Gilbert v. El Paso Company
Facts
Burlington launched a highly conditional December 1982 tender offer for enough El Paso shares to obtain control through a partial, two-tier structure that gave early tendering shareholders proration rights but provided no second-step protections for remaining minority shareholders. El Paso's board, composed mostly of outside directors, rejected the offer as unfair and inadequate, adopted defensive measures, and conducted an extensive search for better alternatives but found none. As the offer's withdrawal deadline approached and control by Burlington appeared inevitable, El Paso negotiated a settlement under which Burlington terminated the December offer, bought treasury shares from El Paso for $100 million, and substituted a January offer at the same $24 price open to all shareholders with additional protections for minority holders. Plaintiffs, who had tendered into the December offer, claimed this destroyed their favorable proration position and was done to let El Paso directors tender their own shares into the January offer.
Issue
Whether Burlington breached contractual obligations or the implied covenant of good faith by terminating its conditional December tender offer after stated conditions occurred, and whether El Paso's directors breached fiduciary duties by negotiating and approving the January transaction that diluted the December offer's proration benefits to the plaintiff class. Also at issue was the proper standard of review for the directors' conduct.
Rule
A tender offeror may condition its obligation to purchase shares on specified events, and when those objective conditions occur, termination of the offer pursuant to its terms does not breach the contract or the implied covenant of good faith absent evidence that the offeror deliberately caused the condition's occurrence. When a board responds to a hostile bid affecting corporate control, Unocal's enhanced scrutiny applies to the board's actions, including negotiated settlements that alter the bid: directors must show good faith, reasonable investigation, and that their response was reasonable in relation to the threat posed. Directors may act to protect all shareholders, even if doing so defeats a tendering subclass's advantageous proration position, so long as the board is not improperly motivated by self-interest and acts consistently with its duties to the corporation and all shareholders.
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Shareholders who had tendered sue Pioneer for breach of contract, arguing that once they tendered, Pioneer was obligated to buy. Which is the strongest answer?