In my book Mergers and Acquisitions
As former Delaware Chancellor Allen explained in the closely related context of management buyout transactions: "The court's own implicit evaluation of the integrity of the ... process marks that process as deserving respect or condemns it to be ignored." Assuming that a special committee of independent directors would be appointed to consider the proposed transaction, Allen went on to explain: "When a special committee's process is perceived as reflecting a good faith, informed attempt to approximate aggressive, arms length bargaining, it will be accorded substantial importance by the court. When, on the other hand, it appears as artifice, ruse or charade, or when the board unduly limits the committee or when the committee fails to correctly perceive its mission—then one can expect that its decision will be accorded no respect." The same is true with respect to board resistance to unsolicited tender offers. If the conflict of interest inherent in such resistance has matured into actual self dealing, the court will invalidate the defensive tactics. If the board acted from proper motives, even if mistakenly, however, the court will leave the defenses in place.
Former Delaware Supreme Court Justice Moore argued, for example, that his court's "decisions represent a case by case analysis of some difficult and compelling problems." He later elaborated:
We did not approach [takeover] cases with the question of whether to allow the corporation to continue in its present form or to permit someone else to acquire the company.... [T]he question before the court was whether the directors acted properly in accepting or rejecting the competing offers.... As long as the directors adhered to their fiduciary duties, it would have been most inappropriate for any court to intrude upon a board's business decision. No court has a role in disciplining directors for the proper exercise of business judgment, even if it turns out to be wrong.
Former Delaware Chancellor Allen made much the same point in RJR Nabisco, where he indicated that the basic question is whether the board acted with due care and in good faith:
Surely the board may not use its power to exercise judgment in [an auction of control] as a sham or pretext to prefer one bidder for inappropriate reasons.... But the board of directors continues, in the auction setting as in others, to bear the burden imposed and exercise the power conferred by Section 141(a). Assuming it does exercise a business judgment, in good faith and advisedly, concerning the management of the auction process, it has, in my opinion, satisfied its duty.
A federal court similarly described the Unocal standard as asking "whether a fully informed, wholly disinterested, reasonably courageous director would dissent from the board's act in any material part." Motive is a consistent theme throughout these summations of Delaware law.
As I argued in my article Unocal at 20, the focus on motive is how the Delaware courts resolved the basic tension in corporate law:
The search for conflicted interests reflects the Delaware courts’ solution to the irreconcilable tension between authority and accountability. Concern for accountability drives the courts’ expectation that the board will function as a separate institution independent from and superior to the firm’s managers. The court will inquire closely into the role actually played by the board, especially the outside directors, the extent to which they were supplied with all relevant information and used independent advisors, and the extent to which it was insulated from management influence. Only if the directors had the ultimate decision-making authority, rather than incumbent management, will the board’s conduct pass muster. But if it does, respect for authority values will require the court to defer to the board’s substantive decisions. The board has legitimate authority in the takeover context, just as it has in proxy contests and a host of other decisions that nominally appear to belong to the shareholders. Nor can the board’s authority be restricted in this context without impinging on the board’s authority elsewhere. Therefore, authority cannot be avoided anymore than accountability; the task is to come up with a reasonable balance. Properly interpreted, that is precisely what the Delaware cases have done.
All of which is preface to a very interesting new decision from the Delaware Chancery Court. In Chen v. Howard-Anderson, Vice Chancellor Travis Laster writes that:
The metric of reasonableness employed in the intermediate standard of review [i.e., the Unocal standard] enables a reviewing court to ―smoke out mere pretextual justifications for improperly motivated decisions. ...
Conceived in that way, [enhanced scrutiny] is itself reminiscent of some federal Constitutional standards of review, which smoke out the actual objective supposedly motivating challenged governmental action and require a fit (of looser or tighter nature) between that objective and the means used. This approach to analyzing behavior also is useful in exposing pre-textual justifications. Because there is a burden on the party in power to identify its legitimate objectives and to explain its actions as necessary to advance those objections, flimsy pretense stands a greater chance of being revealed. [Mercier v. Inter-Tel (Del.), Inc., 929 A.2d 786, 807 (Del. Ch. 2007) (footnotes omitted); see, e.g., Phillips v. Insituform of N. Am., Inc., 1987 WL 16285, at *5-6, *11 (Del. Ch. Aug. 27, 1987) (Allen, C.) (applying enhanced scrutiny, finding that a board‘s proffered justifications for its actions were a pretext, and holding that the plaintiffs had demonstrated a likelihood of success in showing that the board breached its fiduciary duties).]
"[T]he reasonableness standard requires the court to consider for itself whether the board is truly well motivated (i.e., is it acting for the proper ends?) before ultimately determining whether its means were themselves a reasonable way of advancing those ends." Dollar Thrifty, 14 A.3d at 599-600.
This is precisely the point I've been making about Unocal, so I am glad that Chancellor Travis has articluated the argument so clearly and well. (And that he cited my article, albeit elsewhere in the decision.)
