A. Gilchrist Sparks, III (argued), and Kenneth J. Nachbar of Morris, Nichols, Arsht & Tunnell, Wilmington, James R. Martin and Mitchell A. Karlan of Gibson, Dunn & Crutcher and Paul, Hastings, Janofsky & Walker, Los Angeles, Cal., of counsel, for appellant.

Charles F. Richards, Jr. (argued), Samuel A. Nolen, and Gregory P. Williams of Richards, Layton & Finger, Wilmington, for appellees.

Before McNEILLY and MOORE, JJ., and TAYLOR, Judge (Sitting by designation pursuant to Del. Const., Art. 4, § 12.)

[949] MOORE, Justice.

We confront an issue of first impression in Delaware — the validity of a corporation's self-tender for its own shares which excludes from participation a stockholder making a hostile tender offer for the company's stock.

The Court of Chancery granted a preliminary injunction to the plaintiffs, Mesa Petroleum Co., Mesa Asset Co., Mesa Partners II, and Mesa Eastern, Inc. (collectively "Mesa")^[1], enjoining an exchange offer of the defendant, Unocal Corporation (Unocal) for its own stock. The trial court concluded that a selective exchange offer, excluding Mesa, was legally impermissible. We cannot agree with such a blanket rule. The factual findings of the Vice Chancellor, fully supported by the record, establish that Unocal's board, consisting of a majority of independent directors, acted in good faith, and after reasonable investigation found that Mesa's tender offer was both inadequate and coercive. Under the circumstances the board had both the power and duty to oppose a bid it perceived to be harmful to the corporate enterprise. On this record we are satisfied that the device Unocal adopted is reasonable in relation to the threat posed, and that the board acted in the proper exercise of sound business judgment. We will not substitute our views for those of the board if the latter's decision can be "attributed to any rational business purpose." Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717, 720 (1971). Accordingly, we reverse the decision of the Court of Chancery and order the preliminary injunction vacated.^[2]

I.

The factual background of this matter bears a significant relationship to its ultimate outcome.

On April 8, 1985, Mesa, the owner of approximately 13% of Unocal's stock, commenced a two-tier "front loaded" cash tender offer for 64 million shares, or approximately 37%, of Unocal's outstanding stock at a price of $54 per share. The "back-end" was designed to eliminate the remaining publicly held shares by an exchange of securities purportedly worth $54 per share. However, pursuant to an order entered by the United States District Court for the Central District of California on April 26, 1985, Mesa issued a supplemental proxy statement to Unocal's stockholders disclosing that the securities offered in the second-step merger would be highly subordinated, and that Unocal's capitalization would differ significantly from its present [950] structure. Unocal has rather aptly termed such securities "junk bonds".^[3]

Unocal's board consists of eight independent outside directors and six insiders. It met on April 13, 1985, to consider the Mesa tender offer. Thirteen directors were present, and the meeting lasted nine and one-half hours. The directors were given no agenda or written materials prior to the session. However, detailed presentations were made by legal counsel regarding the board's obligations under both Delaware corporate law and the federal securities laws. The board then received a presentation from Peter Sachs on behalf of Goldman Sachs & Co. (Goldman Sachs) and Dillon, Read & Co. (Dillon Read) discussing the bases for their opinions that the Mesa proposal was wholly inadequate. Mr. Sachs opined that the minimum cash value that could be expected from a sale or orderly liquidation for 100% of Unocal's stock was in excess of $60 per share. In making his presentation, Mr. Sachs showed slides outlining the valuation techniques used by the financial advisors, and others, depicting recent business combinations in the oil and gas industry. The Court of Chancery found that the Sachs presentation was designed to apprise the directors of the scope of the analyses performed rather than the facts and numbers used in reaching the conclusion that Mesa's tender offer price was inadequate.

Mr. Sachs also presented various defensive strategies available to the board if it concluded that Mesa's two-step tender offer was inadequate and should be opposed. One of the devices outlined was a self-tender by Unocal for its own stock with a reasonable price range of $70 to $75 per share. The cost of such a proposal would cause the company to incur $6.1-6.5 billion of additional debt, and a presentation was made informing the board of Unocal's ability to handle it. The directors were told that the primary effect of this obligation would be to reduce exploratory drilling, but that the company would nonetheless remain a viable entity.

The eight outside directors, comprising a clear majority of the thirteen members present, then met separately with Unocal's financial advisors and attorneys. Thereafter, they unanimously agreed to advise the board that it should reject Mesa's tender offer as inadequate, and that Unocal should pursue a self-tender to provide the stockholders with a fairly priced alternative to the Mesa proposal. The board then reconvened and unanimously adopted a resolution rejecting as grossly inadequate Mesa's tender offer. Despite the nine and one-half hour length of the meeting, no formal decision was made on the proposed defensive self-tender.

On April 15, the board met again with four of the directors present by telephone [951] and one member still absent.^[4] This session lasted two hours. Unocal's Vice President of Finance and its Assistant General Counsel made a detailed presentation of the proposed terms of the exchange offer. A price range between $70 and $80 per share was considered, and ultimately the directors agreed upon $72. The board was also advised about the debt securities that would be issued, and the necessity of placing restrictive covenants upon certain corporate activities until the obligations were paid. The board's decisions were made in reliance on the advice of its investment bankers, including the terms and conditions upon which the securities were to be issued. Based upon this advice, and the board's own deliberations, the directors unanimously approved the exchange offer. Their resolution provided that if Mesa acquired 64 million shares of Unocal stock through its own offer (the Mesa Purchase Condition), Unocal would buy the remaining 49% outstanding for an exchange of debt securities having an aggregate par value of $72 per share. The board resolution also stated that the offer would be subject to other conditions that had been described to the board at the meeting, or which were deemed necessary by Unocal's officers, including the exclusion of Mesa from the proposal (the Mesa exclusion). Any such conditions were required to be in accordance with the "purport and intent" of the offer.

Unocal's exchange offer was commenced on April 17, 1985, and Mesa promptly challenged it by filing this suit in the Court of Chancery. On April 22, the Unocal board met again and was advised by Goldman Sachs and Dillon Read to waive the Mesa Purchase Condition as to 50 million shares. This recommendation was in response to a perceived concern of the shareholders that, if shares were tendered to Unocal, no shares would be purchased by either offeror. The directors were also advised that they should tender their own Unocal stock into the exchange offer as a mark of their confidence in it.

Another focus of the board was the Mesa exclusion. Legal counsel advised that under Delaware law Mesa could only be excluded for what the directors reasonably believed to be a valid corporate purpose. The directors' discussion centered on the objective of adequately compensating shareholders at the "back-end" of Mesa's proposal, which the latter would finance with "junk bonds". To include Mesa would defeat that goal, because under the proration aspect of the exchange offer (49%) every Mesa share accepted by Unocal would displace one held by another stockholder. Further, if Mesa were permitted to tender to Unocal, the latter would in effect be financing Mesa's own inadequate proposal.

On April 24, 1985 Unocal issued a supplement to the exchange offer describing the partial waiver of the Mesa Purchase Condition. On May 1, 1985, in another supplement, Unocal extended the withdrawal, proration and expiration dates of its exchange offer to May 17, 1985.

Meanwhile, on April 22, 1985, Mesa amended its complaint in this action to challenge the Mesa exclusion. A preliminary injunction hearing was scheduled for May 8, 1985. However, on April 23, 1985, Mesa moved for a temporary restraining order in response to Unocal's announcement that it was partially waiving the Mesa Purchase Condition. After expedited briefing, the Court of Chancery heard Mesa's motion on April 26.

[952] On April 29, 1985, the Vice Chancellor temporarily restrained Unocal from proceeding with the exchange offer unless it included Mesa. The trial court recognized that directors could oppose, and attempt to defeat, a hostile takeover which they considered adverse to the best interests of the corporation. However, the Vice Chancellor decided that in a selective purchase of the company's stock, the corporation bears the burden of showing: (1) a valid corporate purpose, and (2) that the transaction was fair to all of the stockholders, including those excluded.

Unocal immediately sought certification of an interlocutory appeal to this Court pursuant to Supreme Court Rule 42(b). On May 1, 1985, the Vice Chancellor declined to certify the appeal on the grounds that the decision granting a temporary restraining order did not decide a legal issue of first impression, and was not a matter to which the decisions of the Court of Chancery were in conflict.

However, in an Order dated May 2, 1985, this Court ruled that the Chancery decision was clearly determinative of substantive rights of the parties, and in fact decided the main question of law before the Vice Chancellor, which was indeed a question of first impression. We therefore concluded that the temporary restraining order was an appealable decision. However, because the Court of Chancery was scheduled to hold a preliminary injunction hearing on May 8 at which there would be an enlarged record on the various issues, action on the interlocutory appeal was deferred pending an outcome of those proceedings.

In deferring action on the interlocutory appeal, we noted that on the record before us we could not determine whether the parties had articulated certain issues which the Vice Chancellor should have an opportunity to consider in the first instance. These included the following:

a) Does the directors' duty of care to the corporation extend to protecting the corporate enterprise in good faith from perceived depredations of others, including persons who may own stock in the company?

b) Have one or more of the plaintiffs, their affiliates, or persons acting in concert with them, either in dealing with Unocal or others, demonstrated a pattern of conduct sufficient to justify a reasonable inference by defendants that a principle objective of the plaintiffs is to achieve selective treatment for themselves by the repurchase of their Unocal shares at a substantial premium?

c) If so, may the directors of Unocal in the proper exercise of business judgment employ the exchange offer to protect the corporation and its shareholders from such tactics? See Pogostin v. Rice, Del. Supr., 480 A.2d 619 (1984).

d) If it is determined that the purpose of the exchange offer was not illegal as a matter of law, have the directors of Unocal carried their burden of showing that they acted in good faith? See Martin v. American Potash & Chemical Corp., 33 Del.Ch. 234, 92 A.2d 295 at 302.

After the May 8 hearing the Vice Chancellor issued an unreported opinion on May 13, 1985 granting Mesa a preliminary injunction. Specifically, the trial court noted that "[t]he parties basically agree that the directors' duty of care extends to protecting the corporation from perceived harm whether it be from third parties or shareholders." The trial court also concluded in response to the second inquiry in the Supreme Court's May 2 order, that "[a]lthough the facts, ... do not appear to be sufficient to prove that Mesa's principle objective is to be bought off at a substantial premium, they do justify a reasonable inference to the same effect."

As to the third and fourth questions posed by this Court, the Vice Chancellor stated that they "appear to raise the more fundamental issue of whether directors owe fiduciary duties to shareholders who they perceive to be acting contrary to the best interests of the corporation as a whole." While determining that the directors' decision to oppose Mesa's tender [953] offer was made in a good faith belief that the Mesa proposal was inadequate, the court stated that the business judgment rule does not apply to a selective exchange offer such as this.

On May 13, 1985 the Court of Chancery certified this interlocutory appeal to us as a question of first impression, and we accepted it on May 14. The entire matter was scheduled on an expedited basis.^[5]

II.

The issues we address involve these fundamental questions: Did the Unocal board have the power and duty to oppose a takeover threat it reasonably perceived to be harmful to the corporate enterprise, and if so, is its action here entitled to the protection of the business judgment rule?

Mesa contends that the discriminatory exchange offer violates the fiduciary duties Unocal owes it. Mesa argues that because of the Mesa exclusion the business judgment rule is inapplicable, because the directors by tendering their own shares will derive a financial benefit that is not available to all Unocal stockholders. Thus, it is Mesa's ultimate contention that Unocal cannot establish that the exchange offer is fair to all shareholders, and argues that the Court of Chancery was correct in concluding that Unocal was unable to meet this burden.

Unocal answers that it does not owe a duty of "fairness" to Mesa, given the facts here. Specifically, Unocal contends that its board of directors reasonably and in good faith concluded that Mesa's $54 two-tier tender offer was coercive and inadequate, and that Mesa sought selective treatment for itself. Furthermore, Unocal argues that the board's approval of the exchange offer was made in good faith, on an informed basis, and in the exercise of due care. Under these circumstances, Unocal contends that its directors properly employed this device to protect the company and its stockholders from Mesa's harmful tactics.

III.

We begin with the basic issue of the power of a board of directors of a Delaware corporation to adopt a defensive measure of this type. Absent such authority, all other questions are moot. Neither issues of fairness nor business judgment are pertinent without the basic underpinning of a board's legal power to act.

The board has a large reservoir of authority upon which to draw. Its duties and responsibilities proceed from the inherent powers conferred by 8 Del.C. § 141(a), respecting management of the corporation's "business and affairs".^[6] Additionally, the powers here being exercised derive from 8 Del.C. § 160(a), conferring broad authority upon a corporation to deal in its own stock.^[7] From this it is now well established that in the acquisition of its shares a [954] Delaware corporation may deal selectively with its stockholders, provided the directors have not acted out of a sole or primary purpose to entrench themselves in office. Cheff v. Mathes, Del.Supr., 199 A.2d 548, 554 (1964); Bennett v. Propp, Del.Supr., 187 A.2d 405, 408 (1962); Martin v. American Potash & Chemical Corporation, Del.Supr., 92 A.2d 295, 302 (1952); Kaplan v. Goldsamt, Del.Ch., 380 A.2d 556, 568-569 (1977); Kors v. Carey, Del. Ch., 158 A.2d 136, 140-141 (1960).

Finally, the board's power to act derives from its fundamental duty and obligation to protect the corporate enterprise, which includes stockholders, from harm reasonably perceived, irrespective of its source. See e.g. Panter v. Marshall Field & Co., 646 F.2d 271, 297 (7th Cir.1981); Crouse-Hinds Co. v. Internorth, Inc., 634 F.2d 690, 704 (2d Cir.1980); Heit v. Baird, 567 F.2d 1157, 1161 (1st Cir.1977); Cheff v. Mathes, 199 A.2d at 556; Martin v. American Potash & Chemical Corp., 92 A.2d at 302; Kaplan v. Goldsamt, 380 A.2d at 568-69; Kors v. Carey, 158 A.2d at 141; Northwest Industries, Inc. v. B.F. Goodrich Co., 301 F.Supp. 706, 712 (M.D.Ill. 1969). Thus, we are satisfied that in the broad context of corporate governance, including issues of fundamental corporate change, a board of directors is not a passive instrumentality.^[8]

Given the foregoing principles, we turn to the standards by which director action is to be measured. In Pogostin v. Rice, Del.Supr., 480 A.2d 619 (1984), we held that the business judgment rule, including the standards by which director conduct is judged, is applicable in the context of a takeover. Id. at 627. The business judgment rule is a "presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." Aronson v. Lewis, Del.Supr., 473 A.2d 805, 812 (1984) (citations omitted). 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." Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717, 720 (1971).

When a board addresses a pending takeover bid it has an obligation to determine whether the offer is in the best interests of the corporation and its shareholders. In that respect a board's duty is no different from any other responsibility it shoulders, and its decisions should be no less entitled to the respect they otherwise would be accorded in the realm of business judgment.^[9] See also Johnson v. Trueblood, 629 F.2d 287, 292-293 (3d Cir.1980). There are, however, certain caveats to a proper exercise of this function. Because of the omnipresent specter that a board may be acting primarily in its own interests, rather than those of the corporation and its shareholders, there is an enhanced duty which calls for judicial examination at the threshold before the protections of the business judgment rule may be conferred.

This Court has long recognized that:

[955] We must bear in mind the inherent danger in the purchase of shares with corporate funds to remove a threat to corporate policy when a threat to control is involved. The directors are of necessity confronted with a conflict of interest, and an objective decision is difficult.

Bennett v. Propp, Del.Supr., 187 A.2d 405, 409 (1962). In the face of this inherent conflict directors must show that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed because of another person's stock ownership. Cheff v. Mathes, 199 A.2d at 554-55. However, they satisfy that burden "by showing good faith and reasonable investigation...." Id. at 555. Furthermore, such proof is materially enhanced, as here, by the approval of a board comprised of a majority of outside independent directors who have acted in accordance with the foregoing standards. See Aronson v. Lewis, 473 A.2d at 812, 815; Puma v. Marriott, Del.Ch., 283 A.2d 693, 695 (1971); Panter v. Marshall Field & Co., 646 F.2d 271, 295 (7th Cir.1981).

IV.

A.

In the board's exercise of corporate power to forestall a takeover bid our analysis begins with the basic principle that corporate directors have a fiduciary duty to act in the best interests of the corporation's stockholders. Guth v. Loft, Inc., Del. Supr., 5 A.2d 503, 510 (1939). As we have noted, their duty of care extends to protecting the corporation and its owners from perceived harm whether a threat originates from third parties or other shareholders.^[10] But such powers are not absolute. A corporation does not have unbridled discretion to defeat any perceived threat by any Draconian means available.

The restriction placed upon a selective stock repurchase is that the directors may not have acted solely or primarily out of a desire to perpetuate themselves in office. See Cheff v. Mathes, 199 A.2d at 556; Kors v. Carey, 158 A.2d at 140. Of course, to this is added the further caveat that inequitable action may not be taken under the guise of law. Schnell v. Chris-Craft Industries, Inc., Del.Supr., 285 A.2d 437, 439 (1971). The standard of proof established in Cheff v. Mathes and discussed supra at page 16, is designed to ensure that a defensive measure to thwart or impede a takeover is indeed motivated by a good faith concern for the welfare of the corporation and its stockholders, which in all circumstances must be free of any fraud or other misconduct. Cheff v. Mathes, 199 A.2d at 554-55. However, this does not end the inquiry.

B.

A further aspect is the element of balance. If a defensive measure is to come within the ambit of the business judgment rule, it must be reasonable in relation to the threat posed. This entails an analysis by the directors of the nature of the takeover bid and its effect on the corporate enterprise. Examples of such concerns may include: inadequacy of the price offered, nature and timing of the offer, questions of illegality, the impact on "constituencies" other than shareholders (i.e., creditors, customers, employees, and perhaps even the community generally), the risk of nonconsummation, and the quality of securities being offered in the exchange. See Lipton and Brownstein, Takeover Responses and Directors' Responsibilities: An Update, p. 7, ABA National Institute on the Dynamics of Corporate Control (December 8, 1983). While not a controlling factor, it also seems to us that a board may reasonably consider the basic stockholder [956] interests at stake, including those of short term speculators, whose actions may have fueled the coercive aspect of the offer at the expense of the long term investor.^[11] Here, the threat posed was viewed by the Unocal board as a grossly inadequate two-tier coercive tender offer coupled with the threat of greenmail.

Specifically, the Unocal directors had concluded that the value of Unocal was substantially above the $54 per share offered in cash at the front end. Furthermore, they determined that the subordinated securities to be exchanged in Mesa's announced squeeze out of the remaining shareholders in the "back-end" merger were "junk bonds" worth far less than $54. It is now well recognized that such offers are a classic coercive measure designed to stampede shareholders into tendering at the first tier, even if the price is inadequate, out of fear of what they will receive at the back end of the transaction.^[12] Wholly beyond the coercive aspect of an inadequate two-tier tender offer, the threat was posed by a corporate raider with a national reputation as a "greenmailer".^[13]

In adopting the selective exchange offer, the board stated that its objective was either to defeat the inadequate Mesa offer or, should the offer still succeed, provide the 49% of its stockholders, who would otherwise be forced to accept "junk bonds", with $72 worth of senior debt. We find that both purposes are valid.

However, such efforts would have been thwarted by Mesa's participation in the exchange offer. First, if Mesa could tender its shares, Unocal would effectively be subsidizing the former's continuing effort to buy Unocal stock at $54 per share. Second, Mesa could not, by definition, fit within the class of shareholders being protected from its own coercive and inadequate tender offer.

Thus, we are satisfied that the selective exchange offer is reasonably related to the threats posed. It is consistent with the principle that "the minority stockholder shall receive the substantial equivalent in value of what he had before." Sterling v. Mayflower Hotel Corp., Del.Supr., 93 A.2d 107, 114 (1952). See also Rosenblatt v. Getty Oil Co., Del.Supr., 493 A.2d 929, 940 (1985). This concept of fairness, while stated in the merger context, is also relevant [957] in the area of tender offer law. Thus, the board's decision to offer what it determined to be the fair value of the corporation to the 49% of its shareholders, who would otherwise be forced to accept highly subordinated "junk bonds", is reasonable and consistent with the directors' duty to ensure that the minority stockholders receive equal value for their shares.

V.

Mesa contends that it is unlawful, and the trial court agreed, for a corporation to discriminate in this fashion against one shareholder. It argues correctly that no case has ever sanctioned a device that precludes a raider from sharing in a benefit available to all other stockholders. However, as we have noted earlier, the principle of selective stock repurchases by a Delaware corporation is neither unknown nor unauthorized. Cheff v. Mathes, 199 A.2d at 554; Bennett v. Propp, 187 A.2d at 408; Martin v. American Potash & Chemical Corporation, 92 A.2d at 302; Kaplan v. Goldsamt, 380 A.2d at 568-569; Kors v. Carey, 158 A.2d at 140-141; 8 Del. C. § 160. The only difference is that heretofore the approved transaction was the payment of "greenmail" to a raider or dissident posing a threat to the corporate enterprise. All other stockholders were denied such favored treatment, and given Mesa's past history of greenmail, its claims here are rather ironic.

However, our corporate law is not static. It must grow and develop in response to, indeed in anticipation of, evolving concepts and needs. Merely because the General Corporation Law is silent as to a specific matter does not mean that it is prohibited. See Providence and Worcester Co. v. Baker, Del.Supr., 378 A.2d 121, 123-124 (1977). In the days when Cheff, Bennett, Martin and Kors were decided, the tender offer, while not an unknown device, was virtually unused, and little was known of such methods as two-tier "front-end" loaded offers with their coercive effects. Then, the favored attack of a raider was stock acquisition followed by a proxy contest. Various defensive tactics, which provided no benefit whatever to the raider, evolved. Thus, the use of corporate funds by management to counter a proxy battle was approved. Hall v. Trans-Lux Daylight Picture Screen Corp., Del.Supr., 171 A. 226 (1934); Hibbert v. Hollywood Park, Inc., Del.Supr., 457 A.2d 339 (1983). Litigation, supported by corporate funds, aimed at the raider has long been a popular device.

More recently, as the sophistication of both raiders and targets has developed, a host of other defensive measures to counter such ever mounting threats has evolved and received judicial sanction. These include defensive charter amendments and other devices bearing some rather exotic, but apt, names: Crown Jewel, White Knight, Pac Man, and Golden Parachute. Each has highly selective features, the object of which is to deter or defeat the raider.

Thus, while the exchange offer is a form of selective treatment, given the nature of the threat posed here the response is neither unlawful nor unreasonable. If the board of directors is disinterested, has acted in good faith and with due care, its decision in the absence of an abuse of discretion will be upheld as a proper exercise of business judgment.

To this Mesa responds that the board is not disinterested, because the directors are receiving a benefit from the tender of their own shares, which because of the Mesa exclusion, does not devolve upon all stockholders equally. See Aronson v. Lewis, Del.Supr., 473 A.2d 805, 812 (1984). However, Mesa concedes that if the exclusion is valid, then the directors and all other stockholders share the same benefit. The answer of course is that the exclusion is valid, and the directors' participation in the exchange offer does not rise to the level of a disqualifying interest. The excellent discussion in Johnson v. Trueblood, 629 F.2d at 292-293, of the use of the business judgment rule in takeover contests also seems pertinent here.

[958] Nor does this become an "interested" director transaction merely because certain board members are large stockholders. As this Court has previously noted, that fact alone does not create a disqualifying "personal pecuniary interest" to defeat the operation of the business judgment rule. Cheff v. Mathes, 199 A.2d at 554.

Mesa also argues that the exclusion permits the directors to abdicate the fiduciary duties they owe it. However, that is not so. The board continues to owe Mesa the duties of due care and loyalty. But in the face of the destructive threat Mesa's tender offer was perceived to pose, the board had a supervening duty to protect the corporate enterprise, which includes the other shareholders, from threatened harm.

Mesa contends that the basis of this action is punitive, and solely in response to the exercise of its rights of corporate democracy.^[14] Nothing precludes Mesa, as a stockholder, from acting in its own self-interest. See e.g., DuPont v. DuPont, 251 Fed. 937 (D.Del.1918), aff'd 256 Fed. 129 (3d Cir.1918); Ringling Bros.-Barnum & Bailey Combined Shows, Inc. v. Ringling, Del.Supr., 53 A.2d 441, 447 (1947); Heil v. Standard Gas & Electric Co., Del.Ch., 151 A. 303, 304 (1930). But see, Allied Chemical & Dye Corp. v. Steel & Tube Co. of America, Del.Ch., 120 A. 486, 491 (1923) (majority shareholder owes a fiduciary duty to the minority shareholders). However, Mesa, while pursuing its own interests, has acted in a manner which a board consisting of a majority of independent directors has reasonably determined to be contrary to the best interests of Unocal and its other shareholders. In this situation, there is no support in Delaware law for the proposition that, when responding to a perceived harm, a corporation must guarantee a benefit to a stockholder who is deliberately provoking the danger being addressed. There is no obligation of self-sacrifice by a corporation and its shareholders in the face of such a challenge.

Here, the Court of Chancery specifically found that the "directors' decision [to oppose the Mesa tender offer] was made in the good faith belief that the Mesa tender offer is inadequate." Given our standard of review under Levitt v. Bouvier, Del. Supr., 287 A.2d 671, 673 (1972), and Application of Delaware Racing Association, Del.Supr., 213 A.2d 203, 207 (1965), we are satisfied that Unocal's board has met its burden of proof. Cheff v. Mathes, 199 A.2d at 555.

VI.

In conclusion, there was directorial power to oppose the Mesa tender offer, and to undertake a selective stock exchange made in good faith and upon a reasonable investigation pursuant to a clear duty to protect the corporate enterprise. Further, the selective stock repurchase plan chosen by Unocal is reasonable in relation to the threat that the board rationally and reasonably believed was posed by Mesa's inadequate and coercive two-tier tender offer. Under those circumstances the board's action is entitled to be measured by the standards of the business judgment rule. Thus, unless it is shown by a preponderance of the evidence that the directors' decisions were primarily based on perpetuating themselves in office, or some other breach of fiduciary duty such as fraud, overreaching, lack of good faith, or being uninformed, a Court will not substitute its judgment for that of the board.

In this case that protection is not lost merely because Unocal's directors have [959] tendered their shares in the exchange offer. Given the validity of the Mesa exclusion, they are receiving a benefit shared generally by all other stockholders except Mesa. In this circumstance the test of Aronson v. Lewis, 473 A.2d at 812, is satisfied. See also Cheff v. Mathes, 199 A.2d at 554. If the stockholders are displeased with the action of their elected representatives, the powers of corporate democracy are at their disposal to turn the board out. Aronson v. Lewis, Del.Supr., 473 A.2d 805, 811 (1984). See also 8 Del.C. §§ 141(k) and 211(b).

With the Court of Chancery's findings that the exchange offer was based on the board's good faith belief that the Mesa offer was inadequate, that the board's action was informed and taken with due care, that Mesa's prior activities justify a reasonable inference that its principle objective was greenmail, and implicitly, that the substance of the offer itself was reasonable and fair to the corporation and its stockholders if Mesa were included, we cannot say that the Unocal directors have acted in such a manner as to have passed an "unintelligent and unadvised judgment". Mitchell v. Highland-Western Glass Co., Del. Ch., 167 A. 831, 833 (1933). The decision of the Court of Chancery is therefore REVERSED, and the preliminary injunction is VACATED.

[1] T. Boone Pickens, Jr., is President and Chairman of the Board of Mesa Petroleum and President of Mesa Asset and controls the related Mesa entities.

[2] This appeal was heard on an expedited basis in light of the pending Mesa tender offer and Unocal exchange offer. We announced our decision to reverse in an oral ruling in open court on May 17, 1985 with the further statement that this opinion would follow shortly thereafter. See infra n. 5.

[3]Mesa's May 3, 1985 supplement to its proxy statement states:

(i) following the Offer, the Purchasers would seek to effect a merger of Unocal and Mesa Eastern or an affiliate of Mesa Eastern (the "Merger") in which the remaining Shares would be acquired for a combination of subordinated debt securities and preferred stock; (ii) the securities to be received by Unocal shareholders in the Merger would be subordinated to $2,400 million of debt securities of Mesa Eastern, indebtedness incurred to refinance up to $1,000 million of bank debt which was incurred by affiliates of Mesa Partners II to purchase Shares and to pay related interest and expenses and all then-existing debt of Unocal; (iii) the corporation surviving the Merger would be responsible for the payment of all securities of Mesa Eastern (including any such securities issued pursuant to the Merger) and the indebtedness referred to in item (ii) above, and such securities and indebtedness would be repaid out of funds generated by the operations of Unocal; (iv) the indebtedness incurred in the Offer and the Merger would result in Unocal being much more highly leveraged, and the capitalization of the corporation surviving the Merger would differ significantly from that of Unocal at present; and (v) in their analyses of cash flows provided by operations of Unocal which would be available to service and repay securities and other obligations of the corporation surviving the Merger, the Purchasers assumed that the capital expenditures and expenditures for exploration of such corporation would be significantly reduced.

[4] Under Delaware law directors may participate in a board meeting by telephone. Thus, 8 Del.C.§ 141(i) provides:

Unless otherwise restricted by the certificate of incorporation or by-laws, members of the board of directors of any corporation, or any committee designated by the board, may participate in a meeting of such board or committee by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting pursuant to this subsection shall constitute presence in person at such meeting.

[5] Such expedition was required by the fact that if Unocal's exchange offer was permitted to proceed, the proration date for the shares entitled to be exchanged was May 17, 1985, while Mesa's tender offer expired on May 23. After acceptance of this appeal on May 14, we received excellent briefs from the parties, heard argument on May 16 and announced our oral ruling in open court at 9:00 a.m. on May 17. See supra n. 2.

[6] The general grant of power to a board of directors is conferred by 8 Del.C.§ 141(a), which provides:

(a) The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation. (Emphasis added)

[7] This power under 8 Del.C.§ 160(a), with certain exceptions not pertinent here, is as follows:

(a) Every corporation may purchase, redeem, receive, take or otherwise acquire, own and hold, sell, lend, exchange, transfer or otherwise dispose of, pledge, use and otherwise deal in and with its own shares; ...

[8] Even in the traditional areas of fundamental corporate change, i.e., charter, amendments [8 Del.C. § 242(b)], mergers [8 Del.C. §§ 251(b), 252(c), 253(a), and 254(d)], sale of assets [8 Del.C. § 271(a)], and dissolution [8 Del.C. § 275(a)], director action is a prerequisite to the ultimate disposition of such matters. See also, Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 888 (1985).

[9] This is a subject of intense debate among practicing members of the bar and legal scholars. Excellent examples of these contending views are: Block & Miller, The Responsibilities and Obligations of Corporate Directors in Takeover Contests, 11 Sec.Reg. L.J. 44 (1983); Easterbrook & Fischel, Takeover Bids, Defensive Tactics, and Shareholders' Welfare, 36 Bus.Law. 1733 (1981); Easterbrook & Fischel, The Proper Role of a Target's Management In Responding to a Tender Offer, 94 Harv.L.Rev. 1161 (1981). Herzel, Schmidt & Davis, Why Corporate Directors Have a Right To Resist Tender Offers, 3 Corp.L.Rev. 107 (1980); Lipton, Takeover Bids in the Target's Boardroom, 35 Bus.Law. 101 (1979).

[10] It has been suggested that a board's response to a takeover threat should be a passive one. Easterbrook & Fischel, supra, 36 Bus.Law. at 1750. However, that clearly is not the law of Delaware, and as the proponents of this rule of passivity readily concede, it has not been adopted either by courts or state legislatures. Easterbrook & Fischel, supra, 94 Harv.L.Rev. at 1194.

[11] There has been much debate respecting such stockholder interests. One rather impressive study indicates that the stock of over 50 percent of target companies, who resisted hostile takeovers, later traded at higher market prices than the rejected offer price, or were acquired after the tender offer was defeated by another company at a price higher than the offer price. See Lipton, supra 35 Bus.Law. at 106-109, 132-133. Moreover, an update by Kidder Peabody & Company of this study, involving the stock prices of target companies that have defeated hostile tender offers during the period from 1973 to 1982 demonstrates that in a majority of cases the target's shareholders benefited from the defeat. The stock of 81% of the targets studied has, since the tender offer, sold at prices higher than the tender offer price. When adjusted for the time value of money, the figure is 64%. See Lipton & Brownstein, supra ABA Institute at 10. The thesis being that this strongly supports application of the business judgment rule in response to takeover threats. There is, however, a rather vehement contrary view. See Easterbrook & Fischel, supra 36 Bus.Law. at 1739-1745.

[12] For a discussion of the coercive nature of a two-tier tender offer see e.g., Brudney & Chirelstein, Fair Shares in Corporate Mergers and Takeovers, 88 Harv.L.Rev. 297, 337 (1974); Finkelstein, Antitakeover Protection Against Two-Tier and Partial Tender Offers: The Validity of Fair Price, Mandatory Bid, and Flip-Over Provisions Under Delaware Law, 11 Sec.Reg. L.J. 291, 293 (1984); Lipton, supra, 35 Bus.Law at 113-14; Note, Protecting Shareholders Against Partial and Two-Tiered Takeovers: The Poison Pill Preferred, 97 Harv.L.Rev. 1964, 1966 (1984).

[13] The term "greenmail" refers to the practice of buying out a takeover bidder's stock at a premium that is not available to other shareholders in order to prevent the takeover. The Chancery Court noted that "Mesa has made tremendous profits from its takeover activities although in the past few years it has not been successful in acquiring any of the target companies on an unfriendly basis." Moreover, the trial court specifically found that the actions of the Unocal board were taken in good faith to eliminate both the inadequacies of the tender offer and to forestall the payment of "greenmail".

[14] This seems to be the underlying basis of the trial court's principal reliance on the unreported Chancery decision of Fisher v. Moltz, Del.Ch. No. 6068 (1979), published in 5 Del.J.Corp.L. 530 (1980). However, the facts in Fisher are thoroughly distinguishable. There, a corporation offered to repurchase the shares of its former employees, except those of the plaintiffs, merely because the latter were then engaged in lawful competition with the company. No threat to the enterprise was posed, and at best it can be said that the exclusion was motivated by pique instead of a rational corporate purpose.

William Prickett (argued) and James P. Dalle Pazze, of Prickett, Jones, Elliott, Kristol & Schnee, Wilmington, and Ivan Irwin, Jr. and Brett A. Ringle, of Shank, Irwin, Conant & Williamson, Dallas, Tex., of counsel, for plaintiffs below, appellants.

Robert K. Payson (argued) and Peter M. Sieglaff of Potter, Anderson & Corroon, Wilmington, for individual defendants below, appellees.

Lewis S. Black, Jr., A. Gilchrist Sparks, III (argued) and Richard D. Allen, of Morris, Nichols, Arsht & Tunnell, Wilmington, for Trans Union Corp., Marmon Group, Inc., GL Corp. and New T. Co., defendants below, appellees.

Before HERRMANN, C.J., and McNEILLY, HORSEY, MOORE and CHRISTIE, JJ., constituting the Court en banc.

[863] HORSEY, Justice (for the majority):

This appeal from the Court of Chancery involves a class action brought by shareholders of the defendant Trans Union Corporation ("Trans Union" or "the Company"), originally seeking rescission of a cash-out merger of Trans Union into the defendant New T Company ("New T"), a wholly-owned subsidiary of the defendant, Marmon Group, Inc. ("Marmon"). Alternate relief in the form of damages is sought against the defendant members of the Board of Directors of Trans Union, [864] New T, and Jay A. Pritzker and Robert A. Pritzker, owners of Marmon.^[1]

Following trial, the former Chancellor granted judgment for the defendant directors by unreported letter opinion dated July 6, 1982.^[2] Judgment was based on two findings: (1) that the Board of Directors had acted in an informed manner so as to be entitled to protection of the business judgment rule in approving the cash-out merger; and (2) that the shareholder vote approving the merger should not be set aside because the stockholders had been "fairly informed" by the Board of Directors before voting thereon. The plaintiffs appeal.

Speaking for the majority of the Court, we conclude that both rulings of the Court of Chancery are clearly erroneous. Therefore, we reverse and direct that judgment be entered in favor of the plaintiffs and against the defendant directors for the fair value of the plaintiffs' stockholdings in Trans Union, in accordance with Weinberger v. UOP, Inc., Del.Supr., 457 A.2d 701 (1983).^[3]

We hold: (1) that the Board's decision, reached September 20, 1980, to approve the proposed cash-out merger was not the product of an informed business judgment; (2) that the Board's subsequent efforts to amend the Merger Agreement and take other curative action were ineffectual, both legally and factually; and (3) that the Board did not deal with complete candor with the stockholders by failing to disclose all material facts, which they knew or should have known, before securing the stockholders' approval of the merger.

I.

The nature of this case requires a detailed factual statement. The following facts are essentially uncontradicted:^[4]

-A-

Trans Union was a publicly-traded, diversified holding company, the principal earnings of which were generated by its railcar leasing business. During the period here involved, the Company had a cash flow of hundreds of millions of dollars annually. However, the Company had difficulty in generating sufficient taxable income to offset increasingly large investment tax credits (ITCs). Accelerated depreciation deductions had decreased available taxable income against which to offset accumulating ITCs. The Company took these deductions, despite their effect on usable ITCs, because the rental price in the railcar leasing market had already impounded the purported tax savings.

In the late 1970's, together with other capital-intensive firms, Trans Union lobbied in Congress to have ITCs refundable in cash to firms which could not fully utilize the credit. During the summer of 1980, defendant Jerome W. Van Gorkom, Trans Union's Chairman and Chief Executive Officer, [865] testified and lobbied in Congress for refundability of ITCs and against further accelerated depreciation. By the end of August, Van Gorkom was convinced that Congress would neither accept the refundability concept nor curtail further accelerated depreciation.

Beginning in the late 1960's, and continuing through the 1970's, Trans Union pursued a program of acquiring small companies in order to increase available taxable income. In July 1980, Trans Union Management prepared the annual revision of the Company's Five Year Forecast. This report was presented to the Board of Directors at its July, 1980 meeting. The report projected an annual income growth of about 20%. The report also concluded that Trans Union would have about $195 million in spare cash between 1980 and 1985, "with the surplus growing rapidly from 1982 onward." The report referred to the ITC situation as a "nagging problem" and, given that problem, the leasing company "would still appear to be constrained to a tax breakeven." The report then listed four alternative uses of the projected 1982-1985 equity surplus: (1) stock repurchase; (2) dividend increases; (3) a major acquisition program; and (4) combinations of the above. The sale of Trans Union was not among the alternatives. The report emphasized that, despite the overall surplus, the operation of the Company would consume all available equity for the next several years, and concluded: "As a result, we have sufficient time to fully develop our course of action."

-B-

On August 27, 1980, Van Gorkom met with Senior Management of Trans Union. Van Gorkom reported on his lobbying efforts in Washington and his desire to find a solution to the tax credit problem more permanent than a continued program of acquisitions. Various alternatives were suggested and discussed preliminarily, including the sale of Trans Union to a company with a large amount of taxable income.

Donald Romans, Chief Financial Officer of Trans Union, stated that his department had done a "very brief bit of work on the possibility of a leveraged buy-out." This work had been prompted by a media article which Romans had seen regarding a leveraged buy-out by management. The work consisted of a "preliminary study" of the cash which could be generated by the Company if it participated in a leveraged buyout. As Romans stated, this analysis "was very first and rough cut at seeing whether a cash flow would support what might be considered a high price for this type of transaction."

On September 5, at another Senior Management meeting which Van Gorkom attended, Romans again brought up the idea of a leveraged buy-out as a "possible strategic alternative" to the Company's acquisition program. Romans and Bruce S. Chelberg, President and Chief Operating Officer of Trans Union, had been working on the matter in preparation for the meeting. According to Romans: They did not "come up" with a price for the Company. They merely "ran the numbers" at $50 a share and at $60 a share with the "rough form" of their cash figures at the time. Their "figures indicated that $50 would be very easy to do but $60 would be very difficult to do under those figures." This work did not purport to establish a fair price for either the Company or 100% of the stock. It was intended to determine the cash flow needed to service the debt that would "probably" be incurred in a leveraged buyout, based on "rough calculations" without "any benefit of experts to identify what the limits were to that, and so forth." These computations were not considered extensive and no conclusion was reached.

At this meeting, Van Gorkom stated that he would be willing to take $55 per share for his own 75,000 shares. He vetoed the suggestion of a leveraged buy-out by Management, however, as involving a potential conflict of interest for Management. Van Gorkom, a certified public accountant and lawyer, had been an officer of Trans Union [866] for 24 years, its Chief Executive Officer for more than 17 years, and Chairman of its Board for 2 years. It is noteworthy in this connection that he was then approaching 65 years of age and mandatory retirement.

For several days following the September 5 meeting, Van Gorkom pondered the idea of a sale. He had participated in many acquisitions as a manager and director of Trans Union and as a director of other companies. He was familiar with acquisition procedures, valuation methods, and negotiations; and he privately considered the pros and cons of whether Trans Union should seek a privately or publicly-held purchaser.

Van Gorkom decided to meet with Jay A. Pritzker, a well-known corporate takeover specialist and a social acquaintance. However, rather than approaching Pritzker simply to determine his interest in acquiring Trans Union, Van Gorkom assembled a proposed per share price for sale of the Company and a financing structure by which to accomplish the sale. Van Gorkom did so without consulting either his Board or any members of Senior Management except one: Carl Peterson, Trans Union's Controller. Telling Peterson that he wanted no other person on his staff to know what he was doing, but without telling him why, Van Gorkom directed Peterson to calculate the feasibility of a leveraged buy-out at an assumed price per share of $55. Apart from the Company's historic stock market price,^[5] and Van Gorkom's long association with Trans Union, the record is devoid of any competent evidence that $55 represented the per share intrinsic value of the Company.

Having thus chosen the $55 figure, based solely on the availability of a leveraged buy-out, Van Gorkom multiplied the price per share by the number of shares outstanding to reach a total value of the Company of $690 million. Van Gorkom told Peterson to use this $690 million figure and to assume a $200 million equity contribution by the buyer. Based on these assumptions, Van Gorkom directed Peterson to determine whether the debt portion of the purchase price could be paid off in five years or less if financed by Trans Union's cash flow as projected in the Five Year Forecast, and by the sale of certain weaker divisions identified in a study done for Trans Union by the Boston Consulting Group ("BCG study"). Peterson reported that, of the purchase price, approximately $50-80 million would remain outstanding after five years. Van Gorkom was disappointed, but decided to meet with Pritzker nevertheless.

Van Gorkom arranged a meeting with Pritzker at the latter's home on Saturday, September 13, 1980. Van Gorkom prefaced his presentation by stating to Pritzker: "Now as far as you are concerned, I can, I think, show how you can pay a substantial premium over the present stock price and pay off most of the loan in the first five years. * * * If you could pay $55 for this Company, here is a way in which I think it can be financed."

Van Gorkom then reviewed with Pritzker his calculations based upon his proposed price of $55 per share. Although Pritzker mentioned $50 as a more attractive figure, no other price was mentioned. However, Van Gorkom stated that to be sure that $55 was the best price obtainable, Trans Union should be free to accept any better offer. Pritzker demurred, stating that his organization would serve as a "stalking horse" for an "auction contest" only if Trans Union would permit Pritzker to buy 1,750,000 shares of Trans Union stock at market price which Pritzker could then sell to any higher bidder. After further discussion on this point, Pritzker told Van Gorkom that he would give him a more definite reaction soon.

[867] On Monday, September 15, Pritzker advised Van Gorkom that he was interested in the $55 cash-out merger proposal and requested more information on Trans Union. Van Gorkom agreed to meet privately with Pritzker, accompanied by Peterson, Chelberg, and Michael Carpenter, Trans Union's consultant from the Boston Consulting Group. The meetings took place on September 16 and 17. Van Gorkom was "astounded that events were moving with such amazing rapidity."

On Thursday, September 18, Van Gorkom met again with Pritzker. At that time, Van Gorkom knew that Pritzker intended to make a cash-out merger offer at Van Gorkom's proposed $55 per share. Pritzker instructed his attorney, a merger and acquisition specialist, to begin drafting merger documents. There was no further discussion of the $55 price. However, the number of shares of Trans Union's treasury stock to be offered to Pritzker was negotiated down to one million shares; the price was set at $38-75 cents above the per share price at the close of the market on September 19. At this point, Pritzker insisted that the Trans Union Board act on his merger proposal within the next three days, stating to Van Gorkom: "We have to have a decision by no later than Sunday [evening, September 21] before the opening of the English stock exchange on Monday morning." Pritzker's lawyer was then instructed to draft the merger documents, to be reviewed by Van Gorkom's lawyer, "sometimes with discussion and sometimes not, in the haste to get it finished."

On Friday, September 19, Van Gorkom, Chelberg, and Pritzker consulted with Trans Union's lead bank regarding the financing of Pritzker's purchase of Trans Union. The bank indicated that it could form a syndicate of banks that would finance the transaction. On the same day, Van Gorkom retained James Brennan, Esquire, to advise Trans Union on the legal aspects of the merger. Van Gorkom did not consult with William Browder, a Vice-President and director of Trans Union and former head of its legal department, or with William Moore, then the head of Trans Union's legal staff.

On Friday, September 19, Van Gorkom called a special meeting of the Trans Union Board for noon the following day. He also called a meeting of the Company's Senior Management to convene at 11:00 a.m., prior to the meeting of the Board. No one, except Chelberg and Peterson, was told the purpose of the meetings. Van Gorkom did not invite Trans Union's investment banker, Salomon Brothers or its Chicago-based partner, to attend.

