## Facts

- Mesa, controlled by T. Boone Pickens, owned about 13% of Unocal and launched a hostile two-tier, front-loaded tender offer.
- Mesa offered $54 per share for about 37% of Unocal (front end) and proposed a back-end squeeze-out merger for highly subordinated securities worth substantially less than $54.
- Unocal’s board (majority outside directors) met multiple times, consulted legal and financial advisers, and concluded the offer was inadequate in price and coercive to shareholders who might be left with inferior back-end consideration.
- As a defense, Unocal approved a selective self-tender (exchange offer) to repurchase up to 49% of its shares for senior debt securities valued at about $72 per share.
- Unocal excluded Mesa from participating to prevent Mesa from using Unocal’s funds to support Mesa’s acquisition effort.
- Mesa sought to enjoin the selective exchange offer, arguing the discriminatory exclusion violated fiduciary duties and Delaware law.

## Issues

1. Whether a Delaware board may respond to a hostile tender offer with a selective self-tender that excludes the hostile bidder.
2. What standard of review governs board-adopted defensive measures in response to a takeover threat.

## Decision

- The Delaware Supreme Court reversed the preliminary injunction and allowed Unocal’s selective self-tender to proceed.
- The court rejected a per se rule requiring equal treatment of all shareholders in issuer repurchases.
- The court applied enhanced scrutiny to defensive measures because of the risk that directors may act for entrenchment rather than shareholder welfare.
- The board showed reasonable grounds, based on good-faith investigation and expert advice, to view Mesa’s two-tier offer as an inadequate and coercive threat.
- The selective exchange offer was deemed a reasonable, non-preclusive response because it provided shareholders a higher-valued alternative and did not bar Mesa from continuing its bid.

## Legal Principles

- Defensive measures against takeovers are reviewed under enhanced scrutiny, not automatic business-judgment deference, due to the conflict-of-interest risk in board resistance to control changes.
- Enhanced scrutiny requires a two-part showing:
  - Directors must have reasonable grounds, after good-faith and reasonable investigation, to believe a threat to corporate policy and effectiveness exists.
  - The response must be reasonable in relation to the threat posed and not coercive or preclusive.
- A board’s burden is strengthened when a majority of independent directors acts after informed deliberation and reliance on competent advisers.
- Delaware law permits selective self-tenders that treat shareholders differently when justified by a proper corporate purpose and when the measure satisfies enhanced scrutiny; equal treatment is not required in all issuer repurchases.

## Conclusion

The court upheld Unocal’s selective exchange offer excluding Mesa and established the Unocal enhanced-scrutiny framework: boards may deploy takeover defenses only after showing a reasonably perceived threat and a proportionate, non-coercive response, after which business-judgment protection may apply.


Unocal Corp. v. Mesa Petrol. Co., 493 A.2d 946 (Del. 1985)