Delaware's high court Friday dealt T. Boone Pickens Jr. and his partners a serious blow in their fight for Unocal and set an important precedent in takeover law by establishing some guidelines on the latitude managements have in fighting takeovers of their companies.
A three-judge Delaware Supreme Court panel, overturning a lower court decision, ruled that Unocal has the legal right to exclude Pickens, its biggest shareholder, from its lucrative offer to buy back 50 million Unocal shares at $72 a share, a 57% premium over the current per-share price.
Unocal's exclusion of Pickens, which some have labeled reverse greenmail, "is not so irresponsible and unjustified" when weighed in the context of fighting an "inadequate tender offer," the panel decided.
Pickens' Mesa Partners II has offered to buy 64 million Unocal shares for $54 apiece, which, when combined with the 23.7 million Unocal shares that it already owns, would give the investor group a 50.1% stake in the Los Angeles-based oil company.
The Unocal board of directors rejected the offer as "grossly inadequate" and advanced the no-Pickens offer as a key component of its strategy to repel him.
The decision is "extremely important in this case, without question," said Simon M. Lorne, a partner with the Los Angeles law firm of Munger, Tolles & Rickershauser and chairman of the business and corporate law section of the Los Angeles County Bar Assn.
While ruling in Unocal's behalf, the Delaware Supreme Court cautioned managements of other Delaware corporations fighting hostile takeovers against viewing this ruling as a broad mandate to use "any Draconian means available" to fight unwanted takeovers.
Nevertheless, securities lawyers view the ruling as a significant legal precedent, one that adds a powerful weapon to management's arsenal of takeover defenses.
"This ruling is the first major one that has addressed the issue of whether you can have offers that only go to some shareholders," said Terry Kelly, a securities and corporate law specialist with the Los Angeles firm of McKenna, Conner & Cuneo. "You may see more companies incorporating in Delaware," he said, adding that Unocal probably would have lost this skirmish in the California courts.
"It's another example of the courts saying that (managements) do have quite a bit of latitude within the business judgment rule to do quite a lot," Los Angeles attorney Lorne said. "It expands board authority and the ability of boards to respond to tender offers."
'The End of the Road'
As the Delaware court said Friday, "a hallmark of the business judgment rule is that a court will not substitute its judgment for that of the board if the latter's decision can be attributed to any rational business purpose."
Because the ruling permits companies to differentiate among shareholders, sources said some Securities & Exchange Commission officials were disturbed by the laissez faire decision and plan to review it.
The Pickens group could seek a rehearing of the ruling or appeal to a federal court if it can find a federal issue in this case. But attorneys for both sides characterized such moves as unlikely and said the legal challenge has reached "the end of the road."
Coupled with the apparent failure of Pickens' proxy fight with Unocal management--the results aren't expected until Monday but Pickens has all but conceded failure--the court ruling is viewed by both sides as a turning point in the battle for control of Unocal.
"Although Mesa has a number of strategic alternatives, certainly this has to alter the course," said a source with the Pickens team.
Officially, Unocal would say only that it feels vindicated by the ruling. It wouldn't say whether it intends to proceed with its repurchase offer.
Pickens, reached late Friday at his home in Amarillo, Tex., called the court decision "a real killer blow to the shareholders in corporate America." Fourteen hours after hearing the ruling, "I still can't believe it," he said.
As Unocal's largest shareholder, "we still have a few options," he said. "But they've left us without any rights."
Among the options, he said, are "riding it out" until the 1986 Unocal meeting or negotiating a settlement. Shark repellents in Unocal's bylaws prohibit anyone from electing directors or bringing up other business before the Unocal board except at the annual meeting. The 1985 meeting was last Monday.
Pickens has said repeatedly that he won't accept greenmail and Unocal has said it won't pay it. So, the two sides would have to strike a deal that would be financially attractive to Pickens but whose value wouldn't differ substantially from the deal the remaining shareholders would get.
It could be argued, for example, that if Unocal makes good on its $72 offer for roughly one-third of its shares, the blended value of that offer and the post-offer market price of the remaining stock would be about $48. The Pickens group needs about $49 for each of its 23.7 million shares to recover the initial cost of the stock and its expenses.
At Mesa's headquarters Friday, the mood was glum as the Mesa team worried that Unocal had found the perfect takeover defense and could engage in a game of chicken. Even if the investor group keeps sweetening its offer, Unocal could counter with a more lucrative, exclusionary offer until someone gives up. As a result, it looked increasingly likely Friday that Pickens will try to find a graceful way to bow out of the fight.
Pickens said that, while the two sides have "indirectly had some conversations" about returning to the bargaining table, he considers it unlikely that they will meet this weekend.
At Unocal's request, the two sides met on two consecutive days this week to discuss a possible settlement. The talks, attended by Pickens and Unocal Chairman Fred L. Hartley, among others, were broken off by Mesa with no settlement reached and no further talks set.
The court decision, however, "strengthens Hartley's hand to get a settlement," observed M. Craig Schwerdt, a securities analyst who is following the takeover fight for the brokerage firm of Morgan, Olmstead, Kennedy & Gardner.
Should a second round of talks fail, it is considered likely that Unocal--which has been waffling on its commitment to buy back 50 million shares even if Pickens goes away--would then proceed with its tender offer.
Unocal stock then probably would fall about $10 a share, analysts estimate, as the company takes on another $3.6 million in debt. Using Friday's closing price of $46, that would put the post-offer price at $36.
If the Pickens investor group had to sell its Unocal stock at the lower price, it would lose at least $308 million, based on the average price paid for its Unocal shares and its out-of-pocket expenses.