Unocal Corporation v. Mesa Petroleum Co. 493 A.2d 946(Del.1985).
FACTS: April 8,1985 Mesa 13% The two-tier coercive tender offer: ① $54-----------------64 million ② securities--------------remaining Unocal-----aptly termed such securities “ junk bonds ” ( presentation of Goldman Sachs& Dillon.)
The Court of Chancery: the Sachs presentation was designed to apprise the directors of the scope of the analyses performed rather than the facts and numbers used in reaching the conclusion that Mesa ’ s tender offer price was inadequate. BOD not informed
Defensive measure April 15 $72 ----remaining 49% 1.Mesa Purchase Condition 64M purchased by Mesa----50M 2.Mesa Exclusion Mesa can not tender to Unocal Injunction
FUNDAMENTAL ISSUES 1. Did the Unocal board have the power and duty to take a defensive measure to oppose a takeover threat? 2. Is its action here entitled to the protection of the business judgment rule?
The legal power of board 8 Del. C. §141(a) 8 Del. C. §160(a) A board of directors is not a passive instrumentality. Five cases BJR — apply to the takeover situation Good faith& reasonable investigation informed + disinterested + independent
The board ’ s exercise of corporate power to forestall a takeover------fiduciary duty. The element of balance (nature & effect) ① inadequacy of the price offered ② nature and timing of the offer ③ questions of illegality ④ impact on “ constituencies ” national reputation as a “ greenmailer ” stampede shareholders into tendering at the first tier the director ’ s duty to ensure that the minority stockholders receive equal value
Nonsupport of Mesa ’ s argument 1.Unlawful--discriminate against one SH. 2.The exclusion permits the directors to abdicate the fiduciary duties they owe it. Mesa can also tender after this Mesa can turn the board out 3.The basis of this action is punitive, and solely in response to the exercise of its rights of corporate democracy. Not the Fisher Case ’ s facts
The Result There was a directorial power to oppose the Mesa tender offer. The selective stock repurchase plan chosen by Unocal is rational & reasonable. The board ’ s action is entitled to the protection of the BJR. The decision of the Court of Chancery:REVERSED The preliminary injunction:VACATED
ATTENTION: The reasoning of common law. The compare of the facts in the proceed of reasoning.
Appeal from the court of chancery Plaintiff: Pantry pride Defendants: *Revlon *BOD of Revlon *Forstmann Injunction: * lock-up option * no-shop provision * $25M cancellation fee
The court of Chancery: Revlon directors breached duty of care. Supreme Court of Delaware: Affirm Active bidding contest for corporate control----defensive measures (permitted) Here------no a corporation may consider the impact of a takeover threat on constituencies other than SH Here------no rationally related benefits accruing to the SH, so no
Facts: June 1985 $40-50 Mr. Perelman Mr. Bergerac Pantry Pride Revlon (NO) August 14 1.Negotiation: $42-$43 per S. 2.Hostile tender offer: $45
Defensive measures Lazard Freres--Revlon investment banker * $45 per S-----inadequate * Pantry Pride use junk bond to finance *break-up of Revlon and deposition of its assets $60-70 Per S return sale as a whole----$mid 50 range
1. repurchase up to 5 M of its nearly 30 M outstanding shares; 2. adopt a “ Note Purchase Rights Plan ” unless $65 cash for all S dividend--one common S = one rights 20% acquired trigger A $65 principal Revlon note 12%interests per year BOD 10cents each redeem
Pantry pride August 23 $47.5-common S;26.67-preferred S Revlon August 29 $47.5 Subordinated Note — 10Million 1995, 11.75% interests/y no additional debt, no assets sale no dividends unless approval by independent directors
Pantry pride Sept. 16 second cash bid----$42 increase price if no “ rights ” Sept.27 $50 Oct.1 $53 Oct.7 $56.25 Revlon BOD reject all its offers. Leverage buyout by Forstmann.
Revlon SH--$56 cash waive the Notes covenants Finance by: Revlon “ golden parachutes ” sell cosmetics and fragrance division for $905M Forstmann assume $475M debts — sell Revlon ’ s two divisions for $335M Notes from par value$100--$87.5 noteholders----threat to suit
Forstmann ’ s privileges: 1.Access to certain Revlon financial data; 2. lock-up option: purchase one divisions for $525M which is $100-175M below its value if other acquiror get 40% of Revlon ’ s shares; 3.Rights and Notes covenants ---removed 4.No-shop provision 5.Cancellation fee $25M to be placed in escrow if this agreement terminated or if another acquiror get 19.9% of Revlon ’ s shares. $57.5 No Revlon management involved support the par value of the Notes
Revlon BOD ’ s reasons: 1.Higher price than the Pantry Pride bid; 2.Protect the noteholders; 3.Forstmann ’ s financing was firmly in place. should consider time value of money No
Court of Chancery Injunctive relief Temporary restraining order breach the duty of loyalty prohibit: the transfer of assets lock-up no-shop cancellation fee concern the liability to the noteholders (No) Maximizing the sale price of the company for the shareholders (Yes)
Regarding the preliminary injunction 1. Plaintiff must demonstrate a reasonable probability of success on the merits; 2.some irreparable harm would occur if absent the injuntion.
