There are major issues concerning US state corporation laws. As well as legal principles underlying some court law rulings that have analyzed these statutes. Here are some of them.
Business Judgment Rule
This term refers to the standard where corporate directors are judged. They exercise their fiduciary roles when trying to employ a takeover. Here, it is presumed that they will act consistently with their fiduciary duties to the shareholders. Hence, any party that contests this presumption is required to conclusively demonstrate a breach of fiduciary duties.
If the company or individual in the US brings a case against a company’s directors and establishes this. Then the directors will carry the burden of establishing that the transaction was “entirely fair”. There have been certain court law decisions that emphasized relevant issues. About how directors should act when employing anti-takeover defenses. Through such choices, standards like the Revlon duties and the Unocal Standard have been established.
Director’s duties
With regard to the Delaware Law, the directors’ duties are to manage the affairs of the company. This is by taking these three obligations into consideration:
- They should be loyal.
- Will demonstrate care for the interest of the shareholders
- They have the duty of carrying these in a manner that is always n the best interest of the corporation and its shareholders.
In terms of mergers and acquisitions, the business judgment rule does not necessarily mean that the directors of the target have to jump up. And react emphatically to bids that come down the pike. It is important for them to be informed about their company’s value and other details being presented to them. They don’t have to enter an active negotiation with the bidder. They can just say no to the bid, stay apathetic, and be uninformed about its financial aspects. And what merits it may have for their shareholders.
Delaware Supreme Court
Directors are also vulnerable to lawsuits, even for approved deals by the shareholders. There are two Delaware decisions that have been improved for the legal position of director defendants. In one case (Singh v. Attenborough), the Delaware Supreme Court law favored the director defendant. As it made it easier for them to obtain early dismissal of the claims thrown at them. If the sale was an orderly one in which shareholders were fully informed and not coerced.
After two months of making this decision, the Delaware Chancery Court law extended those protections to two-step mergers done pursuant to Section 251(h) deals. This section of the statute allows deals to go through without a formal shareholder vote. If the percentage of shareholders that would have been necessary to win such a vote tendered their shares to the bidder. As a result, the tender offer then has a cleansing effect on the fairness of the said deal.
Unocal v. Mesa Petroleum
Meanwhile, in Unocal v. Mesa Petroleum, the actions of the Unocal board of directors were reviewed by the Supreme Court of Delaware. As they implemented an anti-takeover strategy in order to thwart the unwanted tender offer made by Mesa Petroleum. Its CEO was Boone Pickens. This strategy included a self-tender offer in which the target made a tender offer for itself in competition with the offer initiated by the bidder.
Upon making a decision, the court law considered its concern that directors might be acting for their own interests, such as in this case. In which they were allegedly favoring the self-tender as opposed to simply objectively searching for the best deal for shareholders. When this is the case, directors should demonstrate their reason to believe. That there was a danger in pursuing a corporate policy that was in the best interest of shareholders. Moreover, they should show that their actions served their interests.
Responsibilities
The Unocal Standard made subsequent courts refine their responsibility:
- Reasonableness test. The board should clearly demonstrate that its actions were reasonable. In terms of the perceived beliefs about the danger to their corporate policies.
- Proportionality test. They are also required to show that these defenses were aligned to the magnitude of the perceived danger to the policies.
The normal presumptions about the director’s behavior under the business judgment rule may apply once the standards are met. When a board is offered by an unwanted bidder and is trying to know whether to accept it or not, the business judgment rule is the operative standard. But when they move from rejection to taking active steps to fight off the bidder, then the Unocal Standard kicks in.
There is a contradiction between the standards of the directors’ fiduciary role in the US. And those of some other nations that have active takeover markets. For instance, the United Kingdom’s self-regulatory system in effect precludes the development of detailed case law on this issue. As such cases rarely reach the courts in the United Kingdom.
Revlon Duties
In the prominent case of Revlon v.MacAndrews and Forbes Holdings, the Delaware Supreme Court law ruled on what obligations a target board of directors have when they are faced with an offer for control of their company. Court law ruled in this transaction that there are certain anti-takeover defenses that are in favor of one bidder over another and was invalid.
The court laws knew that instead of promoting the auction process, which should result in maximizing shareholder wealth, these antitakeover defenses which are a lockup option and a no-shop provision inhibited rather than promoted the auction process. It’s clear that the sale or breakup of the company is inevitable and Revlon duties come into play here. Here, the directors are responsible for changing their focus from actions that they normally would take to preserve the corporation and its strategy to actions that will lead to the greatest gains for shareholders, such as making sure they get the highest bid possible.
Auction Process
The court law decided that the use of these defenses was invalid. These actions may be consistent with the board’s Revlon duties if they promoted the auction process by letting one bidder be more competitive with another for prices to get higher. They also did not go as far as to require the target boards to solicit bids. They chose not to narrowly circumscribe the actions that target boards can take. But the court law implied that directors should have a good reason for not considering an auction process.
Remember that Revlon duties do not necessitate the conduction of an actual formal auction to the target’s board even if it is preferable, as long as the directors can show that they possess reliable information about the company’s market value.
The Supreme Court of Delaware stated in 2015 that if a deal receives majority approval from fully informed, non-coerced, disinterested shareholders then the Revlon Standard is not enough for post-cloning the damage claims.
Blasius Standard of Review
The Delaware Chancery Court put forward the compelling justification in 1988. This was in support of a target board’s decision to take action to limit a dissident shareholder’s abilities to elect a majority of the board. Along with the Unocal Standard, this gives relevant power to a target’s board which makes abuse of power more possible.
This standard was clarified in later decisions where the Delaware Chancery court noted that it would carefully analyze a board’s decision to guarantee that shareholders’ rights are being exercised and that the board would not abuse them.
Mercer v. Inter-Tel
In the 2007 case of Mercer v. Inter-Tel, the Delaware Chancery Court saw that the directors had a reasonable argument for postponing a shareholders’ meeting to prevent the defeat of a merger proposal. But the court’s concern was an abuse of the Unocal and Blasius standards, which is also parallel to other cases like Portnoy v. Cryo-Cell International. Here, the court noted that if the interests of shareholders were thwarted by a board, it would grant shareholders relief.
Entire Fairness Standard
When considering steps in approving the sale of a company or opposing a bid, directors need to remember that a Delaware court will determine their decisions based on fairness to the shareholders. They have agreed that there is no single characteristic that determines fairness and that each matter brings its own unique factors that are important to the overall fairness of a transaction or the steps fo the deal to be stopped.
© Image credits to Frank Cone