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The business judgment rule, including the standards by which director conduct is judged, is applicable in the context of a takeover. The business judgment rule is a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. A court will not substitute its judgment for that of the board if the latter's decision can be attributed to any rational business purpose.
On April 8, 1985, the plaintiffs, Mesa Petroleum Co., Mesa Asset Co., Mesa Partners II, and Mesa Eastern, Inc. (collectively "Mesa"), commenced a two-tier "front loaded" cash tender offer for 64 million shares, or approximately 37%, of the defendant, Unocal Corporation (Unocal). The "back-end" was designed to eliminate the remaining publicly held shares by an exchange of securities purportedly worth $54 per share. However, pursuant to an order entered by the United States District Court for the Central District of California on April 26, 1985, Mesa issued a supplemental proxy statement to Unocal's stockholders disclosing that the securities offered in the second-step merger would be highly subordinated, and that Unocal's capitalization would differ significantly from its present structure. The majority of Unocal’s board members, however, unanimously agreed to reject Mesa’s tender offer and advised the remaining board members to pursue a self-tender to provide the stockholders with a fairly priced alternative to the Mesa proposal. Eventually, Unocal’s directors agreed upon an exchange offer wherein Unocal would buy the remaining 49% outstanding for an exchange of debt securities having an aggregate par value of $72 per share in the event that Mesa acquired 64 million shares of Unocal stock through its own offer. Unocal's exchange offer was commenced on April 17, 1985, and Mesa promptly challenged it by filing a suit in the Court of Chancery. The lower court granted a preliminary injunction to Mesa, concluding that the proposed exchange offer of Unocal for its own stock was legally impermissible. Thereafter, Unocal challenged the lower court’s decision.
Did the Unocal board have the power to oppose a takeover threat, and if so, is its action here entitled to the protection of the business judgment rule?
The court reversed the judgment and vacated the preliminary injunction vacated. The Court held that there was directorial power to oppose Mesa's tender offer and to undertake a selective stock exchange made in good faith, and upon a reasonable investigation pursuant to a clear duty to protect the corporate enterprise. The Court further held that the repurchase plan chosen by Unocal Corporation was reasonable in relation to the perceived threat and was entitled to be measured by business judgment rule.