recognition Change to BOD role Defenders auctioneers no Unocal test here Preservation of Revlon as a corporate entity Revlon board negotiate a merger or buyout with Forstmann Revlon for sale Maximize the company value at a sale for SH benefits
Lock-up Legal under Delaware Law Citing Thompson V. Enstar Corp. 1. Some lock-up options may be beneficial to the SH Such as those that induce a bidder to compete for the control of a corporation 2. Some may be harmful Such as those that effectively preclude the bidders from competing with the optionee bidder
Not to foster bidding----but destroy it (here, illegal) Preferring the noteholders Ignoring the duty of loyalty to the SH intent At the expense of the SH rights of noteholders were fixed by contract, need no further protection protect the directors against a perceived litigation threat from the creditors
No-shop provision Like the lock-up, not per se illegal. Impermissible under the Unocal standards when a board ’ s primary duty becomes that of an auctioneer responsible for selling the company to the highest bidder.
consider a no-shop agreement Ironic here 1. Cooperation from management 2. Access to financial data 3. The exclusive opportunity to present merger proposals directly to the BOD Offer adversely affect SH ’ s interests Justifiable ok When bidders make relatively similar offers Dissolution of the company is inevitable BOD remain free to negotiate deal preferentially Forsemann Best price for SH ’ s equity no
Brief Paramount Time SH of Time preliminary injunction Walner 51% tender $70 cash Fail on Merits Chancery: Deny the motion Supreme: Affirm
Two important facts Time outside directors Inside Directors 4 8 Henry R. Luce III dominated by (1) (2) Since 1983-1989 considerable time study the merger Warner Best fit Time control the BOD Preserve a management culture (journalistic integrity) Not report to top officer Report to a committee of BOD Care Profits (no)
Time ’ s resolution with Warner No-shop agreement Dry-up fee Lock-up exchange agreement (each hold 9-11 percent of other ’ s shares )
Structure of Time-Warner Time Warner Time-Warner 39 % 61% (1) 50% of BOD (2) Time culture Premium for Time SH vote (June 1989) Stock-for-stock merger
Time ’ s defense--Paramount Paramount offer “ smoke and mirrors ” Time stock $182.75 $170 $44 $175 inadequate price Time BOD meet 3times in 8days protect the Time-Warner combination $200 51% $70 cash (56% premium of Warner stock) Remaining combined cash and security = $70 Avoid SH vote Cash bid accelerate the combination? Still (no)
Shareholder Plaintiff assert: (1) Paramount ’ s bid for Time place Time “ for sale ” (2) Time ’ s transaction with Warner result in Transfer of control (3) Combined Time-Warner is not large BOD should enhance short- term shareholder value and to treat all other interested acquirors on an equal basis. Revlon duties preclude the possibility of SH receiving a future control premium. trigger
Chancery and Supreme court: (1)Del 141(a): (2) If not under Revlon BOD has conferred authority to manage corporation business to enhance profitability No fixed investment horizon Not put the corporation ’ s future in the hands of its SH BOD should act in an informed manner no duty to maximize SH value in the short term Pivotal Issue: Time —” up for sale ” ?
No Revlon here: (1)Corporation initiate an active bidding process seeking to sell or reorganization involving a clear break-up of the company. (here no) (2)In response to a bidder ’ s offer, a target abandons its long-term strategy and seeks an alternative transaction also involving the break- up of the company. (here no) Here: control of the corporation existed in a fluid aggregation of unaffiliated SH (Control in the Market)
Apply Unocal here: Safety devices Lock-up No-shop Dry-up fee Not prevent SH from a control premium Properly subject to a Unocal analysis Merger agreement before Mar.3----BJR ok Revised transaction on June 16----Under Unocal
Plaintiff: two-tier offer ---------- threat all cash, all share offer------- no threat Court: Wrong Unocal *inadequacy of the price *nature and timing of the offer *questions of illegality *the impact on contingencies other than SH *The risk of nonconsummation *quality of securities how to evaluating threat:
Unocal 1: where is the threat Threat: (1) Paramount ’ s 11 hour offer upset the SH to consider the Time-Warner merger vote (2) Paramount offer a degree of uncertainty BOD informed (1) long time investigation for Warner (2) 12/ 16 are outside directors
Unocal 2: Is this a reasonable defensive action? Paramount: Assuming threat there, Time ’ s response was unreasonable in precluding SH accepting the a control premium. Court: Directors are not obliged to abandon a deliberately conceived corporate plan for a short-term SH Profit unless there is clearly no basis to sustain the corporate strategy. Paramount can still make an offer for the combined Time- Warner Heavy debts incur to finance the acquisition of Warner----Fine