Unocal Corp. v. Mesa Petroleum Co.

On April 8, 1985, Mesa, the Owner of approximately 13% of Unocal's stock, commenced a two-tiered hostile tender offer. The first tier was a cash offer of $54 per share for 64 million shares, which would give Mesa an additional 37% of the company's stock. The second tier, or "back-end" was designed to eliminate the remaining publicly held shares through the issuance of debt securities, which Mesa referred to as junk bonds. The Unocal board then met with investment bankers and counsel, who provided the board with the opinion that the Mesa offer was inadequate. As a defensive measure, it was suggested that Unocal pursue a self-tender, which excluded Mesa, to provide shareholders with a fairly priced alternative to the Mesa proposal. Mesa challenged the legality of its exclusion from Unocal's self-tender.

When evaluating defensive measures a board has undertaken in response to a hostile takeover, the directors must satisfy a two-pronged threshold for their actions to fall within the ambit of the business judgment rule: (1) that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed because of another person's stock ownership; and (2) that the defensive measure was reasonable in relation to the threat posed. In this case, the court found that the Unocal board satisfied both elements.

Fundamental Change Transactions | Hostile Offers