Superficies espaciales de curvatura media constante en el espacio steady state

As described in Chapter 1, when facing a hostile takeover there is an inherent conflict of interest between target directors, who seek to maintain their jobs by deterring the offer, and their shareholders, who might benefit from the takeover by accepting the offer.

287_{See e.g., New York Business Corporation Law, s 912 (McKinney Supp. 2002) and Delaware General Corporation}

Law, s 203.

288_{Amanda Acquisition Corp v Universal Foods Corp 877 F 2d 496 (7}th _{Cir 1989).}

Ideally, the regulation of board conduct is to pursue a balance between improper use of defences to serve directors’ self-interests and proper use of defences to prevent that the tender offer is under-value.290

2.2.1 Directors’ Fiduciary Duties

In the US, the federal laws do not interfere with the power of a target’s board under its corporate charter. The state laws attempt to address this issue through a ‘single and homogeneously defined standard’ on the accountability of the target’s board, known as fiduciary duties.291 In the face of a hostile takeover, takeover defences are at the business discretion of the board of directors and can be widely adopted by the target board without shareholder approval. However, the adoption of these defensive measures by target directors must comply with their fiduciary duties to the company and its shareholders. As a general rule, directors’ fiduciary duties, beyond mere fairness and honesty, include the duty of care and the duty of loyalty. Directors are required to make decisions on all reasonably available information by the duty of care and to make decision in the interests of the company and its shareholders, not out of self-interest, by the duty of loyalty.292. As Benjamin Cardozo held in Meinhard v Salmon, ‘[m]any forms of conduct permissible in a workaday world for those acting at arm’s length, are forbidden to those bound by fiduciary ties. A trustee is held to something stricter than the morals of the market place. Not honesty alone, but the punctilio of an honour the most sensitive, is then the standard of behaviour’.293

290 _{Larry E. Ribstein, ‘Why Corporations?’(2004) 1 Berkeley Business Law Journal 183, 183.}

291 _{Klaus J. Hopt, ‘Common Principles of Corporate Governance in Europe?’ in Joseph A. McCahery and others (eds),}

Corporate Governance Regimes: Convergence and Diversity (Oxford University Press 2002) 259.

292 _{David Lamb, ‘United States of America: Directors’ Duties under Delaware Takeover Law’ (1994) 15(9) Company}

Law 283, 283.

The US courts generally apply a number of procedural and substantive standards to determine whether a board of directors properly exercises their fiduciary duties, which are often collectively referred to as the ‘Business Judgment Rule’.294 The Business Judgment Rule is based on the essential notion that the management and affairs of a corporation are entrusted to its board of directors, whose decisions are made based on sound business judgement with due care and in good faith.295 In Aronson v Lewis, the court defined the Business Judgment Rule as a ‘a presumption that in making a business decision that directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interest of the company’.296

Under this rule, the board of directors are not liable for a mistake in business judgement if it is made in good faith and in what they believe to be the best interest of the company. It was addressed in AC Acquisitions Corp v Anderson, Clayton & Co.: when a court is required to review the propriety of business decisions by the board of directors, it will decline to evaluate the merits or wisdom of the decisions of board of directors who are elected by shareholders to manage the business of the company.297 In other words, as Lamb has argued, ‘the directors are afforded a presumption that they have fulfilled their fiduciary duties and in such circumstances the court will not substitute its judgement for that of the directors’.298

2.2.2 Delaware Court’s Decisions

As described previously, the Williams Act is primarily a disclosure statute and does not directly govern the conduct of target boards in responding to, particularly in resisting, a

294_{SeePogostin v Rice 480 A 2d 619 (Del 1984), 627; Aronson v Lewis 473 A 2d 805 (Del 1984), 812; Paramount}

Communications Inc v QVC Network Inc 637 A 2d 34 (Del 1994), 41-42.

295 _{Jeffrey Gordon and Harvey Nixon, ‘The Outer Boundaries of the Poison Pill in US Takeovers’ (1989) 4(3) Journal}

of International Business and Law 142, 146.

