## Facts

- Hanson Trust PLC accumulated SCM Corporation stock and announced a tender offer intended to obtain control of SCM.
- SCM’s board opposed the bid as hostile and inadequate and pursued alternatives, including a potential “white knight” transaction.
- SCM adopted defensive measures that included significant asset dispositions and contractual arrangements granting preferential rights (including lock-up type options) to a favored third party.
- Hanson alleged the defensive transactions were intended to entrench SCM’s incumbent management and to impede shareholders from choosing whether to accept Hanson’s offer.
- Hanson sued in federal district court seeking injunctive relief to block or unwind the defensive transactions, alleging breaches of fiduciary duty under applicable state corporate law.
- The district court declined to grant the requested relief and treated the board’s actions as protected by business judgment deference.
- Hanson appealed to the Second Circuit.

## Issues

1. What standard of fiduciary review applies to a target board’s defensive measures adopted in response to a hostile takeover bid.
2. Whether the business judgment rule applies without heightened scrutiny when defensive actions may reflect management self-interest.
3. Whether SCM’s asset sales and lock-up arrangements were reasonable responses to a perceived threat or impermissibly coercive or preclusive measures that improperly foreclosed shareholder choice.

## Decision

- The Second Circuit reversed in part and remanded for further proceedings.
- The court held that takeover defenses are subject to fiduciary limits and cannot be upheld solely through ordinary business judgment deference where entrenchment concerns are substantial.
- The court required a showing that the board reasonably perceived a threat and that the defensive response was reasonable and proportionate to that threat.
- On the record, the court found that at least some challenged transactions, including certain asset dispositions and lock-up arrangements, were not adequately justified as proportionate, shareholder-serving responses.
- The court directed further scrutiny of directors’ motives, the fairness of the transactions, and their practical effect on the takeover contest.

## Legal Principles

- When a board adopts defensive measures in the face of a hostile bid, courts may apply enhanced scrutiny because directors may face conflicts tied to retaining control.
- Directors must show a reasonable basis for perceiving a threat to corporate policy or effectiveness and must demonstrate that defensive actions are reasonable and proportionate to that threat.
- Defensive transactions that materially deter competing bids or effectively prevent shareholders from considering an offer may be invalid if their primary effect is coercive, preclusive, or entrenching.
- Where indicia of self-interest exist, the burden shifts to directors to justify the fairness and shareholder orientation of defensive measures; conclusory invocations of business judgment are insufficient.

## Conclusion

The Second Circuit required heightened judicial review of SCM’s takeover defenses and rejected uncritical business judgment deference where defensive measures plausibly served entrenchment and foreclosed shareholder choice, remanding for closer examination of proportionality and motive.


Hanson Tr. PLC v. SCM Corp., 774 F.2d 47 (2d Cir. 1985)