Unocal Test
What does "Unocal Test" mean in law?
The Unocal test is an intermediate standard of enhanced judicial review, established in Unocal Corp. v. Mesa Petroleum Co. (1985), applied to evaluate defensive measures adopted by a board of directors in response to a perceived threat to corporate policy or effectiveness, such as a hostile takeover bid. Under the two-pronged test, the board must first demonstrate that it had reasonable grounds to believe a danger to corporate policy and effectiveness existed (the threat prong), and second, that the defensive measure adopted was reasonable in relation to the threat posed (the proportionality prong). This intermediate standard falls between the deferential business judgment rule and the demanding entire fairness standard, reflecting the inherent conflict of interest directors face when their positions are at stake. If the board satisfies both prongs, the business judgment rule applies; if not, the directors bear the burden of proving the entire fairness of their actions.
Definition
The Unocal test is an intermediate standard of enhanced judicial review, established in Unocal Corp. v. Mesa Petroleum Co. (1985), applied to evaluate defensive measures adopted by a board of directors in response to a perceived threat to corporate policy or effectiveness, such as a hostile takeover bid. Under the two-pronged test, the board must first demonstrate that it had reasonable grounds to believe a danger to corporate policy and effectiveness existed (the threat prong), and second, that the defensive measure adopted was reasonable in relation to the threat posed (the proportionality prong). This intermediate standard falls between the deferential business judgment rule and the demanding entire fairness standard, reflecting the inherent conflict of interest directors face when their positions are at stake. If the board satisfies both prongs, the business judgment rule applies; if not, the directors bear the burden of proving the entire fairness of their actions.
Example
When the board adopted a poison pill in response to an unsolicited tender offer at a 20% premium, the court applied the Unocal test and found the defense proportionate because the board demonstrated that the offer was coercive and inadequate, and the pill merely gave the board time to explore superior alternatives.