Citation. Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946, 1985 Del. LEXIS 482, Fed. Sec. L. Rep. (CCH) P92,077 (Del. June 10, 1985)
Brief Fact Summary. Defendant, Unocal Corp., appealed the lower court decision that prevented Unocal from excluding Plaintiff, Mesa Petroleum Co., from participating in Defendant’s self-tender for its own shares.
Synopsis of Rule of Law. Directors have a duty to protect the corporation from injury by third parties and other shareholders, which grants directors the power to exclude some shareholders from a stock repurchase.
Issue. The issue is whether Defendant can exclude Plaintiff from participating in Defendant’s self-tender.
Held. The court held that Defendant could exclude Plaintiff from its repurchase of its own shares. The directors for Defendant corporation have a duty to protect the shareholders and the corporations, and one of the harms that can befall a company is a takeover by a shareholder who is offering an inadequate offer. The directors’ decision to prevent an offer such as the one at issue should be subjected to an enhanced scrutiny since there is a natural conflict when the directors are excluding a party from acquiring a majority control. In this case the directors met the burden. There was evidence to support that the company was in reasonable danger: the outside directors approved of their self-tender, the offer by Plaintiff included the junk bonds, the value of each share was more than the proposed $54 per share, and Plaintiff was well-known as a corporate raider.
Discussion. The burden of proof was on the directors to prove that there was a legitimate business interest at stake to rebut the presumption of their conflicting interest in denying the takeover. This was well-established, but the allowance by the court to allow the directors to deny the plaintiff from participating in the resulting repurchase was new ground.