Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985)
Unocal Corp. v.
What standard governs a board of directors' adoption of defensive measures in response to a hostile takeover bid, and under that standard, may a corporation lawfully implement a selective self-tender that excludes the hostile bidder?
When a board adopts defensive measures against a takeover threat, its actions are subject to enhanced scrutiny under the Unocal standard. The board bears the initial burden to demonstrate: (1) it had reasonable grounds for believing a danger to corporate policy and effectiveness existed, established by good faith and reasonable investigation (with meaningful involvement of independent directors and informed advice from experts), and (2) the defensive response was reasonable in relation to the threat posed (i.e., proportional, and not draconian). If the board meets this burden, the business judgment rule protections attach and the action will be upheld. Under Delaware law (including 8 Del. C. § 160), a corporation may selectively repurchase its shares, and such discrimination among stockholders is permissible if undertaken in good faith and consistent with fiduciary duties under the Unocal standard.
The Delaware Supreme Court adopted an enhanced-scrutiny standard for takeover defenses and held that Unocal's selective self-tender, which excluded Mesa from participating, was a reasonable and proportionate response to a coercive, inadequate two-tier tender offer. The Court reversed the injunction against excluding Mesa and permitted the selective self-tender to proceed.
Unocal is a cornerstone of Delaware takeover jurisprudence. It created the enhanced-scrutiny framework governing defensive measures, placing an initial justificatory burden on directors to show both a legitimate threat and a proportionate response, before regaining business judgment protection. The case legitimized selective defenses—such as discriminatory self-tenders and, by extension, reinforced later acceptance of poison pills—when supported by an informed, independent process and tailored to the specific threat (e.g., inadequate price, coercive structure, timing, or financing risk). Unocal's proportionality concept was later refined: Unitrin articulated that defenses cannot be coercive or preclusive and must fall within a range of reasonableness; Revlon imposed sale-of-control duties when the company is up for sale; QVC clarified when Revlon triggers; and Time/Paramount elaborated on long-term strategy and threat assessment. For law students, Unocal frames how to analyze board action in M&A: identify the threat, scrutinize process and independence, test for proportionality, and then determine whether business judgment deference is restored.