Unocal Corp. v. Mesa Petroleum Co.
Citation: 493 A.2d 946 (Delaware Supreme Court, 1985)
Facts
T. Boone Pickens’s Mesa Petroleum made a two-tiered, front-loaded hostile tender offer for Unocal Corporation — a classic coercive structure where shareholders who tendered early received higher consideration, pressuring all shareholders to tender quickly. Unocal’s board, after deliberation with outside advisors, adopted a selective self-tender at a higher price that excluded Mesa from participating, effectively defending against the hostile bid. Mesa challenged the selective exclusion as a breach of fiduciary duty.
Issue
What standard of judicial review applies to a board’s adoption of defensive measures in response to a hostile takeover bid, and may a board selectively exclude the hostile bidder from a defensive self-tender?
Holding
The Delaware Supreme Court upheld the selective self-tender, establishing a two-part enhanced scrutiny test for evaluating defensive measures. The board must show: (1) that it had reasonable grounds to believe a danger to corporate policy or effectiveness existed, and (2) that the defensive measure was reasonable in relation to the threat posed.
Rule
When a board adopts defensive measures in response to a takeover threat, the business judgment rule does not apply automatically because directors have an inherent conflict of interest (self-interest in keeping their jobs). Courts apply enhanced scrutiny under the Unocal test: the board must demonstrate that (1) it reasonably perceived a cognizable threat to the corporation, and (2) the defensive response was proportionate — not draconian or preclusive — to that threat. The range of threats includes inadequate price, timing, and structural coercion.
Significance
Unocal is the foundational case for judicial review of defensive tactics in Delaware and introduced the enhanced scrutiny standard that governs the full range of defensive measures including poison pills (upheld in Moran v. Household International), staggered boards, and white knight arrangements. The case is essential for understanding the tension between board authority to protect the corporation and the duty to shareholders not to entrench management. Unocal and Revlon together define the two central tracks of enhanced scrutiny in Delaware M&A law.