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.