Unocal Corp. v. Mesa Petroleum Co.: Unocal Test

Defensive Tactics for Corporate Control

Unocal Corp. v. Mesa Petroleum Co.: Unocal Test

Unocal Corp. v. Mesa Petroleum Co. is a landmark decision of  the Delaware Supreme Court on corporate defensive tactics against take-over bids.

As a trial court, Delaware Court of Chancery found that this selective exchange offer was not legally permissible, and issued a preliminary injunction against the use of the self tender offer defense.

The Delaware Supreme Court reversed the trial court.

The Delaware Supreme Court found that the Unocal's board of directors had reasonable grounds for believing that a danger to corporate policy or effectiveness existed and that the response was reasonable in relation to the threat posed. This reasonable relation analysis permitted an analysis of the nature, price and time of the offer as well as the impact on shareholders, creditors, customers and employees.

The Unocal test the court established to determine whether the directors may try to prevent a take over is a two pronged test. The two prongs include:

First, did the directors reasonably perceive a threat? and,

Second, was the directors' defensive measure reasonable in relation to the threat posed?

Related:

Business judgement rule

The business judgement rule is a case law doctrine that courts respect the business judgement of a corporation's board of directors. To chanllenge the actions of  a corporation's board of derectors, a plaintiff assumes the burden of providing evidence that directors breached their fiduciary duty.

If the party challenging the board’s decision is able to allege and prove that those involved in the decision-making process lack independence or otherwise breached any of their fiduciary duties, then the business judgment rule’s presumption is overcome and the court will apply the “entire fairness doctrine.” As a result, the burden shifts to the corporation to prove that both the process that was followed and the price that was achieved are fair to the stockholders of the corporation.

Entire fairness doctrine