Hanson Trust PLC v. ML SCM Acquisition Inc.

United States Court of Appeals for the Second Circuit · 1986 · Corporations

781 F.2d 264 (1986)

Updated August 22, 2026

Corporationstakeover defensesbusiness judgment rulefiduciary duty of carelock-up optionsduty of careNew York corporate lawlock-up option

Facts

After Hanson made hostile tender offers for SCM, SCM's management and advisers negotiated with Merrill for a leveraged buyout. As part of a revised $74 bid, Merrill insisted on an irrevocable option to buy SCM's Pigments and Consumer Foods businesses if a third party acquired more than one-third of SCM stock; those businesses had generated about half of SCM's net operating income. At a three-hour late-night meeting on September 10, SCM's nine outside directors approved the asset option after hearing Goldman Sachs say the prices were within a fair range, but the board did not ask for or receive a valuation range, supporting documents, pro formas, or analysis of what SCM would look like without those divisions. Hanson then challenged the option and sought a preliminary injunction to stop its exercise.

Issue

Whether, under New York law, SCM's outside directors were protected by the business judgment rule when they approved a defensive asset lock-up option in favor of Merrill, despite the limited information and inquiry underlying that decision. Relatedly, whether Hanson made a sufficient showing of breach of fiduciary duty and irreparable harm to warrant a preliminary injunction against exercise of the option.

Rule

Under New York law, directors owe a duty of care requiring them to act with the diligence of an ordinarily prudent person and to make informed decisions based on reasonable diligence in gathering and considering material information. The business judgment rule protects takeover defenses, including lock-up options, only absent a prima facie showing of breach of fiduciary duty; where the challenger shows substantial evidence that the board's methodologies and procedures were so shallow, restricted, or pro forma as to suggest lack of due care, the burden shifts to the directors to justify the overall fairness of the lock-up option to shareholders. In evaluating a defensive lock-up, directors must ensure overall fairness, including fair option pricing, and cannot justify a device that forecloses bidding without showing objective shareholder benefit.

See the holding & full analysis

Create a free KwikCourt account to unlock the rest of this brief — and practice the case.

The court's holding and reasoning
Doctrine tests, pitfalls & exam hypotheticals
10 practice questions + 4 AI-graded essays on this case

Free sample · practice this case

Test yourself

One of 10 multiple-choice questions for this case. Pick an answer to see why.

Cascade Household Products, a New York corporation based in Buffalo, receives a hostile $48 per-share cash bid from North Harbor Holdings. The board's nine outside directors approve a lock-up option giving a friendly bidder the right to buy Cascade's detergent and paper divisions after a two-hour evening meeting, relying only on the banker’s oral statement that the option prices are 'within a fair range'; they do not ask for valuation ranges, backup materials, or any analysis of Cascade after those divisions are sold.

If North Harbor sues to enjoin exercise of the option under New York law, which is the strongest argument that the board is not protected by the business judgment rule at the preliminary stage?

Explanation. The majority held that New York directors initially receive business-judgment protection, but that protection falls away when the challenger makes a prima facie showing that the board failed to use reasonable diligence to gather and consider material information before approving a defensive lock-up. Conclusory fairness assurances, without inquiry into valuation range, supporting documents, or the impact of selling major income-producing assets, are enough to raise serious due-care concerns and shift the burden to directors to justify the option’s fairness.