## Facts

- American General Corporation made an all-cash tender offer to acquire Unitrin, Inc. for about $2.6 billion at $50⅜ per share.
- Unitrin’s board determined the offer was inadequate.
- Unitrin’s directors collectively owned roughly 23% of Unitrin’s shares; institutional investors held about 42%.
- In response to the offer, Unitrin adopted a shareholder rights plan (poison pill) and approved a repurchase program authorizing buybacks of up to 10 million shares.
- American General and certain shareholders sued to enjoin the repurchase program.
- The Delaware Court of Chancery temporarily restrained further repurchases and then preliminarily enjoined the repurchase program, concluding it was a disproportionate defensive response under Unocal because it would concentrate voting power and make a proxy contest materially more difficult.
- The Delaware Supreme Court accepted an interlocutory appeal from the preliminary injunction order.

## Issues

1. Whether the Court of Chancery correctly applied Unocal’s enhanced-scrutiny proportionality review in preliminarily enjoining Unitrin’s stock repurchase program adopted in response to a hostile tender offer.
2. Whether the repurchase program (alone or together with the poison pill) was coercive or preclusive of stockholder choice, or otherwise outside the range of reasonable defensive measures.

## Decision

- The Delaware Supreme Court reversed the preliminary injunction against the repurchase program.
- The Court held that the Court of Chancery misapplied Unocal by treating “unnecessary” as the test for disproportionality.
- The Court clarified that Unocal proportionality review requires first determining whether the defense is “draconian” (coercive or preclusive); if not, the measure is reviewed for whether it falls within a range of reasonable responses.
- The Court concluded the record did not support a finding that the repurchase program and poison pill were coercive or preclusive.
- The case was remanded for further proceedings applying the clarified Unocal analysis to the combined defensive measures.

## Legal Principles

- Under Unocal enhanced scrutiny, directors must (1) show reasonable grounds for perceiving a threat to corporate policy and effectiveness, and (2) show the response is proportionate to that threat.
- A defensive measure is “draconian” if it is either:
  - coercive (pressuring stockholders to accept management’s preferred alternative), or
  - preclusive (making a successful proxy contest realistically unattainable).
- If a defensive measure is not draconian, it is permissible if it falls within a range of reasonable responses; courts should not require the least restrictive or strictly “necessary” defense.
- Defensive measures are not preclusive merely because they make an insurgent’s success more difficult; preclusion requires practical or mathematical impossibility of success.

## Conclusion

The Delaware Supreme Court reversed an injunction against Unitrin’s buyback defense and refined Unocal by requiring courts to ask first whether the response is coercive or preclusive, and, if not, whether it remains within a range of reasonable defensive measures rather than whether it was strictly necessary.


Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361 (Del. 1995)