Financial History 140 Winter 2022 | Page 27

the Delaware courts embedded profit in the standard of review applicable to directors ’ actions , namely fairness . A trilogy of cases , authored by Justice Andrew G . T . Moore , made it so .
Weinberger v . UOP , Inc . was the first in the trilogy , and the first case to make explicit the connection between directors ’ duties and stock price . Minority shareholders of UOP challenged a cash-out merger between UOP and its majority owner , The Signal Companies , Inc . In determining the price that it was willing to offer the public shareholders of UOP , Signal used a feasibility study conducted by two of Signal ’ s members on the UOP board , concluding that the merger would be beneficial to Signal at any price up to $ 24 per share . The study was never disclosed to the other members of the UOP board or to UOP ’ s shareholders before they approved the merger at $ 21 per share .
The shareholders alleged that Signal and its representatives on the UOP board breached their duty of loyalty to UOP and its public shareholders , and the Delaware Supreme Court agreed , holding that the actions of Signal and its appointed directors on the UOP board were sufficient to require that the controlling shareholder and the board prove the entire fairness of the transaction . Defining fairness as including two elements : fair dealing and fair price , Moore explained that the latter includes all “ elements that affect the intrinsic or inherent value of [ the ] stock .”
Two years later , in Unocal Corp . v . Mesa Petroleum Corp ., this fairness standard was brought to bear upon analyses of boards ’ reactions to hostile tender offers . The Delaware Supreme Court held that , when defending against a hostile takeover , directors would have to demonstrate that they “ had reasonable grounds for believing that a danger to corporate policy and effectiveness existed ” and that their response was “ reasonable in relation to the threat posed ” before their actions could receive the protective presumption of the business judgment rule .
Unocal ’ s board of directors responded to Mesa ’ s hostile tender offer by engaging in a selective exchange offer for Unocal stock . Addressing the second prong , Moore noted that “ the selective exchange offer ” was reasonable because it was “ consistent with the principle that
‘ the minority stockholder shall receive the substantial equivalent in value of what he had before .’” “ This concept of fairness , while stated in the merger context , is also relevant in the area of tender offer law ,” Moore stressed . Fairness , a standard of review intended to ensure protection to the corporation and its shareholders when those in control engaged in self-dealing transactions , was linked to the maximization of stock price , and offered as a rhetoric that boards could use to justify their defensive tactics .
Revlon , Inc . v . MacAndrews & Forbes Holdings , Inc . was the last in the trilogy ; it pitted Revlon ’ s insiders , Michel Christian Bergerac , Revlon ’ s French-born CEO , and his board against the outsiders , Ronald Perelman , a third-generation Jewish American , and his banker Michael Milken with his junk bonds operation . After his attempts at a friendly purchase of Revlon were not reciprocated , Perelman announced a tender offer for Revlon ’ s shares . Revlon responded by implementing several defensive tactics , including an exchange of notes for shares of Revlon ’ s stock ; when Perelman did not back down , Revlon ’ s board negotiated a sale of Revlon to their chosen knight that , among other things , promised to support the value of the notes .
Perelman sued to bar this transaction and the measures that protected it , and the Delaware Supreme Court obliged . Noting that “ The Revlon board ’ s authorization permitting management to negotiate a merger or buyout with a third party was a recognition that the company was for sale ,” Moore stressed that such a recognition charged the directors “ with getting the best price for the stockholders at a sale of the company .”
Many have used Revlon to champion corporate law ’ s commitment to shareholder value , but Moore did not elevate profit maximization as the corporation ’ s sole purpose , even in a sale of the company . Rather , having defined fairness in Weinberger and applied it in Unocal , Moore applied it again in Revlon . Revlon ’ s directors , according to Unocal , were required to assess the threat of Perelman ’ s bid and respond , bearing in mind the two prongs of the fairness standard : fair dealing and fair price . When the directors allowed their concerns about the noteholders to cloud their judgment , they failed to meet this standard , and thus breached their duty of loyalty .
Notably , Moore did not impose an affirmative duty on directors to maximize price . Merging fairness and price , Revlon simply provided directors a tool to justify their actions and thwart challenges to their power ( including the threat of hostile takeovers ). As long as corporate directors explained their decisions as maximizing wealth for their shareholders , the Delaware courts were not likely to intervene or evaluate their actions . Profit maximization has been and will remain a rhetoric legitimating directors ’ absolute dominion .
Dalia Mitchell is a Professor of Law at the George Washington University . Her scholarship focuses on American legal history , with emphasis on the development of modern corporate law and theory . A longer version of this essay is forthcoming in the University of Pennsylvania Journal of Business Law .
Sources Bayer v . Beran , 49 N . Y . S . 2d 2 ( Sup . Ct . 1944 ).
Bruck , Connie . The Predators ’ Ball : The Inside Story of Drexel Burnham and the Rise of the Junk Bond Raiders . New York : Penguin Books . 1989 .
Dodge v . Ford Motor Co ., 204 Mich . 459 ( 1919 ).
Ho , Karen . Liquidated : An Ethnography of Wall Street . Durham , NC : Duke University Press . 2009 .
Nelson , William E . The Legalist Reformation : Law , Politics , and Ideology in New York 1920 – 1980 . Durham , NC : The University of North Carolina Press . 2001 .
Ott , Julia C . When Wall Street Met Main Street : The Quest for an Investors ’ Democracy . Cambridge , MA : Harvard University Press . 2011 .
Revlon , Inc . v . MacAndrews & Forbes Holdings , Inc ., 506 A . 2d 173 ( 1986 ).
Unocal Corp . v . Mesa Petroleum , Co ., 493 A . 2d 946 ( Del . 1985 ).
Weinberger v . UOP , Inc ., 457 A . 2d 701 ( Del . 1983 ).
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