651 A.2d 1361 (Del. 1995)
In January 1994, James Tuerff, the president of American General, met with Richard Vie, Unitrin’s chief executive officer, to discuss American General potentially acquiring other companies including Unitrin.1 Vie replied that Unitrin had excellent prospects as an independent company and had never considered a merger, indicating that Unitrin was not for sale.2 The Unitrin Board confirmed this position at its February 1994 meeting.3
On July 12, 1994, American General sent a letter to Vie proposing a consensual merger transaction in which it would purchase all of Unitrin’s 51.8 million outstanding shares of common stock for $50.50 per share, in cash.4 The Offer price represented a 30% premium over the market price of Unitrin’s shares.5 The offer was conditioned on development of a merger agreement and regulatory approval.6 American General stated it would consider offering a higher price or tax-free alternatives if Unitrin could demonstrate additional value.7 Upon receiving the offer, the Unitrin Board’s Executive Committee engaged legal counsel and scheduled a telephonic Board meeting for July 18.8
The Unitrin Board met for seven hours on July 25, 1994, in Los Angeles with all directors present.9 Vie reviewed Unitrin’s financial condition and ongoing business strategies while Morgan Stanley presented its opinion that the offer was financially inadequate and legal counsel raised antitrust concerns about the combination.10 The Board unanimously concluded that the merger proposal was not in the best interests of Unitrin’s shareholders and voted to reject the offer.11
Vie sent a letter to American General stating that Unitrin was not for sale and had the financial capacity to pursue all avenues the Board considered appropriate.12 On August 2, 1994, American General issued a press release announcing its offer, after which trading volume and the market price of Unitrin stock increased.13 At its regularly scheduled meeting on August 3, the Unitrin Board viewed the public announcement as a hostile act designed to coerce a sale at an inadequate price.14 The Board unanimously approved a shareholder rights plan and an advance notice bylaw provision.15 Between August 2 and August 12, Unitrin issued a series of press releases asserting that its stock was undervalued and that the Board had adopted a poison pill.16
On August 11, 1994, the Unitrin Board met to consider the Repurchase Program after receiving materials from Morgan Stanley that recommended an open market stock repurchase.17 The Board voted to authorize the repurchase of up to ten million shares of its outstanding stock.18 Unitrin publicly announced the Repurchase Program on August 12, noting that the directors who owned 23 percent of the stock would not participate.19 The company’s certificate of incorporation included a supermajority voting provision.20 By noon on August 24, Morgan Stanley had purchased nearly five million shares on Unitrin’s behalf at an average price slightly above the offer price.21
American General and Unitrin shareholder plaintiffs filed suit in the Court of Chancery seeking to enjoin the Repurchase Program.22 On August 26, 1994, the Court of Chancery temporarily restrained Unitrin from making any further repurchases.23 After expedited discovery, briefing, and argument, the Court of Chancery entered a preliminary injunction on October 13, 1994, enjoining further repurchases on the ground that the Repurchase Program was a disproportionate response.24 The Court of Chancery certified an interlocutory appeal on October 24, 1994, which this Court accepted on October 27, 1994.25
Whether the Court of Chancery erred in assuming that Unitrin’s outside directors would subconsciously act contrary to their substantial financial interests as stockholders?26
Yes. The established facts establish that the five non-employee directors receive only a fixed annual fee of $30,000 with no other significant financial benefit.29 At the offering price proposed by American General the value of their stock exceeded $450 million.30 The Court of Chancery’s sua sponte determination that these stockholder directors would subconsciously reject an excellent offer unless compensated for prestige and perquisites lacks any record support and cannot be presumed under the governing legal standard.31
The Court of Chancery erred in making that assumption.32
Whether the Court of Chancery erred in holding that the Repurchase Program would materially affect the ability of an insurgent stockholder to win a proxy contest?33
Yes. The established facts show that the directors held 23 percent of Unitrin’s shares before the Repurchase Program began.36 Institutional investors owned 42 percent of Unitrin’s shares.37 American General’s own calculations demonstrate that with a 90 percent turnout a 14.9 percent bidder would need only 30.2 percent additional votes to elect directors and 35.2 percent for a merger.38 These figures confirm that a proxy contest remained viable after the directors increased their ownership to 28 percent.39
The Court of Chancery erred in that holding.40
Whether the Court of Chancery erred in finding that the plaintiffs would be irreparably harmed absent an injunction?41
Yes. The established facts reflect that the Court of Chancery granted the preliminary injunction solely because it found the Repurchase Program disproportionate under an erroneous Unocal analysis.44 Once that analysis is corrected the record supplies no independent basis for finding irreparable harm to plaintiffs from the limited open-market repurchases.45
The Court of Chancery erred in that finding.46
Whether the Court of Chancery erred in concluding that the Repurchase Program was unnecessary and disproportionate to the threat posed by American General’s offer?47
Yes. The established facts establish that the Unitrin Board reasonably perceived substantive coercion from an inadequate all-cash offer.50 The Board had already adopted a proportionate poison pill.51 It implemented a limited open-market Repurchase Program that provided liquidity to short-term holders while recognizing distinctions among shareholders.52 The Court of Chancery applied an erroneous necessity standard rather than the required range-of-reasonableness test and therefore improperly substituted its business judgment for the Board’s.53
The Court of Chancery erred in that conclusion.54
Whether the Court of Chancery’s factual findings regarding the effects of the Repurchase Program on a proxy contest were supported by the record?55
No. The established facts reveal that the Court of Chancery’s conclusion that the Repurchase Program rendered a proxy contest merely theoretical rested on the unsupported prestige-and-perquisites assumption and on two objective mathematical errors concerning voting power.58 The record instead shows institutional ownership and vote calculations confirming a viable proxy contest remained available.59
The Court of Chancery’s factual findings were not supported by the record.60