Of those present at the Senior Management meeting on September 20, only Chelberg and Peterson had prior knowledge of Pritzker's offer. Van Gorkom disclosed the offer and described its terms, but he furnished no copies of the proposed Merger Agreement. Romans announced that his department had done a second study which showed that, for a leveraged buy-out, the price range for Trans Union stock was between $55 and $65 per share. Van Gorkom neither saw the study nor asked Romans to make it available for the Board meeting.

Senior Management's reaction to the Pritzker proposal was completely negative. No member of Management, except Chelberg and Peterson, supported the proposal. Romans objected to the price as being too low;^[6] he was critical of the timing and suggested that consideration should be given to the adverse tax consequences of an all-cash deal for low-basis shareholders; and he took the position that the agreement to sell Pritzker one million newly-issued shares at market price would inhibit other offers, as would the prohibitions against soliciting bids and furnishing inside information [868] to other bidders. Romans argued that the Pritzker proposal was a "lock up" and amounted to "an agreed merger as opposed to an offer." Nevertheless, Van Gorkom proceeded to the Board meeting as scheduled without further delay.

Ten directors served on the Trans Union Board, five inside (defendants Bonser, O'Boyle, Browder, Chelberg, and Van Gorkom) and five outside (defendants Wallis, Johnson, Lanterman, Morgan and Reneker). All directors were present at the meeting, except O'Boyle who was ill. Of the outside directors, four were corporate chief executive officers and one was the former Dean of the University of Chicago Business School. None was an investment banker or trained financial analyst. All members of the Board were well informed about the Company and its operations as a going concern. They were familiar with the current financial condition of the Company, as well as operating and earnings projections reported in the recent Five Year Forecast. The Board generally received regular and detailed reports and was kept abreast of the accumulated investment tax credit and accelerated depreciation problem.

Van Gorkom began the Special Meeting of the Board with a twenty-minute oral presentation. Copies of the proposed Merger Agreement were delivered too late for study before or during the meeting.^[7] He reviewed the Company's ITC and depreciation problems and the efforts theretofore made to solve them. He discussed his initial meeting with Pritzker and his motivation in arranging that meeting. Van Gorkom did not disclose to the Board, however, the methodology by which he alone had arrived at the $55 figure, or the fact that he first proposed the $55 price in his negotiations with Pritzker.

Van Gorkom outlined the terms of the Pritzker offer as follows: Pritzker would pay $55 in cash for all outstanding shares of Trans Union stock upon completion of which Trans Union would be merged into New T Company, a subsidiary wholly-owned by Pritzker and formed to implement the merger; for a period of 90 days, Trans Union could receive, but could not actively solicit, competing offers; the offer had to be acted on by the next evening, Sunday, September 21; Trans Union could only furnish to competing bidders published information, and not proprietary information; the offer was subject to Pritzker obtaining the necessary financing by October 10, 1980; if the financing contingency were met or waived by Pritzker, Trans Union was required to sell to Pritzker one million newly-issued shares of Trans Union at $38 per share.

Van Gorkom took the position that putting Trans Union "up for auction" through a 90-day market test would validate a decision by the Board that $55 was a fair price. He told the Board that the "free market will have an opportunity to judge whether $55 is a fair price." Van Gorkom framed the decision before the Board not as whether $55 per share was the highest price that could be obtained, but as whether the $55 price was a fair price that the stockholders should be given the opportunity to accept or reject.^[8]

Attorney Brennan advised the members of the Board that they might be sued if they failed to accept the offer and that a fairness opinion was not required as a matter of law.

Romans attended the meeting as chief financial officer of the Company. He told the Board that he had not been involved in the negotiations with Pritzker and knew nothing about the merger proposal until [869] the morning of the meeting; that his studies did not indicate either a fair price for the stock or a valuation of the Company; that he did not see his role as directly addressing the fairness issue; and that he and his people "were trying to search for ways to justify a price in connection with such a [leveraged buy-out] transaction, rather than to say what the shares are worth." Romans testified:

I told the Board that the study ran the numbers at 50 and 60, and then the subsequent study at 55 and 65, and that was not the same thing as saying that I have a valuation of the company at X dollars. But it was a way — a first step towards reaching that conclusion.

Romans told the Board that, in his opinion, $55 was "in the range of a fair price," but "at the beginning of the range."

Chelberg, Trans Union's President, supported Van Gorkom's presentation and representations. He testified that he "participated to make sure that the Board members collectively were clear on the details of the agreement or offer from Pritzker;" that he "participated in the discussion with Mr. Brennan, inquiring of him about the necessity for valuation opinions in spite of the way in which this particular offer was couched;" and that he was otherwise actively involved in supporting the positions being taken by Van Gorkom before the Board about "the necessity to act immediately on this offer," and about "the adequacy of the $55 and the question of how that would be tested."

The Board meeting of September 20 lasted about two hours. Based solely upon Van Gorkom's oral presentation, Chelberg's supporting representations, Romans' oral statement, Brennan's legal advice, and their knowledge of the market history of the Company's stock,^[9] the directors approved the proposed Merger Agreement. However, the Board later claimed to have attached two conditions to its acceptance: (1) that Trans Union reserved the right to accept any better offer that was made during the market test period; and (2) that Trans Union could share its proprietary information with any other potential bidders. While the Board now claims to have reserved the right to accept any better offer received after the announcement of the Pritzker agreement (even though the minutes of the meeting do not reflect this), it is undisputed that the Board did not reserve the right to actively solicit alternate offers.

The Merger Agreement was executed by Van Gorkom during the evening of September 20 at a formal social event that he hosted for the opening of the Chicago Lyric Opera. Neither he nor any other director read the agreement prior to its signing and delivery to Pritzker.

* * *

On Monday, September 22, the Company issued a press release announcing that Trans Union had entered into a "definitive" Merger Agreement with an affiliate of the Marmon Group, Inc., a Pritzker holding company. Within 10 days of the public announcement, dissent among Senior Management over the merger had become widespread. Faced with threatened resignations of key officers, Van Gorkom met with Pritzker who agreed to several modifications of the Agreement. Pritzker was willing to do so provided that Van Gorkom could persuade the dissidents to remain on the Company payroll for at least six months after consummation of the merger.

Van Gorkom reconvened the Board on October 8 and secured the directors' approval of the proposed amendments — sight unseen. The Board also authorized the employment of Salomon Brothers, its investment [870] banker, to solicit other offers for Trans Union during the proposed "market test" period.

The next day, October 9, Trans Union issued a press release announcing: (1) that Pritzker had obtained "the financing commitments necessary to consummate" the merger with Trans Union; (2) that Pritzker had acquired one million shares of Trans Union common stock at $38 per share; (3) that Trans Union was now permitted to actively seek other offers and had retained Salomon Brothers for that purpose; and (4) that if a more favorable offer were not received before February 1, 1981, Trans Union's shareholders would thereafter meet to vote on the Pritzker proposal.

It was not until the following day, October 10, that the actual amendments to the Merger Agreement were prepared by Pritzker and delivered to Van Gorkom for execution. As will be seen, the amendments were considerably at variance with Van Gorkom's representations of the amendments to the Board on October 8; and the amendments placed serious constraints on Trans Union's ability to negotiate a better deal and withdraw from the Pritzker agreement. Nevertheless, Van Gorkom proceeded to execute what became the October 10 amendments to the Merger Agreement without conferring further with the Board members and apparently without comprehending the actual implications of the amendments.

* * *

Salomon Brothers' efforts over a three-month period from October 21 to January 21 produced only one serious suitor for Trans Union — General Electric Credit Corporation ("GE Credit"), a subsidiary of the General Electric Company. However, GE Credit was unwilling to make an offer for Trans Union unless Trans Union first rescinded its Merger Agreement with Pritzker. When Pritzker refused, GE Credit terminated further discussions with Trans Union in early January.

In the meantime, in early December, the investment firm of Kohlberg, Kravis, Roberts & Co. ("KKR"), the only other concern to make a firm offer for Trans Union, withdrew its offer under circumstances hereinafter detailed.

On December 19, this litigation was commenced and, within four weeks, the plaintiffs had deposed eight of the ten directors of Trans Union, including Van Gorkom, Chelberg and Romans, its Chief Financial Officer. On January 21, Management's Proxy Statement for the February 10 shareholder meeting was mailed to Trans Union's stockholders. On January 26, Trans Union's Board met and, after a lengthy meeting, voted to proceed with the Pritzker merger. The Board also approved for mailing, "on or about January 27," a Supplement to its Proxy Statement. The Supplement purportedly set forth all information relevant to the Pritzker Merger Agreement, which had not been divulged in the first Proxy Statement.

* * *

On February 10, the stockholders of Trans Union approved the Pritzker merger proposal. Of the outstanding shares, 69.9% were voted in favor of the merger; 7.25% were voted against the merger; and 22.85% were not voted.

II.

We turn to the issue of the application of the business judgment rule to the September 20 meeting of the Board.

The Court of Chancery concluded from the evidence that the Board of Directors' approval of the Pritzker merger proposal fell within the protection of the business judgment rule. The Court found that the Board had given sufficient time and attention to the transaction, since the directors had considered the Pritzker proposal on three different occasions, on September 20, and on October 8, 1980 and finally on January 26, 1981. On that basis, the Court reasoned that the Board had acquired, over the four-month period, sufficient information to reach an informed business judgment [871] on the cash-out merger proposal. The Court ruled:

... that given the market value of Trans Union's stock, the business acumen of the members of the board of Trans Union, the substantial premium over market offered by the Pritzkers and the ultimate effect on the merger price provided by the prospect of other bids for the stock in question, that the board of directors of Trans Union did not act recklessly or improvidently in determining on a course of action which they believed to be in the best interest of the stockholders of Trans Union.

The Court of Chancery made but one finding; i.e., that the Board's conduct over the entire period from September 20 through January 26, 1981 was not reckless or improvident, but informed. This ultimate conclusion was premised upon three subordinate findings, one explicit and two implied. The Court's explicit finding was that Trans Union's Board was "free to turn down the Pritzker proposal" not only on September 20 but also on October 8, 1980 and on January 26, 1981. The Court's implied, subordinate findings were: (1) that no legally binding agreement was reached by the parties until January 26; and (2) that if a higher offer were to be forthcoming, the market test would have produced it,^[10] and Trans Union would have been contractually free to accept such higher offer. However, the Court offered no factual basis or legal support for any of these findings; and the record compels contrary conclusions.

This Court's standard of review of the findings of fact reached by the Trial Court following full evidentiary hearing is as stated in Levitt v. Bouvier, Del.Supr., 287 A.2d 671, 673 (1972):

[In an appeal of this nature] this court has the authority to review the entire record and to make its own findings of fact in a proper case. In exercising our power of review, we have the duty to review the sufficiency of the evidence and to test the propriety of the findings below. We do not, however, ignore the findings made by the trial judge. If they are sufficiently supported by the record and are the product of an orderly and logical deductive process, in the exercise of judicial restraint we accept them, even though independently we might have reached opposite conclusions. It is only when the findings below are clearly wrong and the doing of justice requires their overturn that we are free to make contradictory findings of fact.

Applying that standard and governing principles of law to the record and the decision of the Trial Court, we conclude that the Court's ultimate finding that the Board's conduct was not "reckless or imprudent" is contrary to the record and not the product of a logical and deductive reasoning process.

The plaintiffs contend that the Court of Chancery erred as a matter of law by exonerating the defendant directors under the business judgment rule without first determining whether the rule's threshold condition of "due care and prudence" was satisfied. The plaintiffs assert that the Trial Court found the defendant directors to have reached an informed business judgment on the basis of "extraneous considerations and events that occurred after September 20, 1980." The defendants deny that the Trial Court committed legal error in relying upon post-September 20, 1980 events and the directors' later acquired knowledge. The defendants further submit that their decision to accept $55 per share was informed because: (1) they were "highly qualified;" (2) they were "well-informed;" and (3) they deliberated over the "proposal" not once but three times. On [872] essentially this evidence and under our standard of review, the defendants assert that affirmance is required. We must disagree.

Under Delaware law, the business judgment rule is the offspring of the fundamental principle, codified in 8 Del.C. § 141(a), that the business and affairs of a Delaware corporation are managed by or under its board of directors.^[11]Pogostin v. Rice, Del.Supr., 480 A.2d 619, 624 (1984); Aronson v. Lewis, Del.Supr., 473 A.2d 805, 811 (1984); Zapata Corp. v. Maldonado, Del.Supr., 430 A.2d 779, 782 (1981). In carrying out their managerial roles, directors are charged with an unyielding fiduciary duty to the corporation and its shareholders. Loft, Inc. v. Guth, Del.Ch., 2 A.2d 225 (1938), aff'd, Del.Supr., 5 A.2d 503 (1939). The business judgment rule exists to protect and promote the full and free exercise of the managerial power granted to Delaware directors. Zapata Corp. v. Maldonado, supra at 782. The rule itself "is a presumption that in making a business decision, the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." Aronson, supra at 812. Thus, the party attacking a board decision as uninformed must rebut the presumption that its business judgment was an informed one. Id.

The determination of whether a business judgment is an informed one turns on whether the directors have informed themselves "prior to making a business decision, of all material information reasonably available to them." Id.^[12]

Under the business judgment rule there is no protection for directors who have made "an unintelligent or unadvised judgment." Mitchell v. Highland-Western Glass, Del.Ch., 167 A. 831, 833 (1933). A director's duty to inform himself in preparation for a decision derives from the fiduciary capacity in which he serves the corporation and its stockholders. Lutz v. Boas, Del.Ch., 171 A.2d 381 (1961). See Weinberger v. UOP, Inc., supra; Guth v. Loft, supra. Since a director is vested with the responsibility for the management of the affairs of the corporation, he must execute that duty with the recognition that he acts on behalf of others. Such obligation does not tolerate faithlessness or self-dealing. But fulfillment of the fiduciary function requires more than the mere absence of bad faith or fraud. Representation of the financial interests of others imposes on a director an affirmative duty to protect those interests and to proceed with a critical eye in assessing information of the type and under the circumstances present here. See Lutz v. Boas, supra; Guth v. Loft, supra at 510. Compare Donovan v. Cunningham, 5th Cir., 716 F.2d 1455, 1467 (1983); Doyle v. Union Insurance Company, Neb.Supr., 277 N.W.2d 36 (1979); Continental Securities Co. v. Belmont, N.Y. App., 99 N.E. 138, 141 (1912).

Thus, a director's duty to exercise an informed business judgment is in [873] the nature of a duty of care, as distinguished from a duty of loyalty. Here, there were no allegations of fraud, bad faith, or self-dealing, or proof thereof. Hence, it is presumed that the directors reached their business judgment in good faith, Allaun v. Consolidated Oil Co., Del. Ch., 147 A. 257 (1929), and considerations of motive are irrelevant to the issue before us.

The standard of care applicable to a director's duty of care has also been recently restated by this Court. In Aronson, supra, we stated:

While the Delaware cases use a variety of terms to describe the applicable standard of care, our analysis satisfies us that under the business judgment rule director liability is predicated upon concepts of gross negligence. (footnote omitted)

473 A.2d at 812.

We again confirm that view. We think the concept of gross negligence is also the proper standard for determining whether a business judgment reached by a board of directors was an informed one.^[13]

In the specific context of a proposed merger of domestic corporations, a director has a duty under 8 Del.C. 251(b),^[14] along with his fellow directors, to act in an informed and deliberate manner in determining whether to approve an agreement of merger before submitting the proposal to the stockholders. Certainly in the merger context, a director may not abdicate that duty by leaving to the shareholders alone the decision to approve or disapprove the agreement. See Beard v. Elster, Del.Supr., 160 A.2d 731, 737 (1960). Only an agreement of merger satisfying the requirements of 8 Del.C. § 251(b) may be submitted to the shareholders under § 251(c). See generally Aronson v. Lewis, supra at 811-13; see also Pogostin v. Rice, supra.

It is against those standards that the conduct of the directors of Trans Union must be tested, as a matter of law and as a matter of fact, regarding their exercise of an informed business judgment in voting to approve the Pritzker merger proposal.

III.

The defendants argue that the determination of whether their decision to accept $55 per share for Trans Union represented an informed business judgment requires consideration, not only of that which they knew and learned on September 20, but also of that which they subsequently learned and did over the following four-month [874] period before the shareholders met to vote on the proposal in February, 1981. The defendants thereby seek to reduce the significance of their action on September 20 and to widen the time frame for determining whether their decision to accept the Pritzker proposal was an informed one. Thus, the defendants contend that what the directors did and learned subsequent to September 20 and through January 26, 1981, was properly taken into account by the Trial Court in determining whether the Board's judgment was an informed one. We disagree with this post hoc approach.

The issue of whether the directors reached an informed decision to "sell" the Company on September 20, 1980 must be determined only upon the basis of the information then reasonably available to the directors and relevant to their decision to accept the Pritzker merger proposal. This is not to say that the directors were precluded from altering their original plan of action, had they done so in an informed manner. What we do say is that the question of whether the directors reached an informed business judgment in agreeing to sell the Company, pursuant to the terms of the September 20 Agreement presents, in reality, two questions: (A) whether the directors reached an informed business judgment on September 20, 1980; and (B) if they did not, whether the directors' actions taken subsequent to September 20 were adequate to cure any infirmity in their action taken on September 20. We first consider the directors' September 20 action in terms of their reaching an informed business judgment.

-A-

On the record before us, we must conclude that the Board of Directors did not reach an informed business judgment on September 20, 1980 in voting to "sell" the Company for $55 per share pursuant to the Pritzker cash-out merger proposal. Our reasons, in summary, are as follows:

The directors (1) did not adequately inform themselves as to Van Gorkom's role in forcing the "sale" of the Company and in establishing the per share purchase price; (2) were uninformed as to the intrinsic value of the Company; and (3) given these circumstances, at a minimum, were grossly negligent in approving the "sale" of the Company upon two hours' consideration, without prior notice, and without the exigency of a crisis or emergency.

As has been noted, the Board based its September 20 decision to approve the cash-out merger primarily on Van Gorkom's representations. None of the directors, other than Van Gorkom and Chelberg, had any prior knowledge that the purpose of the meeting was to propose a cash-out merger of Trans Union. No members of Senior Management were present, other than Chelberg, Romans and Peterson; and the latter two had only learned of the proposed sale an hour earlier. Both general counsel Moore and former general counsel Browder attended the meeting, but were equally uninformed as to the purpose of the meeting and the documents to be acted upon.

Without any documents before them concerning the proposed transaction, the members of the Board were required to rely entirely upon Van Gorkom's 20-minute oral presentation of the proposal. No written summary of the terms of the merger was presented; the directors were given no documentation to support the adequacy of $55 price per share for sale of the Company; and the Board had before it nothing more than Van Gorkom's statement of his understanding of the substance of an agreement which he admittedly had never read, nor which any member of the Board had ever seen.

Under 8 Del.C. § 141(e),^[15] "directors are fully protected in relying in [875] good faith on reports made by officers." Michelson v. Duncan, Del.Ch., 386 A.2d 1144, 1156 (1978); aff'd in part and rev'd in part on other grounds, Del.Supr., 407 A.2d 211 (1979). See also Graham v. Allis-Chalmers Mfg. Co., Del.Supr., 188 A.2d 125, 130 (1963); Prince v. Bensinger, Del. Ch., 244 A.2d 89, 94 (1968). The term "report" has been liberally construed to include reports of informal personal investigations by corporate officers, Cheff v. Mathes, Del.Supr., 199 A.2d 548, 556 (1964). However, there is no evidence that any "report," as defined under § 141(e), concerning the Pritzker proposal, was presented to the Board on September 20.^[16] Van Gorkom's oral presentation of his understanding of the terms of the proposed Merger Agreement, which he had not seen, and Romans' brief oral statement of his preliminary study regarding the feasibility of a leveraged buy-out of Trans Union do not qualify as § 141(e) "reports" for these reasons: The former lacked substance because Van Gorkom was basically uninformed as to the essential provisions of the very document about which he was talking. Romans' statement was irrelevant to the issues before the Board since it did not purport to be a valuation study. At a minimum for a report to enjoy the status conferred by § 141(e), it must be pertinent to the subject matter upon which a board is called to act, and otherwise be entitled to good faith, not blind, reliance. Considering all of the surrounding circumstances — hastily calling the meeting without prior notice of its subject matter, the proposed sale of the Company without any prior consideration of the issue or necessity therefor, the urgent time constraints imposed by Pritzker, and the total absence of any documentation whatsoever — the directors were duty bound to make reasonable inquiry of Van Gorkom and Romans, and if they had done so, the inadequacy of that upon which they now claim to have relied would have been apparent.

The defendants rely on the following factors to sustain the Trial Court's finding that the Board's decision was an informed one: (1) the magnitude of the premium or spread between the $55 Pritzker offering price and Trans Union's current market price of $38 per share; (2) the amendment of the Agreement as submitted on September 20 to permit the Board to accept any better offer during the "market test" period; (3) the collective experience and expertise of the Board's "inside" and "outside" directors;^[17] and (4) their reliance on Brennan's legal advice that the directors might be sued if they rejected the Pritzker proposal. We discuss each of these grounds seriatim:

(1)

A substantial premium may provide one reason to recommend a merger, but in the absence of other sound valuation information, the fact of a premium alone does not provide an adequate basis upon which to assess the fairness of an offering price. Here, the judgment reached as to the adequacy of the premium was based on a comparison between the historically depressed Trans Union market price and the amount of the Pritzker offer. Using market price as a basis for concluding that the premium adequately reflected the true value [876] of the Company was a clearly faulty, indeed fallacious, premise, as the defendants' own evidence demonstrates.

The record is clear that before September 20, Van Gorkom and other members of Trans Union's Board knew that the market had consistently undervalued the worth of Trans Union's stock, despite steady increases in the Company's operating income in the seven years preceding the merger. The Board related this occurrence in large part to Trans Union's inability to use its ITCs as previously noted. Van Gorkom testified that he did not believe the market price accurately reflected Trans Union's true worth; and several of the directors testified that, as a general rule, most chief executives think that the market undervalues their companies' stock. Yet, on September 20, Trans Union's Board apparently believed that the market stock price accurately reflected the value of the Company for the purpose of determining the adequacy of the premium for its sale.

In the Proxy Statement, however, the directors reversed their position. There, they stated that, although the earnings prospects for Trans Union were "excellent," they found no basis for believing that this would be reflected in future stock prices. With regard to past trading, the Board stated that the prices at which the Company's common stock had traded in recent years did not reflect the "inherent" value of the Company. But having referred to the "inherent" value of Trans Union, the directors ascribed no number to it. Moreover, nowhere did they disclose that they had no basis on which to fix "inherent" worth beyond an impressionistic reaction to the premium over market and an unsubstantiated belief that the value of the assets was "significantly greater" than book value. By their own admission they could not rely on the stock price as an accurate measure of value. Yet, also by their own admission, the Board members assumed that Trans Union's market price was adequate to serve as a basis upon which to assess the adequacy of the premium for purposes of the September 20 meeting.

The parties do not dispute that a publicly-traded stock price is solely a measure of the value of a minority position and, thus, market price represents only the value of a single share. Nevertheless, on September 20, the Board assessed the adequacy of the premium over market, offered by Pritzker, solely by comparing it with Trans Union's current and historical stock price. (See supra note 5 at 866.)

Indeed, as of September 20, the Board had no other information on which to base a determination of the intrinsic value of Trans Union as a going concern. As of September 20, the Board had made no evaluation of the Company designed to value the entire enterprise, nor had the Board ever previously considered selling the Company or consenting to a buy-out merger. Thus, the adequacy of a premium is indeterminate unless it is assessed in terms of other competent and sound valuation information that reflects the value of the particular business.

Despite the foregoing facts and circumstances, there was no call by the Board, either on September 20 or thereafter, for any valuation study or documentation of the $55 price per share as a measure of the fair value of the Company in a cash-out context. It is undisputed that the major asset of Trans Union was its cash flow. Yet, at no time did the Board call for a valuation study taking into account that highly significant element of the Company's assets.

We do not imply that an outside valuation study is essential to support an informed business judgment; nor do we state that fairness opinions by independent investment bankers are required as a matter of law. Often insiders familiar with the business of a going concern are in a better position than are outsiders to gather relevant information; and under appropriate circumstances, such directors may be fully protected in relying in good faith upon the valuation reports of their management. [877] See 8 Del.C. § 141(e). See also Cheff v. Mathes, supra.

Here, the record establishes that the Board did not request its Chief Financial Officer, Romans, to make any valuation study or review of the proposal to determine the adequacy of $55 per share for sale of the Company. On the record before us: The Board rested on Romans' elicited response that the $55 figure was within a "fair price range" within the context of a leveraged buy-out. No director sought any further information from Romans. No director asked him why he put $55 at the bottom of his range. No director asked Romans for any details as to his study, the reason why it had been undertaken or its depth. No director asked to see the study; and no director asked Romans whether Trans Union's finance department could do a fairness study within the remaining 36-hour^[18] period available under the Pritzker offer.

Had the Board, or any member, made an inquiry of Romans, he presumably would have responded as he testified: that his calculations were rough and preliminary; and, that the study was not designed to determine the fair value of the Company, but rather to assess the feasibility of a leveraged buy-out financed by the Company's projected cash flow, making certain assumptions as to the purchaser's borrowing needs. Romans would have presumably also informed the Board of his view, and the widespread view of Senior Management, that the timing of the offer was wrong and the offer inadequate.

The record also establishes that the Board accepted without scrutiny Van Gorkom's representation as to the fairness of the $55 price per share for sale of the Company — a subject that the Board had never previously considered. The Board thereby failed to discover that Van Gorkom had suggested the $55 price to Pritzker and, most crucially, that Van Gorkom had arrived at the $55 figure based on calculations designed solely to determine the feasibility of a leveraged buy-out.^[19] No questions were raised either as to the tax implications of a cash-out merger or how the price for the one million share option granted Pritzker was calculated.

We do not say that the Board of Directors was not entitled to give some credence to Van Gorkom's representation that $55 was an adequate or fair price. Under § 141(e), the directors were entitled to rely upon their chairman's opinion of value and adequacy, provided that such opinion was reached on a sound basis. Here, the issue is whether the directors informed themselves as to all information that was reasonably available to them. Had they done so, they would have learned of the source and derivation of the $55 price and could not reasonably have relied thereupon in good faith.

None of the directors, Management or outside, were investment bankers or financial analysts. Yet the Board did not consider recessing the meeting until a later hour that day (or requesting an extension of Pritzker's Sunday evening deadline) to give it time to elicit more information as to the sufficiency of the offer, either from [878] inside Management (in particular Romans) or from Trans Union's own investment banker, Salomon Brothers, whose Chicago specialist in merger and acquisitions was known to the Board and familiar with Trans Union's affairs.

Thus, the record compels the conclusion that on September 20 the Board lacked valuation information adequate to reach an informed business judgment as to the fairness of $55 per share for sale of the Company.^[20]

(2)

This brings us to the post-September 20 "market test" upon which the defendants ultimately rely to confirm the reasonableness of their September 20 decision to accept the Pritzker proposal. In this connection, the directors present a two-part argument: (a) that by making a "market test" of Pritzker's $55 per share offer a condition of their September 20 decision to accept his offer, they cannot be found to have acted impulsively or in an uninformed manner on September 20; and (b) that the adequacy of the $17 premium for sale of the Company was conclusively established over the following 90 to 120 days by the most reliable evidence available — the marketplace. Thus, the defendants impliedly contend that the "market test" eliminated the need for the Board to perform any other form of fairness test either on September 20, or thereafter.

Again, the facts of record do not support the defendants' argument. There is no evidence: (a) that the Merger Agreement was effectively amended to give the Board freedom to put Trans Union up for auction sale to the highest bidder; or (b) that a public auction was in fact permitted to occur. The minutes of the Board meeting make no reference to any of this. Indeed, the record compels the conclusion that the directors had no rational basis for expecting that a market test was attainable, given the terms of the Agreement as executed during the evening of September 20. We rely upon the following facts which are essentially uncontradicted:

The Merger Agreement, specifically identified as that originally presented to the Board on September 20, has never been produced by the defendants, notwithstanding the plaintiffs' several demands for production before as well as during trial. No acceptable explanation of this failure to produce documents has been given to either the Trial Court or this Court. Significantly, neither the defendants nor their counsel have made the affirmative representation that this critical document has been produced. Thus, the Court is deprived of the best evidence on which to judge the merits of the defendants' position as to the care and attention which they gave to the terms of the Agreement on September 20.

Van Gorkom states that the Agreement as submitted incorporated the ingredients for a market test by authorizing Trans Union to receive competing offers over the next 90-day period. However, he concedes that the Agreement barred Trans Union from actively soliciting such offers and from furnishing to interested parties any information about the Company other than that already in the public domain. Whether the original Agreement of September 20 went so far as to authorize Trans Union to receive competitive proposals is arguable. The defendants' unexplained failure to produce and identify the original Merger Agreement permits the logical inference that the instrument would not support their assertions in this regard. Wilmington Trust Co. v. General Motors Corp., Del.Supr., 51 A.2d 584, 593 (1947); II Wigmore on Evidence § 291 (3d ed. 1940). It is a well established principle that the production of weak evidence when strong is, or should have been, available can lead only to the conclusion that the strong would have been adverse. Interstate Circuit v. United States, 306 U.S. [879] 208, 226, 59 S.Ct. 467, 474, 83 L.Ed. 610 (1939); Deberry v. State, Del.Supr., 457 A.2d 744, 754 (1983). Van Gorkom, conceding that he never read the Agreement, stated that he was relying upon his understanding that, under corporate law, directors always have an inherent right, as well as a fiduciary duty, to accept a better offer notwithstanding an existing contractual commitment by the Board. (See the discussion infra, part III B(3) at p. 55.)

The defendant directors assert that they "insisted" upon including two amendments to the Agreement, thereby permitting a market test: (1) to give Trans Union the right to accept a better offer; and (2) to reserve to Trans Union the right to distribute proprietary information on the Company to alternative bidders. Yet, the defendants concede that they did not seek to amend the Agreement to permit Trans Union to solicit competing offers.

Several of Trans Union's outside directors resolutely maintained that the Agreement as submitted was approved on the understanding that, "if we got a better deal, we had a right to take it." Director Johnson so testified; but he then added, "And if they didn't put that in the agreement, then the management did not carry out the conclusion of the Board. And I just don't know whether they did or not." The only clause in the Agreement as finally executed to which the defendants can point as "keeping the door open" is the following underlined statement found in subparagraph (a) of section 2.03 of the Merger Agreement as executed:

The Board of Directors shall recommend to the stockholders of Trans Union that they approve and adopt the Merger Agreement (`the stockholders' approval') and to use its best efforts to obtain the requisite votes therefor. GL acknowledges that Trans Union directors may have a competing fiduciary obligation to the shareholders under certain circumstances.

Clearly, this language on its face cannot be construed as incorporating either of the two "conditions" described above: either the right to accept a better offer or the right to distribute proprietary information to third parties. The logical witness for the defendants to call to confirm their construction of this clause of the Agreement would have been Trans Union's outside attorney, James Brennan. The defendants' failure, without explanation, to call this witness again permits the logical inference that his testimony would not have been helpful to them. The further fact that the directors adjourned, rather than recessed, the meeting without incorporating in the Agreement these important "conditions" further weakens the defendants' position. As has been noted, nothing in the Board's Minutes supports these claims. No reference to either of the so-called "conditions" or of Trans Union's reserved right to test the market appears in any notes of the Board meeting or in the Board Resolution accepting the Pritzker offer or in the Minutes of the meeting itself. That evening, in the midst of a formal party which he hosted for the opening of the Chicago Lyric Opera, Van Gorkom executed the Merger Agreement without he or any other member of the Board having read the instruments.

The defendants attempt to downplay the significance of the prohibition against Trans Union's actively soliciting competing offers by arguing that the directors "understood that the entire financial community would know that Trans Union was for sale upon the announcement of the Pritzker offer, and anyone desiring to make a better offer was free to do so." Yet, the press release issued on September 22, with the authorization of the Board, stated that Trans Union had entered into "definitive agreements" with the Pritzkers; and the press release did not even disclose Trans Union's limited right to receive and accept higher offers. Accompanying this press release was a further public announcement that Pritzker had been granted an option to purchase at any time one million shares of [880] Trans Union's capital stock at 75 cents above the then-current price per share.

Thus, notwithstanding what several of the outside directors later claimed to have "thought" occurred at the meeting, the record compels the conclusion that Trans Union's Board had no rational basis to conclude on September 20 or in the days immediately following, that the Board's acceptance of Pritzker's offer was conditioned on (1) a "market test" of the offer; and (2) the Board's right to withdraw from the Pritzker Agreement and accept any higher offer received before the shareholder meeting.

(3)

The directors' unfounded reliance on both the premium and the market test as the basis for accepting the Pritzker proposal undermines the defendants' remaining contention that the Board's collective experience and sophistication was a sufficient basis for finding that it reached its September 20 decision with informed, reasonable deliberation.^[21]Compare Gimbel v. Signal Companies, Inc., Del. Ch., 316 A.2d 599 (1974), aff'd per curiam, Del. Supr., 316 A.2d 619 (1974). There, the Court of Chancery preliminary enjoined a board's sale of stock of its wholly-owned subsidiary for an alleged grossly inadequate price. It did so based on a finding that the business judgment rule had been pierced for failure of management to give its board "the opportunity to make a reasonable and reasoned decision." 316 A.2d at 615. The Court there reached this result notwithstanding the board's sophistication and experience; the company's need of immediate cash; and the board's need to act promptly due to the impact of an energy crisis on the value of the underlying assets being sold — all of its subsidiary's oil and gas interests. The Court found those factors denoting competence to be outweighed by evidence of gross negligence; that management in effect sprang the deal on the board by negotiating the asset sale without informing the board; that the buyer intended to "force a quick decision" by the board; that the board meeting was called on only one-and-a-half days' notice; that its outside directors were not notified of the meeting's purpose; that during a meeting spanning "a couple of hours" a sale of assets worth $480 million was approved; and that the Board failed to obtain a current appraisal of its oil and gas interests. The analogy of Signal to the case at bar is significant.

(4)

Part of the defense is based on a claim that the directors relied on legal advice rendered at the September 20 meeting by James Brennan, Esquire, who was present at Van Gorkom's request. Unfortunately, Brennan did not appear and testify at trial even though his firm participated in the defense of this action. There is no contemporaneous evidence of the advice given by Brennan on September 20, only the later deposition and trial testimony of certain directors as to their recollections or understanding of what was said at the meeting. Since counsel did not testify, and the advice attributed to Brennan is hearsay received by the Trial Court over the plaintiffs' objections, we consider it only in the context of the directors' present claims. In fairness to counsel, we make no findings that the advice attributed to him was in fact given. We focus solely on the efficacy of the [881] defendants' claims, made months and years later, in an effort to extricate themselves from liability.

Several defendants testified that Brennan advised them that Delaware law did not require a fairness opinion or an outside valuation of the Company before the Board could act on the Pritzker proposal. If given, the advice was correct. However, that did not end the matter. Unless the directors had before them adequate information regarding the intrinsic value of the Company, upon which a proper exercise of business judgment could be made, mere advice of this type is meaningless; and, given this record of the defendants' failures, it constitutes no defense here.^[22]

* * *

We conclude that Trans Union's Board was grossly negligent in that it failed to act with informed reasonable deliberation in agreeing to the Pritzker merger proposal on September 20; and we further conclude that the Trial Court erred as a matter of law in failing to address that question before determining whether the directors' later conduct was sufficient to cure its initial error.

A second claim is that counsel advised the Board it would be subject to lawsuits if it rejected the $55 per share offer. It is, of course, a fact of corporate life that today when faced with difficult or sensitive issues, directors often are subject to suit, irrespective of the decisions they make. However, counsel's mere acknowledgement of this circumstance cannot be rationally translated into a justification for a board permitting itself to be stampeded into a patently unadvised act. While suit might result from the rejection of a merger or tender offer, Delaware law makes clear that a board acting within the ambit of the business judgment rule faces no ultimate liability. Pogostin v. Rice, supra. Thus, we cannot conclude that the mere threat of litigation, acknowledged by counsel, constitutes either legal advice or any valid basis upon which to pursue an uninformed course.

Since we conclude that Brennan's purported advice is of no consequence to the defense of this case, it is unnecessary for us to invoke the adverse inferences which may be attributable to one failing to appear at trial and testify.

-B-

We now examine the Board's post-September 20 conduct for the purpose of determining first, whether it was informed and not grossly negligent; and second, if informed, whether it was sufficient to legally rectify and cure the Board's derelictions of September 20.^[23]

(1)

First, as to the Board meeting of October 8: Its purpose arose in the aftermath of the September 20 meeting: (1) the September 22 press release announcing that Trans Union "had entered into definitive agreements to merge with an affiliate of Marmon Group, Inc.;" and (2) Senior Management's ensuing revolt.

Trans Union's press release stated:

FOR IMMEDIATE RELEASE:

CHICAGO, IL — Trans Union Corporation announced today that it had entered into definitive agreements to merge with an affiliate of The Marmon Group, Inc. in a transaction whereby Trans Union stockholders would receive $55 per share in cash for each Trans Union share held. The Marmon Group, Inc. is controlled by the Pritzker family of Chicago.

The merger is subject to approval by the stockholders of Trans Union at a special meeting expected to be held [882] sometime during December or early January.

Until October 10, 1980, the purchaser has the right to terminate the merger if financing that is satisfactory to the purchaser has not been obtained, but after that date there is no such right.

In a related transaction, Trans Union has agreed to sell to a designee of the purchaser one million newly-issued shares of Trans Union common stock at a cash price of $38 per share. Such shares will be issued only if the merger financing has been committed for no later than October 10, 1980, or if the purchaser elects to waive the merger financing condition. In addition, the New York Stock Exchange will be asked to approve the listing of the new shares pursuant to a listing application which Trans Union intends to file shortly.

Completing of the transaction is also subject to the preparation of a definitive proxy statement and making various filings and obtaining the approvals or consents of government agencies.

The press release made no reference to provisions allegedly reserving to the Board the rights to perform a "market test" and to withdraw from the Pritzker Agreement if Trans Union received a better offer before the shareholder meeting. The defendants also concede that Trans Union never made a subsequent public announcement stating that it had in fact reserved the right to accept alternate offers, the Agreement notwithstanding.

The public announcement of the Pritzker merger resulted in an "en masse" revolt of Trans Union's Senior Management. The head of Trans Union's tank car operations (its most profitable division) informed Van Gorkom that unless the merger were called off, fifteen key personnel would resign.

Instead of reconvening the Board, Van Gorkom again privately met with Pritzker, informed him of the developments, and sought his advice. Pritzker then made the following suggestions for overcoming Management's dissatisfaction: (1) that the Agreement be amended to permit Trans Union to solicit, as well as receive, higher offers; and (2) that the shareholder meeting be postponed from early January to February 10, 1981. In return, Pritzker asked Van Gorkom to obtain a commitment from Senior Management to remain at Trans Union for at least six months after the merger was consummated.

Van Gorkom then advised Senior Management that the Agreement would be amended to give Trans Union the right to solicit competing offers through January, 1981, if they would agree to remain with Trans Union. Senior Management was temporarily mollified; and Van Gorkom then called a special meeting of Trans Union's Board for October 8.

Thus, the primary purpose of the October 8 Board meeting was to amend the Merger Agreement, in a manner agreeable to Pritzker, to permit Trans Union to conduct a "market test."^[24] Van Gorkom understood that the proposed amendments were intended to give the Company an unfettered "right to openly solicit offers down through January 31." Van Gorkom presumably so represented the amendments to Trans Union's Board members on October 8. In a brief session, the directors approved Van Gorkom's oral presentation of the substance of the proposed amendments, [883] the terms of which were not reduced to writing until October 10. But rather than waiting to review the amendments, the Board again approved them sight unseen and adjourned, giving Van Gorkom authority to execute the papers when he received them.^[25]

Thus, the Court of Chancery's finding that the October 8 Board meeting was convened to reconsider the Pritzker "proposal" is clearly erroneous. Further, the consequence of the Board's faulty conduct on October 8, in approving amendments to the Agreement which had not even been drafted, will become apparent when the actual amendments to the Agreement are hereafter examined.

The next day, October 9, and before the Agreement was amended, Pritzker moved swiftly to off-set the proposed market test amendment. First, Pritzker informed Trans Union that he had completed arrangements for financing its acquisition and that the parties were thereby mutually bound to a firm purchase and sale arrangement. Second, Pritzker announced the exercise of his option to purchase one million shares of Trans Union's treasury stock at $38 per share — 75 cents above the current market price. Trans Union's Management responded the same day by issuing a press release announcing: (1) that all financing arrangements for Pritzker's acquisition of Trans Union had been completed; and (2) Pritzker's purchase of one million shares of Trans Union's treasury stock at $38 per share.

The next day, October 10, Pritzker delivered to Trans Union the proposed amendments to the September 20 Merger Agreement. Van Gorkom promptly proceeded to countersign all the instruments on behalf of Trans Union without reviewing the instruments to determine if they were consistent with the authority previously granted him by the Board. The amending documents were apparently not approved by Trans Union's Board until a much later date, December 2. The record does not affirmatively establish that Trans Union's directors ever read the October 10 amendments.^[26]

The October 10 amendments to the Merger Agreement did authorize Trans Union to solicit competing offers, but the amendments had more far-reaching effects. The most significant change was in the definition of the third-party "offer" available to Trans Union as a possible basis for withdrawal from its Merger Agreement with Pritzker. Under the October 10 amendments, a better offer was no longer sufficient to permit Trans Union's withdrawal. Trans Union was now permitted to terminate the Pritzker Agreement and abandon the merger only if, prior to February 10, 1981, Trans Union had either consummated a merger (or sale of assets) with a third party or had entered into a "definitive" merger agreement more favorable than Pritzker's and for a greater consideration — subject only to stockholder approval. Further, the "extension" of the market test period to February 10, 1981 was circumscribed by other amendments which required Trans Union to file its preliminary proxy statement on the Pritzker merger proposal by December 5, 1980 and use its best efforts to mail the statement to its shareholders by January 5, 1981. Thus, the market test period was effectively reduced, not extended. (See infra note 29 at 886.)

In our view, the record compels the conclusion that the directors' conduct on October [884] 8 exhibited the same deficiencies as did their conduct on September 20. The Board permitted its Merger Agreement with Pritzker to be amended in a manner it had neither authorized nor intended. The Court of Chancery, in its decision, over-looked the significance of the October 8-10 events and their relevance to the sufficiency of the directors' conduct. The Trial Court's letter opinion ignores: the October 10 amendments; the manner of their adoption; the effect of the October 9 press release and the October 10 amendments on the feasibility of a market test; and the ultimate question as to the reasonableness of the directors' reliance on a market test in recommending that the shareholders approve the Pritzker merger.

We conclude that the Board acted in a grossly negligent manner on October 8; and that Van Gorkom's representations on which the Board based its actions do not constitute "reports" under § 141(e) on which the directors could reasonably have relied. Further, the amended Merger Agreement imposed on Trans Union's acceptance of a third party offer conditions more onerous than those imposed on Trans Union's acceptance of Pritzker's offer on September 20. After October 10, Trans Union could accept from a third party a better offer only if it were incorporated in a definitive agreement between the parties, and not conditioned on financing or on any other contingency.

The October 9 press release, coupled with the October 10 amendments, had the clear effect of locking Trans Union's Board into the Pritzker Agreement. Pritzker had thereby foreclosed Trans Union's Board from negotiating any better "definitive" agreement over the remaining eight weeks before Trans Union was required to clear the Proxy Statement submitting the Pritzker proposal to its shareholders.

(2)

Next, as to the "curative" effects of the Board's post-September 20 conduct, we review in more detail the reaction of Van Gorkom to the KKR proposal and the results of the Board-sponsored "market test."

The KKR proposal was the first and only offer received subsequent to the Pritzker Merger Agreement. The offer resulted primarily from the efforts of Romans and other senior officers to propose an alternative to Pritzker's acquisition of Trans Union. In late September, Romans' group contacted KKR about the possibility of a leveraged buy-out by all members of Management, except Van Gorkom. By early October, Henry R. Kravis of KKR gave Romans written notice of KKR's "interest in making an offer to purchase 100%" of Trans Union's common stock.

Thereafter, and until early December, Romans' group worked with KKR to develop a proposal. It did so with Van Gorkom's knowledge and apparently grudging consent. On December 2, Kravis and Romans hand-delivered to Van Gorkom a formal letter-offer to purchase all of Trans Union's assets and to assume all of its liabilities for an aggregate cash consideration equivalent to $60 per share. The offer was contingent upon completing equity and bank financing of $650 million, which Kravis represented as 80% complete. The KKR letter made reference to discussions with major banks regarding the loan portion of the buy-out cost and stated that KKR was "confident that commitments for the bank financing * * * can be obtained within two or three weeks." The purchasing group was to include certain named key members of Trans Union's Senior Management, excluding Van Gorkom, and a major Canadian company. Kravis stated that they were willing to enter into a "definitive agreement" under terms and conditions "substantially the same" as those contained in Trans Union's agreement with Pritzker. The offer was addressed to Trans Union's Board of Directors and a meeting with the Board, scheduled for that afternoon, was requested.

Van Gorkom's reaction to the KKR proposal was completely negative; he did not view the offer as being firm because of its [885] financing condition. It was pointed out, to no avail, that Pritzker's offer had not only been similarly conditioned, but accepted on an expedited basis. Van Gorkom refused Kravis' request that Trans Union issue a press release announcing KKR's offer, on the ground that it might "chill" any other offer.^[27] Romans and Kravis left with the understanding that their proposal would be presented to Trans Union's Board that afternoon.

