Law School Case Brief
AC Acquisitions Corp. v. Anderson, Clayton & Co. - 519 A.2d 103 (Del. Ch. 1986)
Because the effect of the proper invocation of the business judgment rule is so powerful and the standard of entire fairness so exacting, the determination of the appropriate standard of judicial review frequently is determinative of the outcome of derivative litigation. Where a board takes action designed to defeat a threatened change in control of the company, a more flexible, intermediate form of judicial review is appropriate. In such a setting the omnipresent specter that a board may be acting primarily in its own interests, justifies the utilization of a standard that has two elements. First, there must be shown some basis for the board to have concluded that a proper corporate purpose was served by implementation of the defensive measure and, second, that measure must be found reasonable in relation to the threat posed by the change in control that instigates the action. Thus, when a stock repurchase is designed in part to defeat a change in control: Directors, in the face of an inherent conflict must show that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed because of another person's stock ownership. And, a further aspect is the element of balance. If a defensive measure is to come within the ambit of the business judgment rule, it must be reasonable in relation to the threat posed.
Plaintiffs, Bear, Stearns & Co., Inc., Gruss Petroleum Corp. and Gruss Partners (BS/G) were shareholders of Anderson, Clayton & Co., a Delaware corporation (Anderson), who, through a newly formed corporation -- AC Acquisitions Corp. (AC), made a tender offer for any and all shares of Anderson. AC publicly announced a tender offer, and, on the following day, the directors announced the commencement of a self-tender offer. AC then filed a motion for an order preliminarily enjoining defendants from buying any shares of Anderson’s stock pursuant to the pending self-tender offer, selling any of Anderson’s stock to the newly-established employee stock ownership plan, and taking any steps to finance the self-tender offer or attempting to apply or enforce a "fair price" provision.
Was AC’s motion to enjoin Anderson and its directors from buying any shares of Anderson’s stock pursuant to its pending self-tender offer, selling any of Anderson’s stock to the newly-established employee stock ownership plan, and taking any steps to finance the self-tender offer or attempting to apply or enforce a "fair price" provision meritorious?
The court found that AC demonstrated a reasonable probability of success in the litigation and held that there was no evidence that AC’s offer threatened injury to shareholders or to the enterprise. The court stated that it was reasonable to create an option that permitted shareholders to keep an equity interest in the firm, but it was not reasonable in relation to such a "threat" to structure such an option so as to preclude as a practical matter shareholders from accepting the shareholders' offer.
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