## Facts

- A shareholder group (BS/G) formed AC Acquisitions Corp. to pursue control of Anderson, Clayton & Co., a Delaware corporation.
- 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.
- 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.
- 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.
- 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.
- 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

1. Whether the self-tender/ESOP recapitalization was “economically coercive” by effectively forcing shareholders to tender to avoid being left with significantly devalued residual shares.
2. Whether the board likely breached fiduciary duties of loyalty and care by adopting a defensive measure that impaired shareholder choice and entrenched incumbents.
3. 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.


AC Acquisitions Corp. v. Anderson, Clayton & Co., 519 A.2d 103 (Del. Ch. 1986)