Within a matter of hours and shortly before the scheduled Board meeting, Kravis withdrew his letter-offer. He gave as his reason a sudden decision by the Chief Officer of Trans Union's rail car leasing operation to withdraw from the KKR purchasing group. Van Gorkom had spoken to that officer about his participation in the KKR proposal immediately after his meeting with Romans and Kravis. However, Van Gorkom denied any responsibility for the officer's change of mind.

At the Board meeting later that afternoon, Van Gorkom did not inform the directors of the KKR proposal because he considered it "dead." Van Gorkom did not contact KKR again until January 20, when faced with the realities of this lawsuit, he then attempted to reopen negotiations. KKR declined due to the imminence of the February 10 stockholder meeting.

GE Credit Corporation's interest in Trans Union did not develop until November; and it made no written proposal until mid-January. Even then, its proposal was not in the form of an offer. Had there been time to do so, GE Credit was prepared to offer between $2 and $5 per share above the $55 per share price which Pritzker offered. But GE Credit needed an additional 60 to 90 days; and it was unwilling to make a formal offer without a concession from Pritzker extending the February 10 "deadline" for Trans Union's stockholder meeting. As previously stated, Pritzker refused to grant such extension; and on January 21, GE Credit terminated further negotiations with Trans Union. Its stated reasons, among others, were its "unwillingness to become involved in a bidding contest with Pritzker in the absence of the willingness of [the Pritzker interests] to terminate the proposed $55 cash merger."

* * *

In the absence of any explicit finding by the Trial Court as to the reasonableness of Trans Union's directors' reliance on a market test and its feasibility, we may make our own findings based on the record. Our review of the record compels a finding that confirmation of the appropriateness of the Pritzker offer by an unfettered or free market test was virtually meaningless in the face of the terms and time limitations of Trans Union's Merger Agreement with Pritzker as amended October 10, 1980.

(3)

Finally, we turn to the Board's meeting of January 26, 1981. The defendant directors rely upon the action there taken to refute the contention that they did not reach an informed business judgment in approving the Pritzker merger. The defendants contend that the Trial Court correctly concluded that Trans Union's directors were, in effect, as "free to turn down the Pritzker proposal" on January 26, as they were on September 20.

Applying the appropriate standard of review set forth in Levitt v. Bouvier, supra, we conclude that the Trial Court's finding in this regard is neither supported by the record nor the product of an orderly and logical deductive process. Without disagreeing with the principle that a business decision by an originally uninformed board of directors may, under appropriate circumstances, be timely cured so as to become informed and deliberate, Muschel v. Western Union Corporation, Del. Ch., 310 [886] A.2d 904 (1973),^[28] we find that the record does not permit the defendants to invoke that principle in this case.

The Board's January 26 meeting was the first meeting following the filing of the plaintiffs' suit in mid-December and the last meeting before the previously-noticed shareholder meeting of February 10.^[29] All ten members of the Board and three outside attorneys attended the meeting. At that meeting the following facts, among other aspects of the Merger Agreement, were discussed:

(a) The fact that prior to September 20, 1980, no Board member or member of Senior Management, except Chelberg and Peterson, knew that Van Gorkom had discussed a possible merger with Pritzker;

(b) The fact that the price of $55 per share had been suggested initially to Pritzker by Van Gorkom;

(c) The fact that the Board had not sought an independent fairness opinion;

(d) The fact that, at the September 20 Senior Management meeting, Romans and several members of Senior Management indicated both concern that the $55 per share price was inadequate and a belief that a higher price should and could be obtained;

(e) The fact that Romans had advised the Board at its meeting on September 20, that he and his department had prepared a study which indicated that the Company had a value in the range of $55 to $65 per share, and that he could not advise the Board that the $55 per share offer made by Pritzker was unfair.

The defendants characterize the Board's Minutes of the January 26 meeting as a "review" of the "entire sequence of events" from Van Gorkom's initiation of the negotiations on September 13 forward.^[30] The defendants also rely on the [887] testimony of several of the Board members at trial as confirming the Minutes.^[31] On the basis of this evidence, the defendants argue that whatever information the Board lacked to make a deliberate and informed judgment on September 20, or on October 8, was fully divulged to the entire Board on January 26. Hence, the argument goes, the Board's vote on January 26 to again "approve" the Pritzker merger must be found to have been an informed and deliberate judgment.

On the basis of this evidence, the defendants assert: (1) that the Trial Court was legally correct in widening the time frame for determining whether the defendants' approval of the Pritzker merger represented an informed business judgment to include the entire four-month period during which the Board considered the matter from September 20 through January 26; and (2) that, given this extensive evidence of the Board's further review and deliberations on January 26, this Court must affirm the Trial Court's conclusion that the Board's action was not reckless or improvident.

We cannot agree. We find the Trial Court to have erred, both as a matter of fact and as a matter of law, in relying on the action on January 26 to bring the defendants' conduct within the protection of the business judgment rule.

Johnson's testimony and the Board Minutes of January 26 are remarkably consistent. Both clearly indicate recognition that the question of the alternative courses of action, available to the Board on January 26 with respect to the Pritzker merger, was a legal question, presenting to the Board (after its review of the full record developed through pre-trial discovery) three options: (1) to "continue to recommend" the Pritzker merger; (2) to "recommend that [888] the stockholders vote against" the Pritzker merger; or (3) to take a noncommittal position on the merger and "simply leave the decision to [the] shareholders."

We must conclude from the foregoing that the Board was mistaken as a matter of law regarding its available courses of action on January 26, 1981. Options (2) and (3) were not viable or legally available to the Board under 8 Del.C. § 251(b). The Board could not remain committed to the Pritzker merger and yet recommend that its stockholders vote it down; nor could it take a neutral position and delegate to the stockholders the unadvised decision as to whether to accept or reject the merger. Under § 251(b), the Board had but two options: (1) to proceed with the merger and the stockholder meeting, with the Board's recommendation of approval; or (2) to rescind its agreement with Pritzker, withdraw its approval of the merger, and notify its stockholders that the proposed shareholder meeting was cancelled. There is no evidence that the Board gave any consideration to these, its only legally viable alternative courses of action.

But the second course of action would have clearly involved a substantial risk — that the Board would be faced with suit by Pritzker for breach of contract based on its September 20 agreement as amended October 10. As previously noted, under the terms of the October 10 amendment, the Board's only ground for release from its agreement with Pritzker was its entry into a more favorable definitive agreement to sell the Company to a third party. Thus, in reality, the Board was not "free to turn down the Pritzker proposal" as the Trial Court found. Indeed, short of negotiating a better agreement with a third party, the Board's only basis for release from the Pritzker Agreement without liability would have been to establish fundamental wrongdoing by Pritzker. Clearly, the Board was not "free" to withdraw from its agreement with Pritzker on January 26 by simply relying on its self-induced failure to have reached an informed business judgment at the time of its original agreement. See Wilmington Trust Company v. Coulter, Del.Supr., 200 A.2d 441, 453 (1964), aff'g Pennsylvania Company v. Wilmington Trust Company, Del.Ch., 186 A.2d 751 (1962).

Therefore, the Trial Court's conclusion that the Board reached an informed business judgment on January 26 in determining whether to turn down the Pritzker "proposal" on that day cannot be sustained.^[32] The Court's conclusion is not supported by the record; it is contrary to the provisions of § 251(b) and basic principles of contract law; and it is not the product of a logical and deductive reasoning process.

* * *

Upon the basis of the foregoing, we hold that the defendants' post-September conduct did not cure the deficiencies of their September 20 conduct; and that, accordingly, the Trial Court erred in according to the defendants the benefits of the business judgment rule.

IV.

Whether the directors of Trans Union should be treated as one or individually in terms of invoking the protection of the business judgment rule and the applicability of 8 Del.C. § 141(c) are questions which were not originally addressed by the parties in their briefing of this case. This resulted in a supplemental briefing and a second rehearing en banc on two basic questions: (a) whether one or more of the directors were deprived of the protection of the business judgment rule by evidence of an absence of good faith; and (b) whether one or more of the outside directors were [889] entitled to invoke the protection of 8 Del.C. § 141(e) by evidence of a reasonable, good faith reliance on "reports," including legal advice, rendered the Board by certain inside directors and the Board's special counsel, Brennan.

The parties' response, including reargument, has led the majority of the Court to conclude: (1) that since all of the defendant directors, outside as well as inside, take a unified position, we are required to treat all of the directors as one as to whether they are entitled to the protection of the business judgment rule; and (2) that considerations of good faith, including the presumption that the directors acted in good faith, are irrelevant in determining the threshold issue of whether the directors as a Board exercised an informed business judgment. For the same reason, we must reject defense counsel's ad hominem argument for affirmance: that reversal may result in a multi-million dollar class award against the defendants for having made an allegedly uninformed business judgment in a transaction not involving any personal gain, self-dealing or claim of bad faith.

In their brief, the defendants similarly mistake the business judgment rule's application to this case by erroneously invoking presumptions of good faith and "wide discretion":

This is a case in which plaintiff challenged the exercise of business judgment by an independent Board of Directors. There were no allegations and no proof of fraud, bad faith, or self-dealing by the directors....

The business judgment rule, which was properly applied by the Chancellor, allows directors wide discretion in the matter of valuation and affords room for honest differences of opinion. In order to prevail, plaintiffs had the heavy burden of proving that the merger price was so grossly inadequate as to display itself as a badge of fraud. That is a burden which plaintiffs have not met.

However, plaintiffs have not claimed, nor did the Trial Court decide, that $55 was a grossly inadequate price per share for sale of the Company. That being so, the presumption that a board's judgment as to adequacy of price represents an honest exercise of business judgment (absent proof that the sale price was grossly inadequate) is irrelevant to the threshold question of whether an informed judgment was reached. Compare Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717 (1971); Kelly v. Bell, Del.Supr., 266 A.2d 878, 879 (1970); Cole v. National Cash Credit Association, Del.Ch., 156 A. 183 (1931); Allaun v. Consolidated Oil Co., supra; Allen Chemical & Dye Corp. v. Steel & Tube Co. of America, Del.Ch., 120 A. 486 (1923).

V.

The defendants ultimately rely on the stockholder vote of February 10 for exoneration. The defendants contend that the stockholders' "overwhelming" vote approving the Pritzker Merger Agreement had the legal effect of curing any failure of the Board to reach an informed business judgment in its approval of the merger.

The parties tacitly agree that a discovered failure of the Board to reach an informed business judgment in approving the merger constitutes a voidable, rather than a void, act. Hence, the merger can be sustained, notwithstanding the infirmity of the Board's action, if its approval by majority vote of the shareholders is found to have been based on an informed electorate. Cf. Michelson v. Duncan, Del.Supr., 407 A.2d 211 (1979), aff'g in part and rev'g in part, Del.Ch., 386 A.2d 1144 (1978). The disagreement between the parties arises over: (1) the Board's burden of disclosing to the shareholders all relevant and material information; and (2) the sufficiency of the evidence as to whether the Board satisfied that burden.

On this issue the Trial Court summarily concluded "that the stockholders of Trans Union were fairly informed as to the pending merger...." The Court provided no [890] supportive reasoning nor did the Court make any reference to the evidence of record.

The plaintiffs contend that the Court committed error by applying an erroneous disclosure standard of "adequacy" rather than "completeness" in determining the sufficiency of the Company's merger proxy materials. The plaintiffs also argue that the Board's proxy statements, both its original statement dated January 19 and its supplemental statement dated January 26, were incomplete in various material respects. Finally, the plaintiffs assert that Management's supplemental statement (mailed "on or about" January 27) was untimely either as a matter of law under 8 Del.C. § 251(c), or untimely as a matter of equity and the requirements of complete candor and fair disclosure.

The defendants deny that the Court committed legal or equitable error. On the question of the Board's burden of disclosure, the defendants state that there was no dispute at trial over the standard of disclosure required of the Board; but the defendants concede that the Board was required to disclose "all germane facts" which a reasonable shareholder would have considered important in deciding whether to approve the merger. Thus, the defendants argue that when the Trial Court speaks of finding the Company's shareholders to have been "fairly informed" by Management's proxy materials, the Court is speaking in terms of "complete candor" as required under Lynch v. Vickers Energy Corp., Del.Supr., 383 A.2d 278 (1978).

The settled rule in Delaware is that "where a majority of fully informed stockholders ratify action of even interested directors, an attack on the ratified transaction normally must fail." Gerlach v. Gillam, Del.Ch., 139 A.2d 591, 593 (1958). The question of whether shareholders have been fully informed such that their vote can be said to ratify director action, "turns on the fairness and completeness of the proxy materials submitted by the management to the ... shareholders." Michelson v. Duncan, supra at 220. As this Court stated in Gottlieb v. Heyden Chemical Corp., Del.Supr., 91 A.2d 57, 59 (1952):

[T]he entire atmosphere is freshened and a new set of rules invoked where a formal approval has been given by a majority of independent, fully informed stockholders....

In Lynch v. Vickers Energy Corp., supra, this Court held that corporate directors owe to their stockholders a fiduciary duty to disclose all facts germane to the transaction at issue in an atmosphere of complete candor. We defined "germane" in the tender offer context as all "information such as a reasonable stockholder would consider important in deciding whether to sell or retain stock." Id. at 281. Accord Weinberger v. UOP, Inc., supra; Michelson v. Duncan, supra; Schreiber v. Pennzoil Corp., Del.Ch., 419 A.2d 952 (1980). In reality, "germane" means material facts.

Applying this standard to the record before us, we find that Trans Union's stockholders were not fully informed of all facts material to their vote on the Pritzker Merger and that the Trial Court's ruling to the contrary is clearly erroneous. We list the material deficiencies in the proxy materials:

(1) The fact that the Board had no reasonably adequate information indicative of the intrinsic value of the Company, other than a concededly depressed market price, was without question material to the shareholders voting on the merger. See Weinberger, supra at 709 (insiders' report that cash-out merger price up to $24 was good investment held material); Michelson, supra at 224 (alleged terms and intent of stock option plan held not germane); Schreiber, supra at 959 (management fee of $650,000 held germane).

Accordingly, the Board's lack of valuation information should have been disclosed. Instead, the directors cloaked the absence of such information in both the Proxy Statement and the Supplemental [891] Proxy Statement. Through artful drafting, noticeably absent at the September 20 meeting, both documents create the impression that the Board knew the intrinsic worth of the Company. In particular, the Original Proxy Statement contained the following:

[a]lthough the Board of Directors regards the intrinsic value of the Company's assets to be significantly greater than their book value ..., systematic liquidation of such a large and complex entity as Trans Union is simply not regarded as a feasible method of realizing its inherent value. Therefore, a business combination such as the merger would seem to be the only practicable way in which the stockholders could realize the value of the Company.

The Proxy stated further that "[i]n the view of the Board of Directors ..., the prices at which the Company's common stock has traded in recent years have not reflected the inherent value of the Company." What the Board failed to disclose to its stockholders was that the Board had not made any study of the intrinsic or inherent worth of the Company; nor had the Board even discussed the inherent value of the Company prior to approving the merger on September 20, or at either of the subsequent meetings on October 8 or January 26. Neither in its Original Proxy Statement nor in its Supplemental Proxy did the Board disclose that it had no information before it, beyond the premium-over-market and the price/earnings ratio, on which to determine the fair value of the Company as a whole.

(2) We find false and misleading the Board's characterization of the Romans report in the Supplemental Proxy Statement. The Supplemental Proxy stated:

At the September 20, 1980 meeting of the Board of Directors of Trans Union, Mr. Romans indicated that while he could not say that $55,00 per share was an unfair price, he had prepared a preliminary report which reflected that the value of the Company was in the range of $55.00 to $65.00 per share.

Nowhere does the Board disclose that Romans stated to the Board that his calculations were made in a "search for ways to justify a price in connection with" a leveraged buy-out transaction, "rather than to say what the shares are worth," and that he stated to the Board that his conclusion thus arrived at "was not the same thing as saying that I have a valuation of the Company at X dollars." Such information would have been material to a reasonable shareholder because it tended to invalidate the fairness of the merger price of $55. Furthermore, defendants again failed to disclose the absence of valuation information, but still made repeated reference to the "substantial premium."

(3) We find misleading the Board's references to the "substantial" premium offered. The Board gave as their primary reason in support of the merger the "substantial premium" shareholders would receive. But the Board did not disclose its failure to assess the premium offered in terms of other relevant valuation techniques, thereby rendering questionable its determination as to the substantiality of the premium over an admittedly depressed stock market price.

(4) We find the Board's recital in the Supplemental Proxy of certain events preceding the September 20 meeting to be incomplete and misleading. It is beyond dispute that a reasonable stockholder would have considered material the fact that Van Gorkom not only suggested the $55 price to Pritzker, but also that he chose the figure because it made feasible a leveraged buy-out. The directors disclosed that Van Gorkom suggested the $55 price to Pritzker. But the Board misled the shareholders when they described the basis of Van Gorkom's suggestion as follows:

Such suggestion was based, at least in part, on Mr. Van Gorkom's belief that loans could be obtained from institutional lenders (together with about a $200 million [892] equity contribution) which would justify the payment of such price, ...

Although by January 26, the directors knew the basis of the $55 figure, they did not disclose that Van Gorkom chose the $55 price because that figure would enable Pritzker to both finance the purchase of Trans Union through a leveraged buy-out and, within five years, substantially repay the loan out of the cash flow generated by the Company's operations.

(5) The Board's Supplemental Proxy Statement, mailed on or after January 27, added significant new matter, material to the proposal to be voted on February 10, which was not contained in the Original Proxy Statement. Some of this new matter was information which had only been disclosed to the Board on January 26; much was information known or reasonably available before January 21 but not revealed in the Original Proxy Statement. Yet, the stockholders were not informed of these facts. Included in the "new" matter first disclosed in the Supplemental Proxy Statement were the following:

(a) The fact that prior to September 20, 1980, no Board member or member of Senior Management, except Chelberg and Peterson, knew that Van Gorkom had discussed a possible merger with Pritzker;

(b) The fact that the sale price of $55 per share had been suggested initially to Pritzker by Van Gorkom;

(c) The fact that the Board had not sought an independent fairness opinion;

(d) The fact that Romans and several members of Senior Management had indicated concern at the September 20 Senior Management meeting that the $55 per share price was inadequate and had stated that a higher price should and could be obtained; and

(e) The fact that Romans had advised the Board at its meeting on September 20 that he and his department had prepared a study which indicated that the Company had a value in the range of $55 to $65 per share, and that he could not advise the Board that the $55 per share offer which Pritzker made was unfair.

* * *

The parties differ over whether the notice requirements of 8 Del.C. § 251(c) apply to the mailing date of supplemental proxy material or that of the original proxy material.^[33] The Trial Court summarily disposed of the notice issue, stating it was "satisfied that the proxy material furnished to Trans Union stockholders ... fairly presented the question to be voted on at the February 10, 1981 meeting."

The defendants argue that the notice provisions of § 251(c) must be construed as requiring only that stockholders receive notice of the time, place, and purpose of a meeting to consider a merger at least 20 days prior to such meeting; and since the Original Proxy Statement was disseminated more than 20 days before the meeting, the defendants urge affirmance of the Trial Court's ruling as correct as a matter of statutory construction. Apparently, the question has not been addressed by either the Court of Chancery or this Court; and authority in other jurisdictions is limited. See Electronic Specialty Co. v. Int'l Controls Corp., 2d Cir., 409 F.2d 937, 944 (1969) (holding that a tender offeror's September 16, 1968 correction of a previous misstatement, combined with an offer of withdrawal running for eight days until September 24, 1968, was sufficient to cure past violations and eliminate any need for rescission); Nicholson File Co. v. H.K. Porter Co., D.R.I., 341 F.Supp. 508, 513-14 (1972), aff'd, 1st Cir., 482 F.2d 421 (1973) [893] (permitting correction of a material misstatement by a mailing to stockholders within seven days of a tender offer withdrawal date). Both Electronic and Nicholson are federal security cases not arising under 8 Del.C. § 251(c) and they are otherwise distinguishable from this case on their facts.

Since we have concluded that Management's Supplemental Proxy Statement does not meet the Delaware disclosure standard of "complete candor" under Lynch v. Vickers, supra, it is unnecessary for us to address the plaintiffs' legal argument as to the proper construction of § 251(c). However, we do find it advisable to express the view that, in an appropriate case, an otherwise candid proxy statement may be so untimely as to defeat its purpose of meeting the needs of a fully informed electorate.

In this case, the Board's ultimate disclosure as contained in the Supplemental Proxy Statement related either to information readily accessible to all of the directors if they had asked the right questions, or was information already at their disposal. In short, the information disclosed by the Supplemental Proxy Statement was information which the defendant directors knew or should have known at the time the first Proxy Statement was issued. The defendants simply failed in their original duty of knowing, sharing, and disclosing information that was material and reasonably available for their discovery. They compounded that failure by their continued lack of candor in the Supplemental Proxy Statement. While we need not decide the issue here, we are satisfied that, in an appropriate case, a completely candid but belated disclosure of information long known or readily available to a board could raise serious issues of inequitable conduct. Schnell v. Chris-Craft Industries, Inc., Del.Supr., 285 A.2d 437, 439 (1971).

The burden must fall on defendants who claim ratification based on shareholder vote to establish that the shareholder approval resulted from a fully informed electorate. On the record before us, it is clear that the Board failed to meet that burden. Weinberger v. UOP, Inc., supra at 703; Michelson v. Duncan, supra.

* * *

For the foregoing reasons, we conclude that the director defendants breached their fiduciary duty of candor by their failure to make true and correct disclosures of all information they had, or should have had, material to the transaction submitted for stockholder approval.

VI.

To summarize: we hold that the directors of Trans Union breached their fiduciary duty to their stockholders (1) by their failure to inform themselves of all information reasonably available to them and relevant to their decision to recommend the Pritzker merger; and (2) by their failure to disclose all material information such as a reasonable stockholder would consider important in deciding whether to approve the Pritzker offer.

We hold, therefore, that the Trial Court committed reversible error in applying the business judgment rule in favor of the director defendants in this case.

On remand, the Court of Chancery shall conduct an evidentiary hearing to determine the fair value of the shares represented by the plaintiffs' class, based on the intrinsic value of Trans Union on September 20, 1980. Such valuation shall be made in accordance with Weinberger v. UOP, Inc., supra at 712-715. Thereafter, an award of damages may be entered to the extent that the fair value of Trans Union exceeds $55 per share.

* * *

REVERSED and REMANDED for proceedings consistent herewith.

McNEILLY, Justice, dissenting:

The majority opinion reads like an advocate's closing address to a hostile jury. And I say that not lightly. Throughout the [894] opinion great emphasis is directed only to the negative, with nothing more than lip service granted the positive aspects of this case. In my opinion Chancellor Marvel (retired) should have been affirmed. The Chancellor's opinion was the product of well reasoned conclusions, based upon a sound deductive process, clearly supported by the evidence and entitled to deference in this appeal. Because of my diametrical opposition to all evidentiary conclusions of the majority, I respectfully dissent.

It would serve no useful purpose, particularly at this late date, for me to dissent at great length. I restrain myself from doing so, but feel compelled to at least point out what I consider to be the most glaring deficiencies in the majority opinion. The majority has spoken and has effectively said that Trans Union's Directors have been the victims of a "fast shuffle" by Van Gorkom and Pritzker. That is the beginning of the majority's comedy of errors. The first and most important error made is the majority's assessment of the directors' knowledge of the affairs of Trans Union and their combined ability to act in this situation under the protection of the business judgment rule.

Trans Union's Board of Directors consisted of ten men, five of whom were "inside" directors and five of whom were "outside" directors. The "inside" directors were Van Gorkom, Chelberg, Bonser, William B. Browder, Senior Vice-President-Law, and Thomas P. O'Boyle, Senior Vice-President-Administration. At the time the merger was proposed the inside five directors had collectively been employed by the Company for 116 years and had 68 years of combined experience as directors. The "outside" directors were A.W. Wallis, William B. Johnson, Joseph B. Lanterman, Graham J. Morgan and Robert W. Reneker. With the exception of Wallis, these were all chief executive officers of Chicago based corporations that were at least as large as Trans Union. The five "outside" directors had 78 years of combined experience as chief executive officers, and 53 years cumulative service as Trans Union directors.

The inside directors wear their badge of expertise in the corporate affairs of Trans Union on their sleeves. But what about the outsiders? Dr. Wallis is or was an economist and math statistician, a professor of economics at Yale University, dean of the graduate school of business at the University of Chicago, and Chancellor of the University of Rochester. Dr. Wallis had been on the Board of Trans Union since 1962. He also was on the Board of Bausch & Lomb, Kodak, Metropolitan Life Insurance Company, Standard Oil and others.

William B. Johnson is a University of Pennsylvania law graduate, President of Railway Express until 1966, Chairman and Chief Executive of I.C. Industries Holding Company, and member of Trans Union's Board since 1968.

Joseph Lanterman, a Certified Public Accountant, is or was President and Chief Executive of American Steel, on the Board of International Harvester, Peoples Energy, Illinois Bell Telephone, Harris Bank and Trust Company, Kemper Insurance Company and a director of Trans Union for four years.

Graham Morgan is achemist, was Chairman and Chief Executive Officer of U.S. Gypsum, and in the 17 and 18 years prior to the Trans Union transaction had been involved in 31 or 32 corporate takeovers.

Robert Reneker attended University of Chicago and Harvard Business Schools. He was President and Chief Executive of Swift and Company, director of Trans Union since 1971, and member of the Boards of seven other corporations including U.S. Gypsum and the Chicago Tribune.

Directors of this caliber are not ordinarily taken in by a "fast shuffle". I submit they were not taken into this multi-million dollar corporate transaction without being fully informed and aware of the state of the art as it pertained to the entire corporate panoroma of Trans Union. True, even [895] directors such as these, with their business acumen, interest and expertise, can go astray. I do not believe that to be the case here. These men knew Trans Union like the back of their hands and were more than well qualified to make on the spot informed business judgments concerning the affairs of Trans Union including a 100% sale of the corporation. Lest we forget, the corporate world of then and now operates on what is so aptly referred to as "the fast track". These men were at the time an integral part of that world, all professional business men, not intellectual figureheads.

The majority of this Court holds that the Board's decision, reached on September 20, 1980, to approve the merger was not the product of an informed business judgment, that the Board's subsequent efforts to amend the Merger Agreement and take other curative action were legally and factually ineffectual, and that the Board did not deal with complete candor with the stockholders by failing to disclose all material facts, which they knew or should have known, before securing the stockholders' approval of the merger. I disagree.

At the time of the September 20, 1980 meeting the Board was acutely aware of Trans Union and its prospects. The problems created by accumulated investment tax credits and accelerated depreciation were discussed repeatedly at Board meetings, and all of the directors understood the problem thoroughly. Moreover, at the July, 1980 Board meeting the directors had reviewed Trans Union's newly prepared five-year forecast, and at the August, 1980 meeting Van Gorkom presented the results of a comprehensive study of Trans Union made by The Boston Consulting Group. This study was prepared over an 18 month period and consisted of a detailed analysis of all Trans Union subsidiaries, including competitiveness, profitability, cash throw-off, cash consumption, technical competence and future prospects for contribution to Trans Union's combined net income.

At the September 20 meeting Van Gorkom reviewed all aspects of the proposed transaction and repeated the explanation of the Pritzker offer he had earlier given to senior management. Having heard Van Gorkom's explanation of the Pritzker's offer, and Brennan's explanation of the merger documents the directors discussed the matter. Out of this discussion arose an insistence on the part of the directors that two modifications to the offer be made. First, they required that any potential competing bidder be given access to the same information concerning Trans Union that had been provided to the Pritzkers. Second, the merger documents were to be modified to reflect the fact that the directors could accept a better offer and would not be required to recommend the Pritzker offer if a better offer was made. The following language was inserted into the agreement:

"Within 30 days after the execution of this Agreement, TU shall call a meeting of its stockholders (the `Stockholder's Meeting') for the purpose of approving and adopting the Merger Agreement. The Board of Directors shall recommend to the stockholders of TU that they approve and adopt the Merger Agreement (the `Stockholders' Approval') and shall use its best efforts to obtain the requisite vote therefor; provided, however, that GL and NTC acknowledge that the Board of Directors of TU may have a competing fiduciary obligation to the Stockholders under certain circumstances." (Emphasis added)

While the language is not artfully drawn, the evidence is clear that the intention underlying that language was to make specific the right that the directors assumed they had, that is, to accept any offer that they thought was better, and not to recommend the Pritzker offer in the face of a better one. At the conclusion of the meeting, the proposed merger was approved.

At a subsequent meeting on October 8, 1981 the directors, with the consent of the Pritzkers, amended the Merger Agreement so as to establish the right of Trans Union to solicit as well as to receive higher bids, [896] although the Pritzkers insisted that their merger proposal be presented to the stockholders at the same time that the proposal of any third party was presented. A second amendment, which became effective on October 10, 1981, further provided that Trans Union might unilaterally terminate the proposed merger with the Pritzker company in the event that prior to February 10, 1981 there existed a definitive agreement with a third party for a merger, consolidation, sale of assets, or purchase or exchange of Trans Union stock which was more favorable for the stockholders of Trans Union than the Pritzker offer and which was conditioned upon receipt of stockholder approval and the absence of an injunction against its consummation.

Following the October 8 board meeting of Trans Union, the investment banking firm of Salomon Brothers was retained by the corporation to search for better offers than that of the Pritzkers, Salomon Brothers being charged with the responsibility of doing "whatever possible to see if there is a superior bid in the marketplace over a bid that is on the table for Trans Union". In undertaking such project, it was agreed that Salomon Brothers would be paid the amount of $500,000 to cover its expenses as well as a fee equal to 3/8ths of 1% of the aggregate fair market value of the consideration to be received by the company in the case of a merger or the like, which meant that in the event Salomon Brothers should find a buyer willing to pay a price of $56.00 a share instead of $55.00, such firm would receive a fee of roughly $2,650,000 plus disbursements.

As the first step in proceeding to carry out its commitment, Salomon Brothers had a brochure prepared, which set forth Trans Union's financial history, described the company's business in detail and set forth Trans Union's operating and financial projections. Salomon Brothers also prepared a list of over 150 companies which it believed might be suitable merger partners, and while four of such companies, namely, General Electric, Borg-Warner, Bendix, and Genstar, Ltd. showed some interest in such a merger, none made a firm proposal to Trans Union and only General Electric showed a sustained interest.^[1] As matters transpired, no firm offer which bettered the Pritzker offer of $55 per share was ever made.

On January 21, 1981 a proxy statement was sent to the shareholders of Trans Union advising them of a February 10, 1981 meeting in which the merger would be voted. On January 26, 1981 the directors held their regular meeting. At this meeting the Board discussed the instant merger as well as all events, including this litigation, surrounding it. At the conclusion of the meeting the Board unanimously voted to recommend to the stockholders that they approve the merger. Additionally, the directors reviewed and approved a Supplemental Proxy Statement which, among other things, advised the stockholders of what had occurred at the instant meeting and of the fact that General Electric had decided not to make an offer. On February 10, 1981 [897] the stockholders of Trans Union met pursuant to notice and voted overwhelmingly in favor of the Pritzker merger, 89% of the votes cast being in favor of it.

I have no quarrel with the majority's analysis of the business judgment rule. It is the application of that rule to these facts which is wrong. An overview of the entire record, rather than the limited view of bits and pieces which the majority has exploded like popcorn, convinces me that the directors made an informed business judgment which was buttressed by their test of the market.

At the time of the September 20 meeting the 10 members of Trans Union's Board of Directors were highly qualified and well informed about the affairs and prospects of Trans Union. These directors were acutely aware of the historical problems facing Trans Union which were caused by the tax laws. They had discussed these problems ad nauseam. In fact, within two months of the September 20 meeting the board had reviewed and discussed an outside study of the company done by The Boston Consulting Group and an internal five year forecast prepared by management. At the September 20 meeting Van Gorkom presented the Pritzker offer, and the board then heard from James Brennan, the company's counsel in this matter, who discussed the legal documents. Following this, the Board directed that certain changes be made in the merger documents. These changes made it clear that the Board was free to accept a better offer than Pritzker's if one was made. The above facts reveal that the Board did not act in a grossly negligent manner in informing themselves of the relevant and available facts before passing on the merger. To the contrary, this record reveals that the directors acted with the utmost care in informing themselves of the relevant and available facts before passing on the merger.

The majority finds that Trans Union stockholders were not fully informed and that the directors breached their fiduciary duty of complete candor to the stockholders required by Lynch v. Vickers Energy Corp., Del.Supr. 383 A.2d 278 (1978) [Lynch I], in that the proxy materials were deficient in five areas.

Here again is exploitation of the negative by the majority without giving credit to the positive. To respond to the conclusions of the majority would merely be unnecessary prolonged argument. But briefly what did the proxy materials disclose? The proxy material informed the shareholders that projections were furnished to potential purchasers and such projections indicated that Trans Union's net income might increase to approximately $153 million in 1985. That projection, what is almost three times the net income of $58,248,000 reported by Trans Union as its net income for December 31, 1979 confirmed the statement in the proxy materials that the "Board of Directors believes that, assuming reasonably favorable economic and financial conditions, the Company's prospects for future earnings growth are excellent." This material was certainly sufficient to place the Company's stockholders on notice that there was a reasonable basis to believe that the prospects for future earnings growth were excellent, and that the value of their stock was more than the stock market value of their shares reflected.

Overall, my review of the record leads me to conclude that the proxy materials adequately complied with Delaware law in informing the shareholders about the proposed transaction and the events surrounding it.

The majority suggests that the Supplemental Proxy Statement did not comply with the notice requirement of 8 Del.C. § 251(c) that notice of the time, place and purpose of a meeting to consider a merger must be sent to each shareholder of record at least 20 days prior to the date of the meeting. In the instant case an original proxy statement was mailed on January 18, 1981 giving notice of the time, place and purpose of the meeting. A Supplemental Proxy Statement was mailed January 26, 1981 in an effort to advise Trans Union's [898] shareholders as to what had occurred at the January 26, 1981 meeting, and that General Electric had decided not to make an offer. The shareholder meeting was held February 10, 1981 fifteen days after the Supplemental Proxy Statement had been sent.

All § 251(c) requires is that notice of the time, place and purpose of the meeting be given at least 20 days prior to the meeting. This was accomplished by the proxy statement mailed January 19, 1981. Nothing in § 251(c) prevents the supplementation of proxy materials within 20 days of the meeting. Indeed when additional information, which a reasonable shareholder would consider important in deciding how to vote, comes to light that information must be disclosed to stockholders in sufficient time for the stockholders to consider it. But nothing in § 251(c) requires this additional information to be disclosed at least 20 days prior to the meeting. To reach a contrary result would ignore the current practice and would discourage the supplementation of proxy materials in order to disclose the occurrence of intervening events. In my opinion, fifteen days in the instant case was a sufficient amount of time for the stockholders to receive and consider the information in the supplemental proxy statement.

CHRISTIE, Justice, dissenting:

I respectfully dissent.

Considering the standard and scope of our review under Levitt v. Bouvier, Del. Supr., 287 A.2d 671, 673 (1972), I believe that the record taken as a whole supports a conclusion that the actions of the defendants are protected by the business judgment rule. Aronson v. Lewis, Del.Supr., 473 A.2d 805, 812 (1984); Pogostin v. Rice, Del.Supr., 480 A.2d 619, 627 (1984). I also am satisfied that the record supports a conclusion that the defendants acted with the complete candor required by Lynch v. Vickers Energy Corp., Del.Supr., 383 A.2d 278 (1978). Under the circumstances I would affirm the judgment of the Court of Chancery.

ON MOTIONS FOR REARGUMENT

Following this Court's decision, Thomas P. O'Boyle, one of the director defendants, sought, and was granted, leave for change of counsel. Thereafter, the individual director defendants, other than O'Boyle, filed a motion for reargument and director O'Boyle, through newly-appearing counsel, then filed a separate motion for reargument. Plaintiffs have responded to the several motions and this matter has now been duly considered.

The Court, through its majority, finds no merit to either motion and concludes that both motions should be denied. We are not persuaded that any errors of law or fact have been made that merit reargument.

However, defendant O'Boyle's motion requires comment. Although O'Boyle continues to adopt his fellow directors' arguments, O'Boyle now asserts in the alternative that he has standing to take a position different from that of his fellow directors and that legal grounds exist for finding him not liable for the acts or omissions of his fellow directors. Specifically, O'Boyle makes a two-part argument: (1) that his undisputed absence due to illness from both the September 20 and the October 8 meetings of the directors of Trans Union entitles him to be relieved from personal liability for the failure of the other directors to exercise due care at those meetings, see Propp v. Sadacca, Del.Ch., 175 A.2d 33, 39 (1961), modified on other grounds, Bennett v. Propp, Del.Supr., 187 A.2d 405 (1962); and (2) that his attendance and participation in the January 26, 1981 Board meeting does not alter this result given this Court's precise findings of error committed at that meeting.

We reject defendant O'Boyle's new argument as to standing because not timely asserted. Our reasons are several. One, in connection with the supplemental briefing of this case in March, 1984, a special opportunity was afforded the individual defendants, [899] including O'Boyle, to present any factual or legal reasons why each or any of them should be individually treated. Thereafter, at argument before the Court on June 11, 1984, the following colloquy took place between this Court and counsel for the individual defendants at the outset of counsel's argument:

COUNSEL: I'll make the argument on behalf of the nine individual defendants against whom the plaintiffs seek more than $100,000,000 in damages. That is the ultimate issue in this case, whether or not nine honest, experienced businessmen should be subject to damages in a case where —

JUSTICE MOORE: Is there a distinction between Chelberg and Van Gorkom vis-a-vis the other defendants?

COUNSEL: No, sir.

JUSTICE MOORE: None whatsoever?

COUNSEL: I think not.

Two, in this Court's Opinion dated January 29, 1985, the Court relied on the individual defendants as having presented a unified defense. We stated:

The parties' response, including reargument, has led the majority of the Court to conclude: (1) that since all of the defendant directors, outside as well as inside, take a unified position, we are required to treat all of the directors as one as to whether they are entitled to the protection of the business judgment rule...

Three, previously O'Boyle took the position that the Board's action taken January 26, 1981 — in which he fully participated — was determinative of virtually all issues. Now O'Boyle seeks to attribute no significance to his participation in the January 26 meeting. Nor does O'Boyle seek to explain his having given before the directors' meeting of October 8, 1980 his "consent to the transaction of such business as may come before the meeting."^[*] It is the view of the majority of the Court that O'Boyle's change of position following this Court's decision on the merits comes too late to be considered. He has clearly waived that right.

The Motions for Reargument of all defendants are denied.

McNEILLY and CHRISTIE, Justices, dissenting:

We do not disagree with the ruling as to the defendant O'Boyle, but we would have granted reargument on the other issues raised.

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[1] The plaintiff, Alden Smith, originally sought to enjoin the merger; but, following extensive discovery, the Trial Court denied the plaintiff's motion for preliminary injunction by unreported letter opinion dated February 3, 1981. On February 10, 1981, the proposed merger was approved by Trans Union's stockholders at a special meeting and the merger became effective on that date. Thereafter, John W. Gosselin was permitted to intervene as an additional plaintiff; and Smith and Gosselin were certified as representing a class consisting of all persons, other than defendants, who held shares of Trans Union common stock on all relevant dates. At the time of the merger, Smith owned 54,000 shares of Trans Union stock, Gosselin owned 23,600 shares, and members of Gosselin's family owned 20,000 shares.

[2] Following trial, and before decision by the Trial Court, the parties stipulated to the dismissal, with prejudice, of the Messrs. Pritzker as parties defendant. However, all references to defendants hereinafter are to the defendant directors of Trans Union, unless otherwise noted.

[3] It has been stipulated that plaintiffs sue on behalf of a class consisting of 10,537 shareholders (out of a total of 12,844) and that the class owned 12,734,404 out of 13,357,758 shares of Trans Union outstanding.

[4] More detailed statements of facts, consistent with this factual outline, appear in related portions of this Opinion.

[5] The common stock of Trans Union was traded on the New York Stock Exchange. Over the five year period from 1975 through 1979, Trans Union's stock had traded within a range of a high of $39½ and a low of $24¼. Its high and low range for 1980 through September 19 (the last trading day before announcement of the merger) was $38¼-$29½.

[6] Van Gorkom asked Romans to express his opinion as to the $55 price. Romans stated that he "thought the price was too low in relation to what he could derive for the company in a cash sale, particularly one which enabled us to realize the values of certain subsidiaries and independent entities."

[7] The record is not clear as to the terms of the Merger Agreement. The Agreement, as originally presented to the Board on September 20, was never produced by defendants despite demands by the plaintiffs. Nor is it clear that the directors were given an opportunity to study the Merger Agreement before voting on it. All that can be said is that Brennan had the Agreement before him during the meeting.

[8] In Van Gorkom's words: The "real decision" is whether to "let the stockholders decide it" which is "all you are being asked to decide today."

[9] The Trial Court stated the premium relationship of the $55 price to the market history of the Company's stock as follows:

* * * the merger price offered to the stockholders of Trans Union represented a premium of 62% over the average of the high and low prices at which Trans Union stock had traded in 1980, a premium of 48% over the last closing price, and a premium of 39% over the highest price at which the stock of Trans Union had traded any time during the prior six years.

[10] We refer to the underlined portion of the Court's ultimate conclusion (previously stated): "that given the market value of Trans Union's stock, the business acumen of the members of the board of Trans Union, the substantial premium over market offered by the Pritzkers and the ultimate effect on the merger price provided by the prospect of other bids for the stock in question, that the board of directors of Trans Union did not act recklessly or improvidently...."

[11] 8 Del.C. § 141 provides, in pertinent part:

(a) The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation.

[12] See Kaplan v. Centex Corporation, Del.Ch., 284 A.2d 119, 124 (1971), where the Court stated:

Application of the [business judgment] rule of necessity depends upon a showing that informed directors did in fact make a business judgment authorizing the transaction under review. And, as the plaintiff argues, the difficulty here is that the evidence does not show that this was done. There were director-committee-officer references to the realignment but none of these singly or cumulative showed that the director judgment was brought to bear with specificity on the transactions.

[13] Compare Mitchell v. Highland-Western Glass, supra, where the Court posed the question as whether the board acted "so far without information that they can be said to have passed an unintelligent and unadvised judgment." 167 A. at 833. Compare also Gimbel v. Signal Companies, Inc., 316 A.2d 599, aff'd per curiam Del. Supr., 316 A.2d 619 (1974), where the Chancellor, after expressly reiterating the Highland-Western Glass standard, framed the question, "Or to put the question in its legal context, did the Signal directors act without the bounds of reason and recklessly in approving the price offer of Burmah?" Id.

[14] 8 Del.C. § 251(b) provides in pertinent part:

(b) The board of directors of each corporation which desires to merge or consolidate shall adopt a resolution approving an agreement of merger or consolidation. The agreement shall state: (1) the terms and conditions of the merger or consolidation; (2) the mode of carrying the same into effect; (3) such amendments or changes in the certificate of incorporation of the surviving corporation as are desired to be effected by the merger or consolidation, or, if no such amendments or changes are desired, a statement that the certificate of incorporation of one of the constituent corporations shall be the certificate of incorporation of the surviving or resulting corporation; (4) the manner of converting the shares of each of the constituent corporations... and (5) such other details or provisions as are deemed desirable.... The agreement so adopted shall be executed in accordance with section 103 of this title. Any of the terms of the agreement of merger or consolidation may be made dependent upon facts ascertainable outside of such agreement, provided that the manner in which such facts shall operate upon the terms of the agreement is clearly and expressly set forth in the agreement of merger or consolidation. (underlining added for emphasis)

[15] Section 141(e) provides in pertinent part:

A member of the board of directors ... shall, in the performance of his duties, be fully protected in relying in good faith upon the books of accounts or reports made to the corporation by any of its officers, or by an independent certified public accountant, or by an appraiser selected with reasonable care by the board of directors ..., or in relying in good faith upon other records of the corporation.

[16] In support of the defendants' argument that their judgment as to the adequacy of $55 per share was an informed one, the directors rely on the BCG study and the Five Year Forecast. However, no one even referred to either of these studies at the September 20 meeting; and it is conceded that these materials do not represent valuation studies. Hence, these documents do not constitute evidence as to whether the directors reached an informed judgment on September 20 that $55 per share was a fair value for sale of the Company.

[17] We reserve for discussion under Part III hereof, the defendants' contention that their judgment, reached on September 20, if not then informed became informed by virtue of their "review" of the Agreement on October 8 and January 26.

[18] Romans' department study was not made available to the Board until circulation of Trans Union's Supplementary Proxy Statement and the Board's meeting of January 26, 1981, on the eve of the shareholder meeting; and, as has been noted, the study has never been produced for inclusion in the record in this case.

[19] As of September 20 the directors did not know: that Van Gorkom had arrived at the $55 figure alone, and subjectively, as the figure to be used by Controller Peterson in creating a feasible structure for a leveraged buy-out by a prospective purchaser; that Van Gorkom had not sought advice, information or assistance from either inside or outside Trans Union directors as to the value of the Company as an entity or the fair price per share for 100% of its stock; that Van Gorkom had not consulted with the Company's investment bankers or other financial analysts; that Van Gorkom had not consulted with or confided in any officer or director of the Company except Chelberg; and that Van Gorkom had deliberately chosen to ignore the advice and opinion of the members of his Senior Management group regarding the adequacy of the $55 price.

[20] For a far more careful and reasoned approach taken by another board of directors faced with the pressures of a hostile tender offer, see Pogostin v. Rice, supra at 623-627.