296_{Aronson v Lewis 473 A 2d 805 (Del 1984), 812.}

297_{AC Acquisitions Corp v Anderson, Clayton & Co 519 A 2d 103 (Del Ch 1986), 111.}

hostile takeover bid. At the federal level, there seems to be no interest in regulating the takeover defences and instead, as Chancellor William Chandler stated:

With minor exceptions, the United States Congress had shown no interest in adopting a statutory framework to regulate corporate decision-making. The [SEC] also expressed no interest in regulating takeover defences such as the poison pill. Moreover, the United States Supreme Court had essentially sidelined federal judges and state legislatures with respect [to] such corporate governance matters. Almost by default, state courts were left to fill this void and create dependable ground rules governing when corporate boards…might employ takeover defences…to deter, thwart, slow down or even stifle an ever increasing wave of hostile acquisitions.299

In addition, according to Alcock, it has never been open to the US federal authorities to establish nation-wide rules to regulate takeovers, because the corporation matter is within the jurisdiction of individual states and therefore the target’s board’s ability to employ takeover defences is not a matter for federal control.300 As a result, the issue regarding how and to what extent the takeover defences can be employed by the target board is regulated through state legislative and judicial decisions and subject to regulatory competition among the individual states. 301

In this competitive context, the standards of target directors’ behaviour in facing a hostile takeover have been defined by a series of precedents in the State Delaware on a case by

299 _{William B. Chandler III, ‘Hostile M&A and the Poison Pill in Japan: A Judicial Perspective’ (2004) Columbia}

Business Law Review 45, 49-50.

300 _{Alistair Alcock (n228) 166.} 301 _{Kenyon-Slade (n51) 56.}

case basis.302 Over almost 30 years, the behaviour standards produced by the Delaware courts to regulate defensive board actions of a Delaware corporation in response to hostile takeovers, have ‘completed the landscape of American tender offer regulation’.303 Delaware is arguably the only state which has established a well-developed case law on the use of takeover defences by the target board.304

These cases play a particularly important role in regulating takeover defences, not only because Delaware was and continues to be the state where more US quoted corporations have chosen to incorporate than in any other state305, but also because of ‘the persuasive authority attributed to Delaware’s courts in corporate law issues’.306 Delaware’s sophisticated court system has used very experienced and knowledgeable judges to decide corporate lawsuits. As a result, they have produced the most influential source of takeover law, and its rulings continue to influence other states. As Delahaye has observed, in states with less sophisticated takeover laws, practitioners frequently advise clients on the basis of Delaware law, and their jurisdictions are unlikely to be stricter than Delaware’s.307

2.2.2.1Unocal Duties – where the board intends to preserve the company’s independence

In Unocal Corp v Mesa Petroleum Corp,308 the Unocal board of directors launched a self- tender offer for itself with the aim of impeding the unwanted tender offer initiated by Mesa Petroleum. However, this self-tender offer excluded Mesa Petroleum who already owned approximately 13% of the outstanding Unocal shares. The Delaware Chancery

302 _{Dana M. Muir and Cindy A. Schipani, ‘New Standards of Director Loyalty and Care in the Post-Enron Era: Are}

Some Shareholders More Equal Than Others’ (2005) 8 Legislation and Public Policy 279, 354.

303 _{Armour and Skeel, Jr. (n118) 1761.} 304 _{Berglöf and Burkart (n32) 188.}

305 _{General Motors, Exxon Mobil, Wal-Mart and DuPont are among over 300,000 companies that have incorporated in}

Delaware. One-half of all New York Stock Exchange companies are incorporated there, along with 60% of the Fortune 500 companies.

306 _{Ventoruzzo (n24) 187.}

307 _{Bernd Delahaye, ‘Still Alive: Poison Pills and Staggered Boards As Hostile Takeover Defences – the Battle for}

Airgas’ (2012) International Company and Commercial Law Review 211, 211.

