In re Pure Resources, Inc. Shareholders Litigation

Delaware Court of Chancery · Corporations

CorporationsControlling shareholdersTender offersDisclosurePreliminary injunctionsentire fairnessSolomonLynch

Facts

Unocal owned about 65% of Pure and launched an exchange offer to acquire the remaining shares, conditioned on a non-waivable majority-of-the-minority tender condition and a waivable 90% threshold for a prompt short-form merger at the same price. Pure's board formed a special committee of two directors, which could negotiate and recommend but was denied broader authority after Unocal-affiliated directors reentered the process and helped pare back the committee's requested powers. The special committee negotiated unsuccessfully for a higher price and then recommended against the offer in the 14D-9. The offer and response materials did not disclose substantive banker analyses, materially misdescribed the special committee's failed request for broader authority, and omitted certain motivations behind Unocal's bid.

Issue

What fiduciary standard applies to a controlling stockholder's tender offer for the minority shares of its subsidiary, and under what conditions is such an offer non-coercive? Also, whether Unocal's offer and the related S-4 and 14D-9 contained material disclosure deficiencies warranting preliminary injunctive relief.

Rule

A controlling stockholder's tender offer to acquire the remaining shares of a controlled subsidiary is generally reviewed under the Solomon line rather than entire fairness, but it is non-coercive only if: (1) the offer is subject to a non-waivable majority-of-the-minority tender condition; (2) the controller promises to consummate a prompt Section 253 short-form merger at the same price if it obtains over 90%; and (3) the controller makes no retributive threats. In addition, the controller must permit the target's independent directors free rein and adequate time to hire advisors, make a recommendation, and provide the minority with materially complete and nonmisleading disclosure, including a fair summary of the substantive work of investment bankers whose advice supports the board's recommendation.

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Red Mesa Energy owns 68% of Basin Rock Drilling, a Delaware corporation headquartered in Tulsa. It launches a tender offer for the remaining shares, conditioned on a non-waivable vote of a majority of shares not owned by Red Mesa, but that group includes Basin Rock's CEO, CFO, and two directors employed by Red Mesa; Red Mesa also promises a prompt short-form merger at the same price if it reaches 90% and makes no threats.

Under the governing Delaware standard, is the offer most likely non-coercive?

Explanation. The majority opinion held that a controlling stockholder tender offer is non-coercive only if, among other things, it uses a genuine majority-of-the-unaffiliated-minority condition. Counting affiliated directors, officers, or management with skewed incentives undermines that protection. The court did not adopt entire fairness as the default for these tender offers; it adhered to the Solomon framework with added safeguards. (Derived from In re Pure Resources, Inc. Shareholders Litigation (n.d.).)