[21] Trans Union's five "inside" directors had backgrounds in law and accounting, 116 years of collective employment by the Company and 68 years of combined experience on its Board. Trans Union's five "outside" directors included four chief executives of major corporations and an economist who was a former dean of a major school of business and chancellor of a university. The "outside" directors had 78 years of combined experience as chief executive officers of major corporations and 50 years of cumulative experience as directors of Trans Union. Thus, defendants argue that the Board was eminently qualified to reach an informed judgment on the proposed "sale" of Trans Union notwithstanding their lack of any advance notice of the proposal, the shortness of their deliberation, and their determination not to consult with their investment banker or to obtain a fairness opinion.

[22] Nonetheless, we are satisfied that in an appropriate factual context a proper exercise of business judgment may include, as one of its aspects, reasonable reliance upon the advice of counsel. This is wholly outside the statutory protections of 8 Del.C. § 141(e) involving reliance upon reports of officers, certain experts and books and records of the company.

[23] As will be seen, we do not reach the second question.

[24] As previously noted, the Board mistakenly thought that it had amended the September 20 draft agreement to include a market test.

A secondary purpose of the October 8 meeting was to obtain the Board's approval for Trans Union to employ its investment advisor, Salomon Brothers, for the limited purpose of assisting Management in the solicitation of other offers. Neither Management nor the Board then or thereafter requested Salomon Brothers to submit its opinion as to the fairness of Pritzker's $55 cash-out merger proposal or to value Trans Union as an entity.

There is no evidence of record that the October 8 meeting had any other purpose; and we also note that the Minutes of the October 8 Board meeting, including any notice of the meeting, are not part of the voluminous records of this case.

[25] We do not suggest that a board must read in haec verba every contract or legal document which it approves, but if it is to successfully absolve itself from charges of the type made here, there must be some credible contemporary evidence demonstrating that the directors knew what they were doing, and ensured that their purported action was given effect. That is the consistent failure which cast this Board upon its unredeemable course.

[26] There is no evidence of record that Trans Union's directors ever raised any objections, procedural or substantive, to the October 10 amendments or that any of them, including Van Gorkom, understood the opposite result of their intended effect — until it was too late.

[27] This was inconsistent with Van Gorkom's espousal of the September 22 press release following Trans Union's acceptance of Pritzker's proposal. Van Gorkom had then justified a press release as encouraging rather than chilling later offers.

[28] The defendants concede that Muschel is only illustrative of the proposition that a board may reconsider a prior decision and that it is otherwise factually distinguishable from this case.

[29] This was the meeting which, under the terms of the September 20 Agreement with Pritzker, was scheduled to be held January 10 and was later postponed to February 10 under the October 8-10 amendments. We refer to the document titled "Amendment to Supplemental Agreement" executed by the parties "as of" October 10, 1980. Under new Section 2.03(a) of Article A VI of the "Supplemental Agreement," the parties agreed, in part, as follows:

"The solicitation of such offers or proposals [i.e., `other offers that Trans Union might accept in lieu of the Merger Agreement'] by TU... shall not be deemed to constitute a breach of this Supplemental Agreement or the Merger Agreement provided that ... [Trans Union] shall not (1) delay promptly seeking all consents and approvals required hereunder ... [and] shall be deemed [in compliance] if it files its Preliminary Proxy Statement by December 5, 1980, uses its best efforts to mail its Proxy Statement by January 5, 1981 and holds a special meeting of its Stockholders on or prior to February 10, 1981 ...

* * * * * *

It is the present intention of the Board of Directors of TU to recommend the approval of the Merger Agreement to the Stockholders, unless another offer or proposal is made which in their opinion is more favorable to the Stockholders than the Merger Agreement."

[30] With regard to the Pritzker merger, the recently filed shareholders' suit to enjoin it, and relevant portions of the impending stockholder meeting of February 10, we set forth the Minutes in their entirety:

The Board then reviewed the necessity of issuing a Supplement to the Proxy Statement mailed to stockholders on January 21, 1981, for the special meeting of stockholders scheduled to be held on February 10, 1981, to vote on the proposed $55 cash merger with a subsidiary of GE Corporation. Among other things, the Board noted that subsequent to the printing of the Proxy Statement mailed to stockholders on January 21, 1981, General Electric Company had indicated that it would not be making an offer to acquire the Company. In addition, certain facts had been adduced in connection with pretrial discovery taken in connection with the lawsuit filed by Alden Smith in Delaware Chancery Court. After further discussion and review of a printer's proof copy of a proposed Supplement to the Proxy Statement which had been distributed to Directors the preceding day, upon motion duly made and seconded, the following resolution was unanimously adopted, each Director having been individually polled with respect thereto:

RESOLVED, that the Secretary of the Company be and he hereby is authorized and directed to mail to the stockholders a Supplement to Proxy Statement, substantially in the form of the proposed Supplement to Proxy Statement submitted to the Board at this meeting, with such changes therein and modifications thereof as he shall, with the advice and assistance of counsel, approve as being necessary, desirable, or appropriate.

The Board then reviewed and discussed at great length the entire sequence of events pertaining to the proposed $55 cash merger with a subsidiary of GE Corporation, beginning with the first discussion on September 13, 1980, between the Chairman and Mr. Jay Pritzker relative to a possible merger. Each of the Directors was involved in this discussion as well as counsel who had earlier joined the meeting. Following this review and discussion, such counsel advised the Directors that in light of their discussions, they could (a) continue to recommend to the stockholders that the latter vote in favor of the proposed merger, (b) recommend that the stockholders vote against the merger, or (c) take no position with respect to recommending the proposed merger and simply leave the decision to stockholders. After further discussion, it was moved, seconded, and unanimously voted that the Board of Directors continue to recommend that the stockholders vote in favor of the proposed merger, each Director being individually polled with respect to his vote.

[31] In particular, the defendants rely on the testimony of director Johnson on direct examination:

Q. Was there a regular meeting of the board of Trans Union on January 26, 1981?

A. Yes.

Q. And what was discussed at that meeting?

A. Everything relevant to this transaction.

You see, since the proxy statement of the 19th had been mailed, see, General Electric had advised that they weren't going to make a bid. It was concluded to suggest that the shareholders be advised of that, and that required a supplemental proxy statement, and that required authorization of the board, and that led to a total review from beginning to end of every aspect of the whole transaction and all relevant developments.

Since that was occurring and a supplemental statement was going to the shareholders, it also was obvious to me that there should be a review of the board's position again in the light of the whole record. And we went back from the beginning. Everything was examined and reviewed. Counsel were present. And the board was advised that we could recommend the Pritzker deal, we could submit it to the shareholders with no recommendation, or we could recommend against it.

The board voted to issue the supplemental statement to the shareholders. It voted unanimously — and this time we had a unanimous board, where one man was missing before — to recommend the Pritzker deal. Indeed, at that point there was no other deal. And, in truth, there never had been any other deal. And that's what transpired: a total review of the GE situation, KKR and everything else that was relevant.

[32] To the extent the Trial Court's ultimate conclusion to invoke the business judgment rule is based on other explicit criteria and supporting evidence (i.e., market value of Trans Union's stock, the business acumen of the Board members, the substantial premium over market and the availability of the market test to confirm the adequacy of the premium), we have previously discussed the insufficiency of such evidence.

[33] The pertinent provisions of 8 Del.C. § 251(c) provide:

(c) The agreement required by subsection (b) shall be submitted to the stockholders of each constituent corporation at an annual or special meeting thereof for the purpose of acting on the agreement. Due notice of the time, place and purpose of the meeting shall be mailed to each holder of stock, whether voting or non-voting, of the corporation at his address as it appears on the records of the corporation, at least 20 days prior to the date of the meeting....

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[1] Shortly after the announcement of the proposed merger in September senior members of Trans Union's management got in touch with KKR to discuss their possible participation in a leverage buyout scheme. On December 2, 1980 KKR through Henry Kravis actually made a bid of $60.00 per share for Trans Union stock on December 2, 1980 but the offer was withdrawn three hours after it was made because of complications arising out of negotiations with the Reichman family, extremely wealthy Canadians and a change of attitude toward the leveraged buyout scheme, by Jack Kruzenga, the member of senior management of Trans Union who most likely would have been President and Chief Operating Officer of the new company. Kruzenga was the President and Chief Operating Officer of the seven subsidiaries of Trans Union which constituted the backbone of Trans Union as shown through exhaustive studies and analysis of Trans Union's intrinsic value on the market place by the respected investment banking firm of Morgan Stanley. It is interesting to note that at no time during the market test period did any of the 150 corporations contacted by Salomon Brothers complain of the time frame or availability of corporate records in order to make an independent judgment of market value of 100% of Trans Union.

[*] We do not hereby determine that a director's execution of a waiver of notice of meeting and consent to the transaction of business constitutes an endorsement (or approval) by the absent director of any action taken at such a meeting.

[652] A. Gilchrist Sparks, III, and Michael Houghton of Morris, Nichols, Arsht & Tunnell, Wilmington, and Greg A. Danilow, M. Nicole Marcey, and Meric Craig Bloch, of Weil, Gotshal & Manges, and Linda C. Goldstein of Kramer, Levin, Nessen, Kamin & Frankel, New York City, for plaintiffs.

Charles F. Richards, Jr., Samuel A. Nolan, and Cynthia D. Kaiser of Richards, Layton & Finger, Wilmington, and Kenneth R. Logan, Joseph F. Tringali, David A. Martland, and Brad N. Friedman of Simpson Thacher & Bartlett, New York City, for defendants.

OPINION

ALLEN, Chancellor.

Two cases pitting the directors of Atlas Corporation against that company's largest (9.1%) shareholder, Blasius Industries, have been consolidated and tried together. Together, these cases ultimately require the court to determine who is entitled to sit on Atlas' board of directors. Each, however, presents discrete and important legal issues.

The first of the cases was filed on December 30, 1987. As amended, it challenges the validity of board action taken at a telephone meeting of December 31, 1987 that added two new members to Atlas' seven member board. That action was taken as an immediate response to the delivery to Atlas by Blasius the previous day of a form of stockholder consent that, if joined in by holders of a majority of Atlas' stock, would have increased the board of Atlas from seven to fifteen members and would have elected eight new members nominated by Blasius.

As I find the facts of this first case, they present the question whether a board acts consistently with its fiduciary duty when it acts, in good faith and with appropriate care, for the primary purpose of preventing or impeding an unaffiliated majority of shareholders from expanding the board and electing a new majority. For the reasons that follow, I conclude that, even though defendants here acted on their view of the corporation's interest and not selfishly, their December 31 action constituted an offense to the relationship between corporate directors and shareholders that has traditionally been protected in courts of equity. As a consequence, I conclude that the board action taken on December 31 was invalid and must be voided. The basis for this opinion is set forth at pages 658-663 below.

The second filed action was commenced on March 9, 1988. It arises out of the consent solicitation itself (or an amended [653] version of it) and requires the court to determine the outcome of Blasius' consent solicitation, which was warmly and actively contested on both sides. The vote was, on either view of the facts and law, extremely close. For the reasons set forth at pages 663-670 below, I conclude that the judges of election properly confined their count to the written "ballots" (so to speak) before them; that on that basis, they made several errors, but that correction of those errors does not reverse the result they announced. I therefore conclude that plaintiffs' consent solicitation failed to garner the support of a majority of Atlas shares.

The facts set forth below represent findings based upon a preponderance of the admissible evidence, as I evaluate it.

I.

Blasius Acquires a 9% Stake in Atlas.

Blasius is a new stockholder of Atlas. It began to accumulate Atlas shares for the first time in July, 1987. On October 29, it filed a Schedule 13D with the Securities Exchange Commission disclosing that, with affiliates, it then owed 9.1% of Atlas' common stock. It stated in that filing that it intended to encourage management of Atlas to consider a restructuring of the Company or other transaction to enhance shareholder values. It also disclosed that Blasius was exploring the feasibility of obtaining control of Atlas, including instituting a tender offer or seeking "appropriate" representation on the Atlas board of directors.

Blasius has recently come under the control of two individuals, Michael Lubin and Warren Delano, who after experience in the commercial banking industry, had, for a short time, run a venture capital operation for a small investment banking firm. Now on their own, they apparently came to control Blasius with the assistance of Drexel Burnham's well noted junk bond mechanism. Since then, they have made several attempts to effect leveraged buyouts, but without success.

In May, 1987, with Drexel Burnham serving as underwriter, Lubin and Delano caused Blasius to raise $60 million through the sale of junk bonds. A portion of these funds were used to acquire a 9% position in Atlas. According to its public filings with the SEC, Blasius' debt service obligations arising out of the sale of the junk bonds are such that it is unable to service those obligations from its income from operations.

The prospect of Messrs. Lubin and Delano involving themselves in Atlas' affairs, was not a development welcomed by Atlas' management. Atlas had a new CEO, defendant Weaver, who had, over the course of the past year or so, overseen a business restructuring of a sort. Atlas had sold three of its five divisions. It had just announced (September 1, 1987) that it would close its once important domestic uranium operation. The goal was to focus the Company on its gold mining business. By October, 1987, the structural changes to do this had been largely accomplished. Mr. Weaver was perhaps thinking that the restructuring that had occurred should be given a chance to produce benefit before another restructuring (such as Blasius had alluded to in its Schedule 13D filing) was attempted, when he wrote in his diary on October 30, 1987:

13D by Delano & Lubin came in today. Had long conversation w/MAH & Mark Golden [of Goldman, Sachs] on issue. All agree we must dilute these people down by the acquisition of another Co. w/stock, or merger or something else.

The Blasius Proposal of A Leverage Recapitalization Or Sale.

Immediately after filing its 13D on October 29, Blasius' representatives sought a meeting with the Atlas management. Atlas dragged its feet. A meeting was arranged for December 2, 1987 following the regular meeting of the Atlas board. Attending that meeting were Messrs. Lubin and Delano for Blasius, and, for Atlas, Messrs. Weaver, Devaney (Atlas' CFO), Masinter (legal counsel and director) and Czajkowski (a representative of Atlas' investment banker, Goldman Sachs).

[654] At that meeting, Messrs. Lubin and Delano suggested that Atlas engage in a leveraged restructuring and distribute cash to shareholders. In such a transaction, which is by this date a commonplace form of transaction, a corporation typically raises cash by sale of assets and significant borrowings and makes a large one time cash distribution to shareholders. The shareholders are typically left with cash and an equity interest in a smaller, more highly leveraged enterprise. Lubin and Delano gave the outline of a leveraged recapitalization for Atlas as they saw it.

Immediately following the meeting, the Atlas representatives expressed among themselves an initial reaction that the proposal was infeasible. On December 7, Mr. Lubin sent a letter detailing the proposal. In general, it proposed the following: (1) an initial special cash dividend to Atlas' stockholders in an aggregate amount equal to (a) $35 million, (b) the aggregate proceeds to Atlas from the exercise of option warrants and stock options, and (c) the proceeds from the sale or disposal of all of Atlas' operations that are not related to its continuing minerals operations; and (2) a special non-cash dividend to Atlas' stockholders of an aggregate $125 million principal amount of 7% Secured Subordinated Gold-Indexed Debentures. The funds necessary to pay the initial cash dividend were to principally come from (i) a "gold loan" in the amount of $35,625,000, repayable over a three to five year period and secured by 75,000 ounces of gold at a price of $475 per ounce, (ii) the proceeds from the sale of the discontinued Brockton Sole and Plastics and Ready-Mix Concrete businesses, and (iii) a then expected January, 1988 sale of uranium to the Public Service Electric & Gas Company. (DX H.)

Atlas Asks Its Investment Banker to Study the Proposal.

This written proposal was distributed to the Atlas board on December 9 and Goldman Sachs was directed to review and analyze it.

The proposal met with a cool reception from management. On December 9, Mr. Weaver issued a press release expressing surprise that Blasius would suggest using debt to accomplish what he characterized as a substantial liquidation of Atlas at a time when Atlas' future prospects were promising. He noted that the Blasius proposal recommended that Atlas incur a high debt burden in order to pay a substantial one time dividend consisting of $35 million in cash and $125 million in subordinated debentures. Mr. Weaver also questioned the wisdom of incurring an enormous debt burden amidst the uncertainty in the financial markets that existed in the aftermath of the October crash.

Blasius attempted on December 14 and December 22 to arrange a further meeting with the Atlas management without success. During this period, Atlas provided Goldman Sachs with projections for the Company. Lubin was told that a further meeting would await completion of Goldman's analysis. A meeting after the first of the year was proposed.

The Delivery of Blasius' Consent Statement.

On December 30, 1987, Blasius caused Cede & Co. (the registered owner of its Atlas stock) to deliver to Atlas a signed written consent (1) adopting a precatory resolution recommending that the board develop and implement a restructuring proposal, (2) amending the Atlas bylaws to, among other things, expand the size of the board from seven to fifteen members — the maximum number under Atlas' charter, and (3) electing eight named persons to fill the new directorships. Blasius also filed suit that day in this court seeking a declaration that certain bylaws adopted by the board on September 1, 1987 acted as an unlawful restraint on the shareholders' right, created by Section 228 of our corporation statute, to act through consent without undergoing a meeting.

The reaction was immediate. Mr. Weaver conferred with Mr. Masinter, the Company's outside counsel and a director, who viewed the consent as an attempt to take control of the Company. They decided to call an emergency meeting of the board, even though a regularly scheduled meeting was to occur only one week hence, on January [655] 6, 1988. The point of the emergency meeting was to act on their conclusion (or to seek to have the board act on their conclusion) "that we should add at least one and probably two directors to the board ..." (Tr. 85, Vol. II). A quorum of directors, however, could not be arranged for a telephone meeting that day. A telephone meeting was held the next day. At that meeting, the board voted to amend the bylaws to increase the size of the board from seven to nine and appointed John M. Devaney and Harry J. Winters, Jr. to fill those newly created positions. Atlas' Certificate of Incorporation creates staggered terms for directors; the terms to which Messrs. Devaney and Winters were appointed would expire in 1988 and 1990, respectively.

The Motivation of the Incumbent Board In Expanding the Board and Appointing New Members.

In increasing the size of Atlas' board by two and filling the newly created positions, the members of the board realized that they were thereby precluding the holders of a majority of the Company's shares from placing a majority of new directors on the board through Blasius' consent solicitation, should they want to do so. Indeed the evidence establishes that that was the principal motivation in so acting.

The conclusion that, in creating two new board positions on December 31 and electing Messrs. Devaney and Winters to fill those positions the board was principally motivated to prevent or delay the shareholders from possibly placing a majority of new members on the board, is critical to my analysis of the central issue posed by the first filed of the two pending cases. If the board in fact was not so motivated, but rather had taken action completely independently of the consent solicitation, which merely had an incidental impact upon the possible effectuation of any action authorized by the shareholders, it is very unlikely that such action would be subject to judicial nullification. See, e.g., Frantz Manufacturing Company v. EAC Industries, Del.Supr., 501 A.2d 401, 407 (1985); Moran v. Household International, Inc., Del.Ch., 490 A.2d 1059, 1080, aff'd, Del. Supr., 500 A.2d 1346 (1985). The board, as a general matter, is under no fiduciary obligation to suspend its active management of the firm while the consent solicitation process goes forward.

There is testimony in the record to support the proposition that, in acting on December 31, the board was principally motivated simply to implement a plan to expand the Atlas board that preexisted the September, 1987 emergence of Blasius as an active shareholder. I have no doubt that the addition of Mr. Winters, an expert in mining economics, and Mr. Devaney, a financial expert employed by the Company, strengthened the Atlas board and, should anyone ever have reason to review the wisdom of those choices, they would be found to be sensible and prudent. I cannot conclude, however, that the strengthening of the board by the addition of these men was the principal motive for the December 31 action. As I view this factual determination as critical, I will pause to dilate briefly upon the evidence that leads me to this conclusion.

The evidence indicates that CEO Weaver was acquainted with Mr. Winters prior to the time he assumed the presidency of Atlas. When, in the fall of 1986, Mr. Weaver learned of his selection as Atlas' future CEO, he informally approached Mr. Winters about serving on the board of the Company. Winters indicated a willingness to do so and sent to Mr. Weaver a copy of his curriculum vitae. Weaver, however, took no action with respect to this matter until he had some informal discussion with other board members on December 2, 1987, the date on which Mr. Lubin orally presented Blasius' restructuring proposal to management. At that time, he mentioned the possibility to other board members.

Then, on December 7, Mr. Weaver called Mr. Winters on the telephone and asked him if he would serve on the board and Mr. Winters again agreed.

On December 24, 1987, Mr. Weaver wrote to other board members, sending them Mr. Winters curriculum vitae and notifying them that Mr. Winters would be [656] proposed for board membership at the forthcoming January 6 meeting. It was also suggested that a dinner meeting be scheduled for January 5, in order to give board members who did not know Mr. Winters an opportunity to meet him prior to acting on that suggestion. The addition of Mr. Devaney to the board was not mentioned in that memo, nor, so far as the record discloses, was it discussed at the December 2 board meeting.

It is difficult to consider the timing of the activation of the interest in adding Mr. Winters to the board in December as simply coincidental with the pressure that Blasius was applying. The connection between the two events, however, becomes unmistakably clear when the later events of December 30 and 31 are focused upon. As noted above, on the 30th, Atlas received the Blasius consent which proposed to shareholders that they expand the board from seven to fifteen and add eight new members identified in the consent. It also proposed the adoption of a precatory resolution encouraging restructuring or sale of the Company. Mr. Weaver immediately met with Mr. Masinter. In addition to receiving the consent, Atlas was informed it had been sued in this court, but it did not yet know the thrust of that action. At that time, Messrs. Weaver and Masinter "discussed a lot of [reactive] strategies and Edgar [Masinter] told me we really got to put a program together to go forward with this consent.... we talked about taking no action. We talked about adding one board member. We talked about adding two board members. We talked about adding eight board members. And we did a lot of looking at other and various and sundry alternatives...." (Weaver Testimony, Tr. I, p. 130). They decided to add two board members and to hold an emergency board meeting that very day to do so. It is clear that the reason that Mr. Masinter advised taking this step immediately rather than waiting for the January 6 meeting was that he feared that the Court of Chancery might issue a temporary restraining order prohibiting the board from increasing its membership, since the consent solicitation had commenced. It is admitted that there was no fear that Blasius would be in a position to complete a public solicitation for consents prior to the January 6 board meeting.

In this setting, I conclude that, while the addition of these qualified men would, under other circumstances, be clearly appropriate as an independent step, such a step was in fact taken in order to impede or preclude a majority of the shareholders from effectively adopting the course proposed by Blasius. Indeed, while defendants never forsake the factual argument that that action was simply a continuation of business as usual, they, in effect, admit from time to time this overriding purpose. For example, everyone concedes that the directors understood on December 31 that the effect of adding two directors would be to preclude stockholders from effectively implementing the Blasius proposal. Mr. Weaver, for example, testifies as follows:

Q: Was it your view that by electing these two directors, Atlas was preventing Blasius from electing a majority of the board?

A: I think that is a component of my total overview. I think in the short term, yes, it did.

Directors Farley and Bongiovanni admit that the board acted to slow the Blasius proposal down. See Tr. T, Vol. I, at pp. 23-24 and 81.

This candor is praiseworthy, but any other statement would be frankly incredible. The timing of these events is, in my opinion, consistent only with the conclusion that Mr. Weaver and Mr. Masinter originated, and the board immediately endorsed, the notion of adding these competent, friendly individuals to the board, not because the board felt an urgent need to get them on the board immediately for reasons relating to the operations of Atlas' business, but because to do so would, for the moment, preclude a majority of shareholders from electing eight new board members selected by Blasius. As explained below, I conclude that, in so acting, the board was not selfishly motivated simply to retain power.

There was no discussion at the December 31 meeting of the feasibility or wisdom of the Blasius restructuring proposal. While [657] several of the directors had an initial impression that the plan was not feasible and, if implemented, would likely result in the eventual liquidation of the Company, they had not yet focused upon and acted on that subject. Goldman Sachs had not yet made its report, which was scheduled to be given January 6.

The January 6 Rejection of the Blasius Proposal.

On January 6, the board convened for its scheduled meeting. At that time, it heard a full report from its financial advisor concerning the feasibility of the Blasius restructuring proposal. The Goldman Sachs presentation included a summary of five year cumulative cash flows measured against a base case and the Blasius proposal, an analysis of Atlas' debt repayment capacity under the Blasius proposal, and pro forma income and cash flow statements for a base case and the Blasius proposal, assuming prices of $375, $475 and $575 per ounce of gold.

After completing that presentation, Goldman Sachs concluded with its view that if Atlas implemented the Blasius restructuring proposal (i) a severe drain on operating cash flow would result, (ii) Atlas would be unable to service its long-term debt and could end up in bankruptcy, (iii) the common stock of Atlas would have little or no value, and (iv) since Atlas would be unable to generate sufficient cash to service its debt, the debentures contemplated to be issued in the proposed restructuring could have a value of only 20% to 30% of their face amount. Goldman Sachs also said that it knew of no financial restructuring that had been undertaken by a company where the company had no chance of repaying its debt, which, in its judgment, would be Atlas' situation if it implemented the Blasius restructuring proposal. Finally, Goldman Sachs noted that if Atlas made a meaningful commercial discovery of gold after implementation of the Blasius restructuring proposal, Atlas would not have the resources to develop the discovery.

The board then voted to reject the Blasius proposal. Blasius was informed of that action. The next day, Blasius caused a second, modified consent to be delivered to Atlas. A contest then ensued between the Company and Blasius for the votes of Atlas' shareholders. The facts relating to that contest, and a determination of its outcome, form the subject of the second filed lawsuit to be now decided. That matter, however, will be deferred for the moment as the facts set forth above are sufficient to frame and decide the principal remaining issue raised by the first filed action: whether the December 31 board action, in increasing the board by two and appointing members to fill those new positions, constituted, in the circumstances, an inequitable interference with the exercise of shareholder rights.

II.

Plaintiff attacks the December 31 board action as a selfishly motivated effort to protect the incumbent board from a perceived threat to its control of Atlas. Their conduct is said to constitute a violation of the principle, applied in such cases as Schnell v. Chris Craft Industries, Del. Supr., 285 A.2d 437 (1971), that directors hold legal powers subjected to a supervening duty to exercise such powers in good faith pursuit of what they reasonably believe to be in the corporation's interest. The December 31 action is also said to have been taken in a grossly negligent manner, since it was designed to preclude the recapitalization from being pursued, and the board had no basis at that time to make a prudent determination about the wisdom of that proposal, nor was there any emergency that required it to act in any respect regarding that proposal before putting itself in a position to do so advisedly.

Defendants, of course, contest every aspect of plaintiffs' claims. They claim the formidable protections of the business judgment rule. See, e.g., Aronson v. Lewis, Del.Supr., 473 A.2d 805 (1983); Grobow v. Perot, Del.Supr., 539 A.2d 180 (1988); In re J.P. Stevens & Co., Inc. Shareholders Litigation, Del.Ch., 542 A.2d 770 (1988).

They say that, in creating two new board positions and filling them on December 31, they acted without a conflicting interest [658] (since the Blasius proposal did not, in any event, challenge their places on the board), they acted with due care (since they well knew the persons they put on the board and did not thereby preclude later consideration of the recapitalization), and they acted in good faith (since they were motivated, they say, to protect the shareholders from the threat of having an impractical, indeed a dangerous, recapitalization program foisted upon them). Accordingly, defendants assert there is no basis to conclude that their December 31 action constituted any violation of the duty of the fidelity that a director owes by reason of his office to the corporation and its shareholders.

Moreover, defendants say that their action was fair, measured and appropriate, in light of the circumstances. Therefore, even should the court conclude that some level of substantive review of it is appropriate under a legal test of fairness, or under the intermediate level of review authorized by Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946 (1985), defendants assert that the board's decision must be sustained as valid in both law and equity.

III.

One of the principal thrusts of plaintiffs' argument is that, in acting to appoint two additional persons of their own selection, including an officer of the Company, to the board, defendants were motivated not by any view that Atlas' interest (or those of its shareholders) required that action, but rather they were motivated improperly, by selfish concern to maintain their collective control over the Company. That is, plaintiffs say that the evidence shows there was no policy dispute or issue that really motivated this action, but that asserted policy differences were pretexts for entrenchment for selfish reasons. If this were found to be factually true, one would not need to inquire further. The action taken would constitute a breach of duty. Schnell v. Chris Craft Industries, Del.Supr., 285 A.2d 437 (1971); Guiricich v. Emtrol Corp., Del.Supr., 449 A.2d 232 (1982).

In support of this view, plaintiffs point to the early diary entry of Mr. Weaver (p. 653, supra), to the lack of any consideration at all of the Blasius recapitalization proposal at the December 31 meeting, the lack of any substantial basis for the outside directors to have had any considered view on the subject by that time — not having had any view from Goldman Sachs nor seen the financial data that it regarded as necessary to evaluate the proposal — and upon what it urges is the grievously flawed, slanted analysis that Goldman Sachs finally did present.

While I am satisfied that the evidence is powerful, indeed compelling, that the board was chiefly motivated on December 31 to forestall or preclude the possibility that a majority of shareholders might place on the Atlas board eight new members sympathetic to the Blasius proposal, it is less clear with respect to the more subtle motivational question: whether the existing members of the board did so because they held a good faith belief that such shareholder action would be self-injurious and shareholders needed to be protected from their own judgment.

On balance, I cannot conclude that the board was acting out of a self-interested motive in any important respect on December 31. I conclude rather that the board saw the "threat" of the Blasius recapitalization proposal as posing vital policy differences between itself and Blasius. It acted, I conclude, in a good faith effort to protect its incumbency, not selfishly, but in order to thwart implementation of the recapitalization that it feared, reasonably, would cause great injury to the Company.

The real question the case presents, to my mind, is whether, in these circumstances, the board, even if it is acting with subjective good faith (which will typically, if not always, be a contestable or debatable judicial conclusion), may validly act for the principal purpose of preventing the shareholders from electing a majority of new directors. The question thus posed is not one of intentional wrong (or even negligence), but one of authority as between the fiduciary and the beneficiary (not simply [659] legal authority, i.e., as between the fiduciary and the world at large).

IV.

It is established in our law that a board may take certain steps — such as the purchase by the corporation of its own stock — that have the effect of defeating a threatened change incorporate control, when those steps are taken advisedly, in good faith pursuit of a corporate interest, and are reasonable in relation to a threat to legitimate corporate interests posed by the proposed change in control. See Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946 (1985); Kors v. Carey, Del. Ch., 158 A.2d 136 (1960); Cheff v. Mathes, Del.Supr., 199 A.2d 548 (1964); Kaplan v. Goldsamt, Del.Ch., 380 A.2d 556 (1977). Does this rule — that the reasonable exercise of good faith and due care generally validates, in equity, the exercise of legal authority even if the act has an entrenchment effect — apply to action designed for the primary purpose of interfering with the effectiveness of a stockholder vote? Our authorities, as well as sound principles, suggest that the central importance of the franchise to the scheme of corporate governance, requires that, in this setting, that rule not be applied and that closer scrutiny be accorded to such transaction.

1. Why the deferential business judgment rule does not apply to board acts taken for the primary purpose of interfering with a stockholder's vote, even if taken advisedly and in good faith.

A. The question of legitimacy.

The shareholder franchise is the ideological underpinning upon which the legitimacy of directorial power rests. Generally, shareholders have only two protections against perceived inadequate business performance. They may sell their stock (which, if done in sufficient numbers, may so affect security prices as to create an incentive for altered managerial performance), or they may vote to replace incumbent board members.

It has, for a long time, been conventional to dismiss the stockholder vote as a vestige or ritual of little practical importance.^[1] It may be that we are now witnessing the emergence of new institutional voices and arrangements that will make the stockholder vote a less predictable affair than it has been. Be that as it may, however, whether the vote is seen functionally as an unimportant formalism, or as an important tool of discipline, it is clear that it is critical to the theory that legitimates the exercise of power by some (directors and officers) over vast aggregations of property that they do not own. Thus, when viewed from a broad, institutional perspective, it can be seen that matters involving the integrity of the shareholder voting process involve consideration not present in any other context in which directors exercise delegated power.

B. Questions of this type raise issues of the allocation of authority as between the board and the shareholders.

The distinctive nature of the shareholder franchise context also appears when the matter is viewed from a less generalized, doctrinal point of view. From this point of view, as well, it appears that the ordinary considerations to which the business judgment rule originally responded are simply not present in the shareholder voting context.^[2] That is, a decision by the [660] board to act for the primary purpose of preventing the effectiveness of a shareholder vote inevitably involves the question who, as between the principal and the agent, has authority with respect to a matter of internal corporate governance. That, of course, is true in a very specific way in this case which deals with the question who should constitute the board of directors of the corporation, but it will be true in every instance in which an incumbent board seeks to thwart a shareholder majority. A board's decision to act to prevent the shareholders from creating a majority of new board positions and filling them does not involve the exercise of the corporation's power over its property, or with respect to its rights or obligations; rather, it involves allocation, between shareholders as a class and the board, of effective power with respect to governance of the corporation. This need not be the case with respect to other forms of corporate action that may have an entrenchment effect — such as the stock buybacks present in Unocal, Cheff or Kors v. Carey. Action designed principally to interfere with the effectiveness of a vote inevitably involves a conflict between the board and a shareholder majority. Judicial review of such action involves a determination of the legal and equitable obligations of an agent towards his principal. This is not, in my opinion, a question that a court may leave to the agent finally to decide so long as he does so honestly and competently; that is, it may not be left to the agent's business judgment.^[3]

2. What rule does apply: per se invalidity of corporate acts intended primarily to thwart effective exercise of the franchise or is there an intermediate standard?

Plaintiff argues for a rule of per se invalidity once a plaintiff has established that a board has acted for the primary purpose of thwarting the exercise of a shareholder vote. Our opinions in Canada Southern Oils, Ltd. v. Manabi Exploration Co., Del.Ch., 96 A.2d 810 (1953) and Condec Corporation v. Lunkenheimer Company, Del.Ch., 230 A.2d 769 (1967) could be read as support for such a rule of per se invalidity. Condec is informative.

There, plaintiff had recently closed a tender offer for 51% of defendants' stock. It had announced no intention to do a follow-up merger. The incumbent board had earlier refused plaintiffs' offer to merge and, in response to its tender offer, sought alternative deals. It found and negotiated a proposed sale of all of defendants' assets for stock in the buyer, to be followed up by an exchange offer to the seller's shareholders. The stock of the buyer was publicly traded in the New York Stock Exchange, so that the deal, in effect, offered cash to the target's shareholders. As a condition precedent to the sale of assets, an exchange [661] of authorized but unissued shares of the seller (constituting about 15% of the total issued and outstanding shares after issuance) was to occur. Such issuance would, of course, negate the effective veto that plaintiffs' 51% stockholding would give it over a transaction that would require shareholder approval. Plaintiff sued to invalidate the stock issuance.

The court concluded, as a factual matter, that: "... the primary purpose of the issuance of such shares was to prevent control of Lunkenheimer from passing to Condec...." 230 A.2d at 775. The court then implied that not even a good faith dispute over corporate policy could justify a board in acting for the primary purpose of reducing the voting power of a control shareholder:

Nonetheless, I am persuaded on the basis of the evidence adduced at trial that the transaction here attacked unlike the situation involving the purchase of stock with corporate funds [the court having just cited Bennett v. Propp, Del.Supr., 187 A.2d 405, 409 (1962), and Cheff v. Mathes, Del.Supr., 199 A.2d 548 (1964)] was clearly unwarranted because it unjustifiably strikes at the very heart of corporate representation by causing a stockholder with an equitable right to a majority of corporate stock to have his right to a proportionate voice and influence in corporate affairs to be diminished by the simple act of an exchange of stock which brought no money into the Lunkenheimer treasury, was not connected with a stock option plan or other proper corporate purpose, and which was obviously designed for the primary purpose of reducing Condec's stockholdings in Lunkenheimer below a majority.

Id. at 777. A per se rule that would strike down, in equity, any board action taken for the primary purpose of interfering with the effectiveness of a corporate vote would have the advantage of relative clarity and predictability.^[4] It also has the advantage of most vigorously enforcing the concept of corporate democracy. The disadvantage it brings along is, of course, the disadvantage a per se rule always has: it may sweep too broadly.

In two recent cases dealing with shareholder votes, this court struck down board acts done for the primary purpose of impeding the exercise of stockholder voting power. In doing so, a per se rule was not applied. Rather, it was said that, in such a case, the board bears the heavy burden of demonstrating a compelling justification for such action.

In Aprahamian v. HBO & Company, Del.Ch., 531 A.2d 1204 (1987), the incumbent board had moved the date of the annual meeting on the eve of that meeting when it learned that a dissident stockholder group had or appeared to have in hand proxies representing a majority of the outstanding shares. The court restrained that action and compelled the meeting to occur as noticed, even though the board stated that it had good business reasons to move the meeting date forward, and that that action was recommended by a special committee. The court concluded as follows:

The corporate election process, if it is to have any validity, must be conducted with scrupulous fairness and without any advantage being conferred or denied to any candidate or slate of candidates. In the interests of corporate democracy, those in charge of the election machinery of a corporation must be held to the highest standards of providing for and conducting corporate elections. The business judgment rule therefore does not confer any presumption of propriety on the acts of directors in postponing the annual meeting. Quite to the contrary. When the election machinery appears, at least facially, to have been manipulated those in charge of the election have the burden of persuasion to justify their actions.

Aprahamian, 531 A.2d at 1206-07.

In Phillips v. Insituform of North America, Inc., Del.Ch., C.A. No. 9173, Allen, [662] C. (Aug. 27, 1987), the court enjoined the voting of certain stock issued for the primary purpose of diluting the voting power of certain control shares. The facts were complex. After discussing Canada Southern and Condec in light of the more recent, important Supreme Court opinion in Unocal Corp. v. Mesa Petroleum Company, it was there concluded as follows:

One may read Canada Southern as creating a black-letter rule prohibiting the issuance of shares for the purpose of diluting a large stockholder's voting power, but one need not do so. It may, as well, be read as a case in which no compelling corporate purpose was presented that might otherwise justify such an unusual course. Such a reading is, in my opinion, somewhat more consistent with the recent Unocal case.

* * * * * *

In applying the teachings of these cases, I conclude that no justification has been shown that would arguably make the extraordinary step of issuance of stock for the admitted purpose of impeding the exercise of stockholder rights reasonable in light of the corporate benefit, if any, sought to be obtained. Thus, whether our law creates an unyielding prohibition to the issuance of stock for the primary purpose of depriving a controlling shareholder of control or whether, as Unocal suggests to my mind, such an extraordinary step might be justified in some circumstances, the issuance of the Leopold shares was, in my opinion, an unjustified and invalid corporate act.

Phillips v. Insituform of North America, Inc., supra at 23-24. Thus, in Insituform, it was unnecessary to decide whether a per se rule pertained or not.

In my view, our inability to foresee now all of the future settings in which a board might, in good faith, paternalistically seek to thwart a shareholder vote, counsels against the adoption of a per se rule invalidating, in equity, every board action taken for the sole or primary purpose of thwarting a shareholder vote, even though I recognize the transcending significance of the franchise to the claims to legitimacy of our scheme of corporate governance. It may be that some set of facts would justify such extreme action.^[5] This, however, is not such a case.

3. Defendants have demonstrated no sufficient justification for the action of December 31 which was intended to prevent an unaffiliated majority of shareholders from effectively exercising their right to elect eight new directors.

The board was not faced with a coercive action taken by a powerful shareholder against the interests of a distinct shareholder constituency (such as a public minority). It was presented with a consent [663] solicitation by a 9% shareholder. Moreover, here it had time (and understood that it had time) to inform the shareholders of its views on the merits of the proposal subject to stockholder vote. The only justification that can, in such a situation, be offered for the action taken is that the board knows better than do the shareholders what is in the corporation's best interest. While that premise is no doubt true for any number of matters, it is irrelevant (except insofar as the shareholders wish to be guided by the board's recommendation) when the question is who should comprise the board of directors. The theory of our corporation law confers power upon directors as the agents of the shareholders; it does not create Platonic masters. It may be that the Blasius restructuring proposal was or is unrealistic and would lead to injury to the corporation and its shareholders if pursued. Having heard the evidence, I am inclined to think it was not a sound proposal. The board certainly viewed it that way, and that view, held in good faith, entitled the board to take certain steps to evade the risk it perceived. It could, for example, expend corporate funds to inform shareholders and seek to bring them to a similar point of view. See, e.g. Hall v. Trans-Lux Daylight Picture Screen Corporation, Del.Ch., 171 A. 226, 227 (1934); Hibbert v. Hollywood Park, Inc., Del. Supr., 457 A.2d 339 (1982). But there is a vast difference between expending corporate funds to inform the electorate and exercising power for the primary purpose of foreclosing effective shareholder action. A majority of the shareholders, who were not dominated in any respect, could view the matter differently than did the board. If they do, or did, they are entitled to employ the mechanisms provided by the corporation law and the Atlas certificate of incorporation to advance that view. They are also entitled, in my opinion, to restrain their agents, the board, from acting for the principal purpose of thwarting that action.

I therefore conclude that, even finding the action taken was taken in good faith, it constituted an unintended violation of the duty of loyalty that the board owed to the shareholders. I note parenthetically that the concept of an unintended breach of the duty of loyalty is unusual but not novel. See Lerman v. Diagnostic Data, supra; AC Acquisitions Corp. v. Anderson, Clayton & Co., Del.Ch., 519 A.2d 103 (1986). That action will, therefore, be set aside by order of this court.

V.

I turn now to a discussion of the second case which is a Section 225 case designed to determine whether the nominees of Blasius were elected to an expanded Atlas board pursuant to the consent procedure.^[6]

On March 6, 1988, after several rounds of mailings by each side, Blasius presented consents to the corporation purporting to adopt its five proposals. The corporation appointed an independent fiduciary (Manufacturers Hanover Trust Company) to act as judge of the stockholder vote. It reported a final tally report on March 17 and issued a Certificate of the Stockholder Vote on March 22. That certificate stated that the vote had been exceedingly close and that, as calculated by Manufacturer's Hanover, none of Blasius' proposals had succeeded. In order to be adopted by a majority of shares entitled to vote, each proposition needed to garner 1,486,293 consents. Each was about 45,000 shares short (about 1.5% of the total outstanding stock).^[7]

Blasius' Position

Blasius contends that the inspector of elections made an error in the counting of the vote that under our law should be [664] reviewed, and, when reviewed, must be corrected. When corrected, it contends the vote adopted each of its proposals. That "error" is described below. Blasius goes on to argue that while the court may and should review the testimonial (deposition) evidence that establishes this point, it may not rely upon other evidence (offered by Atlas and admitted over objection) that tends to establish that a material number of shares were counted as granting consent by record holders either without authority or in contravention of the beneficial owners' actual intention.

The single "error" that Blasius seeks to have remedied relates to the effect that the judges gave to revocations received from record holders for whom earlier dated consents had been submitted. The background must be set forth. Each side made two mailings to shareholders. Each mailing enclosed a card for voting. The Blasius (white) card provide a space to mark "consent," "consent withheld," or "abstain."^[8] It provided that "[s]igned but unmarked consent cards will be deemed to give consent to the action set forth below."^[9] The management (blue) card was intended as a revocation card. It also addressed each of the five propositions. While it was intended as a means to revoke consents, one could vote to give a consent by using that card as well. (It is unclear why this revocation card did not simply provide for the revocation of consents already given; perhaps SEC rules require the added confusion that providing for the giving of a consent on a revocation card entails). A "revoke" vote would, of course, have no meaning unless that shareholder had previously granted a "consent." The judges received many revoke cards that did not relate to prior consents — some shareholders used the revoke card as one might use a proxy card to express endorsement of management.

Voting, or the granting of consent to stockholder action, is, of course, the legal right of record holders of stock only. In practice, there are often as many as four (or more) levels of activity in connection with a vote or a consent solicitation. First, record holders are frequently depository companies (Depository Trust Company, for example, holding through its nominee, Cede & Co.). They hold for brokers or other institutions, who in turn hold for beneficial owners. The institutions sometimes contract with Independent Election Company of America (IECA) which distributes voting materials for brokers to their customers and which, as agent, receives back proxy cards or consent cards from beneficial owners, collects them and makes out one or more cards for each broker or bank for which it acts. IECA then physically sends voting cards to the corporation or the judges of election. The depository companies (the actual record holders) will have given blanket proxies to their customers — the institutional record holders, who will then act themselves or through IECA.

The judges of the process counted the vote according to the following procedure in calculating the consents. First, the cards of individual stockholders were treated. All of the Blasius (white) cards and the Atlas (blue) cards were put in alphabetical order. They were then matched to see if any consents granted were revoked by later blue cards and the results tallied.

The same general process was followed with the institutional record holders, but it [665] was more complex. First, the cards for each broker or institution were gathered together — both white consents and blue revokes. The consent cards were then inspected to see if there were "clear duplicates." Some institutions — banks typically, but more rarely, brokers — noted their own subaccount number on the consent cards; these numbers were taken to refer to a beneficial owner's account with the institution, and when the same number appeared on a later dated consent, it was taken as a duplicate of an earlier one having the same number. Accordingly, in those instances, the earlier consent was not counted. Brokers, however, do not tend to show subaccount numbers, and with respect to brokerage accounts, there is generally no way for an inspector to know whether a later consent was intended to substitute for an earlier one, unless the earlier one voted all of the shares registered in the name of that broker (or more correctly, all of the shares which Cede & Co. holds for that broker).^[10]

The judges matched later revocations with consents. Since most financial institution cards did not have subaccount numbers or otherwise identify the beneficial owner of the shares being voted, there was no way to be sure that a later revocation for, e.g., 2,000 shares was intended to revoke pro tanto an earlier consent for, e.g., 5,000 shares, or whether it represented an altogether different 2,000 shares. The judges sought independent legal advice on how they should handle this question. They were advised the following day that they should not seek information beyond that which the cards afforded, and where a record holder revoked consent for some number of shares, that card should be given effect by subtracting from the number of consents submitted by that record holder, the number of shares represented by later dated revocations. This was then done. In some instances, the number of later dated consents exceeded the number of consents submitted by that registered owner.