Court issued a preliminary injunction against the self-tender on the grounds that the company directors have a fiduciary duty to treat all shareholders fairly and that the self- tender unfairly discriminated against Mesa Petroleum.309 However, a few days after the Chancery Court’s opinion, as Shepro and Herzel described ‘to the astonishment of most corporation lawyers’, the Delaware Supreme Court held that a defensive self-defender offer that discriminated against a hostile bidder who was also a major shareholder of Unocal was valid.310

In reaching its decision, the court noted its concern that ‘a director may be acting primarily in his own interests rather than those of the corporation and its shareholder’ and adopted an ‘enhanced scrutiny’ standard that calls for ‘judicial examination at the threshold before the protections of the business judgment rule may be conferred’.311 When faced with hostile takeovers, the court modified the business judgement rule and required the board to meet the following two tests when trying to preserve the independence of the target company:

• A Reasonableness test which is satisfied by a demonstration that directors have reasonable grounds to believe that danger to the pursuit of a corporate policy and effectiveness exists if the company is controlled by the hostile bidder, and • A Proportionality test which is satisfied by a demonstration that their defensive

actions were ‘proportionate’ to the threat posed by the hostile bid and its effect on the company.

The Unocal case was particularly significant, as Muir and Schipani have explained, because it showed that Delaware courts ‘are willing to scrutinize a decision to resist a

309_{Unocal Corp v Mesa Petroleum Corp Civil Citation No 7977, unreported opinion (13 May, 1985).}

310 _{Herzel and Shepro (n284) 84.}

takeover attempt more closely than an ordinary business decision’.312 The Unocal standard, also known as the ‘enhanced business judgment rule’, has frequently been used by Delaware courts as a standard for reviewing the conduct of target boards against hostile tender offers with the aim of preserving the company’s independence.313 It is argued that these are duties, along with the fiduciary duties governing almost all defensive measures taken by the target directors in response to a hostile takeover.314 Once the Unocal duties have been satisfied, the normal presumptions about directors’ behaviour under the business judgment rule apply.315

2.2.2.2Revlon Duties — where change of control of the company is inevitable

In Revlon Inc v MacAndrews and Forbes Holdings Inc,316 _{Revlon had given a lockup} option on its health divisions to Forstmann Little & Co in the face of a hostile takeover attempt by Pantry Pride.The Delaware Chancery Court enjoined the lockup by holding that ‘once the breakup of Revlon became inevitable… the board [had] to view its primary role as the promoter of bids, with price the dominant consideration.’317 The Delaware Supreme Court ruled on the obligation of a target board of directors to recommend the transaction that will maximise shareholder wealth if it is certain that its company is going to be sold. In this context, the court said, ‘[t]he directors’ role changed from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company’.318

312 _{Muir and Schipani (n302) 354.} 313 _{Gordon and Nixon (n295) 143.} 314 _{Lamb (n292) 284.}

315_{Unocal Corp v Mesa Petroleum Corp 493 A 2d 954 (Del. 1985)}

316_{Revlon Inc v MacAndrews & Forbes Holdings Inc 506 A 2d 173 (Del 1986).}

317_{MacAndrews & Forbes Holdings Inc v Revlon Inc 501 A 2d 1239 (Del Ch 1985), 1250-1251.}

The judgement in the case of Revlon continues to be cited in various cases and the rules introduced by the court came to be known as the Revlon Duties.319 Where the takeover will result in change of control or break-up of the company, as Lamb has pointed out, the nature of the board’s Unocal Duties changes.320 The fundamental role of directors is to maximise the gains for their shareholders rather than to preserve the independence of the company. Therefore, Revlon Duties come into play when it is clear that the sale or breakup of the company is inevitable. The Delaware Supreme Court has clarified this point by noting that the duty of the target board of directors to be an auctioneer arises only if it is ‘apparent’ that a sale of the company is ‘inevitable’, which is not the case when the board is determined to remain independent.321

It is worth noting that although the lockup options were held to be invalid, the court did not go so far as to prohibit the use of the defences. If the defences are used to promote the auction process by favouring one bidder over another and thereby causing the offer price to rise, they could be consistent with the board’s Revlon duties. However, defences are used to hinder the auction process are not valid. In other words, the directors’ role changes from defender attempting to frustrate the sale to auctioneer seeking the highest price for shareholders.322

2.2.2.3Moran Case -- where the board intends to adopt poison pills

Poison pills have been a common feature of US companies and more than half of them have adopted such plan in potential takeovers.323 Courts in the US have generally been

319 _{Joy Dey, ‘Efficiency of Takeover Defence Regulations A Critical Analysis of the Takeover Defence Regimes in}

Delaware and the UK’ (2009) Social Science Research Network <http://ssrn.com/abstract=1369542> accessed 2 January 2011, 13.

