## Facts

- Interco, a Delaware corporation, adopted a shareholder-rights plan (poison pill) to deter takeovers and later replaced it with a plan containing flip-in and flip-over features, including a reduced trigger threshold.
- City Capital Associates (through an acquisition vehicle) accumulated Interco stock and made escalating all-cash offers to purchase all shares, ultimately offering $74 per share and expressing an intent to complete a prompt back-end merger at the same price.
- Interco’s board, advised by an investment banker, concluded the offer was inadequate based on valuation analyses and pursued a restructuring intended to deliver greater value through cash/dividends/debentures plus a residual equity interest.
- The tender offer was treated as noncoercive because it was for all shares, all cash, and contemplated equal-price treatment in the back-end merger.
- Plaintiffs sought a preliminary mandatory injunction requiring Interco’s board to redeem the rights and to halt steps implementing the restructuring as an alternative to the tender offer.
- The dispute arose at a late point in the contest, when the board’s continued use of the pill no longer functioned to improve bidder terms or generate additional shareholder options.

## Issues

1. Whether the board breached fiduciary duties by refusing to redeem the poison pill, thereby preventing shareholders from tendering into a noncoercive, all-cash, all-shares offer.
2. Whether continued maintenance of the pill at this stage was a reasonable and proportionate defensive response under Unocal.
3. Whether the board’s adoption of a restructuring alternative, and its decisionmaking process supporting it, complied with fiduciary duties.

## Decision

- The court granted a preliminary mandatory injunction directing redemption of the rights plan, concluding the continued pill was an unjustified defensive measure in the circumstances.
- The court held that the $74 all-cash, all-shares offer posed no threat sufficient to justify blocking shareholder choice at this stage of the contest.
- The court found the restructuring itself could be a reasonable business response to a belief that the offer price was inadequate.
- The court determined the directors adequately informed themselves through advisors and valuation work and did not breach duties in their information-gathering process.
- The court directed the parties to confer on the form of the injunction order.

## Legal Principles

- Under Unocal, directors must (1) reasonably perceive a threat to corporate policy or stockholder interests and (2) adopt a response that is reasonable and proportionate to that threat.
- A noncoercive, all-cash, all-shares offer with equal back-end treatment reduces the range of threats that can justify preclusive defensive measures.
- At an end-stage point where a pill no longer operates to improve terms or create additional shareholder options, maintaining it to block a noncoercive offer may be disproportionate and impermissibly preclusive of shareholder choice.
- Directors may, consistent with fiduciary duties, pursue an alternative transaction they reasonably believe yields higher value, but may not use a pill solely to force shareholders into the board’s preferred alternative once the market choice is fully presented.

## Conclusion

The court held that Interco’s board could pursue a restructuring it reasonably viewed as value-maximizing, but it could not continue using a poison pill to prevent shareholders from accepting a fully financed, noncoercive, all-cash offer at the end stage of the contest; Unocal required redemption because the continued defense was disproportionate and foreclosed shareholder choice without a sufficient threat.


City Capital Assocs. Ltd. P'ship v. Interco Inc., 551 A.2d 787 (Del. Ch. 1988)