have had legitimate concerns with the pilots' initiative, the offer provided for considerable debt, it required the pilots to "hock" the company's assets in exchange for financing, and it was likely to cause labor unrest (IAM made clear it did not want to be owned by the pilots). Nonetheless, the Board's claim that the offer was inadequate, and therefore, a threat is not factually plausible. The pilots left all aspects of their proposal open to negotiation; the proposal cannot in good faith be deemed a threat, at least until an offer based on fixed terms is made. Bass, 552 A.2d at 1241.
Neither can United show that the anti-takeover provisions were adopted in good faith and on an informed basis. United never considered sections B(1)(b) and C in conjunction with the pilots' proposal to determine the precise effect of the provisions on the proposal and on the shareholders. The Directors approved those provisions with little or no consideration and upon the misinformation that they were in compliance with federal law. Mills Acquisition Corp. v. Macmillan, Inc. [Current Transfer Binder] Fed. Sec. L. Rep. (CCH) P 94,401, 92,599 (Del. May 3, 1989) (invalidating lock-up agreement which prematurely ended action, court held that "where the decision of directors granting the lock up option was not informed or was induced by fiduciary breaches . . . they cannot survive"); Aronson v. Lewis, 473 A.2d 805, 813 (Del. 1984) (the business judgment rule does not protect directors who make no business decision); EAC Industries, Inc. v. Frantz Mfg. Co., C.A. No. 8003, slip op. (Del. Ch. June 28, 1985) (Board approval of issuance of ESOP shares invalidated because the Board was uninformed that management's intention was to dilute the shares of the acquiror), aff'd 501 A.2d 401 (Del. 1985).
United alleges that the Board had no duty to examine the provisions in the labor agreement because pursuant to a long-time United policy the Directors delegated all labor arrangements. Stephen E. Tallent, a labor specialist from the law firm of Gibson, Dunn & Crutcher, was hired by Frank A. Olson, the then President and CEO of United, specifically for the purpose of negotiating labor agreements. The law is clear, although a board may delegate its duties, it may not avoid its responsibilities. Mills Acquisition, supra, at 92,579. Olson says he never recognized the relationship between the provisions, approved summarily by the Board, and the pilots' proposal. Only the one takeover proposal was outstanding at the time and the effect of at least section C on the pilots' proposal was evident on the face of the provision. If Olson's claim were true, we need go no further to conclude that the Board was uninformed in adopting the measures which barred the pilots' proposal. The Board can neither rely on misinformation, Mills, supra, at 92,597, nor the fact that they did not consider themselves to be defending against a takeover when pursuing the challenged action, Shamrock Holdings, Inc. v Polaroid Corp., 559 A.2d 257, [1988-89 Transfer Binder]Fed. Sec. L. Rep. para. 94,176, 91,619 (Del. Ch. 1989), to justify the failure to undertake a Unocal scrutiny of their business action.
If the corporation adopts measures which function like anti-takeover devices, the board must make an informed determination before they are adopted. Bass, 552 A.2d at 1239. If managers are permitted to stop anti-takeover defenses any time the managers' jobs are at issue, shareholders would rarely be able to realize the value of their stock. Even if United acted in the context of a labor agreement, corporate law principles require the Board to satisfy Unocal. Here, the Board adopted potent defensive measures, which thwarted the pilots' deal without any deliberation over the provisions themselves, the effect of the provisions on the pilots' proposal or the provisions in relation to their fiduciary duties to the shareholders. Thus the first prong of Unocal cannot be satisfied.