320 _{Lamb (284) 284.}

321_{Ivanhoe Partners v Newmont Mining Corp 535 A 2d 1334 (Del1987), 1341.}

322 _{Magnuson (n265) 215.} 323 _{Lowry (n50) 341.} 323 _{Hill (n58) 7.}

kind to the adoption of poison pills. In the case of Moran v Household International, Inc,324 the target board adopted a poison pill and refused to redeem it. The Delaware Supreme Court upheld the legality of poison pills by concluding that their adoption by a target board was consistent with Delaware Law, despite the fact that they cause discrimination between the tender offer bidder and other shareholders of the target company.325 The court based the validity of poison pills on the condition that an adoption of poison pills by the target board is subject to fiduciary duties and therefore open to judicial review, by noting that

when the Household Board of Directors is faced with a tender offer and a request to redeem the rights, they will not be able to arbitrarily reject the offer. They will be held to the same fiduciary standards as any other board of directors would be held to in deciding to adopt a defensive mechanism, the same standard as they were held to in approving the Rights Plan.326

In most cases, Delaware courts are reluctant to order the target board to redeem the pill because the existence of the poison pill can act as a powerful defensive mechanism to protect undervalued target companies from opportunistic acquirers. As a result, apart from negotiating directly with the target’s board and reaching a settlement before making any tender offer, if hostile bidders want to get over the barrier set up by the poison pill, they must first gain control of the target’s board and redeem the poison pill afterwards. Their solution is to combine a hostile tender offer with a proxy solicitation to remove the incumbent target directors and replace them with their own board candidates who would

324_{Moran v Household International Inc 500 A 2d 1346 (Del 1985).}

325 _ibid1357.

redeem the poison pill after their election. Therefore, the arrangement of board elections became the critical factor influencing the target’s defensive prospects.327

If the target company has a unitary board, where all members are elected at the annual meeting of shareholders, a bidder would have to wait for the next election to conduct a proxy contest. However, if the target company has staggered boards, this effectively prevents a bidder from obtaining control of the board in a single election. The bidder might have to wait even longer to replace the board. Correspondingly, the target board’s ability to impose delays on a bidder in gaining control of a company could serve as a significant deterrent to the making of a bid in the first place.328 It is therefore argued that when a poison pill is combined with a staggered board, it makes a hostile takeover difficult because the bidder cannot remove the poison pill by simply asking target shareholders to replace the board on one occasion. The Delaware Corporation Law allows boards to have two or three classes of directors. 329

2.2.2.4Subsequent Cases

In Blasius Industries Inc v Atlas Corp,330 Atlas’s board amended the bylaws to expand its size by appointing two directors to fill the newly created board, in order to retain control of the incumbent board irrespective of the outcome of the proxy contest. Delaware Court of Chancery invalidated this defensive action by concluding that the action, intended to interfere with the shareholders’ power to appoint a majority of the board, will constitute an unintended violation of the duty of loyalty that directors owe to the shareholders, even if the board are sincerely acting in the best interest of the company and not merely to

327 _{Bebchuk and Coates IV and Subramanian (n52) 890.}

328 _{John C. Coates IV, ‘Measuring the Domain of Mediating Hierarchy: How Contestable are US Public Corporations?’}

(1999) 24 Journal of Corporate Law 837, 853.

329_{See Del. Code Ann. tit. 8, s 141 (1991).}

entrench themselves; unless the board can demonstrate a ‘compelling justification’ for undertaking it on the ground that the shareholder vote that installs the directors into office is what legitimates the directors’ exercise of power. As Armour et al have stressed, the Blasius standard was ‘designed to reinforce that principle as a matter of fundamental corporate law policy’.331 This ruling protects shareholders’ ability to respond to unsatisfactory management by exercising their voting rights or selling their shares to outsiders.

When the adoption of poison pills was held to be valid in Moran, it coincided with and arguably caused the decline of hostile takeover bids in the 1980s. During the recession in the United Sates in the 1990s, the number of hostile takeovers continued to go down,