What’s Left of Unocal
Paul L. Regan
The upsurge of hostile takeovers in corporate America in the 1980s brought about a rise in shareholder challenges to the defensive measures adopted by their board of directors. The Delaware Supreme Court responded to these challenges in Unocal Corp. v. Mesa Petroleum Co., announcing that directors when adopting defensive measures were to satisfy a two-part test of reasonableness that would be known later as “enhanced scrutiny.” Several months after Unocal was decided, the court went further in Moran v. Household International Inc, upholding the board’s use of the poison pill, but imposing two important limitations to the power. The court emphasized that shareholders must retain the ability to remove their board through the proxy machinery, and secondly, that the board was subject to Unocal review in their use of the pill in the face of an actual tender offer.
Over the years the balance of the director-shareholder power established in these cases has been altered dramatically by the Delaware Supreme Court. Cases such as Paramount Communications, Inc. v. Time Inc. and Unitrin, Inc. v. American General Corp., have introduced the concept of “substantive coercion” as a threat that justifies a powerful defensive response under the “enhanced scrutiny” test in Unocal. The author argues that by endorsing this concept, the court has essentially reduced Unocal review to ensuring the shareholders retain power to remove the board in a proxy contest at the next election.
This article discusses the Unocal decision and how it has developed in the case law through the years. The article goes on to discuss how these later decisions have virtually eliminated the added fiduciary protections Unocal and Moran once promised. The article concludes with some proposals on how the Delaware Supreme Court can reinvigorate Unocal’s promise of meaning fulfiduciary accountabiliy for board adopted defensive measures.