Even if all the Directors needed to do was assert that the pilots' plan was inadequate in order to adopt a defense strategy, sections B(1)(b) and C would certainly violate the second prong of Unocal. Under this inquiry, United must show that their response is reasonable in relation to the threat posed. Unocal, 493 A.2d at 955. Sections B(1)(b) and C, because they are incorporated in the collective bargaining agreement, cannot be unilaterally revoked by the Board. Generally defensive measures are included as part of the articles of incorporation or by-laws of the corporation and will be redeemable by board or shareholder action. The provisions here are irredeemable, and, thus, fatal to any transaction to which they may apply, regardless of how attractive an offer may be. ALPA v. UAL Corp., 874 F.2d 439, 441 (7th Cir. 1989) ("in at least one respect they [sections B(1)(b) and C] are more lethal than poison pills: the board of directors cannot unilaterally rescind them, no matter how attractive the tender offer"). Thus, the measures adopted by United are far more potent than defensive measures approved by Delaware courts as reasonable responses to a threat.
Finally, defendants argue they need not satisfy Unocal because the Board can satisfy the intrinsic fairness test, the highest scrutiny of all. Defendants cite Shamrock Holdings, a recent Delaware case, as evidence that the courts are abandoning Unocal in favor of applying the fairness test to determine if the directors acted fairly with respect to the shareholders. Shamrock Holdings, supra, at 91,620. Defendants maintain that the criteria they adopted which a bidder would need to satisfy before obtaining Board approval and their subsequent refusal to negotiate with the pilots who did not satisfy these requirements, was intrinsically fair to shareholders and in their best interest.
The Unocal test's second prong supposes that the Board's response is fair to shareholders and respects share value maximization considerations. This is essentially the analysis the Shamrock Holdings court pursued. In any event, a defense measure which is irredeemable, regardless of the offer tendered, is manifestly unfair to shareholders and inconsistent with the United Board's duty of care. Shamrock Holdings, supra, at 91,622 (the court reasoned that because of the ESOP, the challenged anti-takeover defense did not block a successful takeover, but merely "meant the acquiror had to have the employees confidence . . .", it was fair to shareholders); Interco, 551 A.2d at 798 (expressing doubt that there is ever a case where it is "appropriate for a board of directors to permanently foreclose their shareholders from accepting a noncoercive offer"). Even if the pilots could comply with the Board's requirements for an acquiror to obtain Board approval (and assuming these were permissible restrictions) sections B(1)(b) and C now foreclose the pilots' plan. We are satisfied that United would not satisfy the intrinsic fairness text.
The Unocal decision advanced a heightened scrutiny for business decisions made when a board of directors, struggling for control of the corporation, may have interests adverse to those of the shareholders. As takeovers become more prevalent and anti-takeover arsenals more sophisticated, some courts have indicated a reluctance to apply a pure Unocal analysis even where the corporate decision was made against the background of a takeover. E.g., TW Services, supra (Board decision not to redeem previously developed defensive devices in response to merger proposal was fair to shareholders); Shamrock Holdings, supra (failure by Board to make adequately informed decision or to pursue the Unocal analysis will not necessarily invalidate a fair decision to adopt an ESOP which had some defensive purposes). In some cases, for example, where a board merely reaffirms, in light of a pending takeover, a business decision made previously, the dangers Unocal protects against may not be as apparent. In these cases Unocal may be too onerous a burden for directors to carry and inconsistent with the Board's obligation to run the affairs of the corporation and preserve the entity. We need not decide here, however, whether the Unocal inquiry should be refined with respect to current corporate governance. United's business judgment -- to implement anti-takeover measures in response to the pilots' proposal -- is precisely the type of business decision which is suspect and where shareholders must have their interest protected by heightened judicial inquiry. The Directors neither made an informed decision nor engaged in any deliberative process before approving sections B(1)(b) and C of the labor agreement. And because those were defensive measures, such a failure by the Board invalidates the provisions.
In summary, for the reasons given above, we find that 1) Cockrell is a fair and adequate representative of the shareholders, 2) the validity of sections B(1)(b) and C under Delaware law is not a moot issue, and 3) the United Board violated their obligations under Delaware law by failing to follow proper procedures when adopting anti-takeover measures. Thus sections B(1)(b) and C violate Delaware law and are invalid.
Date: July 7, 1989