The judges realized that if the institutions (or IECA who had acted for many of them) had already matched later dated revocations with earlier consents from the same beneficial owner, and had, with respect to any beneficial holder, sent only a consent reflecting a net position, then the process of netting that the judges used would result in disenfranchising some shareholders. The judges adopted the tack of proceeding as if the record holder (or IECA) had not discarded prior consents that had been revoked. They filed a qualified report, however, noting this choice and reporting the results of the vote on the contrary assumption. That report shows that between 56,000 and 59,000 consents (depending upon which of the five propositions are considered) were counted as revoked by reason of this netting process. (About half of those were consents sent by IECA and half directly from institutional record holders). Had no netting been done, the judges would have reported that each of the propositions had been consented to by a very small majority of all shares.

During the course of the count, at the instigation of Blasius, an IECA official telephoned one of the judges of election and explained the process that IECA used in its task as agent for various brokers and banks in sending consent materials, receiving them back, computing totals by beneficial owners, and then creating master consents or revoke cards. That process deletes prior consents from a particular beneficial owner before reporting (or sending in to the judges) net positions. Discovery in this case, and evidence admitted at trial, establishes that this report to the judges of the IECA process was correct. The judges, however, elected, in good faith, to exclude this information from their report (except insofar as they noted the problem and the results on the alternative assumption).

[666] Blasius contends that this course resulted in a clear miscount that now must be corrected.

Atlas' Position

Atlas responds in two principal ways.^[11] First, it says that where the judges act in good faith, neither they nor the court may consider any information except that which appears on the cards. Since the cards in issue do not disclose beneficial ownership, the only course open to the judges, based the upon the information on the cards, was to assume that the later dated revocation cards did revoke consents that were in hand.^[12] The demands of a feasible administration of the corporate franchise require that, absent fraud or other wrongdoing, proxy contests or consent contests be judged on the "ballots" and not on extrinsic evidence. On that basis, Atlas asserts the judges' tally must be affirmed.

Atlas' second position is that if one is to inquire beyond the face of the consent cards themselves, then one — in this instance — will see that many, many mistakes were made in this process, a few by the judges and a more significant number by the record holders; if all of those mistakes are to be reviewed and corrected, the result, as declared by the judges, would remain unchanged. A good deal of discovery was conducted, and testimony admitted, concerning this matter. A few examples of the sort of errors to which Atlas here refers are necessary to appreciate its argument. Its discovery program uncovered many instances of what it contends are errors in executing the wishes of the beneficial owners. Its brief focuses on 14 of these. In this opinion, I will limit the discussion to a handful, as I think that is sufficient to understand the nature and scale of the argument.

A.G. Edwards

A.G. Edwards returned four cards, two each on management's blue revocation form and two on Blasius' white consent form. The two blue cards were dated February 19 and March 4, respectively. The later of the two management cards was also dated March 4. Both of the March 4 cards were stamped "previous proxy will not be counted." In tabulating the total number of consents executed by A.G. Edwards, the judges summed the number of consents given on Blasius' February 19 card, the number of consents given on Blasius' March 4 and the number of consents given on management's February 19 revocation card. The March 4 management card was received too late and was not given effect.

In counting the February 19 Blasius card evidencing consent for 2,425 shares on all propositions in addition to the March 4 Blasius card evidencing consent for 12,099 shares on all propositions and stamped "previous proxy will not be counted," the proxy judges clearly acted contrary to instructions on the face of the card.

Northern Trust

The February 24 Blasius card evidencing consent for 16,700 shares on all propositions was counted in addition to a later dated (March 4) Blasius card evidencing consent for 18,820 shares. Northern Trust's total position in Atlas stock was 21,159 and the total of these two consents, of course, far exceeded that. The judges did not interpret the March 4 card as superseding the February 24 card, but rather interpreted the two cards as independent (and as an implicit attempt to vote far more shares than the shareholder owned). They counted the two consents as voting the full 21,159 shares. This was not the intention of Northern Trust. It has testified that it [667] intended its March 4 card to supersede its earlier card and to vote only 18,820 of its shares in favor of the consent.

State Street Bank

According to Atlas, State Street Bank received oral instructions from Champion Spark Plug, a beneficial holder of 26,890 shares, to vote against the Blasius proposals. State Street then instructed its agent, IECA, to vote the 26,890 shares against the Blasius proposal. Despite these instructions, IECA delivered a card voting 26,890 shares for the proposals and the independent judges recorded the 26,890 shares as voting for the proposals. Blasius contends the record does not show a mistake in this instance.

E.F. Hutton

E.F. Hutton returned both a Blasius consent and a management revocation card dated March 2. The management revocation card was marked as follows:

(1) -240- FOR -5,873- AGST. -110-ABS.

(2) -200- FOR -6,023- WITHHOLD

(3) -244- FOR -5,873- AGST. -110-ABS.

(4) -244- FOR -5,873- AGST. -110-ABS.

While the evidence discloses that Hutton intended a "for" vote to be in favor of the consent proposal, or a consent, and the much larger "against" vote to be a withholding of consent (but apparently not a revocation of a prior consent), the judges of election counted the votes in the reverse fashion because they appeared on a management revocation card. That is, they interpreted this vote as 240 revocations and 5,873 consents.

B.C. Christopher

B.C. Christopher Securities Co. is neither a record nor a beneficial stockholder of Atlas. Purporting to act on behalf of some of its customers, it sent to Securities Settlement Corporation, a clearing house with authority to vote Atlas stock by virtue of an omnibus proxy executed by Cede & Co. authority to "vote the 30,000+ shares of Atlas Corp. in favor of ... Blasius." (DX RRR; Spear Dep. at 6-7). At the time this telex was sent, B.C. Christopher did not know how many shares its customers owned; the figure was given to one Gordon Spear, a B.C. Christopher stock broker, by plaintiff, Warren Delano. Securities Settlement rejected this attempt to vote all shares and requested a list of the shareholders consenting. B.C. Christopher then provided Securities Settlement with a list containing the names and positions of all customers serviced in its Denver office whom B.C. Christopher believed owned stock aggregating 23,800 shares.

Securities Settlement, based only upon this list, directed IECA to vote the positions of all those shareholders as consenting to the Blasius proposal. All customers were tabulated by IECA as consenting to their full share amounts. Evidence in this case, however, establishes that a number of the B.C. Christopher customers never gave B.C. Christopher any authority to consent. The shareholdings of B.C. Christopher customers, affirmatively shown not to have authorized consents, totalled some 3,550. Some of these shareholders had indeed sent in revocation cards intending to withhold consent prior to the B.C. Christopher involvement, and the unauthorized advice from the broker, apparently stimulated by plaintiff Delano, was treated as overriding that direct action. Other B.C. Christopher customers were unavailable or refused to give deposition testimony in this case, but documentary evidence indicates that they have denied giving B.C. Christopher authority to exercise power to consent on their behalfs. (See DX CCCCC; DX DDDDD) (1,600 shares).

In addition, although some of B.C. Christopher's customers did in fact deliver white consent cards to IECA, IECA did not receive cards indicating consent to Blasius' proposal from some 12 shareholders representing approximately 13,500 shares. B.C. Christopher could produce no written evidence that these or any of the other shareholders in fact authorized it to consent on their behalf.

* * *

[668] Atlas, therefore, in summary, replies to Blasius' position by contending that the judges of election, acting in good faith, handled the ministerial duty of calculating unrevoked consents properly — according to the face of the consent itself, and not on the basis of external matters. It relies upon the Supreme Court case Williams v. Sterling Oil of Oklahoma, Inc., Del.Supr., 273 A.2d 264 (1971) in that connection.

Beyond that, it contends that if the court is to go beyond the face of the consents to consider extraneous matters, that the record developed shows that the Blasius proposal did not garner the support of a majority of the beneficial owners, even if the court were to deem it appropriate to reverse the "netting" procedure followed by the judges. It contends that one need not get to that level of review, however, because a ministerial review of the consents delivered is sufficient and, under that approach, it would prevail.

Finally, I should note Blasius' rebuttal, which is as follows: It contends that the face of the consents is what governs, but that the judges neglected to engage in a presumption that exists as a matter of law. The limited evidence of record holders that it submits simply confirms that presumption to in fact be true here. Once that legal presumption is correctly understood, and the "netting" is reversed due to its application, Blasius says that its proposals have been adopted. The presumption arises from the case of Schott v. Climax Molybdenum Company, Del. Ch., 154 A.2d 221 (1959). Blasius says that the other evidence of "errors" is irrelevant.

I turn to my analysis of these positions now.

VI.

The multilevel system of beneficial ownership of stock and the interposition of other institutional players between investors and corporations (e.g., IECA or brokers whose customers hold stock beneficially) renders the process of corporate voting complex. This case demonstrates that the currently employed process by which consents are solicited and counted is even more prone to problems than is the process of proxy counting. In reviewing the computating of the outcome of a proxy fight or a consent contest, the law does not inquire into the subjective intent of either the record owner or the beneficial owner in the usual case.^[13]

A legal test that made inquiry into the subjective wishes of ultimate owners relevant would, of course, threaten to convert every close proxy fight into protracted and costly litigation. The law has avoided that risk while attempting to preserve a credible claim to corporate democracy by announcing the rule that only record owners are entitled to vote and if any investor chooses to hold his stock in some fashion other than his own name, he thereby assumes the risk that involving intermediaries will entail. See, e.g., The American Hardware Corporation v. Savage Arms Corporation, Del.Supr., 136 A.2d 690 (1957); ENSTAR Corp. v. Senouf, Del. Supr., 535 A.2d 1351 (1987). Moreover, even as to record owners, the administrative need for expedition and certainty are such that judges of election (and reviewing courts absent fraud or breach of duty) are not to inquire into their intention except as expressed on the face of the proxy, consent or other "ballot." The Supreme Court has held:

We hold the proper rule to be that, in the exercise of their ministerial functions and powers, the inspectors of an election must reject all identical but conflicting proxies when the conflict cannot be resolved from the face of the proxies themselves or from the regular books and records of the corporation. Otherwise stated, conflicting proxies, irreconcilable on their faces or from the books and records of the corporation, may not be reconciled by extrinsic evidence. See Pope v. Whitridge, 110 Md. 468, 73 A. 281, 286 (1909); 5 Fletcher, Cyclopedia of [669] Corporations, § 2062 (Perm.Ed.1967); 2 Thompson on Corporations, § 1021 (3rd Ed.1927); Rogers, Proxy Guide for Meetings of Stockholders, §§ 19, 39 (1969). This rule is dictated by the necessity for practical and certain procedures in the fair handling of proxies and the expeditious conclusion of corporate elections.

* * * * * *

The policy favoring correction of mistake must be limited to corrections that can be made from the face of the proxy itself or from the regular books and records of the corporation. The acceptance and consideration of extrinsic evidence for the purpose, especially when questioned and controverted as here, improperly take the inspectors over the line from the realm of the ministerial to that of the quasi-judicial.

Williams v. Sterling Oil of Oklahoma, Inc., 273 A.2d at 265-66.

Both sides to this contest invoke the authority of Williams. Defendant does so straightforwardly, plaintiff with the addition of another precedent, Schott v. Climax Molybdenum Company, Del.Ch., 154 A.2d 221 (1959). Schott is said by plaintiff to establish a legal rule (which the judges of election here are said to have violated) that later proxies (and, by extension, consents) from brokers are presumed to be with respect to stock held for different beneficial owners than earlier proxies from the same broker, unless otherwise noted on the face of the proxy. In Schott, the court was asked to review the vote that authorized a merger. The judges had counted several proxies received sequentially from a broker (actually there were a number of brokers in the same position). Together those proxies covered less than the total number of shares registered in the name of the broker. On their face, the proxies did not revoke prior proxies. The judges counted all such proxies.

On review, plaintiffs contended that this was error. Their theory was that a later proxy revokes an earlier one. The court held:

Clearly a later proxy revokes an earlier one when such instructions appear on the face of the later proxy. And there is no question but that a later proxy revokes an earlier one where the total number of shares registered in the name of the person giving the proxies is included in each proxy. But is the rule that a later proxy revokes an earlier one applied indiscriminately?

As noted, the various proxies in each series were not, in toto, in excess of the total registered in the particular stockholder's name. Nor were any instructions contained on the proxies. Thus, there is nothing on the face of the proxies which rendered the counting of all of such shares inconsistent. Although not the case here, such a later proxy might be intended to revoke an earlier one. Since it is not necessarily so, I believe the inspectors of election properly resolved the doubt in favor of counting both. My conclusion is based in part on a general policy against disenfranchisement. See Gow v. Consolidated Coppermines Corp. [19 Del.Ch. 172, 165 A. 136] above; Investment Associates v. Standard Power & Light Corp., 29 Del.Ch. 225, 48 A.2d 501, affirmed 29 Del.Ch. 593, 51 A.2d 572. It is also based upon the fact, as here, that this problem arises largely from broker given proxies. Such brokers are undoubtedly expressing the varying wishes of beneficial owners.

Obviously, brokers should, as the Stock Exchange Rule provides, make their intention clear on the face of the proxy. Nevertheless, I think my conclusion is more likely to implement the true intent of the beneficial owner. I conclude that the particular proxies here involved were properly counted by the inspectors. Nor is there any basis in the evidence for rejecting such votes. The evidence adduced shows that in fact the shares, with one exception, were voted in accordance with the wishes of the beneficial owners.

Schott v. Climax Molybdenum Company, supra at 223. (emphasis added).

I do not read Schott as establishing a rule that, in a consent solicitation, a later [670] dated revocation from a broker-registered owner is to be assumed to be with respect to a different beneficial owner than an earlier dated consent unless the reverse appears from the face of the card. Such a rule would require judges to assume that the submission of revocation cards (at least those that contained no consents as well) was a futile act since the "assumption" would leave such revocations in each instance revoking nothing. The proxy setting with which Schott dealt is different than the consent setting in a significant respect. There, to hold that a later dated proxy by a broker-registered owner was not intended to revoke an earlier one (on the assumption that it is with respect to a different beneficial owner) is to give effect to both submissions. It accords to each submission the effect that it calls for on its face. The later Williams opinion of the Supreme Court affirms that, absent fraud, or breach of duty, effect must be given to properly submitted proxies that are not inconsistent. Plaintiffs' interpretation of Schott would accord no effect to a properly submitted revocation, and is not required by Schott itself. It must, therefore, be rejected; it is, in my opinion, inconsistent with Williams.

There were mistakes made by the judges (see, e.g., footnotes 9 and 10 above) and by record owners and their agents; there appears to have been unauthorized and perhaps even wrongful behavior (e.g., B.C. Christopher & Co.). Much of the problem arises from the perhaps thoughtless utilization of proxy contest procedures for a consent solicitation contest. But the mistakes of the judges, on balance, tend to cut against plaintiff. The "netting" procedure did not, in my opinion, constitute a mistake of theirs. Rather, it resulted from the actions of record holders or their IECA agent. As such, I see it as not different in principle from other execution errors of record holders (e.g., E.F. Hutton, and possibly, State Street Bank).

We cannot know, in these circumstances, what the outcome of this close contest would have been if the true wishes of all beneficial owners had been accurately measured. The parties must, in my opinion, be content with the result announced by the judges. Those mistakes that were made by the judges do not alter the outcome.

Judgment will be entered in favor of defendants. An appropriate form of order may be submitted on notice.

[1] See, e.g., E. Rostow, To Whom and For What Ends Is Corporate Management Responsible, in The Corporation in Modern Society (E.S. Mason ed.1959). The late Professor A.A. Berle once dismissed the shareholders' meeting as a "kind of ancient, meaningless ritual like some of the ceremonies that go with the mace in the House of Lords." Berle, Economic Power and the Free Society (1957), quoted in Balotti, Finkelstein, Williams, Meetings of Shareholders (1987) at 2.

[2] Delaware courts have long exercised a most sensitive and protective regard for the free and effective exercise of voting rights. This concern suffuses our law, manifesting itself in various settings. For example, the perceived importance of the franchise explains the cases that hold that a director's fiduciary duty requires disclosure to shareholders asked to authorize a transaction of all material information in the corporation's possession, even if the transaction is not a self-dealing one. See, e.g., Smith v. Van Gorkom, Del.Supr., 488 A.2d 858 (1985); In re Anderson Clayton Shareholders' Litigation, Del. Ch., 519 A.2d 669, 675 (1986).

A similar concern, for credible corporate democracy, underlies those cases that strike down board action that sets or moves an annual meeting date upon a finding that such action was intended to thwart a shareholder group from effectively mounting an election campaign. See, e.g., Schnell v. Chris Craft, supra; Lerman v. Diagnostic Data, Inc., Del.Ch., 421 A.2d 906 (1980); Aprahamian v. HBO, Del.Ch., 531 A.2d 1204 (1987).

The cases invalidating stock issued for the primary purpose of diluting the voting power of a control block also reflect the law's concern that a credible form of corporate democracy be maintained. See Canada Southern Oils, Ltd. v. Manabi Exploration Co., Inc., Del.Ch., 96 A.2d 810 (1953); Condec Corporation v. Lunkenheimer Company, Del.Ch., 230 A.2d 769 (1967); Phillips v. Insituform of North America, Inc., Del. Ch., C.A. No. 9173, Allen, C., 1987 WL 16285 (August 27, 1987).

Similarly, a concern for corporate democracy is reflected (1) in our statutory requirement of annual meetings (8 Del.C. § 211), and in the cases that aggressively and summarily enforce that right. See, e.g., Coaxial Communications, Inc. v. CNA Financial Corp., Del.Supr., 367 A.2d 994 (1976); Speiser v. Baker, Del.Ch., 525 A.2d 1001 (1987), and (2) in our consent statute (8 Del.C. § 228) and the interpretation it has been accorded. See Datapoint Corp. v. Plaza Securities Co., Del.Supr., 496 A.2d 1031 (1985) (order); Allen v. Prime Computer, Inc., Del.Supr., No. 26, 1988 [538 A.2d 1113 (table)] (Jan. 26, 1988); Frantz Manufacturing Company v. EAC Industries, Del.Supr., 501 A.2d 401 (1985).

[3] I thus am unable to be guided by the somewhat different view expressed in the unreported case American Rent-A-Car, Inc. v. Cross, Del. Ch., C.A. No. 7583, 1984 WL 8204 (May 9, 1984).

[4] While it must be admitted that any rule that requires for its invocation the finding of a subjective mental state (i.e., a primary purpose) necessarily will lead to controversy concerning whether it applies or not, nevertheless, once it is determined to apply, this per se rule would be clearer than the alternative discussed below.

[5] Imagine the facts of Condec changed very slightly and coming up in today's world of corporate control transactions. Assume an acquiring company buys 25% of the target's stock in a small number of privately negotiated transactions. It then commences a public tender offer for 26% of the company stock at a cash price that the board, in good faith, believes is inadequate. Moreover, the acquiring corporation announces that it may or may not do a second-step merger, but if it does one, the consideration will be junk bonds that will have a value, when issued, in the opinion of its own investment banker, of no more than the cash being offered in the tender offer. In the face of such an offer, the board may have a duty to seek to protect the company's shareholders from the coercive effects of this inadequate offer. Assume, for purposes of the hypothetical, that neither newly amended Section 203, nor any defensive device available to the target specifically, offers protection. Assume that the target's board turns to the market for corporate control to attempt to locate a more fairly priced alternative that would be available to all shareholders. And assume that just as the tender offer is closing, the board locates an all cash deal for all shares at a price materially higher than that offered by the acquiring corporation. Would the board of the target corporation be justified in issuing sufficient shares to the second acquiring corporation to dilute the 51% stockholder down so that it no longer had a practical veto over the merger or sale of assets that the target board had arranged for the benefit of all shares? It is not necessary to now hazard an opinion on that abstraction. The case is clearly close enough, however, despite the existence of the Condec precedent, to demonstrate, to my mind at least, the utility of a rule that permits, in some extreme circumstances, an incumbent board to act in good faith for the purpose of interfering with the outcome of a contemplated vote. See also American International Rent-A-Car, Inc. v. Cross, supra, n. 3.

[6] Having decided that the board action of December 31 was invalid in equity, I pass over the dispute whether Messrs. Winter and Devaney could be removed from office by shareholders only for cause.

[7] The report of the count was as follows:

Proposition 1 (precatory resolution)     1,444,807
Proposition 2 (amend bylaws to increase  1,443,464
  board from 7 to 15)
Proposition 3 (removal of Winters and    1,446,209
  Devaney)
Proposition 4 (election of eight new     1,442,023
  directors)
Proposition 5 (election of up to seven   1,441,234
  new directors in event Atlas has
  more than seven directors validly)

[8] Since a consent solicitation requires the affirmative vote of all shares authorized to vote on the question, an "abstain" is the functional equivalent of a "consent withheld" vote.

[9] This instruction was interpreted by the judges to mean that a signed card on which a shareholder had indicated a position on a single proposition counted as an affirmative vote on each of the other propositions. Literally, a consent card that marks only one of several propositions is not "an unmarked consent." The judges of election clearly erred in counting such cards as consents for unmarked propositions. The cards on their face did not indicate that a consent had been granted in such instances. There were between 400 and 1,000 consents counted as a result of partially completed cards from individuals, many of whom simply marked "withhold" or "abstain" as to one proposition. From institutions, 1,660 consents were counted where only a "withhold" or "abstain" was marked and approximately 15,500 consents were counted where one proposition was consented to, but others were unmarked.

[10] In one instance, a later dated consent for 12,099 shares noted, "[p]revious proxy will not be counted." The previous consent had been for 2,425 shares. Since the record shareholder owned more than 14,524 shares, the judges counted both as not including a "clear duplicate." This was, in my opinion, clear error. See pp. 666, infra.

[11] A third argument that, with respect to two of the five proposals, more than 60 days provided in Section 228 elapsed before the consents were delivered, will not need to be addressed.

[12] The problem apparently arises, in part, from the fact that IECA and other institutional record holders not only gave effect to the revocations from beneficial owners (thus dissipating the effect of those revocations), but also sent a revocation card to the judges reflecting that revocation. This process works in a proxy contest where a later proxy not only revokes an earlier one, but acts as an affirmative vote. It does not, however, make much sense in a consent contest where a revocation has only one effect, and once it is given that effect, is inoperative.

[13] A different approach, at least by the court, might well be appropriate where fraud or the breach of fiduciary duty is alleged. See, e.g., In re Canal Construction Co., Del.Ch., 182 A. 545 (1936).

A. Gilchrist Sparks, III (argued), Lawrence A. Hamermesh, and Kenneth Nachbar, of Morris, Nichols, Arsht & Tunnell, Wilmington, and Herbert M. Wachtell, Douglas S. Liebhafsky, Kenneth B. Forrest, and Theodore N. Mirvis, of Wachtell, Lipton, Rosen & Katz, New York City, of counsel, for appellant Revlon.

Michael D. Goldman, James F. Burnett, Donald J. Wolfe, Jr., Richard L. Horwitz, of Potter, Anderson & Corroon, Wilmington, and Leon Silverman (argued), and Marc P. Cherno, of Fried, Frank, Harris, Shriver & Jacobson, New York City, of counsel, for appellant Forstmann Little.

Bruce M. Stargatt (argued), Edward B. Maxwell, 2nd, David C. McBride, Josy W. Ingersoll, of Young, Conaway, Stargatt & Taylor, Wilmington, and Stuart L. Shapiro (argued), Stephen P. Lamb, Andrew J. Turezyn, and Thomas P. White, of Skadden, Arps, Slate, Meagher & Flom, Wilmington, and Michael W. Mitchell (New York City) and Marc B. Tucker, Washington, D.C., of Skadden, Arps, Slate, Meagher & Flom, for appellee.

Before McNEILLY and MOORE, JJ., and BALICK, Judge (Sitting by designation pursuant to Del. Const., Art. IV, § 12.).

[175] MOORE, Justice:

In this battle for corporate control of Revlon, Inc. (Revlon), the Court of Chancery enjoined certain transactions designed to thwart the efforts of Pantry Pride, Inc. (Pantry Pride) to acquire Revlon.^[1] The defendants are Revlon, its board of directors, and Forstmann Little & Co. and the latter's affiliated limited partnership (collectively, Forstmann). The injunction barred consummation of an option granted Forstmann to purchase certain Revlon assets (the lockup option), a promise by Revlon to deal exclusively with Forstmann in the face of a takeover (the no-shop provision), and the payment of a $25 million cancellation fee to Forstmann if the transaction was aborted. The Court of Chancery found that the Revlon directors had breached their duty of care by entering into the foregoing transactions [176] and effectively ending an active auction for the company. The trial court ruled that such arrangements are not illegal per se under Delaware law, but that their use under the circumstances here was impermissible. We agree. See MacAndrews & Forbes Holdings, Inc. v. Revlon, Inc., Del. Ch., 501 A.2d 1239 (1985). Thus, we granted this expedited interlocutory appeal to consider for the first time the validity of such defensive measures in the face of an active bidding contest for corporate control.^[2] Additionally, we address for the first time the extent to which a corporation may consider the impact of a takeover threat on constituencies other than shareholders. See Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946, 955 (1985).

In our view, lock-ups and related agreements are permitted under Delaware law where their adoption is untainted by director interest or other breaches of fiduciary duty. The actions taken by the Revlon directors, however, did not meet this standard. Moreover, while concern for various corporate constituencies is proper when addressing a takeover threat, that principle is limited by the requirement that there be some rationally related benefit accruing to the stockholders. We find no such benefit here.

Thus, under all the circumstances we must agree with the Court of Chancery that the enjoined Revlon defensive measures were inconsistent with the directors' duties to the stockholders. Accordingly, we affirm.

I.

The somewhat complex maneuvers of the parties necessitate a rather detailed examination of the facts. The prelude to this controversy began in June 1985, when Ronald O. Perelman, chairman of the board and chief executive officer of Pantry Pride, met with his counterpart at Revlon, Michel C. Bergerac, to discuss a friendly acquisition of Revlon by Pantry Pride. Perelman suggested a price in the range of $40-50 per share, but the meeting ended with Bergerac dismissing those figures as considerably below Revlon's intrinsic value. All subsequent Pantry Pride overtures were rebuffed, perhaps in part based on Mr. Bergerac's strong personal antipathy to Mr. Perelman.

Thus, on August 14, Pantry Pride's board authorized Perelman to acquire Revlon, either through negotiation in the $42-$43 per share range, or by making a hostile tender offer at $45. Perelman then met with Bergerac and outlined Pantry Pride's alternate approaches. Bergerac remained adamantly opposed to such schemes and conditioned any further discussions of the matter on Pantry Pride executing a standstill agreement prohibiting it from acquiring Revlon without the latter's prior approval.

On August 19, the Revlon board met specially to consider the impending threat of a hostile bid by Pantry Pride.^[3] At the meeting, Lazard Freres, Revlon's investment [177] banker, advised the directors that $45 per share was a grossly inadequate price for the company. Felix Rohatyn and William Loomis of Lazard Freres explained to the board that Pantry Pride's financial strategy for acquiring Revlon would be through "junk bond" financing followed by a break-up of Revlon and the disposition of its assets. With proper timing, according to the experts, such transactions could produce a return to Pantry Pride of $60 to $70 per share, while a sale of the company as a whole would be in the "mid 50" dollar range. Martin Lipton, special counsel for Revlon, recommended two defensive measures: first, that the company repurchase up to 5 million of its nearly 30 million outstanding shares; and second, that it adopt a Note Purchase Rights Plan. Under this plan, each Revlon shareholder would receive as a dividend one Note Purchase Right (the Rights) for each share of common stock, with the Rights entitling the holder to exchange one common share for a $65 principal Revlon note at 12% interest with a one-year maturity. The Rights would become effective whenever anyone acquired beneficial ownership of 20% or more of Revlon's shares, unless the purchaser acquired all the company's stock for cash at $65 or more per share. In addition, the Rights would not be available to the acquiror, and prior to the 20% triggering event the Revlon board could redeem the rights for 10 cents each. Both proposals were unanimously adopted.

Pantry Pride made its first hostile move on August 23 with a cash tender offer for any and all shares of Revlon at $47.50 per common share and $26.67 per preferred share, subject to (1) Pantry Pride's obtaining financing for the purchase, and (2) the Rights being redeemed, rescinded or voided.

The Revlon board met again on August 26. The directors advised the stockholders to reject the offer. Further defensive measures also were planned. On August 29, Revlon commenced its own offer for up to 10 million shares, exchanging for each share of common stock tendered one Senior Subordinated Note (the Notes) of $47.50 principal at 11.75% interest, due 1995, and one-tenth of a share of $9.00 Cumulative Convertible Exchangeable Preferred Stock valued at $100 per share. Lazard Freres opined that the notes would trade at their face value on a fully distributed basis.^[4] Revlon stockholders tendered 87 percent of the outstanding shares (approximately 33 million), and the company accepted the full 10 million shares on a pro rata basis. The new Notes contained covenants which limited Revlon's ability to incur additional debt, sell assets, or pay dividends unless otherwise approved by the "independent" (nonmanagement) members of the board.

At this point, both the Rights and the Note covenants stymied Pantry Pride's attempted takeover. The next move came on September 16, when Pantry Pride announced a new tender offer at $42 per share, conditioned upon receiving at least 90% of the outstanding stock. Pantry Pride also indicated that it would consider buying less than 90%, and at an increased price, if Revlon removed the impeding Rights. While this offer was lower on its face than the earlier $47.50 proposal, Revlon's investment banker, Lazard Freres, described the two bids as essentially equal in view of the completed exchange offer.

The Revlon board held a regularly scheduled meeting on September 24. The directors rejected the latest Pantry Pride offer and authorized management to negotiate with other parties interested in acquiring Revlon. Pantry Pride remained determined in its efforts and continued to make cash bids for the company, offering $50 per share on September 27, and raising its bid to $53 on October 1, and then to $56.25 on October 7.

[178] In the meantime, Revlon's negotiations with Forstmann and the investment group Adler & Shaykin had produced results. The Revlon directors met on October 3 to consider Pantry Pride's $53 bid and to examine possible alternatives to the offer. Both Forstmann and Adler & Shaykin made certain proposals to the board. As a result, the directors unanimously agreed to a leveraged buyout by Forstmann. The terms of this accord were as follows: each stockholder would get $56 cash per share; management would purchase stock in the new company by the exercise of their Revlon "golden parachutes";^[5] Forstmann would assume Revlon's $475 million debt incurred by the issuance of the Notes; and Revlon would redeem the Rights and waive the Notes covenants for Forstmann or in connection with any other offer superior to Forstmann's. The board did not actually remove the covenants at the October 3 meeting, because Forstmann then lacked a firm commitment on its financing, but accepted the Forstmann capital structure, and indicated that the outside directors would waive the covenants in due course. Part of Forstmann's plan was to sell Revlon's Norcliff Thayer and Reheis divisions to American Home Products for $335 million. Before the merger, Revlon was to sell its cosmetics and fragrance division to Adler & Shaykin for $905 million. These transactions would facilitate the purchase by Forstmann or any other acquiror of Revlon.

When the merger, and thus the waiver of the Notes covenants, was announced, the market value of these securities began to fall. The Notes, which originally traded near par, around 100, dropped to 87.50 by October 8. One director later reported (at the October 12 meeting) a "deluge" of telephone calls from irate noteholders, and on October 10 the Wall Street Journal reported threats of litigation by these creditors.

Pantry Pride countered with a new proposal on October 7, raising its $53 offer to $56.25, subject to nullification of the Rights, a waiver of the Notes covenants, and the election of three Pantry Pride directors to the Revlon board. On October 9, representatives of Pantry Pride, Forstmann and Revlon conferred in an attempt to negotiate the fate of Revlon, but could not reach agreement. At this meeting Pantry Pride announced that it would engage in fractional bidding and top any Forstmann offer by a slightly higher one. It is also significant that Forstmann, to Pantry Pride's exclusion, had been made privy to certain Revlon financial data. Thus, the parties were not negotiating on equal terms.

Again privately armed with Revlon data, Forstmann met on October 11 with Revlon's special counsel and investment banker. On October 12, Forstmann made a new $57.25 per share offer, based on several conditions.^[6] The principal demand was a lock-up option to purchase Revlon's Vision Care and National Health Laboratories divisions for $525 million, some $100-$175 million below the value ascribed to them by Lazard Freres, if another acquiror got 40% of Revlon's shares. Revlon also was required to accept a no-shop provision. The Rights and Notes covenants had to be removed as in the October 3 agreement. There would be a $25 million cancellation fee to be placed in escrow, and released to Forstmann if the new agreement terminated or if another acquiror got more than 19.9% of Revlon's stock. Finally, there would be no participation by Revlon management in the merger. In return, Forstmann agreed to support the par value [179] of the Notes, which had faltered in the market, by an exchange of new notes. Forstmann also demanded immediate acceptance of its offer, or it would be withdrawn. The board unanimously approved Forstmann's proposal because: (1) it was for a higher price than the Pantry Pride bid, (2) it protected the noteholders, and (3) Forstmann's financing was firmly in place.^[7] The board further agreed to redeem the rights and waive the covenants on the preferred stock in response to any offer above $57 cash per share. The covenants were waived, contingent upon receipt of an investment banking opinion that the Notes would trade near par value once the offer was consummated.

Pantry Pride, which had initially sought injunctive relief from the Rights plan on August 22, filed an amended complaint on October 14 challenging the lock-up, the cancellation fee, and the exercise of the Rights and the Notes covenants. Pantry Pride also sought a temporary restraining order to prevent Revlon from placing any assets in escrow or transferring them to Forstmann. Moreover, on October 22, Pantry Pride again raised its bid, with a cash offer of $58 per share conditioned upon nullification of the Rights, waiver of the covenants, and an injunction of the Forstmann lock-up.

On October 15, the Court of Chancery prohibited the further transfer of assets, and eight days later enjoined the lock-up, no-shop, and cancellation fee provisions of the agreement. The trial court concluded that the Revlon directors had breached their duty of loyalty by making concessions to Forstmann, out of concern for their liability to the noteholders, rather than maximizing the sale price of the company for the stockholders' benefit. MacAndrews & Forbes Holdings, Inc. v. Revlon, Inc., 501 A.2d at 1249-50.

II.

To obtain a preliminary injunction, a plaintiff must demonstrate both a reasonable probability of success on the merits and some irreparable harm which will occur absent the injunction. Gimbel v. Signal Companies, Del.Ch., 316 A.2d 599, 602 (1974), aff'd, Del.Supr., 316 A.2d 619 (1974). Additionally, the Court shall balance the conveniences of and possible injuries to the parties. Id.

A.

We turn first to Pantry Pride's probability of success on the merits. The ultimate responsibility for managing the business and affairs of a corporation falls on its board of directors. 8 Del.C. § 141(a).^[8] In discharging this function the directors owe fiduciary duties of care and loyalty to the corporation and its shareholders. Guth v. Loft, Inc., 23 Del.Supr. 255, 5 A.2d 503, 510 (1939); Aronson v. Lewis, Del.Supr., 473 A.2d 805, 811 (1984). These principles apply with equal force when a board approves a corporate merger pursuant to 8 Del.C. § 251(b);^[9]Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 873 (1985); and of course they are the bedrock of our law regarding corporate takeover issues. Pogostin v. Rice, Del.Supr., 480 A.2d 619, 624 (1984); Unocal Corp. v. Mesa [180] Petroleum Co., Del.Supr., 493 A.2d 946, 953, 955 (1985); Moran v. Household International, Inc., Del.Supr., 500 A.2d 1346, 1350 (1985). While the business judgment rule may be applicable to the actions of corporate directors responding to takeover threats, the principles upon which it is founded — care, loyalty and independence — must first be satisfied.^[10]Aronson v. Lewis, 473 A.2d at 812.

If the business judgment rule applies, there is a "presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." Aronson v. Lewis, 473 A.2d at 812. However, when a board implements anti-takeover measures there arises "the omnipresent specter that a board may be acting primarily in its own interests, rather than those of the corporation and its shareholders ..." Unocal Corp. v. Mesa Petroleum Co., 493 A.2d at 954. This potential for conflict places upon the directors the burden of proving that they had reasonable grounds for believing there was a danger to corporate policy and effectiveness, a burden satisfied by a showing of good faith and reasonable investigation. Id. at 955. In addition, the directors must analyze the nature of the takeover and its effect on the corporation in order to ensure balance — that the responsive action taken is reasonable in relation to the threat posed. Id.

B.

The first relevant defensive measure adopted by the Revlon board was the Rights Plan, which would be considered a "poison pill" in the current language of corporate takeovers — a plan by which shareholders receive the right to be bought out by the corporation at a substantial premium on the occurrence of a stated triggering event. See generally Moran v. Household International, Inc., Del.Supr., 500 A.2d 1346 (1985). By 8 Del.C. §§ 141 and 122(13),^[11] the board clearly had the power to adopt the measure. See Moran v. Household International, Inc., 500 A.2d at 1351. Thus, the focus becomes one of reasonableness and purpose.

The Revlon board approved the Rights Plan in the face of an impending hostile takeover bid by Pantry Pride at $45 per share, a price which Revlon reasonably concluded was grossly inadequate. Lazard Freres had so advised the directors, and had also informed them that Pantry Pride was a small, highly leveraged company bent on a "bust-up" takeover by using "junk bond" financing to buy Revlon cheaply, sell the acquired assets to pay the [181] debts incurred, and retain the profit for itself.^[12] In adopting the Plan, the board protected the shareholders from a hostile takeover at a price below the company's intrinsic value, while retaining sufficient flexibility to address any proposal deemed to be in the stockholders' best interests.

To that extent the board acted in good faith and upon reasonable investigation. Under the circumstances it cannot be said that the Rights Plan as employed was unreasonable, considering the threat posed. Indeed, the Plan was a factor in causing Pantry Pride to raise its bids from a low of $42 to an eventual high of $58. At the time of its adoption the Rights Plan afforded a measure of protection consistent with the directors' fiduciary duty in facing a takeover threat perceived as detrimental to corporate interests. Unocal, 493 A.2d at 954-55. Far from being a "show-stopper," as the plaintiffs had contended in Moran, the measure spurred the bidding to new heights, a proper result of its implementation. See Moran, 500 A.2d at 1354, 1356-67.

Although we consider adoption of the Plan to have been valid under the circumstances, its continued usefulness was rendered moot by the directors' actions on October 3 and October 12. At the October 3 meeting the board redeemed the Rights conditioned upon consummation of a merger with Forstmann, but further acknowledged that they would also be redeemed to facilitate any more favorable offer. On October 12, the board unanimously passed a resolution redeeming the Rights in connection with any cash proposal of $57.25 or more per share. Because all the pertinent offers eventually equalled or surpassed that amount, the Rights clearly were no longer any impediment in the contest for Revlon. This mooted any question of their propriety under Moran or Unocal.

C.

The second defensive measure adopted by Revlon to thwart a Pantry Pride takeover was the company's own exchange offer for 10 million of its shares. The directors' general broad powers to manage the business and affairs of the corporation are augmented by the specific authority conferred under 8 Del.C. § 160(a), permitting the company to deal in its own stock.^[13]Unocal, 493 A.2d at 953-54; Cheff v. Mathes, 41 Del.Supr. 494, 199 A.2d 548, 554 (1964); Kors v. Carey, 39 Del.Ch. 47, 158 A.2d 136, 140 (1960). However, when exercising that power in an effort to forestall a hostile takeover, the board's actions are strictly held to the fiduciary standards outlined in Unocal. These standards require the directors to determine the best interests of the corporation and its stockholders, and impose an enhanced duty to abjure any action that is motivated by considerations other than a good faith concern for such interests. Unocal, 493 A.2d at 954-55; see Bennett v. Propp, 41 Del.Supr. 14, 187 A.2d 405, 409 (1962).

The Revlon directors concluded that Pantry Pride's $47.50 offer was grossly inadequate. In that regard the board acted in good faith, and on an informed basis, with reasonable grounds to believe that there existed a harmful threat to the corporate enterprise. The adoption of a defensive measure, reasonable in relation to the threat posed, was proper and fully accorded with the powers, duties, and responsibilities conferred upon directors under our law. Unocal, 493 A.2d at 954; Pogostin v. Rice, 480 A.2d at 627.

[182] D.

However, when Pantry Pride increased its offer to $50 per share, and then to $53, it became apparent to all that the break-up of the company was inevitable. 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. The duty of the board had thus changed from the preservation of Revlon as a corporate entity to the maximization of the company's value at a sale for the stockholders' benefit. This significantly altered the board's responsibilities under the Unocal standards. It no longer faced threats to corporate policy and effectiveness, or to the stockholders' interests, from a grossly inadequate bid. The whole question of defensive measures became moot. The directors' role changed from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company.

III.

This brings us to the lock-up with Forstmann and its emphasis on shoring up the sagging market value of the Notes in the face of threatened litigation by their holders. Such a focus was inconsistent with the changed concept of the directors' responsibilities at this stage of the developments. The impending waiver of the Notes covenants had caused the value of the Notes to fall, and the board was aware of the noteholders' ire as well as their subsequent threats of suit. The directors thus made support of the Notes an integral part of the company's dealings with Forstmann, even though their primary responsibility at this stage was to the equity owners.

The original threat posed by Pantry Pride — the break-up of the company — had become a reality which even the directors embraced. Selective dealing to fend off a hostile but determined bidder was no longer a proper objective. Instead, obtaining the highest price for the benefit of the stockholders should have been the central theme guiding director action. Thus, the Revlon board could not make the requisite showing of good faith by preferring the noteholders and ignoring its duty of loyalty to the shareholders. The rights of the former already were fixed by contract. Wolfensohn v. Madison Fund, Inc., Del.Supr., 253 A.2d 72, 75 (1969); Harff v. Kerkorian, Del.Ch., 324 A.2d 215 (1974). The noteholders required no further protection, and when the Revlon board entered into an auction-ending lock-up agreement with Forstmann on the basis of impermissible considerations at the expense of the shareholders, the directors breached their primary duty of loyalty.

The Revlon board argued that it acted in good faith in protecting the noteholders because Unocal permits consideration of other corporate constituencies. Although such considerations may be permissible, there are fundamental limitations upon that prerogative. A board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to the stockholders. Unocal, 493 A.2d at 955. However, such concern for non-stockholder interests is inappropriate when an auction among active bidders is in progress, and the object no longer is to protect or maintain the corporate enterprise but to sell it to the highest bidder.

Revlon also contended that by Gilbert v. El Paso Co., Del. Ch., 490 A.2d 1050, 1054-55 (1984), it had contractual and good faith obligations to consider the noteholders. However, any such duties are limited to the principle that one may not interfere with contractual relationships by improper actions. Here, the rights of the noteholders were fixed by agreement, and there is nothing of substance to suggest that any of those terms were violated. The Notes covenants specifically contemplated a waiver to permit sale of the company at a fair price. The Notes were accepted by the holders on that basis, including the risk of an adverse market effect stemming from a waiver. Thus, nothing remained for Revlon [183] to legitimately protect, and no rationally related benefit thereby accrued to the stockholders. Under such circumstances we must conclude that the merger agreement with Forstmann was unreasonable in relation to the threat posed.

A lock-up is not per se illegal under Delaware law. Its use has been approved in an earlier case. Thompson v. Enstar Corp., Del. Ch., ___ A.2d ___ (1984). Such options can entice other bidders to enter a contest for control of the corporation, creating an auction for the company and maximizing shareholder profit. Current economic conditions in the takeover market are such that a "white knight" like Forstmann might only enter the bidding for the target company if it receives some form of compensation to cover the risks and costs involved. Note, Corporations-Mergers — "Lock-up" Enjoined Under Section 14(e) of Securities Exchange Act — Mobil Corp. v. Marathon Oil Co., 669 F.2d 366 (6th Cir.1981), 12 Seton Hall L.Rev. 881, 892 (1982). However, while those lock-ups which draw bidders into the battle benefit shareholders, similar measures which end an active auction and foreclose further bidding operate to the shareholders' detriment. Note, Lock-up Options: Toward a State Law Standard, 96 Harv. L. Rev. 1068, 1081 (1983).^[14]

Recently, the United States Court of Appeals for the Second Circuit invalidated a lock-up on fiduciary duty grounds similar to those here.^[15]Hanson Trust PLC, et al. v. ML SCM Acquisition Inc., et al., 781 F.2d 264 (2nd Cir.1986). Citing Thompson v. Enstar Corp., supra, with approval, the court stated:

In this regard, we are especially mindful that some lock-up options may be beneficial to the shareholders, such as those that induce a bidder to compete for control of a corporation, while others may be harmful, such as those that effectively preclude bidders from competing with the optionee bidder. 781 F.2d at 274.

In Hanson Trust, the bidder, Hanson, sought control of SCM by a hostile cash tender offer. SCM management joined with Merrill Lynch to propose a leveraged buy-out of the company at a higher price, and Hanson in turn increased its offer. Then, despite very little improvement in its subsequent bid, the management group sought a lock-up option to purchase SCM's two main assets at a substantial discount. The SCM directors granted the lock-up without adequate information as to the size of the discount or the effect the transaction would have on the company. Their action effectively ended a competitive bidding situation. The Hanson Court invalidated the lock-up because the directors failed to fully inform themselves about the value of a transaction in which management had a strong self-interest. "In short, the Board appears to have failed to ensure that negotiations for alternative bids were conducted by those whose only loyalty was to the shareholders." Id. at 277.

