Facts
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A shareholder group (BS/G) formed AC Acquisitions Corp. to pursue control of Anderson, Clayton & Co., a Delaware corporation.
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BS/G made a hostile tender offer for any and all shares at $56 per share in cash, conditioned on acquiring at least 51% of the outstanding shares, with an announced plan for a follow-up cash merger at the same price if control was obtained.
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In response, the Anderson, Clayton board approved and announced a “Company Transaction” consisting of:
- a self-tender for about 65% of the company’s outstanding shares at $60 per share in cash, and
- an issuance of shares to an ESOP designed to hold about 25% of the post-transaction outstanding shares.
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The board characterized the Company Transaction as a continuation of an earlier recapitalization effort, parts of which had previously been preliminarily enjoined for disclosure problems.
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BS/G challenged the Company Transaction as a defensive measure that would pressure shareholders to tender into the company’s offer because non-tendering would leave them holding stock expected to drop sharply after the leveraged recapitalization.
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The company argued the transaction offered shareholders a higher immediate price than BS/G’s bid and was a good-faith response to risks associated with BS/G’s leveraged acquisition.
Issues
- Whether the self-tender/ESOP recapitalization was “economically coercive” by effectively forcing shareholders to tender to avoid being left with significantly devalued residual shares.
- Whether the board likely breached fiduciary duties of loyalty and care by adopting a defensive measure that impaired shareholder choice and entrenched incumbents.
- Whether, under Unocal enhanced scrutiny, the board identified a legitimate threat and adopted a response reasonable in relation to that threat.
Decision
- The Court of Chancery granted plaintiffs’ motion for a preliminary injunction.
- The court enjoined the company from proceeding with the self-tender/ESOP recapitalization as structured.
- The court found plaintiffs showed a likelihood of success that the transaction was impermissibly coercive and disproportionate under Unocal, defeating business judgment deference at the preliminary-injunction stage.
- The court found irreparable harm because consummation would materially and rapidly alter the capital structure and ownership base in ways not readily undone, impairing shareholder choice.
- The balance of equities favored preserving the status quo so shareholders could choose among competing proposals without coercive pressure.
Legal Principles
- Defensive measures adopted in response to a takeover attempt are reviewed under Unocal enhanced scrutiny, requiring (1) reasonable grounds to perceive a threat to corporate policy and effectiveness and (2) a response reasonable in relation to the threat posed.
- A board may not structure a defensive self-tender or recapitalization so that shareholders are effectively forced to tender due to the expected adverse consequences of remaining holders (economic coercion).
- A higher nominal price in a defensive transaction does not justify measures that materially impair a meaningful shareholder choice among competing bids.
- A defensive transaction with substantial entrenchment effects, particularly when paired with coercive economics, can support a showing of likely loyalty violations and loss of business judgment protection.
Conclusion
The court preliminarily enjoined Anderson, Clayton’s defensive self-tender and ESOP recapitalization because it likely coerced shareholders by making non-tendering economically punitive and, under Unocal, was not a proportionate response to a non-coercive competing cash tender offer, thereby undermining shareholder choice and implicating fiduciary duty concerns.