moment
The case of Unocal Corporation v. Mesa Petroleum Co. stands as a landmark legal precedent in the realm of hostile takeovers, providing crucial guidance for boards grappling with such situations. This case centered around a two-tiered, front-loaded cash tender offer launched by Mesa Petroleum Company targeting 37% of Unocal Corporation’s outstanding shares.
Mesa’s Two-Tiered Offer
Mesa’s strategy involved a two-pronged approach:
- Front-End Offer: Mesa offered $54 per share in cash for the initial 37% stake in Unocal.
- Back-End Merger: For the remaining untendered shares, Mesa proposed an exchange for Mesa securities, initially presented as being valued at $54 per share. However, a subsequent proxy statement revealed that these securities were actually junk bonds, significantly less valuable than Unocal’s stock.
Unocal’s Response: The Defensive Exchange Offer
Recognizing the inadequacy and potential harm of Mesa’s offer, Unocal’s board took action. They implemented a defensive strategy known as a “selective exchange offer.” This involved Unocal offering to repurchase 49% of its own shares for $72 per share—a significantly higher price than Mesa’s bid. Crucially, Mesa Petroleum was excluded from participating in this exchange offer.
The Legal Challenge
Mesa Petroleum, in response to Unocal’s defensive maneuver, filed a lawsuit. They alleged that Unocal’s board, in implementing the selective exchange offer and excluding Mesa, had breached its fiduciary duties to the company and its shareholders.
The Unocal Standard: Balancing Duties and Defense
The Delaware Supreme Court, in its ruling on the Unocal case, articulated a framework for evaluating the legality of defensive measures taken by boards during hostile takeover attempts. This framework, now known as the “Unocal Standard,” requires boards to demonstrate:
1. Reasonable Grounds for Defensive Action
Boards must show that they had reasonable grounds to believe that the hostile bid posed a threat to the corporation and its shareholders. This threat could include inadequate price, coercive tactics, or risks to the company’s long-term value.
2. Proportionality of Response
The defensive measures undertaken by the board must be proportionate to the perceived threat. In other words, the board’s response cannot be draconian or designed solely to entrench themselves in power. The chosen defense mechanisms must be reasonable in relation to the nature and magnitude of the threat posed by the hostile bid.
The Significance of Unical
The Unocal case and the subsequent articulation of the Unocal Standard had a profound impact on the landscape of corporate law and mergers and acquisitions. It established a critical balance:
- Protecting Shareholder Interests: The ruling affirmed the importance of boards acting as faithful fiduciaries, protecting shareholders from opportunistic or unfair takeover attempts.
- Permitting Defensive Measures: It recognized the right of boards to take reasonable and proportionate steps to defend against threats to the corporation’s best interests.
Conclusion
The decision of a board to defend against a hostile takeover is fraught with complexity. The Unocal case and the resulting standard provide a roadmap for boards to navigate these challenges. By carefully considering the legal and fiduciary implications of their actions, boards can fulfill their obligations to shareholders while safeguarding the long-term health of the company.