In re Unitrin, Inc. Shareholders Litigation

Supreme Court of Delaware · 1995 · Corporations

CorporationsTakeover defensesFiduciary dutiesJudicial reviewUnocaltakeover defensestock repurchasepoison pill

Facts

American General publicly proposed a cash merger to buy all of Unitrin's shares at $50 3/8 per share, and Unitrin's board concluded the offer was inadequate and raised antitrust concerns. In response, the board adopted a poison pill, an advance notice bylaw, and later authorized an open-market repurchase of up to 10 million shares, stating the stock was undervalued and that the program would provide liquidity to shareholders wishing to sell while increasing the percentage ownership of non-selling shareholders, including directors. The directors collectively already held about 23% of Unitrin stock, and completion of the repurchase program would increase their holdings percentage. Unitrin's charter also contained a supermajority provision for certain business combinations with more-than-15% stockholders.

Issue

Under Unocal, did the Court of Chancery apply the correct proportionality standard when it preliminarily enjoined Unitrin's repurchase program as an unnecessary response to American General's hostile bid? More specifically, should the repurchase program have been analyzed first for whether it was coercive or preclusive, and if not, whether it fell within a range of reasonable responses to the threat posed?

Rule

When reviewing defensive measures under Unocal, a court must first determine whether the board had reasonable grounds to perceive a threat after a reasonable investigation and in good faith. For proportionality, the court must first ask whether the defensive measure is draconian because it is coercive or preclusive; if it is not draconian, the court then asks whether the measure falls within a range of reasonable responses to the threat posed. A court may not invalidate a board's action merely because it deems the action unnecessary or because it would have chosen a different reasonable alternative.

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Prairie Shield Assurance, a Delaware corporation based in Omaha, receives an unsolicited all-cash bid from Lakeview Holdings. After consulting outside bankers and counsel, Prairie Shield's board concludes the price is inadequate and that shareholders may undervalue the company’s long-term prospects. The board adopts a poison pill and also authorizes an open-market repurchase program available to all shareholders on equal terms.

Shareholders sue, and the trial court finds the repurchase program invalid because the poison pill alone was enough protection and the repurchase was therefore unnecessary. Under the governing Delaware rule, what is the best analysis?

Explanation. When a repurchase is adopted as a defensive response to a takeover threat, enhanced scrutiny applies. The court may not invalidate the measure simply because it views it as unnecessary or because another reasonable alternative existed. The proper proportionality inquiry is whether the measure is draconian because coercive or preclusive; if not, whether it lies within a range of reasonable responses.