Unocal Corp. v. Mesa Petroleum Co.
493 A.2d 946 (Del.Supr. 1985)

  • Mesa made a hostile takeover bid (aka a tender offer) for Unocal for $54 a share.
    • Mesa warned that if people didn’t take the offer, and Mesa got control of Unocal, Mesa would forcibly cash-out all those who wouldn’t sell, but instead of cash they’d get risky junk bonds in exchange for their stock.
  • In response, Unocal’s directors offered to repurchase its stock from shareholders for $72 a share (aka a self-tender offer), but excluded Mesa from the offer.
    • Since shareholders would rather sell their stock to Unocal for $72 than Mesa for $54, the deal ensured that Unocal would not be owned by Mesa. However it did incur a lot of debt.
  • Mesa sued.
    • Mesa argued that the Unocal directors were acting not in the best interest of the corporation, but solely to save their jobs as directors.
    • The directors argued that their actions were covered by the business judgment rule.
  • The Trial Court found for Mesa. The directors appealed.
    • The Trial Court found that a selective exchange (aka offering to buy stock from everyone except Mesa) was not allowed under Delaware law because it discriminates among existing shareholders and that fails the fairness test.
  • The Delaware Supreme Court reversed.
    • The Delaware Supreme Court noted that there is an inherent conflict of interest when directors use a takeover defense to stop someone like Mesa from taking over the corporation.
    • The Court found that when there is a takeover defense, the directors are under an “enhanced duty” to show that their decisions are meant to further the welfare of the corporation and not just to protect their jobs. The directors must demonstrate that they were responding to a legitimate threat to corporate policy and effectiveness, and that their actions were reasonable in relation to the threat posed.
      • Note that this is an intermediate test partway between the standard business judgment rule, and the entire fairness test.
        • See Weinberger v. UOP, Inc. (457 A.2d 701 (1983)).
    • In this case, the Court found that Unocal’s directors had reasonable grounds for believing that Mesa represented a danger to the continued existence of Unocal, and if Mesa took over, there would be a serious risk to the shareholders. Therefore their takeover defense was allowed under the “enhanced duty” business judgment rule.
  • Basically, this case said that there is a two-pronged test that directors must satisfy when they take action to deter a potential hostile takeover:
    • They must have reasonable grounds to believe that a danger to corporate policy and effectiveness exists, and
    • That the defensive measure adopted is proportionate to the threat posed.