available to other shareholders in order to prevent the takeover. Under NYBCL § 572 , if a company wants to repurchase 10% or more of its stock from one shareholder at a price above market, and that purchase is within two years of the date the party acquired the stock, then it must have shareholder approval. 48
lower court said that since the supermajority voting provision already made acquisition of the company nearly impossible, the share repurchase program is overkill – the defense is not proportional to the threat. The court defines “draconian,” creating a continuum of possible defenses. At one end are preclusive defenses (so potent that no third party could ever acquire the company). At the other end are coercive defenses (target company’s Board implements measures to enhance shareholder value beyond what the third party offers, forcing shareholders to accept). Anything between these two extremes meets the Unocal standard for proportionality/reasonableness. Accordingly, the supermajority voting provision coupled with the repurchase program was held not preclusive to the third party. DE is very pro-management, as almost any defense passes the Unocal test these days. 5. Class favoritism The seminal case involving a Board’s fiduciary duties in the context of a decision to sell its company is Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. 1163 Supreme Court of Delaware, 1985. Pantry Pride waged a bitter hostile takeover battle by Pantry Pride (owned by Ron Perelman’s takeover vehicle) against Revlon. Revlon implemented a number of defensive strategies. When it became apparent to Revlon’s Board that Revlon would not remain an independent company, its Board authorized management to negotiate a white knight buyout with Forstmann. Leaving a company’s strategic defenses in place during an auction in inconsistent with the Board’s duty as an auctioneer and thus constitutes a breach of the directors’ duty of loyalty towards stockholders. The court characterized the white knight transaction as putting the company “up for sale.” When a Board puts its company up for sale, its duty changes from preserving the corporate enterprise to maximizing the company’s value for the stockholders’ benefit. Accordingly, defensive measures designed to protect the company from hostile bidders become moot. A Board cannot play favorites during an active auction process. 49
C. Controlling Stockholders What is good is control? What can and cannot be done with it? Sinclair Oil Corporation v. Levien 688 Supreme Court of Delaware, 1971. Sinclair owned 97% of subsidiary Sinven’s stock and had an interlocking directorate. Plaintiff alleged two breaches of the fiduciary duty owed by a controlling stockholder. First, the Sinven dividend payment was excessive, 26 stunting Sinven’s industrial development, because allegedly Sinclair needed the money. The lower court applied the “entire/intrinsic fairness” test, rather than the business judgment rule, based on Sinclair’s domination of Sinven’s Board.
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