Mesa Petroleum, controlled by T. Boone Pickens, launched a two-tier front-end loaded hostile tender offer for Unocal shares at $54 cash for 37% of the company, with the back-end to be paid in junk securities of lesser value. Unocal's board, advised by outside counsel and financial advisors, concluded that Mesa's offer was coercive and inadequate. In response, Unocal approved a self-tender exchange offer for its own shares at $72 in debt securities, but excluded Mesa from participating. Mesa sued, arguing that the selective self-tender was an unlawful defensive measure and breached the directors' fiduciary duties.
When a target board adopts a selective defensive response to a hostile takeover bid, under what standard will Delaware courts review the board's action to determine whether it complies with fiduciary duties?
Because directors confronting a takeover threat face an inherent conflict of interest, they must show reasonable grounds for believing a danger to corporate policy and effectiveness existed, which requires good faith and reasonable investigation. If that showing is made, the defensive response must also be reasonable in relation to the threat posed; defensive measures that are coercive or preclusive will not be sustained.
The court upheld Unocal's selective self-tender. It held that the board had demonstrated reasonable grounds for perceiving Mesa's bid as a threat and that the response was proportionate to that threat.
The court recognized that takeover defenses present a risk that directors may act primarily to entrench themselves, so ordinary business judgment review was insufficient. It therefore crafted an intermediate standard requiring the board first to establish good faith and a reasonable investigation into the threat, including inadequacy of price and the coercive structure of the two-tier bid. Unocal's independent outside directors relied on expert advice and found Mesa's offer harmful to shareholders and corporate policy. The selective exchange offer was deemed a proportionate response because it countered Mesa's coercive tactic without foreclosing all takeover possibilities.
Unocal is the foundational Delaware case establishing enhanced judicial scrutiny for board defensive measures in takeover contests, commonly called the "Unocal test." It sits between the business judgment rule and strict scrutiny, and became central to later takeover cases, including Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986), Moran v. Household International, Inc., 500 A.2d 1346 (Del. 1985), and Unitrin, Inc. v. American General Corp., 651 A.2d 1361 (Del. 1995). The case is also important for recognizing substantive coercion and inadequate price as cognizable threats that may justify defensive action.
Enter a case name or citation — get a structured brief where every case it cites is checked against real law.
Try Law Student Workbench →