In re Pure Resources Inc., Shareholders Litigation
808 A.2d 421 (Del.Ch. 2002)

  • Unocal owned about 65% of Pure. The rest was owned my minority shareholders, including most of Pure’s management team.
  • Unocal decided to buy up the rest of Pure. They went to Pure’s directors and made a tender offer. In response, Pure created a special committee to negotiate a price.
    • A tender offer just an offer to buy stock at some marginally higher rate (in this case 27% more than the stock was currently selling for), with the hope that enough people will sell so that you can do a short-form merger.
    • In a short-form merger, a parent corporation that owns 90%+ of the outstanding shares of a subsidiary can basically just announce they are going to cash out all of the minority shareholders and get 100% ownership.
      • See DGCL §253.
  • Unocal refused to raise their bid, and so the special committee voted to not recommend the offer to shareholders. In addition, Pure’s management announced they wouldn’t sell either.
  • Shareholders that wanted to sell and shareholders that didn’t want to sell started suing each other.
    • The shareholders that didn’t want to sell argued that the offer was inadequate and subject to an entire fairness review. In addition, there was inadequate and misleading information provided by Unocal so shareholders could not make an informed decision.
      • See Kahn v. Lynch Communications Sys. Inc. (638 A.2d 1110 (1994))
    • The shareholders that did want to sell argued that the offer was not subject to an entire fairness review, and that the information was adequate and not misleading.
      • See Solomon v. Pathe Communications Corp. (672 A.2d 35 (1996)).
  • The Trial Court enjoined the offer.
    • The Trial Court found that the offer was not subject to the entire fairness requirements of Lynch, but was subject to the requirements in Solomon.
    • The Court found that even a tender offer could be coercive, even though it was voluntary (unlike the cash-out merger in Lynch). A tender offer should only be considered non-coercive if:
      • It is subject to a non-waiveable majority of the minority tender condition,
      • The controlling stockholder promises to consummate a prompt short-term merger at the same price if it obtains more than 90% of the shares, and
      • The controlling stockholder has made no retributive threats.
    • Looking at the facts of this case, the Court found that the tender offer was coercive because even though it was subject to a majority of the minority shareholders, Unocal considered Unocal executives who owned shares and management of Pure (who had stock options tied up with Unocal) in their definition of ‘minority.’
      • What Unocal needed to do was to define minority are those shareholders unaffiliated with Unocal. If a majority of those people vote for the tender offer, then it can proceed.