ABA Section of Business Law

In order to understand what's at stake in the deal-protection debate, you need to know the buzzwords used as shorthand for some of Delaware's key legal doctrines. These doctrines define the circumstances under which a court will (or will not) apply a standard of review to board actions that differs from the traditional deference to board decisions embodied by the business judgment rule.

Unocal — describes the Delaware courts' approach to defensive measures adopted by the board of directors. In Unocal v. Mesa Petroleum, 493 A.2d 946 (Del. 1985), the Delaware Supreme Court held that before courts will defer to the board's business judgment in adopting defensive measures, the board must first show that it reasonably concluded that a threat to corporate policy and effectiveness was presented, and that the defensive measures were reasonable in relation to the nature of the threat posed (that is, proportional). In Unitrin v. American General, 651 A.2d 1361 (Del. 1995), the court said that "draconian" defensive measures that have the effect of precluding stockholder choice or coercing stockholder acceptance of a management-sponsored alternative were not reasonable responses under Unocal.

Revlon — refers to the special obligations to which directors become subject when a corporation is regarded as being "for sale." In Revlon v. MacAndrews & Forbes, 506 A.2d 173 (Del. 1986), the Delaware Supreme Court held that when a corporation is for sale, the board has an obligation to act reasonably to maximize immediate stockholder value. In Paramount Communications v. QVC Networks, 637 A.2d 34 (Del. 1993), the court held that a corporation is for sale if it enters into a "change in control" transaction. A change in control generally encompasses any transaction in which a corporation owned by a "fluid aggregation of unaffiliated stockholders" is to be acquired by a "single person or entity or by a cohesive group acting together." Deal protections and other steps taken to deter competing bidders are subject to a lot more questioning when the board's primary responsibility is to maximize stockholder value.

Time or Time-Warner — used as shorthand for Delaware's "strategic merger" doctrine. In Paramount Communications v. Time, 571 A.2d 1140 (Del. 1989), the Delaware Supreme Court held that Revlon duties were not invoked by a corporation's decision to enter into a strategic merger. In general, a "strategic merger" is a stock-for-stock merger that does not involve a change in control as defined in QVC. Cases like Arnold v. Society for Savings, 650 A.2d 1270 (Del. 1994) clarified that the board's decision to enter into a strategic merger is protected by the business judgment rule.