Pure Resources, Inc. Shareholders Litigation

Delaware Court of Chancery · Corporations

Corporationscontrolling shareholder tender offersdisclosurepreliminary injunctioncontrolling shareholdertender offershort-form mergermajority of the minority

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 and a waivable 90% condition so it could complete a short-form merger at the same consideration. Pure's board formed a special committee of two directors to evaluate the offer, negotiate, and make a recommendation, but the committee was denied broader authority it sought, including power akin to the full board's authority. The special committee ultimately recommended against the offer, and Pure's management announced present intentions not to tender. The offer materials and Pure's 14D-9 omitted important information, including substantive summaries of the special committee bankers' valuation work and an accurate account of the committee's failed request for broader authority.

Issue

What fiduciary standard applies when a controlling stockholder seeks to acquire the remaining shares through a tender offer followed by a possible short-form merger, rather than through a negotiated merger? Also, was Unocal's offer non-coercive and were the disclosures to Pure's stockholders materially adequate?

Rule

A controlling stockholder's acquisition tender offer is generally governed by the Solomon line rather than entire fairness under Lynch, but the offer is non-coercive only when it is subject to a non-waivable majority-of-the-minority tender condition, the controller promises a prompt Section 253 merger at the same price if it reaches 90%, and 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 on advisability, and provide materially complete and balanced disclosure; stockholders are entitled to a fair summary of the substantive valuation work of bankers whose advice supports the board's recommendation.

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

Red Mesa Energy owns 68% of Prairie Basin Drilling, a Delaware corporation headquartered in Tulsa. Red Mesa launches a cash tender offer for the remaining shares and states that if enough shares are tendered, it plans to complete a short-form merger later; minority stockholders sue immediately, arguing that because Red Mesa is the controller, the offer automatically triggers entire fairness review.

Which is the best statement of the likely standard a Delaware court would apply to this tender offer challenge?

Explanation. The majority opinion held that a controlling stockholder’s tender offer for the remaining shares is generally governed by the Solomon approach rather than Lynch entire fairness. But that does not eliminate fiduciary constraints: the court examines whether the offer is non-coercive and accompanied by materially complete, balanced disclosure. So the right answer is that the court would not automatically impose entire fairness merely because the bidder is a controller.