The Forstmann option had a similar destructive effect on the auction process. Forstmann had already been drawn into the contest on a preferred basis, so the result of the lock-up was not to foster bidding, but to destroy it. The board's stated reasons for approving the transactions were: (1) better financing, (2) noteholder [184] protection, and (3) higher price. As the Court of Chancery found, and we agree, any distinctions between the rival bidders' methods of financing the proposal were nominal at best, and such a consideration has little or no significance in a cash offer for any and all shares. The principal object, contrary to the board's duty of care, appears to have been protection of the noteholders over the shareholders' interests.

While Forstmann's $57.25 offer was objectively higher than Pantry Pride's $56.25 bid, the margin of superiority is less when the Forstmann price is adjusted for the time value of money. In reality, the Revlon board ended the auction in return for very little actual improvement in the final bid. The principal benefit went to the directors, who avoided personal liability to a class of creditors to whom the board owed no further duty under the circumstances. Thus, when a board ends an intense bidding contest on an insubstantial basis, and where a significant by-product of that action is to protect the directors against a perceived threat of personal liability for consequences stemming from the adoption of previous defensive measures, the action cannot withstand the enhanced scrutiny which Unocal requires of director conduct. See Unocal, 493 A.2d at 954-55.

In addition to the lock-up option, the Court of Chancery enjoined the no-shop provision as part of the attempt to foreclose further bidding by Pantry Pride. MacAndrews & Forbes Holdings, Inc. v. Revlon, Inc., 501 A.2d at 1251. The no-shop provision, like the lock-up option, while not per se illegal, is impermissible under the Unocal standards when a board's primary duty becomes that of an auctioneer responsible for selling the company to the highest bidder. The agreement to negotiate only with Forstmann ended rather than intensified the board's involvement in the bidding contest.

It is ironic that the parties even considered a no-shop agreement when Revlon had dealt preferentially, and almost exclusively, with Forstmann throughout the contest. After the directors authorized management to negotiate with other parties, Forstmann was given every negotiating advantage that Pantry Pride had been denied: cooperation from management, access to financial data, and the exclusive opportunity to present merger proposals directly to the board of directors. Favoritism for a white knight to the total exclusion of a hostile bidder might be justifiable when the latter's offer adversely affects shareholder interests, but when bidders make relatively similar offers, or dissolution of the company becomes inevitable, the directors cannot fulfill their enhanced Unocal duties by playing favorites with the contending factions. Market forces must be allowed to operate freely to bring the target's shareholders the best price available for their equity.^[16] Thus, as the trial court ruled, the shareholders' interests necessitated that the board remain free to negotiate in the fulfillment of that duty.

The court below similarly enjoined the payment of the cancellation fee, pending a resolution of the merits, because the fee was part of the overall plan to thwart Pantry Pride's efforts. We find no abuse of discretion in that ruling.

IV.

Having concluded that Pantry Pride has shown a reasonable probability of success on the merits, we address the issue of irreparable harm. The Court of Chancery ruled that unless the lock-up and other aspects of the agreement were enjoined, Pantry Pride's opportunity to bid for Revlon was lost. The court also held that the need for both bidders to compete [185] in the marketplace outweighed any injury to Forstmann. Given the complexity of the proposed transaction between Revlon and Forstmann, the obstacles to Pantry Pride obtaining a meaningful legal remedy are immense. We are satisfied that the plaintiff has shown the need for an injunction to protect it from irreparable harm, which need outweighs any harm to the defendants.

V.

In conclusion, the Revlon board was confronted with a situation not uncommon in the current wave of corporate takeovers. A hostile and determined bidder sought the company at a price the board was convinced was inadequate. The initial defensive tactics worked to the benefit of the shareholders, and thus the board was able to sustain its Unocal burdens in justifying those measures. However, in granting an asset option lock-up to Forstmann, we must conclude that under all the circumstances the directors allowed considerations other than the maximization of shareholder profit to affect their judgment, and followed a course that ended the auction for Revlon, absent court intervention, to the ultimate detriment of its shareholders. No such defensive measure can be sustained when it represents a breach of the directors' fundamental duty of care. See Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 874 (1985). In that context the board's action is not entitled to the deference accorded it by the business judgment rule. The measures were properly enjoined. The decision of the Court of Chancery, therefore, is

AFFIRMED.

[1] The nominal plaintiff, MacAndrews & Forbes Holdings, Inc., is the controlling stockholder of Pantry Pride. For all practical purposes their interests in this litigation are virtually identical, and we hereafter will refer to Pantry Pride as the plaintiff.

[2] This appeal was heard on an expedited basis in light of the pending Pantry Pride offer and the Revlon-Forstmann transactions. We accepted the appeal on Friday, October 25, 1985, received the parties' opening briefs on October 28, their reply briefs on October 29, and heard argument on Thursday, October 31. We announced our decision to affirm in an oral ruling in open court at 9:00 a.m. on Friday, November 1, with the proviso that this more detailed written opinion would follow in due course.

[3] There were 14 directors on the Revlon board. Six of them held senior management positions with the company, and two others held significant blocks of its stock. Four of the remaining six directors were associated at some point with entities that had various business relationships with Revlon. On the basis of this limited record, however, we cannot conclude that this board is entitled to certain presumptions that generally attach to the decisions of a board whose majority consists of truly outside independent directors. See Polk v. Good & Texaco, Del.Supr., ___ A.2d ___, ___ (1986); Moran v. Household International, Inc., Del.Supr., 500 A.2d 1346, 1356 (1985); Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946, 955 (1985); Aronson v. Lewis, Del.Supr., 473 A.2d 805, 812, 815 (1984); Puma v. Marriott, Del. Ch., 283 A.2d 693, 695 (1971).

[4] Like bonds, the Notes actually were issued in denominations of $1,000 and integral multiples thereof. A separate certificate was issued in a total principal amount equal to the remaining sum to which a stockholder was entitled. Likewise, in the esoteric parlance of bond dealers, a Note trading at par ($1,000) would be quoted on the market at 100.

[5] In the takeover context "golden parachutes" generally are understood to be termination agreements providing substantial bonuses and other benefits for managers and certain directors upon a change in control of a company.

[6] Forstmann's $57.25 offer ostensibly is worth $1 more than Pantry Pride's $56.25 bid. However, the Pantry Pride offer was immediate, while the Forstmann proposal must be discounted for the time value of money because of the delay in approving the merger and consummating the transaction. The exact difference between the two bids was an unsettled point of contention even at oral argument.

[7] Actually, at this time about $400 million of Forstmann's funding was still subject to two investment banks using their "best efforts" to organize a syndicate to provide the balance. Pantry Pride's entire financing was not firmly committed at this point either, although Pantry Pride represented in an October 11 letter to Lazard Freres that its investment banker, Drexel Burnham Lambert, was highly confident of its ability to raise the balance of $350 million. Drexel Burnham had a firm commitment for this sum by October 18.

[8] The pertinent provision of the statute is:

(a) The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. 8 Del.C. § 141(a).

[9] The statute provides in pertinent part:

(b) The board of directors of each corporation which desires to merge or consolidate shall adopt a resolution approving an agreement of merger or consolidation. 8 Del.C. § 251(b).

[10] One eminent corporate commentator has drawn a distinction between the business judgment rule, which insulates directors and management from personal liability for their business decisions, and the business judgment doctrine, which protects the decision itself from attack. The principles upon which the rule and doctrine operate are identical, while the objects of their protection are different. See Hinsey, Business Judgment and the American Law Institute's Corporate Governance Project: The Rule, the Doctrine and the Reality, 52 Geo. Wash. L.Rev. 609, 611-13 (1984). In the transactional justification cases, where the doctrine is said to apply, our decisions have not observed the distinction in such terminology. See Polk v. Good & Texaco, Del.Supr., ___ A.2d ___, ___ (1986); Moran v. Household International, Inc., Del. Supr., 500 A.2d 1346, 1356 (1985); Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946, 953-55 (1985); Rosenblatt v. Getty Oil Co., Del. Supr., 493 A.2d 929, 943 (1985). Under the circumstances we do not alter our earlier practice of referring only to the business judgment rule, although in transactional justification matters such reference may be understood to embrace the concept of the doctrine.

[11] The relevant provision of Section 122 is:

Every corporation created under this chapter shall have power to:

(13) Make contracts, including contracts of guaranty and suretyship, incur liabilities, borrow money at such rates of interest as the corporation may determine, issue its notes, bonds and other obligations, and secure any of its obligations by mortgage, pledge or other encumbrance of all or any of its property, franchises and income, ...". 8 Del.C. § 122(13).

See Section 141(a) in n. 8, supra. See also Section 160(a), n. 13, infra.

[12] As we noted in Moran, a "bust-up" takeover generally refers to a situation in which one seeks to finance an acquisition by selling off pieces of the acquired company, presumably at a substantial profit. See Moran, 500 A.2d at 1349, n. 4.

[13] The pertinent provision of this statute is:

(a) Every corporation may purchase, redeem, receive, take or otherwise acquire, own and hold, sell, lend, exchange, transfer or otherwise dispose of, pledge, use and otherwise deal in and with its own shares. 8 Del.C. § 160(a).

[14] For further discussion of the benefits and detriments of lock-up options, also see: Nelson, Mobil Corp. v. Marathon Oil Co. — The Decision and Its Implications for Future Tender Offers, 7 Corp. L.Rev. 233, 265-68 (1984); Note, Swallowing the Key to Lock-up Options: Mobil Corp. v. Marathon Oil Co., 14 U.Tol.L.Rev. 1055, 1081-83 (1983).

[15] The federal courts generally have declined to enjoin lock-up options despite arguments that lock-ups constitute impermissible "manipulative" conduct forbidden by Section 14(e) of the Williams Act [15 U.S.C. § 78n(e)]. See Buffalo Forge Co. v. Ogden Corp., 717 F.2d 757 (2nd Cir.1983), cert. denied, 464 U.S. 1018, 104 S.Ct. 550, 78 L.Ed.2d 724 (1983); Data Probe Acquisition Corp. v. Datatab, Inc., 722 F.2d 1 (2nd Cir.1983); cert. denied 465 U.S. 1052, 104 S.Ct. 1326, 79 L.Ed.2d 722 (1984); but see Mobil Corp. v. Marathon Oil Co., 669 F.2d 366 (6th Cir.1981). The cases are all federal in nature and were not decided on state law grounds.

[16] By this we do not embrace the "passivity" thesis rejected in Unocal. See 493 A.2d at 954-55, nn. 8-10. The directors' role remains an active one, changed only in the respect that they are charged with the duty of selling the company at the highest price attainable for the stockholders' benefit.

Irving S. Shapiro (argued), Rodman Ward, Jr., Stuart L. Shapiro, Stephen P. Lamb, Thomas J. Allingham II and Andrew J. Turezyn of Skadden, Arps, Slate, Meagher & Flom, Wilmington, and Michael W. Mitchell, Jeffrey Glekel, Jeremy A. Berman and Joseph A. Guglielmelli of Skadden, Arps, Slate, Meagher & Flom, New York City, for plaintiffs below-appellants.

Joseph A. Rosenthal and Norman M. Monhait of Morris and Rosenthal, P.A., Wilmington, and Marshall Patner of Orlikoff, Flamm and Patner, Chicago, Frederick Brace of Brace & O'Donnell, and Geoffrey P. Miller (argued), Chicago, Ill., of counsel, for plaintiff intervenor below-appellant.

[1348] Charles E. Richards, Jr. (argued), Donald A. Bussard, Jesse A. Finkelstein, and Gregory P. Williams of Richards, Layton & Finger, Wilmington, and George A. Katz, William C. Sterling, Jr., Michael W. Schwartz, Eric M. Roth, Warren R. Stern and Karen B. Shaer of Wachtell, Lipton, Rosen & Katz, New York City, of counsel, for defendants below-appellees.

Lawrence C. Ashby of Ashby, McKelvie & Geddes, Wilmington, Marc P. Cherno, Harvey L. Pitt, Pamela Jarvis of Fried, Frank, Harris, Shriver & Jacobson, New York City, amicus curiae, and Matthew P. Fink, Thomas D. Maher, Investment Co. Institute, Washington, D.C., of counsel, for Investment Co. Institute.

Robert J. Katzenstein and Clark W. Furlow of Lassen, Smith, Katzenstein & Furlow, Wilmington, and Kurt L. Schultz, Columbus R. Gangemi, Jr., Robert F. Wall, Jerome W. Pope of Winston & Strawn, Chicago, Ill., amicus curiae, for the United Food and Commercial Workers Intern. Union.

Joseph J. Farnan, Jr., U.S. Atty., Sue L. Robinson, Asst. U.S. Atty., Wilmington, Del., Daniel L. Goelzer, Jacob H. Stillman, Eric Summergrad, Gerard S. Citera, amicus curiae, and Paul Gonson, of counsel, for Securities and Exchange Com'n, Washington, D.C.

Before CHRISTIE, Chief Justice, and McNEILLY and MOORE, JJ.

[1347] McNEILLY, Justice:

This case presents to this Court for review the most recent defensive mechanism in the arsenal of corporate takeover weaponry— the Preferred Share Purchase Rights Plan ("Rights Plan" or "Plan"). The validity of this mechanism has attracted national attention. Amici curiae briefs have been filed in support of appellants by the Security and Exchange Commission ("SEC")^[1] and the Investment Company Institute. An amicus curiae brief has been filed in support of appellees ("Household") by the United Food and Commercial Workers International Union.

In a detailed opinion, the Court of Chancery upheld the Rights Plan as a legitimate exercise of business judgment by Household. Moran v. Household International, Inc., Del.Ch., 490 A.2d 1059 (1985). We agree, and therefore, affirm the judgment below.

I

The facts giving rise to this case have been carefully delineated in the Court of Chancery's opinion. Id. at 1064-69. A review of the basic facts is necessary for a complete understanding of the issues.

On August 14, 1984, the Board of Directors of Household International, Inc. adopted the Rights Plan by a fourteen to two vote.^[2] The intricacies of the Rights Plan are contained in a 48-page document entitled "Rights Agreement". Basically, the Plan provides that Household common stockholders are entitled to the issuance of one Right per common share under certain triggering conditions. There are two triggering events that can activate the Rights. The first is the announcement of a tender offer for 30 percent of Household's shares ("30% trigger") and the second is the acquisition of 20 percent of Household's shares by any single entity or group ("20% trigger").

[1349] If an announcement of a tender offer for 30 percent of Household's shares is made, the Rights are issued and are immediately exercisable to purchase 1/100 share of new preferred stock for $100 and are redeemable by the Board for $.50 per Right. If 20 percent of Household's shares are acquired by anyone, the Rights are issued and become non-redeemable and are exercisable to purchase 1/100 of a share of preferred. If a Right is not exercised for preferred, and thereafter, a merger or consolidation occurs, the Rights holder can exercise each Right to purchase $200 of the common stock of the tender offeror for $100. This "flip-over" provision of the Rights Plan is at the heart of this controversy.

Household is a diversified holding company with its principal subsidiaries engaged in financial services, transportation and merchandising. HFC, National Car Rental and Vons Grocery are three of its wholly-owned entities.

Household did not adopt its Rights Plan during a battle with a corporate raider, but as a preventive mechanism to ward off future advances. The Vice-Chancellor found that as early as February 1984, Household's management became concerned about the company's vulnerability as a takeover target and began considering amending its charter to render a takeover more difficult. After considering the matter, Household decided not to pursue a fair price amendment.^[3]

In the meantime, appellant Moran, one of Household's own Directors and also Chairman of the Dyson-Kissner-Moran Corporation, ("D-K-M") which is the largest single stockholder of Household, began discussions concerning a possible leveraged buyout of Household by D-K-M. D-K-M's financial studies showed that Household's stock was significantly undervalued in relation to the company's break-up value. It is uncontradicted that Moran's suggestion of a leveraged buy-out never progressed beyond the discussion stage.

Concerned about Household's vulnerability to a raider in light of the current takeover climate, Household secured the services of Wachtell, Lipton, Rosen and Katz ("Wachtell, Lipton") and Goldman, Sachs & Co. ("Goldman, Sachs") to formulate a takeover policy for recommendation to the Household Board at its August 14 meeting. After a July 31 meeting with a Household Board member and a pre-meeting distribution of material on the potential takeover problem and the proposed Rights Plan, the Board met on August 14, 1984.

Representatives of Wachtell, Lipton and Goldman, Sachs attended the August 14 meeting. The minutes reflect that Mr. Lipton explained to the Board that his recommendation of the Plan was based on his understanding that the Board was concerned about the increasing frequency of "bust-up"^[4] takeovers, the increasing takeover activity in the financial service industry, such as Leucadia's attempt to take over Arco, and the possible adverse effect this type of activity could have on employees and others concerned with and vital to the continuing successful operation of Household even in the absence of any actual bust-up takeover attempt. Against this factual background, the Plan was approved.

Thereafter, Moran and the company of which he is Chairman, D-K-M, filed this suit. On the eve of trial, Gretl Golter, the holder of 500 shares of Household, was permitted to intervene as an additional plaintiff. The trial was held, and the Court [1350] of Chancery ruled in favor of Household.^[5] Appellants now appeal from that ruling to this Court.

II

The primary issue here is the applicability of the business judgment rule as the standard by which the adoption of the Rights Plan should be reviewed. Much of this issue has been decided by our recent decision in Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946 (1985). In Unocal, we applied the business judgment rule to analyze Unocal's discriminatory self-tender. We explained:

When a board addresses a pending takeover bid it has an obligation to determine whether the offer is in the best interests of the corporation and its shareholders. In that respect a board's duty is no different from any other responsibility it shoulders, and its decisions should be no less entitled to the respect they otherwise would be accorded in the realm of business judgment.

Id. at 954 (citation and footnote omitted).

Other jurisdictions have also applied the business judgment rule to actions by which target companies have sought to forestall takeover activity they considered undesirable. See Gearhart Industries, Inc. v. Smith International, 5th Cir., 741 F.2d 707 (1984) (sale of discounted subordinate debentures containing springing warrants); Treco, Inc. v. Land of Lincoln Savings and Loan, 7th Cir., 749 F.2d 374 (1984) (amendment to by-laws); Panter v. Marshall Field, 7th Cir., 646 F.2d 271 (1981) (acquisitions to create antitrust problems); Johnson v. Trueblood, 3d Cir., 629 F.2d 287 (1980), cert. denied, 450 U.S. 999, 101 S.Ct. 1704, 68 L.Ed.2d 200 (1981) (refusal to tender); Crouse-Hinds Co. v. InterNorth, Inc., 2d Cir., 634 F.2d 690 (1980) (sale of stock to favored party); Treadway v. Cane Corp., 2d Cir., 638 F.2d 357 (1980) (sale to White Knight), Enterra Corp. v. SGS Associates, E.D.Pa., 600 F.Supp. 678 (1985) (standstill agreement); Buffalo Forge Co. v. Ogden Corp., W.D.N.Y., 555 F.Supp. 892, aff'd, (2d Cir.) 717 F.2d 757, cert. denied, 464 U.S. 1018, 104 S.Ct. 550, 78 L.Ed.2d 724 (1983) (sale of treasury shares and grant of stock option to White Knight); Whittaker Corp. v. Edgar, N.D.Ill., 535 F.Supp. 933 (1982) (disposal of valuable assets); Martin Marietta Corp. v. Bendix Corp., D.Md., 549 F.Supp. 623 (1982) (PacMan defense).^[6]

This case is distinguishable from the ones cited, since here we have a defensive mechanism adopted to ward off possible future advances and not a mechanism adopted in reaction to a specific threat. This distinguishing factor does not result in the Directors losing the protection of the business judgment rule. To the contrary, pre-planning for the contingency of a hostile takeover might reduce the risk that, under the pressure of a takeover bid, management will fail to exercise reasonable judgment. Therefore, in reviewing a pre-planned defensive mechanism it seems even more appropriate to apply the business judgment rule. See Warner Communications v. Murdoch, D.Del., 581 F.Supp. 1482, 1491 (1984).

Of course, the business judgment rule can only sustain corporate decision making or transactions that are within the power or authority of the Board. Therefore, before the business judgment rule can be applied it must be determined whether the Directors were authorized to adopt the Rights Plan.

[1351] III

Appellants vehemently contend that the Board of Directors was unauthorized to adopt the Rights Plan. First, appellants contend that no provision of the Delaware General Corporation Law authorizes the issuance of such Rights. Secondly, appellants, along with the SEC, contend that the Board is unauthorized to usurp stockholders' rights to receive hostile tender offers. Third, appellants and the SEC also contend that the Board is unauthorized to fundamentally restrict stockholders' rights to conduct a proxy contest. We address each of these contentions in turn.

A.

While appellants contend that no provision of the Delaware General Corporation Law authorizes the Rights Plan, Household contends that the Rights Plan was issued pursuant to 8 Del.C. §§ 151(g) and 157. It explains that the Rights are authorized by § 157^[7] and the issue of preferred stock underlying the Rights is authorized by § 151.^[8] Appellants respond by making several attacks upon the authority to issue the Rights pursuant to § 157.

Appellants begin by contending that § 157 cannot authorize the Rights Plan since § 157 has never served the purpose of authorizing a takeover defense. Appellants contend that § 157 is a corporate financing statute, and that nothing in its legislative history suggests a purpose that has anything to do with corporate control or a takeover defense. Appellants are unable to demonstrate that the legislature, in its adoption of § 157, meant to limit the applicability of § 157 to only the issuance of Rights for the purposes of corporate financing. Without such affirmative evidence, we decline to impose such a limitation upon the section that the legislature has not. Compare Providence & Worchester Co. v. Baker, Del.Supr., 378 A.2d 121, 124 (1977) (refusal to read a bar to protective voting provisions into 8 Del.C. § 212(a)).

As we noted in Unocal:

[O]ur corporate law is not static. It must grow and develop in response to, indeed in anticipation of, evolving concepts and needs. Merely because the General Corporation Law is silent as to a specific matter does not mean that it is prohibited.

493 A.2d at 957. See also Cheff v. Mathes, Del.Supr., 199 A.2d 548 (1964).

Secondly, appellants contend that § 157 does not authorize the issuance of sham rights such as the Rights Plan. They contend that the Rights were designed never to be exercised, and that the Plan has no economic value. In addition, they contend the preferred stock made subject to the Rights is also illusory, citing Telvest, Inc. [1352] v. Olson, Del.Ch., C.A. No. 5798, Brown, V.C. (March 8, 1979).

Appellants' sham contention fails in both regards. As to the Rights, they can and will be exercised upon the happening of a triggering mechanism, as we have observed during the current struggle of Sir James Goldsmith to take control of Crown Zellerbach. See Wall Street Journal, July 26, 1985, at 3, 12. As to the preferred shares, we agree with the Court of Chancery that they are distinguishable from sham securities invalidated in Telvest, supra. The Household preferred, issuable upon the happening of a triggering event, have superior dividend and liquidation rights.

Third, appellants contend that § 157 authorizes the issuance of Rights "entitling holders thereof to purchase from the corporation any shares of its capital stock of any class ..." (emphasis added). Therefore, their contention continues, the plain language of the statute does not authorize Household to issue rights to purchase another's capital stock upon a merger or consolidation.

Household contends, inter alia, that the Rights Plan is analogous to "anti-destruction" or "anti-dilution" provisions which are customary features of a wide variety of corporate securities. While appellants seem to concede that "anti-destruction" provisions are valid under Delaware corporate law, they seek to distinguish the Rights Plan as not being incidental, as are most "anti-destruction" provisions, to a corporation's statutory power to finance itself. We find no merit to such a distinction. We have already rejected appellants' similar contention that § 157 could only be used for financing purposes. We also reject that distinction here.

"Anti-destruction" clauses generally ensure holders of certain securities of the protection of their right of conversion in the event of a merger by giving them the right to convert their securities into whatever securities are to replace the stock of their company. See Broad v. Rockwell International Corp., 5th Cir., 642 F.2d 929, 946, cert. denied, 454 U.S. 965, 102 S.Ct. 506, 70 L.Ed.2d 380 (1981); Wood v. Coastal States Gas Corp., Del.Supr., 401 A.2d 932, 937-39 (1979); B.S.F. Co. v. Philadelphia National Bank, Del.Supr., 204 A.2d 746, 750-51 (1964). The fact that the rights here have as their purpose the prevention of coercive two-tier tender offers does not invalidate them.

Fourth, appellants contend that Household's reliance upon § 157 is contradictory to 8 Del.C. § 203.^[9] Section 203 is a "notice" statute which generally requires that [1353] timely notice be given to a target of an offeror's intention to make a tender offer. Appellants contend that the lack of stronger regulation by the State indicates a legislative intent to reject anything which would impose an impediment to the tender offer process. Such a contention is a non sequitur. The desire to have little state regulation of tender offers cannot be said to also indicate a desire to also have little private regulation. Furthermore, as we explain infra, we do not view the Rights Plan as much of an impediment on the tender offer process.

Fifth, appellants contend that if § 157 authorizes the Rights Plan it would be unconstitutional pursuant to the Commerce Clause and Supremacy Clause of the United States Constitution. Household counters that appellants have failed to properly raise the issues in the Court of Chancery and are, therefore, precluded from raising them. Moreover, Household counters that appellants' contentions are without merit since the conduct complained of here is private conduct of corporate directors and not state regulation.

It is commonly known that issues not properly raised in the trial court will not be considered in the first instance by this Court. Supreme Court Rule 8. We cannot conclude here that appellants have failed to adequately raise their constitutional issues in the Court of Chancery. Appellants raised the Commerce Clause and Supremacy Clause contentions in their "pretrial memo of points and authorities" and in their opening argument at trial. The fact that they did not again raise the issues in their post-trial briefing will not preclude them from raising the issues before this Court.

Appellants contend that § 157 authorization for the Rights Plan violates the Commerce Clause and is void under the Supremacy Clause, since it is an obstacle to the accomplishment of the policies underlying the Williams Act. Appellants put heavy emphasis upon the case of Edgar v. MITE Corp., 457 U.S. 624, 102 S.Ct. 2629, 73 L.Ed.2d 269 (1982), in which the United States Supreme Court held that the Illinois Business Takeover Act was unconstitutional, in that it unduly burdened interstate commerce in violation of the Commerce Clause.^[10] We do not read the analysis in Edgar as applicable to the actions of private parties. The fact that directors of a corporation act pursuant to a state statute provides an insufficient nexus to the state for there to be state action which may violate the Commerce Clause or Supremacy Clause. See Data Probe Acquisition Corp. v. Datatab, Inc., 2d Cir., 722 F.2d 1, 5 (1983).

Having concluded that sufficient authority for the Rights Plan exists in 8 Del.C. § 157, we note the inherent powers of the Board conferred by 8 Del.C. § 141(a),^[11] concerning the management of the corporation's "business and affairs" (emphasis added), also provides the Board additional authority upon which to enact the Rights Plan. Unocal, 493 A.2d at 953.

B.

Appellants contend that the Board is unauthorized to usurp stockholders' [1354] rights to receive tender offers by changing Household's fundamental structure. We conclude that the Rights Plan does not prevent stockholders from receiving tender offers, and that the change of Household's structure was less than that which results from the implementation of other defensive mechanisms upheld by various courts.

Appellants' contention that stockholders will lose their right to receive and accept tender offers seems to be premised upon an understanding of the Rights Plan which is illustrated by the SEC amicus brief which states: "The Chancery Court's decision seriously understates the impact of this plan. In fact, as we discuss below, the Rights Plan will deter not only two-tier offers, but virtually all hostile tender offers."

The fallacy of that contention is apparent when we look at the recent takeover of Crown Zellerbach, which has a similar Rights Plan, by Sir James Goldsmith. Wall Street Journal, July 26, 1985, at 3, 12. The evidence at trial also evidenced many methods around the Plan ranging from tendering with a condition that the Board redeem the Rights, tendering with a high minimum condition of shares and Rights, tendering and soliciting consents to remove the Board and redeem the Rights, to acquiring 50% of the shares and causing Household to self-tender for the Rights. One could also form a group of up to 19.9% and solicit proxies for consents to remove the Board and redeem the Rights. These are but a few of the methods by which Household can still be acquired by a hostile tender offer.

In addition, the Rights Plan is not absolute. When the Household Board of Directors is faced with a tender offer and a request to redeem the Rights, they will not be able to arbitrarily reject the offer. They will be held to the same fiduciary standards any other board of directors would be held to in deciding to adopt a defensive mechanism, the same standard as they were held to in originally approving the Rights Plan. See Unocol, 493 A.2d at 954-55, 958.

In addition, appellants contend that the deterence of tender offers will be accomplished by what they label "a fundamental transfer of power from the stockholders to the directors." They contend that this transfer of power, in itself, is unauthorized.

The Rights Plan will result in no more of a structural change than any other defensive mechanism adopted by a board of directors. The Rights Plan does not destroy the assets of the corporation. The implementation of the Plan neither results in any outflow of money from the corporation nor impairs its financial flexibility. It does not dilute earnings per share and does not have any adverse tax consequences for the corporation or its stockholders. The Plan has not adversely affected the market price of Household's stock.

Comparing the Rights Plan with other defensive mechanisms, it does less harm to the value structure of the corporation than do the other mechanisms. Other mechanisms result in increased debt of the corporation. See Whittaker Corp. v. Edgar, supra (sale of "prize asset"), Cheff v. Mathes, supra, (paying greenmail to eliminate a threat), Unocal Corp. v. Mesa Petroleum Co., supra, (discriminatory self-tender).

There is little change in the governance structure as a result of the adoption of the Rights Plan. The Board does not now have unfettered discretion in refusing to redeem the Rights. The Board has no more discretion in refusing to redeem the Rights than it does in enacting any defensive mechanism.

The contention that the Rights Plan alters the structure more than do other defensive mechanisms because it is so effective as to make the corporation completely safe from hostile tender offers is likewise without merit. As explained above, there [1355] are numerous methods to successfully launch a hostile tender offer.

C.

Appellants' third contention is that the Board was unauthorized to fundamentally restrict stockholders' rights to conduct a proxy contest. Appellants contend that the "20% trigger" effectively prevents any stockholder from first acquiring 20% or more shares before conducting a proxy contest and further, it prevents stockholders from banding together into a group to solicit proxies if, collectively, they own 20% or more of the stock.^[12] In addition, at trial, appellants contended that read literally, the Rights Agreement triggers the Rights upon the mere acquisition of the right to vote 20% or more of the shares through a proxy solicitation, and thereby precludes any proxy contest from being waged.^[13]

Appellants seem to have conceded this last contention in light of Household's response that the receipt of a proxy does not make the recipient the "beneficial owner" of the shares involved which would trigger the Rights. In essence, the Rights Agreement provides that the Rights are triggered when someone becomes the "beneficial owner" of 20% or more of Household stock. Although a literal reading of the Rights Agreement definition of "beneficial owner" would seem to include those shares which one has the right to vote, it has long been recognized that the relationship between grantor and recipient of a proxy is one of agency, and the agency is revocable by the grantor at any time. Henn, Corporations § 196, at 518. Therefore, the holder of a proxy is not the "beneficial owner" of the stock. As a result, the mere acquisition of the right to vote 20% of the shares does not trigger the Rights.

The issue, then, is whether the restriction upon individuals or groups from first acquiring 20% of shares before waging a proxy contest fundamentally restricts stockholders' right to conduct a proxy contest. Regarding this issue the Court of Chancery found:

Thus, while the Rights Plan does deter the formation of proxy efforts of a certain magnitude, it does not limit the voting power of individual shares. On the evidence presented it is highly conjectural to assume that a particular effort to assert shareholder views in the election of directors or revisions of corporate policy will be frustrated by the proxy feature of the Plan. Household's witnesses, Troubh and Higgins described recent corporate takeover battles in which insurgents holding less than 10% stock ownership were able to secure corporate control through a proxy contest or the threat of one.

Moran, 490 A.2d at 1080.

We conclude that there was sufficient evidence at trial to support the Vice-Chancellor's finding that the effect upon proxy contests will be minimal. Evidence at trial established that many proxy contests are won with an insurgent ownership of less than 20%, and that very large holdings are no guarantee of success. There was also testimony that the key variable in proxy contest success is the merit of an insurgent's issues, not the size of his holdings.

IV

Having concluded that the adoption of the Rights Plan was within the authority of the Directors, we now look to whether the Directors have met their burden under the business judgment rule.

[1356] The business judgment rule is a "presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." Aronson v. Lewis, Del.Supr., 473 A.2d 805, 812 (1984) (citations omitted). Notwithstanding, in Unocal we held that when the business judgment rule applies to adoption of a defensive mechanism, the initial burden will lie with the directors. The "directors must show that they had reasonable grounds for believing that a danger to corporate policy and effectiveness existed.... [T]hey satisfy that burden `by showing good faith and reasonable investigation....'" Unocal, 493 A.2d at 955 (citing Cheff v. Mathes, 199 A.2d at 554-55). In addition, the directors must show that the defensive mechanism was "reasonable in relation to the threat posed." Unocal, 493 A.2d at 955. Moreover, that proof is materially enhanced, as we noted in Unocal, where, as here, a majority of the board favoring the proposal consisted of outside independent directors who have acted in accordance with the foregoing standards. Unocal, 493 A.2d at 955; Aronson, 473 A.2d at 815. Then, the burden shifts back to the plaintiffs who have the ultimate burden of persuasion to show a breach of the directors' fiduciary duties. Unocal, 493 A.2d at 958.

There are no allegations here of any bad faith on the part of the Directors' action in the adoption of the Rights Plan. There is no allegation that the Directors' action was taken for entrenchment purposes. Household has adequately demonstrated, as explained above, that the adoption of the Rights Plan was in reaction to what it perceived to be the threat in the market place of coercive two-tier tender offers. Appellants do contend, however, that the Board did not exercise informed business judgment in its adoption of the Plan.

Appellants contend that the Household Board was uninformed since they were, inter alia, told the Plan would not inhibit a proxy contest, were not told the plan would preclude all hostile acquisitions of Household, and were told that Delaware counsel opined that the plan was within the business judgment of the Board.

As to the first two contentions, as we explained above, the Rights Plan will not have a severe impact upon proxy contests and it will not preclude all hostile acquisitions of Household. Therefore, the Directors were not misinformed or uninformed on these facts.

Appellants contend the Delaware counsel did not express an opinion on the flip-over provision of the Rights, rather only that the Rights would constitute validly issued and outstanding rights to subscribe to the preferred stock of the company.

To determine whether a business judgment reached by a board of directors was an informed one, we determine whether the directors were grossly negligent. Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 873 (1985). Upon a review of this record, we conclude the Directors were not grossly negligent. The information supplied to the Board on August 14 provided the essentials of the Plan. The Directors were given beforehand a notebook which included a three-page summary of the Plan along with articles on the current takeover environment. The extended discussion between the Board and representatives of Wachtell, Lipton and Goldman, Sachs before approval of the Plan reflected a full and candid evaluation of the Plan. Moran's expression of his views at the meeting served to place before the Board a knowledgeable critique of the Plan. The factual happenings here are clearly distinguishable from the actions of the directors of Trans Union Corporation who displayed gross negligence in approving a cash-out merger. Id.

In addition, to meet their burden, the Directors must show that the defensive [1357] mechanism was "reasonable in relation to the threat posed". The record reflects a concern on the part of the Directors over the increasing frequency in the financial services industry of "boot-strap" and "bust-up" takeovers. The Directors were also concerned that such takeovers may take the form of two-tier offers.^[14] In addition, on August 14, the Household Board was aware of Moran's overture on behalf of D-K-M. In sum, the Directors reasonably believed Household was vulnerable to coercive acquisition techniques and adopted a reasonable defensive mechanism to protect itself.

V

In conclusion, the Household Directors receive the benefit of the business judgment rule in their adoption of the Rights Plan.

The Directors adopted the Plan pursuant to statutory authority in 8 Del.C. §§ 141, 151, 157. We reject appellants' contentions that the Rights Plan strips stockholders of their rights to receive tender offers, and that the Rights Plan fundamentally restricts proxy contests.

The Directors adopted the Plan in the good faith belief that it was necessary to protect Household from coercive acquisition techniques. The Board was informed as to the details of the Plan. In addition, Household has demonstrated that the Plan is reasonable in relation to the threat posed. Appellants, on the other hand, have failed to convince us that the Directors breached any fiduciary duty in their adoption of the Rights Plan.

While we conclude for present purposes that the Household Directors are protected by the business judgment rule, that does not end the matter. The ultimate response to an actual takeover bid must be judged by the Directors' actions at that time, and nothing we say here relieves them of their basic fundamental duties to the corporation and its stockholders. Unocal, 493 A.2d at 954-55, 958; Smith v. Van Gorkom, 488 A.2d at 872-73; Aronson, 473 A.2d at 812-13; Pogostin v. Rice, Del.Supr., 480 A.2d 619, 627 (1984). Their use of the Plan will be evaluated when and if the issue arises.

* * *

AFFIRMED.

[1] The SEC split 3-2 on whether to intervene in this case. The two dissenting Commissioners have publicly disagreed with the other three as to the merits of the Rights Plan. 17 Securities Regulation & Law Report 400; The Wall Street Journal, March 20, 1985, at 6.

[2] Household's Board has ten outside directors and six who are members of management. Messrs. Moran (appellant) and Whitehead voted against the Plan. The record reflects that Whitehead voted against the Plan not on its substance but because he thought it was novel and would bring unwanted publicity to Household.

[3] A fair price amendment to a corporate charter generally requires supermajority approval for certain business combinations and sets minimum price criteria for mergers. Moran, 490 A.2d at 1064, n. 1.

[4] "Bust-up" takeover generally refers to a situation in which one seeks to finance an acquisition by selling off pieces of the acquired company.

[5] The Vice-Chancellor did rule in favor of appellants on Household's counterclaim, but that ruling is not at issue in this appeal.

[6] The "Pac-Man" defense is generally a target company countering an unwanted tender offer by making its own tender offer for stock of the would-be acquirer. Block & Miller, The Responsibilities and Obligations of Corporate Directors in Takeover Contests, 11 Sec.Reg.L.J. 44, 64 (1983).

[7] The power to issue rights to purchase shares is conferred by 8 Del.C. § 157 which provides in relevant part:

Subject to any provisions in the certificate of incorporation, every corporation may create and issue, whether or not in connection with the issue and sale of any shares of stock or other securities of the corporation, rights or options entitling the holders thereof to purchase from the corporation any shares of its capital stock of any class or classes, such rights or options to be evidenced by or in such instrument or instruments as shall be approved by the board of directors.

[8] 8 Del.C. § 151(g) provides in relevant part:

When any corporation desires to issue any shares of stock of any class or of any series of any class of which the voting powers, designations, preferences and relative, participating, optional or other rights, if any, or the qualifications, limitations or restrictions thereof, if any, shall not have been set forth in the certificate of incorporation or in any amendment thereto but shall be provided for in a resolution or resolutions adopted by the board of directors pursuant to authority expressly vested in it by the provisions of the certificate of incorporation or any amendment thereto, a certificate setting forth a copy of such resolution or resolutions and the number of shares of stock of such class or series shall be executed, acknowledged, filed, recorded, and shall become effective, in accordance with § 103 of this title.

[9] 8 Del.C. § 203 provides in relevant part:

(a) No offeror shall make a tender offer unless:

(1) Not less than 20 nor more than 60 days before the date the tender offer is to be made, the offeror shall deliver personally or by registered or certified mail to the corporation whose equity securities are to be subject to the tender offer, at its registered office in this State or at its principal place of business, a written statement of the offeror's intention to make the tender offer....

(2) The tender offer shall remain open for a period of at least 20 days after it is first made to the holders of the equity securities, during which period any stockholder may withdraw any of the equity securities tendered to the offeror, and any revised or amended tender offer which changes the amount or type of consideration offered or the number of equity securities for which the offer is made shall remain open at least 10 days following the amendment; and

(3) The offeror and any associate of the offeror will not purchase or pay for any tendered equity security for a period of at least 20 days after the tender offer is first made to the holders of the equity securities, and no such purchase or payment shall be made within 10 days after an amended or revised tender offer if the amendment or revision changes the amount or type of consideration offered or the number of equity securities for which the offer is made. If during the period the tender offer must remain open pursuant to this section, a greater number of equity securities is tendered than the offeror is bound or willing to purchase, the equity securities shall be purchased pro rata, as nearly as may be, according to the number of shares tendered during such period by each equity security holder.

[10] Justice White, joined by Chief Justice Burger and Justice Blackman also concluded that the Illinois Business Takeover Act was pre-empted by the Williams Act. Edgar, 457 U.S. at 630, 102 S.Ct. at 2634.

[11] 8 Del.C. § 141(a) provides:

(a) The business and affairs of every corporation organized under this chapter shall be managed by or under the direction of a board of directors, except as may be otherwise provided in this chapter or in its certificate of incorporation. If any such provision is made in the certificate of incorporation, the powers and duties conferred or imposed upon the board of directors by this chapter shall be exercised or performed to such extent and by such person or persons as shall be provided in the certificate of incorporation.

[12] Appellants explain that the acquisition of 20% of the shares trigger the Rights, making them non-redeemable, and thereby would prevent even a future friendly offer for the ten-year life of the Rights.

[13] The SEC still contends that the mere acquisition of the right to vote 20% of the shares through a proxy solicitation triggers the rights. We do not interpret the Rights Agreement in that manner.

[14] We have discussed the coercive nature of two-tier tender offers in Unocal, 493 A.2d at 956, n. 12. We explained in Unocal that a discriminatory self-tender was reasonably related to the threat of two-tier tender offers and possible greenmail.

16 A.3d 48 (2011)

[53] Kenneth J. Nachbar, Jon E. Abramczyk, William M. Lafferty, John P. DiTomo, Eric S. Wilensky, John A. Eakins, Ryan D. Stottmann and S. Michael Sirkin, of Morris, Nichols, Arsht & Tunnell LLP, Wilmington, Delaware; Of Counsel: Thomas G. Rafferty, David R. Marriott and Gary A. Bornstein, of Cravath, Swaine & Moore LLP, New York, New York, Attorneys for Plaintiff Air Products and Chemicals, Inc.

Pamela S. Tikellis, Robert J. Kriner, Jr., A. Zachary Naylor and Scott M. Tucker, of Chimicles & Tikellis LLP, Wilmington, Delaware; Of Counsel: Jeffrey W. Golan, M. Richard Komins and Julie B. Palley, of Barrack, Rodos & Bacine, Philadelphia, Pennsylvania; Mark Lebovitch, Amy Miller and Jeremy Friedman, of Bernstein Litowitz Berger & Grossman LLP, New York, New York; Randall J. Baron, A. Rick Atwood, Jr. and David T. Wissbroecker, of Robbins Geller Rudman & Dowd LLP, San Diego, California; Leslie R. Stern, of Berman Devalerio, Boston, Massachusetts; Joseph E. White III, of Saxena White P.A., Boca Raton, Florida, Attorneys for Shareholder Plaintiffs.

Donald J. Wolfe, Jr., Kevin R. Shannon, Berton W. Ashman, Jr. and Ryan W. Browning, of Potter Anderson & Corroon LLP, Wilmington, Delaware; Of Counsel: Kenneth B. Forrest, Theodore N. Mirvis, Eric M. Roth, Marc Wolinsky, George T. Conway III, Joshua A. Naftalis, Bradley R. Wilson, Jasand Mock and Charles D. Cording, of Wachtell, Lipton, Rosen & Katz, New York, New York, Attorneys for Defendants.

OPINION

CHANDLER, Chancellor.

This case poses the following fundamental question: Can a board of directors, acting in good faith and with a reasonable factual basis for its decision, when faced with a structurally non-coercive, all-cash, fully financed tender offer directed to the stockholders of the corporation, keep a poison pill in place so as to prevent the stockholders from making their own decision about whether they want to tender their shares—even after the incumbent board has lost one election contest, a full year has gone by since the offer was first made public, and the stockholders are fully informed as to the target board's views on the inadequacy of the offer? If so, does that effectively mean that a board can "just say never" to a hostile tender offer?

The answer to the latter question is "no." A board cannot "just say no" to a tender offer. Under Delaware law, it must first pass through two prongs of exacting judicial scrutiny by a judge who will evaluate the actions taken by, and the motives of, the board. Only a board of directors found to be acting in good faith, after reasonable investigation and reliance on the advice of outside advisors, which articulates and convinces the Court that a hostile tender offer poses a legitimate threat to the corporate enterprise, may address that perceived threat by blocking the tender offer and forcing the bidder to elect a board majority that supports its bid.

In essence, this case brings to the fore one of the most basic questions animating all of corporate law, which relates to the allocation of power between directors and stockholders. That is, "when, if ever, will a board's duty to `the corporation and its shareholders' require [the board] to abandon concerns for `long term' values (and other constituencies) and enter a current share value maximizing mode?"^[1] More to the point, in the context of a hostile tender offer, who gets to decide when and if the corporation is for sale?

[55] Since the Shareholder Rights Plan (more commonly known as the "poison pill") was first conceived and throughout the development of Delaware corporate takeover jurisprudence during the twenty-five-plus years that followed, the debate over who ultimately decides whether a tender offer is adequate and should be accepted—the shareholders of the corporation or its board of directors—has raged on. Starting with Moran v. Household International, Inc.^[2] in 1985, when the Delaware Supreme Court first upheld the adoption of the poison pill as a valid takeover defense, through the hostile takeover years of the 1980s, and in several recent decisions of the Court of Chancery and the Delaware Supreme Court,^[3] this fundamental question has engaged practitioners, academics, and members of the judiciary, but it has yet to be confronted head on.

