AC Acquisitions Corporation v. Anderson, Clayton & Company

Delaware Court of Chancery · 1986 · Corporations

519 A.2d 103 (1986)

Updated August 22, 2026

Corporationstakeover defensesself-tender offersfiduciary dutiesUnocalbusiness judgment ruleduty of loyaltyentrenchment

Facts

BS/G launched an any-and-all cash tender offer for Anderson, Clayton shares at $56 per share and announced a planned second-step merger at the same price if it acquired 51% of the stock. The next day, Anderson, Clayton's board approved a self-tender for about 65.5% of its shares at $60 per share plus a sale of stock to a newly formed ESOP, a transaction economically similar to an earlier recapitalization plan. The board said the company transaction was meant to provide shareholders with a tax-advantaged cash distribution while retaining an equity interest in the company, but the record showed that shareholders who did not tender into the self-tender would likely suffer a substantial drop in the value of their holdings. Because BS/G's offer was conditional and shareholders tendering to BS/G would risk missing the front end of the company transaction if BS/G did not close, the structure and timing of the company transaction made the BS/G alternative practically unavailable to rational shareholders.

Issue

When a board responds to a non-coercive, any-and-all cash tender offer at a concededly fair price by launching a front-end loaded self-tender, is that defensive measure lawful under Unocal if its timing and structure effectively prevent shareholders from choosing the hostile offer? Also, was the fair-price-waiver issue ripe for decision on this preliminary injunction motion?

Rule

Under Unocal, when directors take defensive action in response to a threatened change in control, they must show both a valid corporate purpose and that the measure is reasonable in relation to the threat posed. Even if creating an alternative transaction for shareholders is a valid corporate purpose, a coercive self-tender timed and structured so that rational shareholders cannot effectively choose a non-coercive any-and-all cash offer at a fair price is not reasonable in relation to the minimal threat posed and therefore is not protected by the business judgment rule. Where such a transaction has an entrenchment effect and lacks business-judgment protection, it must be fair to shareholders to be sustained.

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Prairie Lantern Foods, a Delaware corporation based in Omaha, receives a hostile any-and-all cash tender offer from Ridgecrest Holdings at $48 per share, followed by an announced second-step merger at the same price if Ridgecrest gets 51%. The next day, Prairie Lantern's board launches a self-tender for 62% of its shares at $51, set to close first, while internal projections show shares left outstanding afterward would likely trade far below $51; Ridgecrest's offer remains conditioned on the company dropping its self-tender.

If shareholders sue to enjoin the self-tender, which is the strongest argument that the board will likely lose under the governing standard?

Explanation. When a board adopts a defensive stock repurchase in response to a threatened change in control, intermediate scrutiny applies. A board may have a valid purpose in offering shareholders an alternative, but the measure must also be reasonable in relation to the threat posed. A front-end loaded self-tender that closes first and leaves non-tendering holders with materially lower-value shares can be coercive in practical effect, especially when the competing any-and-all cash offer is conditional. If rational shareholders cannot realistically choose the outside offer without risking exclusion from the superior front end, the defense is likely disproportionate and not protected by the business judgment rule. (Derived from AC Acquisitions Corporation v. Anderson, Clayton & Company (1986).)