University:
Indiana University Bloomington
Course:
Financial and Managerial Accounting: Information for Decisions - John J. Wild
Academic year:

2024
Views:

133

Pages:

2
Author:

bratrochanter

This text outlines the legal principles governing corporate management decisions, especially concerning defensive tactics against hostile takeovers and the obligations of corporate directors under the duty of loyalty. The document reviews Delaware case law on these issues, which emphasizes the application of the Unocal standard and modifications to the business judgment rule in tender offer contexts, as well as broader director responsibilities. Key Legal Standards for Defensive Tactics: 1. Unocal Test for Defensive Tactics: In Unocal Corp. v. Mesa Petroleum Co., Delaware's Supreme Court ruled that a board must prove that it: o Believed in good faith that the takeover posed a threat to corporate policy. o Acted to protect the corporation and its shareholders, not for personal gain. o Adopted defense measures proportional to the perceived threat. The Unocal case thus requires boards to consider factors beyond mere shareholder profit, including potential impacts on other stakeholders like employees, creditors, and customers. This standard has influenced subsequent rulings, notably validating poison pill defenses in Moran v. Household Int’l and reaffirming the invalidation of certain defensive strategies, such as the lock-up option in Revlon Inc. v. MacAndrews & Forbes Holdings. 2. Revlon Duties in Sale Scenarios: Revlon established that when a board decides to sell the company or break it up, it must maximize shareholder value, typically through an auction. However, in other situations, the board retains discretion to reject offers if aligned with a long-term corporate plan. 3. Paramount v. Time Case: Here, the Delaware Supreme Court allowed the Time board to reject a hostile takeover bid by Paramount in favor of a merger with Warner. The board’s long-standing strategic plan to maintain editorial independence justified its actions under Unocal, emphasizing the board’s prerogative to consider non-financial corporate objectives. Duties of Loyalty and Conflict of Interest:  Directors and officers must avoid self-dealing and prioritize corporate welfare over personal gain. In cases of conflicting interest transactions, approval by a majority of disinterested directors or shareholders can legitimize the transaction under the business judgment rule. However, the transaction must still meet the "intrinsic fairness" standard, requiring it to be fair to the corporation from an objective viewpoint. Sarbanes-Oxley Act on Corporate Loans: The Sarbanes-Oxley Act of 2002 prohibits public companies from issuing loans to directors and executive officers to prevent misuse of corporate assets. This regulation aims to curb potential conflicts of interest and financial abuses following high-profile corporate scandals. Overall, this framework reflects a balancing act in corporate governance: enabling directors to act strategically for long-term growth and stability while holding them accountable for decisions that impact shareholder value and corporate integrity.