For the reasons much more fully described in the remainder of this Opinion, I conclude that, as Delaware law currently stands, the answer must be that the power to defeat an inadequate hostile tender offer ultimately lies with the board of directors. As such, I find that the Airgas board has met its burden under Unocal to articulate a legally cognizable threat (the allegedly inadequate price of Air Products' offer, coupled with the fact that a majority of Airgas's stockholders would likely tender into that inadequate offer) and has taken defensive measures that fall within a range of reasonable responses proportionate to that threat. I thus rule in favor of defendants. Air Products' and the Shareholder Plaintiffs' requests for relief are denied, and all claims asserted against defendants are dismissed with prejudice.^[4]

INTRODUCTION

This is the Court's decision after trial, extensive post-trial briefing, and a supplemental evidentiary hearing in this long-running takeover battle between Air Products & Chemicals, Inc. ("Air Products") and Airgas, Inc. ("Airgas"). The now very public saga began quietly in mid-October 2009 when John McGlade, President and CEO of Air Products, privately approached Peter McCausland, founder and CEO of Airgas, about a potential acquisition or combination. After McGlade's private advances were rebuffed, Air Products went hostile in February 2010, launching a public tender offer for all outstanding Airgas shares.

Now, over a year since Air Products first announced its all-shares, all-cash tender offer, the terms of that offer (other than price) remain essentially unchanged.^[5] After several price bumps and extensions, the offer currently stands at $70 per share and is set to expire today, February 15, 2011—Air Products' stated "best and final" offer. The Airgas board unanimously rejected that offer as being "clearly inadequate."^[6] The Airgas board has repeatedly [56] expressed the view that Airgas is worth at least $78 per share in a sale transaction—and at any rate, far more than the $70 per share Air Products is offering.

So, we are at a crossroads. Air Products has made its "best and final" offer—apparently its offer to acquire Airgas has reached an end stage. Meanwhile, the Airgas board believes the offer is clearly inadequate and its value in a sale transaction is at least $78 per share. At this stage, it appears, neither side will budge. Airgas continues to maintain its defenses, blocking the bid and effectively denying shareholders the choice whether to tender their shares. Air Products and Shareholder Plaintiffs now ask this Court to order Airgas to redeem its poison pill and other defenses that are stopping Air Products from moving forward with its hostile offer, and to allow Airgas's stockholders to decide for themselves whether they want to tender into Air Products' (inadequate or not) $70 "best and final" offer.

A week-long trial in this case was held from October 4, 2010 through October 8, 2010. Hundreds of pages of post-trial memoranda were submitted by the parties. After trial, several legal, factual, and evidentiary questions remained to be answered. In ruling on certain outstanding evidentiary issues, I sent counsel a Letter Order on December 2, 2010 asking for answers to a number of questions to be addressed in supplemental post-trial briefing. On the eve of the parties' submissions to the Court in response to that Letter Order, Air Products raised its offer to the $70 "best and final" number. At that point, defendants vigorously opposed a ruling based on the October trial record, suggesting that the entire trial (indeed, the entire case) was moot because the October trial predominantly focused on the Airgas board's response to Air Products' then-$65.50 offer and the board's decision to keep its defenses in place with respect to that offer. Defendants further suggested that any ruling with respect to the $70 offer was not ripe because the board had not yet met to consider that offer.

I rejected both the mootness and ripeness arguments.^[7] As for mootness, Air Products had previously raised its bid several times throughout the litigation but the core question before me—whether Air Products' offer continues to pose a threat justifying Airgas's continued maintenance of its poison pill—remained, and remains, the same. And as for ripeness, by the time of the December 23 Letter Order the Airgas board had met and rejected Air Products' revised $70 offer. I did, however, allow the parties to take supplemental discovery relating to the $70 offer. A supplemental evidentiary hearing was held from January 25 through January 27, 2011, in order to complete the record on the $70 offer. Counsel presented closing arguments on February 8, 2011.

Now, having thoroughly read, reviewed, and reflected upon all of the evidence presented to me, and having carefully considered the arguments made by counsel, I conclude that the Airgas board, in proceeding as it has since October 2009, has not breached its fiduciary duties owed to the Airgas stockholders. I find that the board has acted in good faith and in the honest belief that the Air Products offer, at $70 per share, is inadequate.

Although I have a hard time believing that inadequate price alone (according to the target's board) in the context of a nondiscriminatory, all-cash, all-shares, fully financed offer poses any "threat"—particularly given the wealth of information available to Airgas's stockholders at this point [57] in time—under existing Delaware law, it apparently does. Inadequate price has become a form of "substantive coercion" as that concept has been developed by the Delaware Supreme Court in its takeover jurisprudence. That is, the idea that Airgas's stockholders will disbelieve the board's views on value (or in the case of merger arbitrageurs who may have short-term profit goals in mind, they may simply ignore the board's recommendations), and so they may mistakenly tender into an inadequately priced offer. Substantive coercion has been clearly recognized by our Supreme Court as a valid threat.

Trial judges are not free to ignore or rewrite appellate court decisions. Thus, for reasons explained in detail below, I am constrained by Delaware Supreme Court precedent to conclude that defendants have met their burden under Unocal to articulate a sufficient threat that justifies the continued maintenance of Airgas's poison pill. That is, assuming defendants have met their burden to articulate a legally cognizable threat (prong 1), Airgas's defenses have been recognized by Delaware law as reasonable responses to the threat posed by an inadequate offer—even an all-shares, all-cash offer (prong 2).

In my personal view, Airgas's poison pill has served its legitimate purpose. Although the "best and final" $70 offer has been on the table for just over two months (since December 9, 2010), Air Products' advances have been ongoing for over sixteen months, and Airgas's use of its poison pill—particularly in combination with its staggered board—has given the Airgas board over a full year to inform its stockholders about its view of Airgas's intrinsic value and Airgas's value in a sale transaction. It has also given the Airgas board a full year to express its views to its stockholders on the purported opportunistic timing of Air Products' repeated advances and to educate its stockholders on the inadequacy of Air Products' offer. It has given Airgas more time than any litigated poison pill in Delaware history—enough time to show stockholders four quarters of improving financial results,^[8] demonstrating that Airgas is on track to meet its projected goals. And it has helped the Airgas board push Air Products to raise its bid by $10 per share from when it was first publicly announced to what Air Products has now represented is its highest offer. The record at both the October trial and the January supplemental evidentiary hearing confirm that Airgas's stockholder base is sophisticated and well-informed, and that essentially all the information they would need to make an informed decision is available to them. In short, there seems to be no threat here—the stockholders know what they need to know (about both the offer and the Airgas board's opinion of the offer) to make an informed decision.

That being said, however, as I understand binding Delaware precedent, I may not substitute my business judgment for that of the Airgas board.^[9] The Delaware Supreme Court has recognized inadequate price as a valid threat to corporate policy and effectiveness.^[10] The Delaware Supreme Court has also made clear that the [58] "selection of a time frame for achievement of corporate goals . . . may not be delegated to the stockholders."^[11] Furthermore, in powerful dictum, the Supreme Court has stated that "[d]irectors are not obliged to abandon a deliberately conceived corporate plan for a short-term shareholder profit unless there is clearly no basis to sustain the corporate strategy."^[12] Although I do not read that dictum as eliminating the applicability of heightened Unocal scrutiny to a board's decision to block a non-coercive bid as underpriced, I do read it, along with the actual holding in Unitrin, as indicating that a board that has a good faith, reasonable basis to believe a bid is inadequate may block that bid using a poison pill, irrespective of stockholders' desire to accept it.

Here, even using heightened scrutiny, the Airgas board has demonstrated that it has a reasonable basis for sustaining its long term corporate strategy—the Airgas board is independent, and has relied on the advice of three different outside independent financial advisors in concluding that Air Products' offer is inadequate. Air Products' own three nominees who were elected to the Airgas board in September 2010 have joined wholeheartedly in the Airgas board's determination, and when the Airgas board met to consider the $70 "best and final" offer in December 2010, it was one of those Air Products Nominees who said, "We have to protect the pill."^[13] Indeed, one of Air Products' own directors conceded at trial that the Airgas board members had acted within their fiduciary duties in their desire to "hold out for the proper price,"^[14] and that "if an offer was made for Air Products that [he] considered to be unfair to the stockholders of Air Products . . . [he would likewise] use every legal mechanism available" to hold out for the proper price as well.^[15] Under Delaware law, the Airgas directors have complied with their fiduciary duties. Thus, as noted above, and for the reasons more fully described in the remainder of this Opinion, I am constrained to deny Air Products' and the Shareholder Plaintiffs' requests for relief.

I. FACTS

These are the facts as I find them after trial, several rounds of post-trial briefing, and the supplemental evidentiary hearing.^[16] Because facts material to this dispute continued to unfold after the October trial had ended, I first describe the general background facts leading up to Air Products' $70 "best and final" offer. The facts developed in the supplemental evidentiary hearing specifically necessary to determine whether Air Products' $70 offer presents a cognizable threat and whether Airgas's defensive measures are reasonable in relation to that threat are set forth beginning in Section I.P (under the heading "Facts Developed at the Supplemental Evidentiary Hearing").

BACKGROUND FACTS

For ease of understanding, I begin with a list of some of the key players with [59] leading roles at the October trial.^[17]

From Air Products:

• John McGlade: Air Products' CEO, President, and Chairman of the board.

• Paul Huck: Air Products' CFO and Senior Vice President.

From Airgas:

• Peter McCausland: Airgas's founder and CEO. McCausland also served as Chairman of the Airgas board from May 1987 until September 15, 2010.

• Robert McLaughlin: Airgas's CFO and Senior Vice President.

• Michael Molinini: Airgas's Chief Operating Officer and Executive Vice President.

• Lee Thomas: Airgas director.

• Richard Ill: Airgas former director who lost his board seat at the September 15, 2010 annual meeting.

The Financial Advisors:

• Filip Rensky: Investment banker from Bank of America Merrill Lynch, one of Airgas's outside financial advisors.

• Michael Carr: Investment banker from Goldman Sachs, Airgas's other outside financial advisor.

With those players in mind,^[18] here are the facts as I find them after trial.

A. The Parties

1. Air Products

Plaintiff Air Products is a Delaware corporation headquartered in Allentown, Pennsylvania that serves technology, energy, industrial and healthcare customers globally. It offers a unique portfolio of products, services and solutions that include [60] atmospheric gases, process and specialty gases, performance materials, equipment and services.^[19] Air Products is the world's largest supplier of hydrogen and helium, and it has also built leading positions in growth markets.^[20] Founded in 1940 on the concept of "on-site" production and sale of industrial gases, Air Products revolutionized the sale of industrial gases by building gas generating facilities adjacent to large-volume gas users, thereby reducing distribution costs.^[21] Today, with annual revenues of $8.3 billion and approximately 18,900 employees, the company provides a wide range of services and operates in over forty countries around the world.^[22] Air Products currently owns approximately 2% of Airgas's outstanding common stock.

2. Shareholder Plaintiffs

The Shareholder Plaintiffs are Airgas stockholders. Together, they own 15,159 shares of Airgas common stock,^[23] and purport to represent all other stockholders of Airgas who are similarly situated.

3. Airgas Defendants

Airgas is a Delaware corporation headquartered in Radnor, Pennsylvania. Founded in 1982 by Chief Executive Officer Peter McCausland, it is a domestic supplier and distributor of industrial, medical and specialty gases and related hardgoods.^[24] Built on an aggressive acquisition strategy (over 400 acquisitions in twenty-seven years), Airgas today operates in approximately 1,100 locations with over 14,000 employees and is the premier packaged gas company in the U.S.^[25] The core of Airgas's business is "packaged" gas—delivering small volumes of gas in cylinders or bottles.^[26] In the last five years or so, Airgas has been moving more into the bulk business as well.^[27] In addition to the gas supply business, about 35% of Airgas's business is comprised of "hardgoods," which includes the products and equipment necessary to consume the gases, as well as welding and safety materials.^[28]

Before its September 15, 2010 annual meeting, Airgas was led by a nine-member staggered board of directors, divided into three equal classes with one class (three directors) up for election each year.^[29] Other than McCausland, the rest of the board members are independent outside directors.^[30] At the time of the September 15 annual meeting (and at the time this [61] lawsuit was initiated), the eight outside directors were: W. Thacher Brown; James W. Hovey; Richard C. Ill; Paula A. Sneed; David M. Stout; Lee M. Thomas; John C. van Roden, Jr. and Ellen C. Wolf^[31] (together with McCausland, "director defendants," and collectively with Airgas, "defendants").^[32]

At the 2010 annual meeting, three Airgas directors (McCausland, Brown, and Ill) lost their seats on the board when three Air Products nominees were elected.^[33] On September 23, 2010, Airgas expanded the size of its board to ten members and reappointed McCausland to fill the new seat.^[34] Thus, Airgas is now led by a ten-member staggered board of directors, nine of whom are independent. To be clear, references to the Airgas board in the section of this Opinion discussing the factual background from October 2009 through September 15, 2010 means the entire Airgas board as it was constituted before the September 15 annual meeting. After the September 15, 2010 meeting, I will discuss in detail the facts relating to Air Products' $70 offer and the actions of the "new" Airgas board, including the three Air Products nominees.

As of the record date for the 2010 annual meeting, Airgas had 83,629,731 shares outstanding. From October 2009 (when Air Products privately approached Airgas about a potential deal) until today, Airgas's stock price has ranged from a low of $41.64^[35] to a high of $71.28.^[36] For historical perspective, before then it had been trading in the $40s and $50s (with a brief stint in the $60s) through most of 2007-2008, until the financial crisis hit in late 2008. The stock price dropped as low as $27 per share in March of 2009, but quickly recovered and jumped back into the mid-$40s. In the board's unanimous view, the company is worth at least $78 in a sale transaction at this time ($60-ish unaffected stock price plus a 30% premium), and left alone, most of the Airgas directors "would say the stock will be worth north of $70 by next year."^[37] In the professional opinion of one of Airgas's independent financial advisors, the fair value of Airgas as of January 26, 2011 is "in the mid to high seventies, and well into the mid eighties."^[38] McCausland currently owns approximately 9.5% of Airgas common stock. The other directors collectively own less than 2% of the outstanding Airgas stock. Together, the ten current Airgas directors own approximately 11% of Airgas's outstanding stock.

[62] B. Airgas's Anti-Takeover Devices

As a result of Airgas's classified board structure, it would take two annual meetings to obtain control of the board. In addition to its staggered board, Airgas has three main takeover defenses: (1) a shareholder rights plan ("poison pill") with a 15% triggering threshold,^[39] (2) Airgas has not opted out of Delaware General Corporation Law ("DGCL") § 203, which prohibits business combinations with any interested stockholder for a period of three years following the time that such stockholder became an interested stockholder, unless certain conditions are met,^[40] and (3) Airgas's Certificate of Incorporation includes a supermajority merger approval provision for certain business combinations. Namely, any merger with an "Interested Stockholder" (defined as a stockholder who beneficially owns 20% or more of the voting power of Airgas's outstanding voting stock) requires the approval of 67% or more of the voting power of the then-outstanding stock entitled to vote, unless approved by a majority of the disinterested directors or certain fair price and procedure requirements are met.^[41]

Together, these are Airgas's takeover defenses that Air Products and the Shareholder Plaintiffs challenge and seek to have removed or deemed inapplicable to Air Products' hostile tender offer.

C. Airgas's Five-Year Plan

In the regular course of business, Airgas prepares a five-year strategic plan approximately every eighteen months, forecasting the company's financial performance over a five year horizon.^[42] In the fall of 2007, Airgas developed a five-year plan predicting the company's performance through fiscal year 2012. The 2007 plan included two scenarios: a strong economy case and a weakening economy case.^[43] Airgas generally has a history of meeting or beating its strategic plans, but it fell behind its 2007 plan when the great recession hit.^[44] At the time of the October trial, Airgas was running about six months behind the weakening economy case, and about a year and a half behind the strong economy case.^[45]

In the summer of 2009, Airgas management was already working on an updated five-year plan.^[46] The 2009 plan included only a single scenario: a "base" case or "slow and steady recovery in the economy."^[47] The 2009 five-year plan was completed [63] and distributed to the Airgas directors before November 2009, and the plan was formally presented to the board at its November 2009 strategic planning retreat.^[48]

D. Air Products Privately Expresses Interest in Airgas

1. The $60 all-stock offer

Air Products first became interested in a transaction with Airgas in 2007,^[49] but did not pursue a transaction at that time because Airgas's stock price was too high.^[50] Then the global recession hit, and in the spring or summer of 2009, Air Products' interest in Airgas was reignited.^[51] On September 17, 2009, the Air Products board of directors authorized McGlade to approach McCausland and discuss a possible transaction between the two companies.^[52] The codename for the project was "Flashback," because Air Products had previously been in the packaged gas business and wanted to "flash back" into it.^[53]

On October 15, 2009, McGlade and McCausland met at Airgas's headquarters.^[54] At the meeting, McGlade conveyed Air Products' interest in a potential business combination with Airgas and proposed a $60 per share all equity deal.^[55] After the meeting, McCausland reported the substance of his conversation with McGlade to Les Graff, Airgas's Senior Vice President for Corporate Development, who took typewritten notes which he called "Thin Air."^[56] As Graff's notes corroborate, during the meeting McGlade communicated Air Products' views on the strategic benefits and synergies that a transaction could yield, noting that a combination would be immediately accretive.^[57] [64] McCausland told McGlade that it was "not a good time" to sell the company^[58] but that he would nevertheless convey the proposal to the Airgas board.^[59]

Shortly thereafter, McCausland telephoned Thacher Brown, Airgas's then-presiding director, to inform him of the offer and ask whether he thought it was necessary to call a special meeting of the board to consider Air Products' proposal.^[60] Brown said he did not think so, since the entire board was already scheduled to meet a few weeks later for its strategic planning retreat.^[61] McCausland suggested that he would reach out to Airgas's legal and financial advisors to solicit their advice, which Brown thought was a good idea.^[62]

At its three-day strategic planning retreat from November 5-7, 2009, in Kiawah, South Carolina, the full board first learned of Air Products' proposal.^[63] In advance of the retreat, the board had received copies of the five-year strategic plan, which served as the basis for the board's consideration of the $60 offer.^[64] The board also relied on a "discounted future stock price analysis" (the "McCausland Analysis") that had been prepared by management at McCausland's request to show the value of Airgas in a change-of-control transaction.^[65]

After reviewing the numbers, the board's view on the inadequacy of the offer was not even a close call. The board agreed that $60 was "just so far below what we thought fair value was" that it would be harmful to Airgas's stockholders [65] if the board sat down with Air Products.^[66] In the board's view, the offer was so "totally out of the range" of what might be reasonable that beginning negotiations at that price would send the wrong message—that Airgas would be willing to sell the company at a price that is well below its fair value.^[67] Thus, the board unanimously concluded that Airgas was "not interested in a transaction."^[68] No one on the Airgas board thought it made sense to have any further discussions with Air Products at that point.^[69] On November 11, McCausland called McGlade to inform him of the board's decision.^[70]

On November 20, 2009, McGlade sent a letter to McCausland essentially putting in writing the offer they had been discussing over the last month—that is, Air Products offered to acquire all of Airgas's outstanding shares for $60 per share on an all-stock basis.^[71] The letter suggested that the $60 offer was negotiable and requested a meeting with Airgas to explore additional sources of value.^[72] The letter also requested a "formal response."^[73]

2. Airgas Formally Rejects the Offer

Perhaps annoyed at the request for a formal response to the same offer the board had already rejected, McCausland had his secretary circulate to the Airgas board and its advisors and management team his response letter to McGlade, written with a derogatory salutation.^[74] This letter was not sent, but McCausland did send a real letter to McGlade that day informing him that the Airgas board would meet in early December to consider the proposal.^[75]

The board held a special telephonic meeting on December 7, 2009.^[76] In the hour-long call, Graff presented a detailed [66] financial analysis of the offer.^[77] McCausland advised the board that management had "spent a great deal of time . . . meeting with [Airgas's] financial advisors and legal team, studying valuation and related issues," and that the management team recommended that the board reject the offer.^[78] Brown stated his belief that "nothing had changed since November, that the proposal should be rejected and that attention should be turned to next steps."^[79] The board then unanimously supported management's recommendation to reject the offer and to decline Air Products' request for a meeting.^[80]

Accordingly, McCausland sent a letter to McGlade the following day conveying the board's formal response to the November 20 proposal: "We are not interested in pursuing your company's proposal and do not believe that any purpose would be served by a meeting."^[81]

3. The $62 cash-stock offer

On December 17, 2009, McGlade sent McCausland a revised proposal, raising Air Products' offer to an implied value of $62 per share in a cash-and-stock transaction, and reiterating Air Products' "continued strong interest in a business combination with Airgas."^[82] McGlade explained that Air Products' original proposal of structuring a potential combination as an all-stock deal was intended to allow Airgas's stockholders to share in the "expected appreciation of Air Products' stock as the synergies of the combined companies are realized."^[83] Nonetheless, to address Airgas's concern that Air Products' stock was an "unattractive currency" for a potential transaction, Air Products was "prepared to offer cash for up to half of the $62 per share" they were offering.^[84]

McGlade again expressed Air Products' willingness to try to negotiate with Airgas on price and requested a meeting between the two companies, writing:

If you believe there is incremental value above and beyond our increased offer, we stand willing to listen and to understand your points on value with a view to sharing increased value appropriately with the Airgas shareholders . . . . Our teams should meet at this point in the process to move forward in a manner that best serves the interest of our respective shareholders. To that end, we and our advisors are formally requesting to meet with you and your advisors as soon as possible to explore additional sources of value in Airgas and to move expeditiously to consummate a transaction.^[85]

The Airgas board held a two-part meeting to consider this revised proposal. First, a special telephonic meeting was [67] held on December 21, 2009.^[86] Graff discussed the financial aspects of the $62 offer.^[87] He noted that the offer price remained low,^[88] and explained that with a 50/50 cash-stock split, Air Products could bid well into the $70s and still maintain its credit rating.^[89] The call lasted about thirty-five minutes.^[90] The board reconvened (again, by telephone) on January 4, 2010 and the discussion resumed.^[91] Again, Graff presented financial analyses of the December 17 proposal based on discussions he and other members of management had had with Airgas's investment bankers.^[92] He advised the board that the bankers agreed the offer was inadequate and well below the company's intrinsic value,^[93] and the board unanimously agreed with management's recommendation to reject the offer.^[94]

On January 4, 2010, McCausland sent a letter to McGlade communicating the Airgas board's view that Air Products' offer "grossly undervalues Airgas."^[95] The letter continued: "[T]he [Airgas] Board is not interested in pursuing your company's proposal and continues to believe there is no reason to meet."^[96]

On January 5, 2010, McCausland exercised 300,000 stock options, half of which were set to expire in May 2010, and half of which were set to expire in May 2011.^[97]

[68] E. Air Products Goes Public

By late January 2010, it was becoming clear that Air Products' private attempts to negotiate with the Airgas board were going nowhere. The Airgas board felt that it was "precisely the wrong time"^[98] to sell the company and thus it continued to reject Air Products' advances. So, Air Products decided to take its offer directly to the Airgas stockholders. On January 20, 2010, McGlade sent a letter to the Air Products board expressing his belief that:

[N]ow is the time to acquire Flashback—their business has yet to recover, the pricing window is favorable, and our ability (should we so choose) to offer an all-cash deal would be viewed very favorably in this market. To take advantage of the situation, we believe we will have to go public with our intentions if we are to get serious consideration by Flashback's board.^[99]

Shortly thereafter, Air Products did just that. On February 4, 2010, Air Products sent a public letter to the Airgas board announcing its intention to proceed with a fully-financed, all-cash offer to acquire all outstanding shares of Airgas for $60 per share.^[100] The letter closed with McGlade again reiterating Air Products' full commitment to completing a transaction with Airgas, and emphasizing Air Products' "willingness to reflect in our offer any incremental value you can demonstrate."^[101]

On February 8-9, 2010, the Airgas board met in Philadelphia, Pennsylvania.^[102] [69] The board's financial advisors from Goldman Sachs and Bank of America Merrill Lynch provided written materials and made presentations to the board regarding Air Products' proposal.^[103] The bankers reviewed Airgas management's financial projections, research analysts' estimates for Airgas, discounted cash flow valuations of Airgas using various EBITDA multiples and discount rates, historical stock prices, and the fact that Airgas generally emerges later from economic recessions than Air Products.^[104] At the meeting, the board unanimously agreed that the $60 price tag was too low, and that it "significantly undervalued Airgas and its future prospects."^[105] The board also unanimously authorized McCausland to convey the board's decision to reject the offer to McGlade,^[106] which he did the following day.^[107]

F. The $60 Tender Offer

On February 11, 2010, Air Products launched its tender offer for all outstanding shares of Airgas common stock on the terms announced in its February 4 letter—$60 per share, all-cash, structurally noncoercive, non-discriminatory, and backed by secured financing.^[108] The tender offer is conditioned, among other things, upon the following:

(1) a majority of the total outstanding shares tendering into the offer;

(2) the Airgas board redeeming its rights plan or the rights otherwise having been deemed inapplicable to the offer;

(3) the Airgas board approving the deal under DGCL § 203 or DGCL § 203 otherwise having been deemed inapplicable to the offer;

(4) the Airgas board approving the deal under Article VI of Airgas's charter or Article VI otherwise being inapplicable to the offer;

(5) certain regulatory approvals having been met;^[109] and

[70] (6) the Airgas board not taking certain action (i.e., entering into a third-party agreement or transaction) that would have the effect of impairing Air Products' ability to acquire Airgas.^[110]

Air Products' stated purpose in commencing its tender offer is "to acquire control of, and the entire equity interest in, Airgas."^[111] To that end, it is Air Products' current intention, "as soon as practicable after consummation of the Offer," to seek to have Airgas consummate a proposed merger with Air Products valued at an amount in cash equal to the highest price per share paid in the offer.^[112] Air Products also announced its intention to run a proxy contest to nominate a slate of directors for election to Airgas's board at the Airgas 2010 annual meeting.^[113]

On February 20, 2010, the Airgas board held another special telephonic meeting to discuss Air Products' tender offer.^[114] Airgas's financial advisors from Goldman Sachs and Bank of America Merrill Lynch reviewed the bankers' presentations with the board,^[115] which were similar to the presentations that had been made to the board on February 8, and concluded that the offer "was inadequate from a financial point of view."^[116]

In a 14D-9 filed with the SEC on February 22, 2010, Airgas recommended that its shareholders not tender into Air Products' offer because it "grossly undervalues Airgas."^[117] In explaining its reasons for recommending that shareholders not accept Air Products' offer, Airgas's filing stated that the timing of the offer was "extremely opportunistic . . . in light of the depressed value of the Airgas Common shares prior to the announcement of the Offer," so while the timing was excellent for Air Products, it was disadvantageous to Airgas.^[118] The filing went on to explain that Airgas had received inadequacy opinions from its financial advisors, Goldman Sachs and Bank of America Merrill Lynch.^[119] In addition, Airgas expressed its view that the offer was highly uncertain and subject to significant regulatory concerns.^[120] Finally, attached to the filing was a fifty-page slide presentation entitled "Our Rejection of Air Products' Proposals."^[121]

[71] G. The Proxy Contest

On March 13, 2010, Air Products nominated its slate of three independent directors for election at the Airgas 2010 annual meeting.^[122] The three Air Products nominees were:

• John P. Clancey;^[123]

• Robert L. Lumpkins;^[124] and

• Ted B. Miller, Jr.^[125] (together, the "Air Products Nominees").

[72] Air Products made clear in its proxy materials that its nominees to the Airgas board were independent and would act in the Airgas stockholders' best interests. Air Products told the Airgas stockholders that "the election of the Air Products Nominees . . . will establish an Airgas Board that is more likely to act in your best interests."^[126] Air Products actively promoted the independence of its slate, saying that its three nominees:

• "are independent and do not have any prior relationship with Airgas or its founder, Chairman and Chief Executive Officer, Peter McCausland:"^[127]

• "will consider without any bias [the Air Products] Offer;"^[128]

• "will be willing to be outspoken in the boardroom about their views on these issues;"^[129] and

• "are highly qualified to serve as directors on the Airgas Board."^[130]

In addition to its proposed slate of directors, Air Products also announced that it was seeking approval by Airgas stockholders of three bylaw proposals that would:

(1) Amend Airgas's bylaws to require Airgas to hold its 2011 annual meeting and all subsequent annual shareholder meetings in the month of January;

(2) Amend Airgas' bylaws to limit the Airgas Board's ability to reseat directors not elected by Airgas shareholders at the annual meeting (excluding the CEO); and

(3) Repeal all bylaw amendments adopted by the Airgas Board after April 7, 2010.^[131]

Over the next several months leading up to Airgas's 2010 annual meeting, both Air Products and Airgas proceeded to engage in a protracted "high-visibility proxy contest widely covered by the media,"^[132] during which the parties aggressively made their respective cases to the Airgas stockholders. Both Airgas and Air Products made numerous SEC filings, press releases and public statements regarding their views on the merits of Air Products' offer.^[133]

[73] H. Airgas Delays Annual Meeting

In April 2010, the Airgas board amended Article II of the company's bylaws (which addressed the timing of Airgas's annual meetings), giving the board the ability to push back Airgas's 2010 annual meeting.^[134] Previously, the bylaws required that the annual meeting be held within five months of the end of Airgas's fiscal year—March—which would make August the annual meeting deadline. The amendment allowed the meeting to be held "on such date as the Board of Directors shall fix."^[135] In other words, the board gave itself full discretion to set the date of the annual meeting as it saw fit.^[136] As it turns out, the reason the board pushed back the meeting date was to buy itself more time to "provide information to stockholders" before the annual meeting, as well as more time to "demonstrate performance of the company."^[137] The annual meeting was scheduled for September 15, 2010.^[138]

I. The $63.50 Offer

On July 8, 2010, Air Products raised its offer to $63.50.^[139] Other than price, all other material terms of the offer remained unchanged.^[140] The following day, McGlade sent a letter to the Airgas board reiterating (once again) Air Products' willingness to negotiate, and inviting the Airgas board and its advisors to sit down with Air Products "to discuss completing the transaction in the best interests of the shareholders of [74] both companies."^[141]

The Airgas board held two special telephonic meetings to consider the revised $63.50 offer. The first was held on July 15, 2010.^[142] McLaughlin updated the board on Airgas's performance for the first quarter of fiscal year 2011^[143] and the financial advisors provided updated financial analyses.^[144] On the second call, held on July 20, 2010, Rensky and Carr each described their respective opinions that the $63.50 offer was "inadequate to the [Airgas] stockholders from a financial point of view,"^[145] and the financial advisors issued written inadequacy opinions to that effect.

The next day, McCausland sent a public letter to McGlade rejecting Air Products' revised offer and invitation to meet because $63.50 "is not a sensible starting point for any discussions or negotiations."^[146] Also on July 21, 2010, Airgas filed an amendment to its 14D-9, rejecting the $63.50 offer as "grossly inadequate" and recommending that Airgas stockholders not tender their shares.^[147] In this filing, Airgas set out many of the reasons for its recommendation, including its view that the offer "grossly undervalue[d]" Airgas because it did not reflect the value of Airgas's future prospects and strategic plans, the fact that Airgas tends to lag in entering into, and emerging from, economic recessions, Airgas's extraordinary historical results, Airgas's unrivaled platform in the packaged gas business, the "extremely opportunistic" timing of Air Products' offer, the inadequacy opinions provided to the board by Airgas's financial advisors, and many other reasons.^[148] The financial advisors' written inadequacy opinions were attached to the filing.^[149] Airgas also released another slide presentation (33 pages this time), entitled "It's All About Value," containing (among other things) updated projections and earnings guidance, board plans for cost savings, and information about Airgas's implementation of its SAP system,^[150] and explaining [75] why Airgas presents "significant strategic value" to a potential acquiror.^[151] Two days later, on July 23, 2010, Airgas filed its definitive proxy statement for the September annual meeting, urging stockholders to vote against the three Air Products Nominees and the bylaw amendments and to wait until "Airgas's growth potential can be fully demonstrated and reflected in its results."^[152]

J. Tension Builds Before the Annual Meeting

Air Products filed its definitive proxy statement on July 29, 2010.^[153] Air Products was explicit in its proxy materials that its proposed bylaws were directly related to its pending tender offer, telling stockholders that by voting in favor of its nominees and bylaw proposals, they would be "send[ing] a message to the Airgas Board and management that . . . Airgas stockholders want the Airgas Board to take action to eliminate the obstacles to the consummation of the [Air Products] Offer."^[154] At the same time, Airgas heavily lobbied its stockholders to vote against the proposed bylaws, urging them not to fall for Air Products' "tactics," and telling them that the Air Products offer was well below the fair value of their shares and that, by shortening the time it would take for Air Products to gain control of the board, voting in favor of the January meeting bylaw would help facilitate Air Products' grossly inadequate offer.^[155] As part of its efforts to dissuade stockholders from voting for Air Products' nominees and the proposed bylaw requiring annual meetings to be held in January, Airgas promised its stockholders that it would hold a special meeting on June 21, 2011 where the stockholders would have the opportunity to elect a majority of the Airgas board by a plurality vote—but only if Air Products' bylaw proposal did not receive a majority of votes at the 2010 annual meeting.^[156]

[76] K. The $65.50 Offer

On September 6, 2010, Air Products further increased its offer to $65.50 per share.^[157] Again, the rest of the terms and conditions of the February 11, 2010 offer remained the same.^[158] In connection with this increased offer, Air Products threatened to walk if the Airgas stockholders did not elect the three Air Products Nominees to the Airgas board and vote in favor of Air Products' proposed bylaw amendments at the 2010 annual meeting.^[159]

The next day, the Airgas board met to consider Air Products' revised offer.^[160] The board received updated analyses from McLaughlin and inadequacy opinions from its bankers.^[161] The board unanimously rejected the $65.50 offer as inadequate,^[162] saying that it was "not an appropriate value or a sensible starting point for negotiations to achieve such a value."^[163] Airgas also filed an amendment to its Schedule 14D-9 on September 8, 2010, recommending that stockholders reject the offer and not tender their shares.^[164]

L. "With $65.50 on the table, the stockholders wanted the parties to engage."^[165]

On September 10, in advance of the annual meeting, McCausland, Thomas, and Brown (along with Airgas's financial advisors, Rensky and Carr, and representatives of Airgas's proxy solicitor, Innisfree) held a series of meetings with about 25-30 Airgas stockholders—mostly arbs, hedge funds, and institutional holders.^[166] At every meeting, the sentiment was the same, "Why don't you guys go negotiate, sit down with Air Products."^[167] The answer was simple: the offer was unreasonably low; it was not a place to begin any serious negotiations about fair value. If Air Products "were to offer $70, with an indication that they were ready to sit down and have a full and fair discussion about real value and negotiate from that, what we both could agree was fair value for the company, [Thomas], for one, would be prepared to have that sit-down discussion."^[168] Brown and McCausland said the same thing.^[169] During the course of two days of meetings with stockholders, McCausland expressed this view to "[m]aybe a hundred" [77] people—he expected word to get back to Air Products.^[170]

Although none of the stockholders attending these meetings said that they wanted Airgas to do a deal with Air Products at $65.50,^[171] the general sentiment was not, "Hell, no, we don't want you to even talk to these people if they're at 65.50"—rather, the "clear message [was:] With 65.50 on the table, the stockholders wanted the parties to engage."^[172]

Rather than engaging with each other directly (i.e. McGlade and McCausland), Air Products' financial advisors at J.P Morgan (Rodney Miller) and Perella Weinberg (Andrew Bednar) called Airgas's financial advisors (Rensky and Carr). Word had gotten back to Bednar and Miller that some Airgas board members had indicated that there might be "reason to sit down together" if Air Products made an offer at "$70 with the willingness to negotiate upwards from there."^[173] Airgas's advisors welcomed a revised offer, but over that weekend before the annual meeting, none came. Air Products' bankers at that point "could not get to $70 a share . . . Air Products was not at that number."^[174]

Counsel for Air Products (James Woolery) met with Carr and Rensky during Airgas's annual meeting on September 15. Woolery asked for assurance that if Air Products offered $70 per share, Airgas would agree to a deal at that price.^[175] Airgas's bankers could not give Woolery the assurance he was looking for, and discussions stalled.^[176]

M. The Annual Meeting

On September 15, 2010, Airgas's 2010 annual meeting was held. The Airgas stockholders elected all three of the Air Products Nominees to the board, and all three of Air Products' bylaw proposals were adopted by a majority of the shares voted.^[177] On September 23, 2010, John van Roden was unanimously appointed Chairman of the Airgas board, and McCausland was unanimously reappointed to the board.^[178]

N. The Bylaw Question

After the annual meeting results were preliminarily calculated, Airgas immediately filed suit against Air Products in the Delaware Court of Chancery to invalidate the January meeting bylaw. Briefing was completed on an expedited basis, and oral arguments on cross-motions for summary judgment were heard on October 8, 2010. That afternoon, the Court issued its decision upholding the validity of the January meeting bylaw.^[179] Airgas appealed, and ultimately the Delaware Supreme Court reversed the decision, invalidating the bylaw and holding that annual meetings must be spaced "approximately" one year [78] apart.^[180] Airgas's current expectation is that its 2011 annual meeting will be held in August or early September 2011.^[181]

O. The October Trial

As a result of both sides having aggressively campaigned for months leading up to Airgas's 2010 annual meeting, the evidence presented at the October trial made clear that, at the time of the September annual meeting, the Airgas stockholders had all of the information they needed to evaluate Air Products' $65.50 offer. The testimony from Airgas's own directors and management demonstrated as much:

McCausland:

Q. You believe the stockholders have enough information to decide whether to accept the $65.50 offer; right?

A. Yes.^[182]

* * *

Q. Are you aware, as you sit here today, Mr. McCausland, of any information that you would like to impart or present to the shareholders that they don't already have?

A. [N]o, I'm not aware of any, except there could be some business strategy things that it would damage the company to present them to the shareholders.

Q. But you feel you have met your duty in providing all the information necessary for the shareholders to make a decision; right?

A. Yes.^[183]

McLaughlin:

Q. Now, you would also agree with me that prior to the recent meeting of Airgas'[s] stockholders, stockholders have all the information they needed to make an informed decision about whether to accept or reject Air Products' offer; right?

A. That is correct.^[184]

Thomas:

Q. In your mind, do [the Airgas stockholders] have every piece of information that's available that's necessary for a reasonable stockholder to decide whether to tender?

A. I think they do.

* * *

Q. And the market knows what the Airgas board thinks Airgas can achieve over the course of the next 18 months or two years or so, isn't that right?

A. I think they do.

* * *

Q. And you believe that the average Airgas stockholder is competent to understand the available information that's been publicly disseminated regarding the tender offer, as well as Airgas and its business and the Airgas board's view as to value; correct?

A. I do.^[185]

[79] Ill: Q. [O]ver the last year Airgas has given its shareholders the information necessary to make an informed judgment about Air Products' offers; correct?

A. That's correct.^[186]

* * *

Q. You would agree with me that Airgas has not failed to provide shareholders anything that shareholders need in order to make an informed decision with respect to the Air Products' offer; correct?

A. In my opinion, that information has been forthcoming from Airgas.^[187]

Molinini:

Q. With this disclosure [JX 499 (the August 31, 2010 Airgas press release regarding SAP implementation^[188])], you believe that the stockholders have all the information they would need to make a decision on anything they wanted to make a decision on. Isn't that correct, sir?

A. That is correct^[189]

The evidence at trial also incontrovertibly demonstrated that $65.50 was not as high as Air Products was willing to go. As Huck unequivocally stated, "65.50 is not our best and final offer."^[190] And as McGlade testified:

Q. Now, the current 65.50 offer is not Air Products' best and final offer; correct?

A. We've been clear about that.

Q. That it's not the best?

A. It is not.

In addition, Air Products made clear that if Airgas were stripped of its defenses at that point, Air Products would seek to close on that $65.50 offer.^[191] So Air Products was moving forward with an offer that admittedly was not its highest and aggressively seeking to remove Airgas's defensive impediments standing in its way. At the same time, Airgas's stockholders arguably knew all of this, and knew whatever information they needed to know in order to make an informed decision on whether they wanted to tender into Air Products' "grossly inadequate" and not-yet-best offer.^[192]

FACTS DEVELOPED AT THE SUPPLEMENTAL EVIDENTIARY HEARING

I pause briefly to introduce some additional players who joined the story mid-game. In addition to McGlade and Huck (Air Products), and McCausland (Airgas), the following individuals featured prominently in the supplemental evidentiary hearing.

[80] From Air Products: William L. Davis, Air Products' Presiding Director. From Airgas: John Clancey and Ted Miller, two of the Air Products Nominees elected to the Airgas board at the September 15, 2010 annual meeting. The new financial advisor: David DeNunzio, the investment banker from Credit Suisse, Airgas's recently-retained third outside financial advisor. Finally, the experts: Peter Harkins resumed his role as Airgas's "proxy expert,"^[193] and Joseph J. Morrow was put on as Air Products' rebuttal "proxy expert."^[194] I will discuss the expert testimony in the analysis section of this Opinion.

P. Representatives from Airgas and Air Products Meet

On October 26, 2010, after announcing strong second-quarter earnings earlier that day,^[195] Airgas Chairman John van Roden sent a letter to McGlade. In the letter, van Roden reiterated that each of Airgas's ten directors—including the three newly-elected Air Products Nominees—"is of the view that the current Air Products offer of $65.50 per share is grossly inadequate."^[196] Indeed, the board viewed the current offer price as not even close to the right price for a sale of the company.^[197] Nevertheless, the letter showed signs that the Airgas board was willing to negotiate with Air Products:

[The Airgas] Board is also unanimous in its views regarding negotiations between Air Products and Airgas . . . . Each member of our Board believes that the value of Airgas in any sale is meaningfully in excess of $70 per share. We are writing to let you know that our Board is unanimous in its willingness to authorize negotiations with Air Products if Air Products provides us with sufficient reason to believe that those negotiations will lead to a transaction at a price that is consistent with that valuation.^[198]

McGlade responded enthusiastically to the letter, writing back to van Roden in a letter dated October 29, 2010:

Dear John:

We appreciate your letter of earlier this week. We are prepared to negotiate in good faith immediately. We welcome any information Airgas may wish to provide us on value in any meeting between our two teams.^[199]

Finally, the companies seemed to be making progress toward a potential friendly transaction. Airgas's board authorized van Roden to respond to McGlade's letter, which he did on November 2, 2010.^[200] The letter opened by saying that the Airgas board was "certainly prepared to meet with [Air Products] if there is a reasonable [81] opportunity to obtain an appropriate value for the Airgas shareholders."^[201] Van Roden continued:

In our last letter, we indicated that our board of directors was of the unanimous view that the value of Airgas in any sale is meaningfully in excess of $70 per share. To provide greater clarity, the board has unanimously concluded that it believes that the value of Airgas in a sale is at least $78 per share, in light of our view of relevant valuation metrics.

We would like to meet with you to provide our perspective on the value of Airgas and are prepared to do so at any time.^[202]

Later that day, Air Products accepted the invitation to meet despite its view that $78 per share is not "a realistic valuation for Airgas, nor ... anywhere near what [Air Products is] prepared to pay," because it nevertheless viewed any meeting to be "in the best interest of both companies."^[203] On November 4, 2010, principals from both companies met in person to discuss their views on the value of Airgas.^[204] The Airgas representatives and the Air Products representatives had differences of opinion regarding some of the assumptions each other had made underlying their respective valuations of Airgas.^[205] The meeting lasted for an hour and a half.^[206] At the conclusion of the meeting, the parties issued a disclosure stating that "no further meetings are planned."^[207] Although perhaps not the result the parties had hoped for, I conclude based on the evidence presented at the supplemental hearing that the November 4 meeting was in fact a legitimate attempt between the parties to reach some sort of meeting of the minds despite their disagreements over Airgas's value (as opposed to a litigation sham designed by defendants), and that both sides acted in good faith.^[208]

[82] Q. More Post-Trial Factual Developments

On November 23, 2010, the Supreme Court issued its decision on the bylaw issue, reversing the ruling of this Court that Airgas's next annual meeting could take place in January 2011.^[209] In a December 2 Letter Order ruling on certain outstanding evidentiary issues, I asked the parties if, in light of the Supreme Court's decision and the fact that now Airgas's 2011 annual meeting would under Delaware law be held approximately eight months later than it would have been had the January meeting bylaw been upheld, counsel believed the ruling had any effect on the fundamental issue remaining to be decided.^[210] I also asked counsel to provide supplemental briefing responding to several questions.^[211]

Counsel's responses were due on or before December 10, 2010. Meanwhile, there had been a flurry of recent activity on the boards of both Airgas and Air Products that subsequently came to light, as the newly-elected Air Products Nominees acquainted themselves with the Airgas board, and as Air Products continued to pursue a deal and consider its strategic options.

