Unocal Enhanced Scrutiny
When a board adopts defensive measures in response to a hostile takeover bid, it receives intermediate scrutiny — neither the deferential business judgment rule nor demanding entire fairness — under Unocal Corp. v. Mesa Petroleum Co. (Del. 1985). The board must satisfy a two-part test to justify the defensive measure.
Elements (Two-Part Unocal Test)
- Reasonable threat: the board must have reasonably perceived a genuine threat to corporate policy and effectiveness — not merely the threat of losing a proxy contest
- Proportional response: the defensive measure must have been reasonable in relation to the threat posed — not coercive or preclusive, and within a range of reasonable responses
The board bears the burden of satisfying both prongs. Defensive measures that are coercive (forcing shareholders to accept) or preclusive (making it impossible for a bidder to succeed) fail proportionality.
Types of Threats
- Inadequate price: below intrinsic value; most common justification
- Structural coercion: front-end loaded, two-tier tender offer coercing shareholders to tender
- Opportunity loss: shareholders will miss a better deal
- Timing: bid does not allow adequate information
- Substantive coercion: shareholders may mistakenly tender thinking price is adequate (Paramount v. Time)
Common Defensive Measures
| Measure | Unocal Analysis |
|---|---|
| Poison pill (rights plan) | Generally upheld; allows board to say “not yet” but not “never” |
| Pac-Man defense | Bidder acquires target while target acquires bidder |
| White knight | Merger with friendly acquirer |
| Lock-up options | May be coercive/preclusive if they deter all other bidders |
| ”Just say no” | Generally permissible under Paramount v. Time if board pursues long-term plan |
Transition to Revlon
Enhanced Unocal scrutiny applies when the board is defending against a takeover and has not decided to sell. Once the board decides to sell the company or a break-up becomes inevitable, Revlon mode triggers and the board must maximize short-term shareholder value. See Revlon Mode.
Policy
- Directors have an inherent conflict when defending against hostile bids — they may be protecting their own positions rather than shareholder interests
- Enhanced scrutiny provides accountability without entirely removing the board’s authority to protect long-term shareholder interests
- The “range of reasonable responses” standard gives boards flexibility while requiring them to justify their choices
Key Cases
| Case | Rule |
|---|---|
| Unocal Corp. v. Mesa Petroleum Co. (Del. 1985) | Establishes the two-part enhanced scrutiny test; self-tender excluding the hostile bidder was proportional |
| Moran v. Household International (Del. 1985) | Upholds adoption of poison pill; shareholders retain the right to remove the board that keeps the pill |
| Paramount Communications, Inc. v. Time Inc. (Del. 1989) | Board may pursue long-term plan even in face of hostile bid; “just say no” upheld |
| Unitrin, Inc. v. American General Corp. (Del. 1995) | Defensive measure must not be coercive or preclusive; if it is, it fails Unocal regardless of threat |