1. The Air Products Nominees and the November 1-2 Airgas Board Meeting

At the supplemental evidentiary hearing, John Clancey, one of the Air Products Nominees, explained his views coming onto the Airgas board following the 2010 annual meeting.^[212] Without any other information, his initial impression of Airgas's position with respect to Air Products' offer was that, quite simply, "[i]t was no."^[213] Back during the course of the proxy contest, Clancey had met with ISS, who had asked what he would do if elected to the Airgas board, focusing on who he thought he would represent and what skills he would bring to the table.^[214] "[I]f I was elected," he told them, "I would immediately represent all the shareholders of Airgas."^[215] His perspective from the outset [83] was that there was a lot of information he wanted to drill down on. He wanted the benefit of meeting with management and hearing from the financial advisors working on the situation to inform his understanding, but he came to the board with no agenda other than wanting to see if a deal could be done.^[216]

A new-director orientation session for Clancey was held on November 1, 2010. New director orientation for Lumpkins and Miller was held on September 23, 2010. The newly-elected Air Products Nominees were given written materials in advance of their orientation sessions.^[217] Clancey came at the board at all different angles at the November 1 orientation.^[218] He challenged the board's economic assumptions in its five-year plan, probed Molinini about the SAP implementation, and asked other questions he felt were important to fully understand the situation.^[219] In the end, he was "very impressed."^[220] He concluded:

I was very impressed with the depth that [the Airgas board] could go to in answering the questions.... [T]hey knew their business. They had achieved their numbers consistently. I thought they were very conservative, looking out.^[221]

With respect to the SAP implementation, he said:

The benefits of SAP are enormous, and you'll finally get there.... I was very impressed with Airgas's approach. It is slow and it's prodigious in terms of what they have to get their arms around, but they're taking it step by step. They've used every best practice ... and I am very optimistic that they'll be very successful.^[222]

And as far as the reasonableness of the macroeconomic assumptions in the Airgas plan, in Clancey's view, "[t]hey were reasonable."^[223] As noted above, at the November 1-2, 2010 meeting, the board agreed to reach out to Air Products to see if they could get a deal done. Also at that meeting, the Air Products Nominees discussed with the board the possibility of forming a special negotiating committee, and they raised the subject of obtaining independent legal counsel and getting a third independent financial advisor to take a fresh look at the valuation and five-year plan, but no such action was taken at that time.^[224]

[84] 2. December 7-8 Airgas Board Letters

On December 7, 2010, the three new directors sent a letter to van Roden formally requesting the Airgas board to authorize their retention of independent outside legal counsel and financial advisors of their choice to assist them in the event Air Products raised its offer.^[225] The letter also suggested that statements about the "unanimous" views of the board on issues relating to Air Products' offer may have "become misleading."^[226]

Specifically, the three Air Products Nominees sought to clarify their view regarding the statement in the November 2, 2010 letter from van Roden to McGlade that "the [Airgas] board has unanimously concluded that it believes that the value of Airgas in a sale is at least $78 per share."^[227] The Air Products Nominees explained:

We do not believe that such an unequivocal statement is accurate. Any discussion about the $78 valuation must be framed in the context in which that number was actually discussed at the November, 2010 board meeting. Specifically, in the context of a board discussion about what should be the next steps in responding to Air Products, we expressed our beliefs that proposing a price (any price, within reason) would be more likely to generate a constructive dialogue between the two companies and potentially result in an increased offer from Air Products than would a figurative "stiff arm." It was in that context, and only in that context, that we agreed to communicate a $78 price to Air Products.

To be clear, at no time did any of us take the position that a $78 offer price was the price of admission to having any discussions with Air Products, nor did we agree that $78 was the minimum per share price at which Airgas might be purchased, and it would be wrong for you to insinuate otherwise to the Court.^[228]

Van Roden responded by letter to the three Air Products Nominees the next day, stating that all of the statements that Airgas has made to the Court and publicly have been accurate.^[229] The letter also stated that while all of the other directors were satisfied with the analyses performed by Airgas's two outside financial advisors, the board agreed to the retention of a third independent financial advisor to advise the Airgas board, to be selected by the nine independent directors.^[230]

The evidence at the supplemental evidentiary hearing revealed that the December 7 letter from the three newly-elected board members was "meant as leverage" in their efforts to prompt the rest of the board to act on their request for a third independent financial advisor.^[231] Clancey explained, "We wanted a financial advisor and [] we were trying to induce [the other directors]. It's like playing poker. We put our chips up on the table, everything [85] we had."^[232]

The play worked—on December 10, the Airgas board (minus McCausland) held a telephonic meeting. The nine independent directors unanimously agreed to retain Credit Suisse as a third independent financial advisor to represent the full board.^[233] The three new directors were satisfied with the choice of Credit Suisse,^[234] and Air Products' own representatives harbored no reason to doubt Credit Suisse's qualifications or independence.^[235] In addition, the Air Products Nominees retained their own independent counsel—Skadden, Arps, Slate, Meagher & Flom, LLP—and the board agreed to reimburse the reasonable costs of Skadden's past work for the new directors and to pay Skadden's fees going forward.^[236]

Moreover, the Air Products Nominees publicly disavowed any real disagreement that may have allegedly existed on the board before the November 2, 2010 letter to Air Products. The December 7 and December 8 letters were made publicly available on December 13, 2010, along with a statement by the three new directors:

In response to reports of division on the Airgas Board of Directors, we the newly elected directors of Airgas, affirm that the Board is functioning effectively in the discharge of its duties to Airgas stockholders. We deny the charges of division on the Board, we condemn the spread of unproductive rumors, and we strongly disagree with the notion that we were unaware of the November 2nd letter to Air Products.^[237]

In any event, as will be explained in greater detail below, by December 21, 2010 the new Air Products Nominees seem to have changed their tune and fully support the view that Airgas is worth at least $78 in a sale transaction.^[238]

R. The $70 "Best and Final" Offer

Meanwhile, over at Air Products, the board was considering its position with respect to its outstanding tender offer, and on December 9, 2010, the board met to discuss its options.^[239] Specifically, question 1 in the Court's December 2 Letter asked: "Is $65.50 per share the price that Air Products wants this Court to rely upon in addressing the `threat' analysis under Unocal?" The Court also recognized that Air Products had made clear that $65.50 was not its best offer—it was a "floor" from which Air Products was willing to negotiate higher.^[240]

[86] After reviewing recent events with the board (including the Supreme Court's reversal on the bylaw issue) and noting the looming December 10 response deadline to my December 2 letter, Huck explained Air Products' options at that point:

(1) withdraw the tender offer and walk away;

(2) seek to call a special meeting of the Airgas stockholders to remove the board; or

(3) "[b]ring the issues around removal of the poison pill to a head by making the Company's best and final offer."^[241]

Huck walked the board through each of the three alternatives, noting that the first would effectively eliminate any possibility of a transaction, and the second was "as a practical matter impossible" (and could take several months as well).^[242] As for the third, Huck said that "while most of the record [in this case] was fully developed, increasing the offer to the Company's best and final price could strengthen the case for removal of the poison pill."^[243] Accordingly, on December 9, 2010—the day before the parties filed their Supplemental Post-Trial Briefs in response to the Court's December 2 Letter—Air Products made its "best and final" offer for Airgas, raising its offer price to $70 per share.^[244]

In its filing and related press release, Air Products said:

This is Air Products' best and final offer for Airgas and will not be further increased. It provides a 61% premium to Airgas' closing price on February 4, 2010, the day before Air Products first announced an offer to acquire Airgas.

John E. McGlade, Air Products chairman, president and chief executive officer, said, "It is time to bring this matter to a conclusion, and we are today making our best and final offer for Airgas. The Air Products Board has determined that it is not in the best interests of Air Products shareholders to pursue this transaction indefinitely, and Airgas shareholders should be aware that Air Products will not pursue this offer to another Airgas shareholder meeting, whenever it may be held."^[245]

The Airgas board, in initially considering the $70 offer, did not really believe that $70 was actually Air Products' "best and final" offer, despite Air Products' public statements saying as much.^[246] Accordingly, in the post-trial discovery window before the supplementary evidentiary hearing, defendants tried to take discovery into Air Products' internal valuations and analyses of Airgas to determine whether Air Products might in fact be willing to pay higher than $70 per share. Relying on [87] business strategy privilege, Air Products refused to produce its internal analyses.^[247] In light of that, defendants filed a motion in limine several days before the supplementary evidentiary hearing began to preclude Air Products from offering testimony or documentary evidence in support of its assertion that $70 is its "best and final" offer. In denying that request, I held:

Air Products is not required to demonstrate the fairness of its offer; nor is it required to demonstrate that its offer is less than, equal to, or greater than what it has independently and internally determined is the value of Airgas. Having publicly announced that its $70 offer is its "final" offer, however, Air Products has now effectively and irrevocably represented to this Court that there will be no further requests for judicial relief with respect to any other offer (should there ever be one).^[248]

Air Products has repeatedly represented, both in publicly available press releases, public filings with the SEC, and submissions to this Court, that $70 per share is its "best and final" offer.^[249] The testimony offered by representatives of Air Products at the supplementary evidentiary hearing regarding the $70 offer provides further evidence to this Court that Air Products' offer is now, as far as this Court is concerned, at its end stage.^[250]

When asked what Air Products meant by "best and final," McGlade responded, "$70 is the maximum number that we're prepared to pay."^[251] Huck concurred: "It is the best and final price which we're willing to offer in this deal"^[252] and "[t]here is no other offer to come."^[253] McGlade further explained:

I wanted to be very clear [to the Air Products board at the December 9 meeting] that best and final meant best and final. We had a discussion around our other alternatives and ... our need to move forward on behalf of our shareholders, 15 months into this or 14 months into this at this time. It was really time to get a decision, positive or negative, and then take the outcome of what that decision was.^[254]

In response to questioning by defendants' counsel as to why, at the December 9 meeting, there was no discussion as to specifically what the words "best and final" meant, Huck responded, "Right. I trust our board can understand words."^[255] The message had resonated. In Davis's words, it was "made clear" at the December 9 [88] meeting that $70 was Air Products' best and final offer for Airgas.^[256] All of the Air Products board members were equally supportive of the decision to make the best and final offer.^[257]

Huck testified that the board's decision to make its best and final offer was based on a cash flow analysis along with the board's judgment of the risks and rewards with respect to this deal.^[258] Whether or not Air Products has the financial ability to pay more is not what the board based its "best and final" price on—nor does it have to be.

In fact, Airgas itself has argued in this litigation that "Air Products' own internal DCF analysis is not relevant to evaluating the reasonableness of the Airgas Board's determination. Rather, the appropriate focus should be on the analyses and opinions of Airgas' financial advisors."^[259] I agree. Thus, for purposes of my analysis and the context of this litigation, based on the representations made in public filings and under oath to this Court, I treat $70, as a matter of fact, as Air Products' "best and final" offer.

S. The Airgas Board Unanimously Rejects the $70 Offer

As noted above, the Airgas board met on December 10, 2010 to discuss the Air Products Nominees' request for independent legal advisors and a third outside financial advisor. The board did not discuss or make a determination with respect to Air Products' revised $70 offer at the December 10 meeting.

On December 21, the Airgas board met to consider Air Products' "best and final" offer.^[260] Management kicked off the meeting by presenting an updated five-year plan to the board. McCausland gave an overview of the refreshed plan, and then McLaughlin addressed key financial highlights.^[261] Molinini and Graff discussed other aspects of the company's growth.^[262] This was followed by presentations by the three financial advisors.^[263] Carr went first, then Rensky. Both Bank of America Merrill Lynch and Goldman Sachs "were of the opinion that the Air Products' $70 offer was inadequate from a financial point of view."^[264]

Then they turned the floor over to David DeNunzio of Credit Suisse, Airgas's newly-retained third independent financial advisor. DeNunzio explained how Credit Suisse had performed its analysis, and how its analysis differed from that of Goldman Sachs and Bank of America Merrill Lynch. He observed that "Airgas's SAP plan is the most detailed plan he and his team had come across in 25-30 years."^[265] In summary, DeNunzio said that Air Products' offer "was only slightly above what [Airgas] should trade at, was below most selected transactions and was well below the value of the Company on the basis of a DCF analysis, which was the analysis to which Credit Suisse gave the most [89] weight."^[266] In the end, Credit Suisse "easily concluded that the $70 offer was inadequate from a financial point of view."^[267]

After considering Airgas's updated five-year plan and the inadequacy opinions of all three of the company's financial advisors, the Airgas board unanimously—including the Air Products Nominees—rejected the $70 offer.^[268] Interestingly, the Air Products Nominees were some of the most vocal opponents to the $70 offer. After the bank presentations, John Clancey, one of the three Air Products Nominees concluded that "the offer was not adequate,"^[269] and that even "an increase to an amount which was well below a $78 per share price was not going to `move the needle.'"^[270] He said to the rest of the board, "We have to protect the pill."^[271] When asked what he meant by that comment, Clancey testified:

That we have a company ... that is worth, in my mind, worth in excess of 78, and I wanted, as a fiduciary, I wanted all shareholders to have an opportunity to realize that. [Protecting the pill was important to achieve that objective because] I don't believe 70 is the correct number. And if there was no pill, it is always feasible, possible, that 51 percent of the people tender, and the other 49 percent don't have a lot of latitude.

This was Air Products' own nominee saying this. The other two Air Products Nominees—Lumpkins and Miller—have expressed similar views on what Airgas would be worth in a sale transaction.^[272] So what changed their minds? Why do they now all believe that the $70 offer is so inadequate? In McCausland's words:

[I]t doesn't reflect the fundamental value—intrinsic value of the company. Airgas can create tremendous value for its shareholders through executing its management plan—value that's far superior to the offer on the table. That's one. I would say that I also, you know, listened to three investment bankers, including Credit Suisse, who came in and took a fresh look. And every one of those bankers has opined that the offer is inadequate. The undisturbed stock price that we just talked about in the low to mid sixties—and that's not some wishful thinking, that's just applying our average five-year multiples, comparing what other companies in our peer group are doing vis-a-vis their five-year multiples. And if you were to apply an appropriate premium for a strategic acquisition like this, in the 35 to 40 percent range, you would end up with a price in the mid to high eighties. There's the DCF valuations that the bankers presented to us. I mean, there's a lot of [90] reasons why this bid is inadequate.^[273]

McCausland testified that he and the rest of the board are "[a]bsolutely not" opposed to a sale of Airgas—but they are opposed to $70 because it is an inadequate bid.^[274]

The next day, December 22, 2010, Airgas filed another amendment to its 14D-9, announcing the board's unanimous rejection of Air Products' $70 offer as "clearly inadequate" and recommending that Airgas stockholders not tender their shares.^[275] The board reiterated once more that the value of Airgas in a sale is at least $78 per share.^[276] In this filing, Airgas listed numerous reasons for its recommendation, in two pages of easy-to-read bullet points.^[277] These reasons included the Airgas board's knowledge and experience in the industry; the board's knowledge of Airgas's financial condition and strategic plans, including current trends in the business and the expected future benefits of SAP and returns on other substantial capital investments that have yet to be realized; Airgas's historical trading prices and strong position in the industry; the potential benefits of the transaction for Air Products, including synergies and accretion; the board's consideration of views expressed by various stockholders; and the inadequacy opinions of its financial advisors.^[278] All three of the outside financial advisors' written inadequacy opinions were attached to the filing.^[279]

Once again, the evidence presented at the supplemental evidentiary hearing was that the Airgas stockholders are a sophisticated group,^[280] and that they had an extraordinary amount of information available to them with which to make an informed decision about Air Products' offer. Although a few of the directors expressed the view that they understood the potential benefits of SAP and the details of the five-year plan better than stockholders could, the material information underlying management's assumptions has been released to stockholders through SEC filings and is reflected in public analysts' reports as well.^[281] Airgas has issued four earnings releases since the time Air Products first announced its tender offer in February 2010.^[282] McCausland has appeared in print, on the radio, and on television, and has met with numerous stockholders individually^[283] to tell them that Air Products' offer is inadequate:

[91] Q. You've said that [the $70 offer is inadequate] hundreds, if not thousands of times. You've said it in print. You've said it on radio, on television. Is there any place you haven't said it, sir?

A. I can't think of any.

Q. Is there any doubt in your mind that an Airgas shareholder, who cares to know what you and your board and your management think, is by now fully aware of your position that $70 is inadequate? ... Do you have any doubt that your shareholders know that Peter McCausland, his fellow directors, all ten of them, the management team at Airgas and their outside advisors all believe that this offer is inadequate?

A. [I] think that we've gotten the point across.

Q. Is there anything you could think of that you've neglected to do to convey that message to the shareholders?

A. [...] We've made that clear, that the offer is inadequate and that our shareholders should not tender.^[284]

The testimony of other Airgas directors and financial advisors provides further support. John van Roden could not think of any other information he believed Airgas could provide to its stockholders to convince them as to the accuracy of the board's view on value that the stockholders don't already know.^[285] Miller could not think of any facts about Airgas's business strategy or Air Products' offer that would make Airgas's stockholders incapable of properly making an economic judgment about the tender offer.^[286] When I asked David DeNunzio, Airgas's financial advisor from Credit Suisse, what more an Airgas stockholder needs to know than they already do know in order to make an informed judgment about accepting an offer at $70 or some other price, he responded "I think you have to conclude that this shareholder base is quite well-informed."^[287]

In addition, numerous independent analysts' reports on Airgas are publicly available (and the numbers are very similar to Airgas's projections). Stockholders can read those reports; they can read the testimony presented during the October trial and the January supplementary hearing. They can read DeNunzio's testimony that in his professional opinion, the fair value of Airgas is in the "mid to high seventies, and well into the mid eighties."^[288] They can read Robert Lumpkins' opinion (one of the Air Products Nominees) that Airgas, "on its own, its own business will be worth $78 or more in the not very distant future because of its own earnings and cash flow prospects ... as a standalone company."^[289] They can read the three inadequacy opinions of the independent financial advisors. In short, "[a]ll the information they could ever want is available."^[290]

II. STANDARD OF REVIEW

A. The Unocal Standard

Because of the "omnipresent specter" of entrenchment in takeover situations, [92] it is well-settled that when a poison pill is being maintained as a defensive measure and a board is faced with a request to redeem the rights, the Unocal standard of enhanced judicial scrutiny applies.^[291] Under that legal framework, to justify its defensive measures, the target board must show (1) that it had "reasonable grounds for believing a danger to corporate policy and effectiveness existed" (i.e., the board must articulate a legally cognizable threat) and (2) that any board action taken in response to that threat is "reasonable in relation to the threat posed."^[292]

The first hurdle under Unocal is essentially a process-based review: "Directors satisfy the first part of the Unocal test by demonstrating good faith and reasonable investigation."^[293] Proof of good faith and reasonable investigation is "materially enhanced, as here, by the approval of a board comprised of a majority of outside independent directors."^[294]

But the inquiry does not end there; process alone is not sufficient to satisfy the first part of Unocal review— "under Unocal and Unitrin the defendants have the burden of showing the reasonableness of their investigation, the reasonableness of their process and also of the result that they reached."^[295] That is, the "process" has to lead to the finding of a threat. Put differently, no matter how exemplary the board's process, or how independent the board, or how reasonable its investigation, to meet their burden under the first prong of Unocal defendants must actually articulate some legitimate threat to corporate policy and effectiveness.^[296]

Once the board has reasonably perceived a legitimate threat, Unocal prong 2 engages the Court in a substantive review of the board's defensive actions: Is the board's action taken in response to that threat proportional to the threat posed?^[297] In other words, "[b]ecause of the omnipresent specter that directors could use a rights plan improperly, even when acting subjectively in good faith, Unocal and its progeny require that this Court also review the use of a rights plan objectively."^[298] This proportionality review asks first whether the board's actions were "draconian, by being either preclusive or coercive."^[299] If the board's response was not draconian, the Court must then determine whether it fell "within a range of [93] reasonable responses to the threat" posed.^[300]

B. Unocal—Not the Business Judgment Rule—Applies Here

Defendants argue that "Unocal does not apply in a situation where the bidder's nominees agree with the incumbent directors after receiving advice from a new investment banker."^[301] This, they say, is because the "sole justification for Unocal's enhanced standard of review is the `omnipresent specter that a board may be acting primarily in its own interests, rather than those of the corporation and its shareholders,'"<sup>[302]</sup> and that in "the absence of this specter, a board's `obligation to determine whether [a takeover] offer is in the best interests of the corporation and its shareholders ... is no different from any other responsibility it shoulders, and its decisions should be no less entitled to the respect they otherwise would be accorded in the realm of business judgment.'"^[303] Thus, they argue, because Airgas has presented overwhelming evidence that the directors—particularly now including the three new Air Products Nominees—are independent and have acted in good faith, the "theoretical specter of disloyalty does not exist" and therefore "Unocal's heightened standard of review does not apply here."^[304]

That is simply an incorrect statement of the law. What the Supreme Court actually said in Unocal, without taking snippets of quotes out of context, was the following:

When a board addresses a pending takeover bid it has an obligation to determine whether the offer is in the best interests of the corporation and its shareholders. In that respect a board's duty is no different from any other responsibility it shoulders, and its decisions should be no less entitled to the respect they otherwise would be accorded in the realm of business judgment. There are, however, certain caveats to a proper exercise of this function. Because of the omnipresent specter that a board may be acting primarily in its own interests, rather than those of the corporation and its shareholders, there is an enhanced duty which calls for judicial examination at the threshold before the protections of the business judgment rule may be conferred.^[305]

Because the Airgas board is taking defensive action in response to a pending takeover bid, the "theoretical specter of disloyalty" does exist— indeed, it is the very reason the Delaware Supreme Court in Unocal created an intermediate standard of review applying enhanced scrutiny to board action before directors would be entitled to the protections of the business judgment rule. In articulating this intermediate standard, the Supreme Court in Unocal continued:

[Even when] a defensive measure to thwart or impede a takeover is indeed motivated by a good faith concern for the welfare of the corporation and its stockholders, which in all circumstances must be free of any fraud or other misconduct... this does not end the inquiry. A further aspect is the element of balance. If a defensive measure is to come within the ambit of the business [94] judgment rule, it must be reasonable in relation to the threat posed.^[306]

The idea that boards may be acting in their own self-interest to perpetuate themselves in office is, in and of itself, the "omnipresent specter" justifying enhanced judicial scrutiny. There is "no doubt that the basis for the omnipresent specter is the interest of incumbent directors, both insiders and outsiders, in retaining the `powers and perquisites' of board membership."^[307] To pass muster under this enhanced scrutiny, those directors bear the burden of proving that they were acting in good faith and have articulated a legally cognizable threat and that their actions were reasonable in response to that perceived threat—not simply that they were independent and acting in good faith.^[308] To wit:

In Time, [the Delaware Supreme Court] expressly rejected the proposition that `once the board's deliberative process has been analyzed and found not to be wanting in objectivity, good faith or deliberativeness, the so-called `enhanced' business judgment rule has been satisfied and no further inquiry is undertaken.^[309]

Accordingly, defendants are wrong. The Unocal standard of enhanced judicial scrutiny—not the business judgment rule—is the standard of review that applies to a board's defensive actions taken in response to a hostile takeover. This is how Delaware has always interpreted the Unocal standard. There has never been any doubt about this, and as recently as four months ago the Delaware Supreme Court reaffirmed this understanding in Selectica.^[310]

C. A Brief Poison Pill Primer—Moran and its Progeny

This case unavoidably highlights what former-Chancellor Allen has called "an anomaly" in our corporation law.^[311] The [95] anomaly is that "[p]ublic tender offers are, or rather can be, change in control transactions that are functionally similar to merger transactions with respect to the critical question of control over the corporate enterprise."^[312] Both tender offers and mergers are "extraordinary" transactions that "threaten[] equivalent impacts upon the corporation and all of its constituencies including existing shareholders."^[313] But our corporation law statutorily views the two differently—under DGCL § 251, board approval and recommendation is required before stockholders have the opportunity to vote on or even consider a merger proposal, while traditionally the board has been given no statutory role in responding to a public tender offer.^[314] The poison pill was born "as an attempt to address the flaw (as some would see it) in the corporation law" giving boards a critical role to play in the merger context but no role to play in tender offers.^[315]

These "functionally similar forms of change in control transactions," however, have received disparate legal treatment— on the one hand, a decision not to pursue a merger proposal (or even a decision not to engage in negotiations at all) is reviewed under the deferential business judgment standard, while on the other hand, a decision not to redeem a poison pill in the face of a hostile tender offer is reviewed under "intermediate scrutiny" and must be "reasonable in relation to the threat posed" by such offer.^[316]

In Moran v. Household International, Inc., written shortly after the Unocal decision in 1985, the Delaware Supreme Court first upheld the legality of the poison pill as a valid takeover defense.^[317] Specifically, in Moran, the Household board of directors "react[ed] to what it perceived to be the threat in the market place of coercive two-tier tender offers" by adopting a stockholder rights plan that would allow the corporation to protect stockholders by issuing securities as a way to ward off a hostile bidder presenting a structurally coercive offer.^[318] The Moran Court held that the adoption of such a rights plan was within the board's statutory authority and thus was not per se illegal under Delaware law. But the Supreme Court cabined the use of the rights plan as follows:

[T]he Rights Plan is not absolute. When the Household Board of Directors is faced with a tender offer and a request to redeem rights, they will not be able to arbitrarily reject the offer. They will be held to the same fiduciary standards any other board of directors would be held to in deciding to adopt a defensive mechanism, the same standard they were held to in originally approving the Rights Plan.^[319]

The Court went on to say that "[t]he Board does not now have unfettered discretion in refusing to redeem the Rights. [96] The Board has no more discretion in refusing to redeem the Rights than it does in enacting any defensive mechanism."^[320] Accordingly, while the Household board's adoption of the rights plan was deemed to be made in good faith, and the plan was found to be reasonable in relation to the threat posed by the "coercive acquisition techniques" that were prevalent at the time, the pill at that point was adopted merely as a preventive mechanism to ward off future advances. The "ultimate response to an actual takeover," though, would have to be judged by the directors' actions taken at that time, and the board's "use of the Plan [would] be evaluated when and if the issue [arose]."^[321]

Notably, the pill in Moran was considered reasonable in part because the Court found that there were many methods by which potential acquirors could get around the pill.^[322] One way around the pill was the "proxy out"—bidders could solicit consents to remove the board and redeem the rights. In fact, the Court did "not view the Rights Plan as much of an impediment on the tender offer process" at all.^[323] After all, the board in Moran was not classified, and so the entire board was up for reelection annually^[324]— meaning that all of the directors could be replaced in one fell swoop and the acquiror could presumably remove any impediments to its tender offer fairly easily after that.

So, the Supreme Court made clear in Moran that "coercive acquisition techniques" (i.e. the well-known two-tiered front-end-loaded hostile tender offers of the 1980s) were a legally cognizable "threat," and the adoption of a poison pill was a reasonable defensive measure taken in response to that threat. At the time Moran was decided, though, the intermediate standard of review was still new and developing, and it remained to be seen "what [other] `threats' from hostile bidders, apart from unequal treatment for non-tendering shareholders, [would be] sufficiently grave to justify preclusive defensive tactics without offering any transactional alternative at all."^[325]

Two scholars at the time penned an article suggesting that there were three types of threats that could be recognized under Unocal: (1) structural coercion— "the risk that disparate treatment of non-tendering shareholders might distort shareholders' tender decisions"^[326] (i.e., the situation involving a two-tiered offer where the back end gets less than the front end); (2) opportunity loss—the "dilemma that a hostile offer might deprive target shareholders of the opportunity to select a superior alternative offered by target management;"^[327] and (3) substantive coercion— "the risk that shareholders will mistakenly accept an underpriced offer because they disbelieve management's representations of intrinsic value."^[328]

Recognizing that substantive coercion was a "slippery concept" that had the potential to be abused or misunderstood, the professors explained:

[97] To note abstractly that management might know shareholder interests better than shareholders themselves do cannot be a basis for rubber-stamping management's pro forma claims in the face of market skepticism and the enormous opportunity losses that threaten target shareholders when hostile offers are defeated. Preclusive defensive tactics are gambles made on behalf of target shareholders by presumptively self-interested players. Although shareholders may win or lose in each transaction, they would almost certainly be better off on average if the gamble were never made in the absence of meaningful judicial review. By minimizing management's ability to further its self-interest in selecting its response to a hostile offer, an effective proportionality test can raise the odds that management resistance, when it does occur, will increase shareholder value.^[329]

Gilson & Kraakman believed that, if used correctly, an effective proportionality test could properly incentivize management, protect stockholders and ultimately increase value for stockholders in the event that management does resist a hostile bid—but only if a real "threat" existed. To demonstrate the existence of such a threat, management must show (in detail) how its plan is better than the alternative (the hostile deal) for the target's stockholders. Only then, if management met that burden, could it use a pill to block a "substantively coercive," but otherwise non-coercive bid.

The test proposed by the professors was taken up, and was more or less adopted, by then-Chancellor Allen in City Capital Associates v. Interco.^[330] There, the board of Interco had refused to redeem a pill that was in place as a defense against an unsolicited tender offer to purchase all of Interco's shares for $74 per share. The bid was non-coercive (structurally), because the offer was for $74 both on the front and back end, if accepted. As an alternative to the offer, the board of Interco sought to effect a restructuring that it claimed would be worth at least $76 per share.

After pointing out that every case in which the Delaware Supreme Court had, to that point, addressed a defensive corporate measure under Unocal involved a structurally coercive offer (i.e. a threat to voluntariness), the Chancellor recognized that "[e]ven where an offer is noncoercive, it may represent a `threat' to shareholder interests" because a board with the power to refuse the proposal and negotiate actively may be able to obtain higher value from the bidder, or present an alternative transaction of higher value to stockholders.^[331] Although he declined to apply the term "substantive coercion" to the threat potentially posed by an "inadequate" but non-coercive offer, Chancellor Allen clearly addressed the concept. Consciously eschewing use of the Orwellian term "substantive coercion,"^[332] the Chancellor determined that, based on the facts presented to him, there was no threat of stockholder [98] "coercion"—instead, the threat was to stockholders' economic interests posed by a "non-coercive" offer that the board deemed to be "inadequate."^[333] As Gilson & Kraakman had suggested, the Chancellor then held that, assuming the board's determination was made in good faith, such a determination could justify leaving a poison pill in place for some period of time while the board protects stockholder interests (either by negotiating with the bidder, or looking for a white knight, or designing an alternative to the offer). But "[o]nce that period has closed ... and [the board] has taken such time as it required in good faith to arrange an alternative value-maximizing transaction, then, in most instances, the legitimate role of the poison pill in the context of a noncoercive offer will have been fully satisfied."^[334] The only remaining function for the pill at that point, he concluded, is to preclude a majority of the stockholders from making their own determination about whether they want to tender.

The Chancellor held that the "mild threat" posed by the tender offer (a difference of approximately $2 per share, when the tender offer was for all cash and the value of management's alternative was less certain) did not justify the board's decision to keep the pill in place, effectively precluding stockholders from exercising their own judgment—despite the board's good faith belief that the offer was inadequate and keeping the pill in place was in the best interests of stockholders.

In Paramount Communications, Inc. v. Time, Inc., however, the Delaware Supreme Court explicitly rejected an approach to Unocal analysis that "would involve the court in substituting its judgment as to what is a `better' deal for that of a corporation's board of directors."^[335] Although not a "pill case," the Supreme Court in Paramount addressed the concept of substantive coercion head on in determining whether an all-cash, all-shares tender offer posed a legally cognizable threat to the target's stockholders.

As the Supreme Court put it, the case presented them with the following question: "Did Time's board, having developed a [long-term] strategic plan ... come under a fiduciary duty to jettison its plan and put the corporation's future in the hands of its stockholders?"^[336] Key to the Supreme Court's ruling was the underlying pivotal question in their mind regarding the Time board's specific long-term plan—its proposed merger with Warner—and whether by entering into the proposed merger, Time had essentially "put itself up for sale."^[337] This was important because, so long as the company is not "for sale," then Revlon duties do not kick in and the board "is not under any per se duty to maximize shareholder value in the short term, even in the context of a takeover."^[338] The Supreme Court held that the Time board had not abandoned its long-term strategic plans; thus Revlon duties were not triggered and Unocal alone applied to the board's actions.^[339]

[99] In evaluating the Time board's actions under Unocal, the Supreme Court embraced the concept of substantive coercion, agreeing with the Time board that its stockholders might have tendered into Paramount's offer "in ignorance or a mistaken belief of the strategic benefit which a business combination with Warner might produce."^[340] Stating in no uncertain terms that "in our view, precepts underlying the business judgment rule militate against a court's engaging in the process of attempting to appraise and evaluate the relative merits of a long-term versus a short-term investment goal for shareholders"^[341] (as to do so would be "a distortion of the Unocal process"), the Supreme Court held that Time's response was proportionate to the threat of Paramount's offer. Time's defensive actions were not aimed at "cramming down" a management-sponsored alternative to Paramount's offer, but instead, were simply aimed at furthering a pre-existing long-term corporate strategy.^[342] This, held the Supreme Court, comported with the board's valid exercise of its fiduciary duties under Unocal.

Five years later, the Supreme Court further applied the "substantive coercion" concept in Unitrin, Inc. v. American General Corp.^[343] There, a hostile acquirer (American General) wanted Unitrin (the target corporation) to be enjoined from implementing a stock repurchase and poison pill adopted in response to American General's "inadequate" all-cash offer. Recognizing that previous cases had held that "inadequate value" of an all-cash offer could be a valid threat (i.e. Interco), the Court also reiterated its conclusion in Paramount that inadequate value is not the only threat posed by a non-coercive, all-cash offer. The Unitrin Court recited that "the Time board of directors had reasonably determined that inadequate value was not the only threat that Paramount's all cash for all shares offer presented, but was also reasonably concerned that the Time stockholders might tender to Paramount in ignorance or based upon a mistaken belief, i.e., yield to substantive coercion."^[344]

Relying on that line of reasoning, the Unitrin Court determined that the Unitrin board "reasonably perceived risk of substantive coercion, i.e., that Unitrin's shareholders might accept American General's inadequate Offer because of `ignorance or mistaken belief' regarding the Board's assessment of the long-term value of Unitrin's stock."^[345] Thus, perceiving a valid threat under Unocal, the Supreme Court then addressed whether the board of Unitrin's response was proportional to the threat.

Having determined that the Unitrin board reasonably perceived the American General offer to be inadequate, and Unitrin's poison pill adoption to be a proportionate response, the Court of Chancery had found that the Unitrin board's decision to authorize its stock repurchase program was disproportionate because it was "unnecessary" to protect the Unitrin stockholders from an inadequate bid since the board already had a pill in place. The Court of Chancery here was sensitive to [100] how the stock buy back would make it extremely unlikely that American General could win a proxy contest. The Supreme Court, however, held that the Court of Chancery had "erred by substituting its judgment, that the Repurchase Program was unnecessary, for that of the board,"^[346] and that such action, if not coercive or preclusive, could be valid if it fell within a range of reasonableness.

At least one of the professors, it seems, is unhappy with how the Supreme Court has apparently misunderstood the concept of substantive coercion as he had envisioned it, noting that "only the phrase and not the substance captured the attention of the Delaware Supreme Court" such that the "mere incantation" of substantive coercion now seems sufficient to establish a threat justifying a board's defensive strategy.^[347]

More recent cases decided by the Court of Chancery have attempted to cut back on the now-broadened concept of "substantive coercion." The concept, after all, was originally (as outlined by Professors Gilson & Kraakman) intended to be a very carefully monitored "threat" requiring close judicial scrutiny of any defensive measures taken in response to such a threat. In Chesapeake v. Shore, Vice Chancellor Strine stated:

One might imagine that the response to this particular type of threat might be time-limited and confined to what is necessary to ensure that the board can tell its side of the story effectively. That is, because the threat is defined as one involving the possibility that stockholders might make an erroneous investment or voting decision, the appropriate response would seem to be one that would remedy that problem by providing the stockholders with adequate information.^[348]

Once the stockholders have access to such information, the potential for stockholder "confusion" seems substantially lessened. At that point, "[o]ur law should [] hesitate to ascribe rube-like qualities to stockholders. If the stockholders are presumed competent to buy stock in the first place, why are they not presumed competent to decide when to sell in a tender offer after an adequate time for deliberation has been afforded them?"^[349]

That is essentially how former-Chancellor Allen first attempted to apply the concept of substantive coercion in Interco. Chancellor Allen found it "significant" that the question of the board's responsibility to redeem or not to redeem the poison pill in Interco arose at the "end-stage" of the takeover contest.^[350] He explained:

[T]he negotiating leverage that a poison pill confers upon this company's board will, it is clear, not be further utilized by the board to increase the options available to shareholders or to improve the terms of those options. Rather, at this stage of this contest, the pill now serves the principal purpose of ... precluding the shareholders from choosing an alternative... that the board finds less valuable to shareholders.^[351]

Similarly, here, the takeover battle between Air Products and Airgas seems to [101] have reached an "end stage."^[352] Air Products has made its "best and final" offer. Airgas deems that offer to be inadequate. And we're not "talking nickels and quarters here"^[353]—an $8 gulf separates the two. The Airgas stockholders know all of this. At this stage, the pill is serving the principal purpose of precluding the shareholders from tendering into Air Products' offer. As noted above, however, the Supreme Court rejected the reasoning of Interco in Paramount. Thus, while I agree theoretically with former-Chancellor Allen's and Vice Chancellor Strine's conception of substantive coercion and its appropriate application, the Supreme Court's dictum in Paramount (which explicitly disapproves of Interco) suggests that, unless and until the Supreme Court rules otherwise, that is not the current state of our law.

D. A Note on TW Services

TW Services, Inc. v. SWT Acquisition Corp.^[354] is an often overlooked case that is, in my view, an illuminating piece in this takeover puzzle. The case was another former-Chancellor Allen decision, decided just after Interco and Pillsbury, and right before Paramount. Indeed, it appears to be cited approvingly in Paramount in the same sentence where "Interco and its progeny" were rejected as not in keeping with proper Unocal analysis.^[355] In other words, according to the Supreme Court, in TW Services (as opposed to Interco), Chancellor Allen did not substitute his "judgment as to what is a `better' deal for that of a corporation's board of directors."^[356] But it is important to look at why this was so.

As noted above, TW Services essentially teed up the very question I am addressing in this Opinion, but then declined to answer it in light of the particular facts of that case. Specifically, Chancellor Allen raised front and center the question when, if ever, must a board abandon its long-run strategy in the face of a hostile tender offer. He declined to answer it because he decided the case on other grounds and did not ultimately need to reach the question.^[357] In doing so, however, he provided insightful commentary on two key points: (1) a board's differing duties when under the Revlon versus Unocal standards of review,^[358] and (2) Interco and its progeny.

First, as the Supreme Court later did in Paramount, Chancellor Allen grappled [102] with the following "critical question[:] when is a corporation in a Revlon [Inc. v. MacAndrews & Forbes Holdings, 506 A.2d 173 (1986)] mode?"^[359] It is not until the board is under Revlon that its duty "narrow[s]" to getting the best price reasonably available for stockholders in a sale of the company.^[360] The reason the board's duty shifts at that point to maximizing shareholder value is simple: "In such a setting, for the present shareholders, there is no long run."^[361] This is not so when the board is under Unocal, the company is not for sale, and the board is instead pursuing long run corporate interests. Accordingly, the Chancellor asked,

But what of a situation in which the board resists a sale? May a board find itself thrust involuntarily into a Revlon mode in which is it required to take only steps designed to maximize current share value and in which it must desist from steps that would impede that goal, even if they might otherwise appear sustainable as an arguable step in the promotion of "long term" corporate or share values?^[362]

Chancellor Allen does not directly answer the question. Instead, he continues with another follow-up question: Does a director's duty of loyalty to "the corporation and its shareholders" require a board—in light of the fact that a majority of shares may wish to tender into a current share value maximizing transaction now—to enter into Revlon mode? Again, he leaves the answer for another day and another case. But the most famous quote from TW Services was embedded in a footnote following that last question. Namely, in considering whether the duty of loyalty could force a board into Revlon mode, the Chancellor mused:

Questions of this type call upon one to ask, what is our model of corporate governance? "Shareholder democracy" is an appealing phrase, and the notion of shareholders as the ultimate voting constituency of the board has obvious pertinence, but that phrase would not constitute the only element in a well articulated model. While corporate democracy is a pertinent concept, a corporation is not a New England town meeting; directors, not shareholders, have responsibilities to manage the business and affairs of the corporation, subject however to a fiduciary obligation.^[363]

Second, Chancellor Allen shed light on two then-recent cases where the Court of Chancery had attempted to order redemption of a poison pill. He noted that the boards in those cases (i.e., Pillsbury^[364] and Interco^[365]) had "elected to pursue a defensive restructuring that in form and effect was (so far as the corporation itself was concerned) a close approximation of and an alternative to a pending all cash tender [103] offer for all shares."^[366] In other words, in Pillsbury and Interco, the boards were responding to a hostile offer by proposing "a management endorsed breakup transaction that, realistically viewed, constituted a functional alternative to the resisted sale."^[367] Importantly, "[t]hose cases did not involve circumstances in which a board had in good faith ... elected to continue managing the enterprise in a long term mode and not to actively consider an extraordinary transaction of any type."^[368] The issue presented by a board that responds to a tender offer with a major restructuring or recapitalization is fundamentally different than that posed by a board which "just says no" and maintains the status quo.

Thus, it seemed, the Chancellor endorsed the view that so long as a corporation is not for sale, it is not in Revlon mode and is free to pursue its long run goals. In essence, TW Services appeared to support the view that a well-informed board acting in good faith in response to a reasonably perceived threat may, in fact, be able to "just say no" to a hostile tender offer.

The foregoing legal framework describes what I believe to be the current legal regime in Delaware. With that legal superstructure in mind, I now apply the Unocal standard to the specific facts of this case.

III. ANALYSIS

A. Has the Airgas Board Established That It Reasonably Perceived the Existence of a Legally Cognizable Threat?

1. Process

Under the first prong of Unocal, defendants bear the burden of showing that the Airgas board, "after a reasonable investigation ... determined in good faith, that the [Air Products offer] presented a threat ... that warranted a defensive response."^[369] I focus my analysis on the defendants' actions in response to Air Products' current $70 offer, but I note here that defendants would have cleared the Unocal hurdles with greater ease when the relevant inquiry was with respect to the board's response to the $65.50 offer.^[370]

In examining defendants' actions under this first prong of Unocal, "the presence of a majority of outside independent directors coupled with a showing of reliance on advice by legal and financial advisors, `constitute[s] a prima facie showing of good faith and reasonable investigation.'"^[371] Here, it is undeniable that the Airgas board meets this test.

First, it is currently comprised of a majority of outside independent directors— including the three recently-elected insurgent directors who were nominated to the board by Air Products. Air Products does not dispute the independence of the Air [104] Products Nominees,^[372] and the evidence at trial showed that the rest of the Airgas board, other than McCausland, are outside, independent directors who are not dominated by McCausland.^[373]

Second, the Airgas board relied on not one, not two, but three outside independent financial advisors in reaching its conclusion that Air Products' offer is "clearly inadequate."^[374] Credit Suisse, the third outside financial advisor—as described in Section I.Q.2—was selected by the entire Airgas board, was approved by the three Air Products Nominees, and its independence and qualifications are not in dispute.^[375] In addition, the Airgas board has relied on the advice of legal counsel,^[376] and the three Air Products Nominees have retained their own additional independent legal counsel (Skadden, Arps). In short, the Airgas board's process easily passes the smell test.

2. What is the "Threat?"

Although the Airgas board meets the threshold of showing good faith and reasonable investigation, the first part of Unocal review requires more than that; it requires the board to show that its good faith and reasonable investigation ultimately gave the board "grounds for concluding that a threat to the corporate enterprise existed."^[377] In the supplemental evidentiary hearing, Airgas (and its lawyers) attempted to identify numerous threats posed by Air Products' $70 offer: It is coercive. It is opportunistically timed.^[378] It presents the stockholders with a "prisoner's dilemma." It undervalues Airgas—it is a "clearly inadequate" price. The merger arbitrageurs who have bought into Airgas need to be "protected from themselves."^[379] The arbs are a "threat" to the minority.^[380] The list goes on.

[105] The reality is that the Airgas board discussed essentially none of these alleged "threats" in its board meetings, or in its deliberations on whether to accept or reject Air Products' $70 offer, or in its consideration of whether to keep the pill in place. The board did not discuss "coercion" or the idea that Airgas's stockholders would be "coerced" into tendering.^[381] The board did not discuss the concept of a "prisoner's dilemma."^[382] The board did not discuss Air Products' offer in terms of any "danger" that it posed to the corporate enterprise.^[383] In the October trial, Airgas had likewise failed to identify threats other than that Air Products' offer undervalues Airgas.^[384] In fact, there has been no specific board discussion since the October trial over whether to keep the poison pill in place (other than Clancey's "protect the pill" line).^[385]

Airgas's board members testified that the concepts of coercion, threat, and the decision whether or not to redeem the pill were nonetheless "implicit" in the board's discussions due to their knowledge that a large percentage of Airgas's stock is held by merger arbitrageurs who have short-term interests and would be willing to tender into an inadequate offer.^[386] But the only threat that the board discussed—the threat that has been the central issue since the beginning of this case—is the inadequate price of Air Products' offer. Thus, inadequate price, coupled with the fact that a majority of Airgas's stock is held by merger arbitrageurs who might be willing to tender into such an inadequate offer, is [106] the only real "threat" alleged. In fact, Airgas directors have admitted as much. Airgas's CEO van Roden testified:

Q. [O]ther than the price being inadequate, is there anything else that you deem to be a threat?

A. No.^[387]

In the end, it really is "All About Value."^[388] Airgas's directors and Airgas's financial advisors concede that the Airgas stockholder base is sophisticated and well-informed, and that they have all the information necessary to decide whether to tender into Air Products' offer.^[389]

a. Structural Coercion

Air Products' offer is not structurally coercive. A structurally coercive offer involves "the risk that disparate treatment of non-tendering shareholders might distort shareholders' tender decisions."^[390]Unocal, for example, "involved a two-tier, highly coercive tender offer" where stock-holders who did not tender into the offer risked getting stuck with junk bonds on the back end.^[391] "In such a case, the threat is obvious: shareholders may be compelled to tender to avoid being treated adversely in the second stage of the transaction."^[392]

Air Products' offer poses no such structural threat. It is for all shares of Airgas, with consideration to be paid in all cash.^[393] The offer is backed by secured financing.^[394] There is regulatory approval.^[395] The front end will get the same consideration as the back end, in the same currency, as quickly as practicable. Air Products is committed to promptly paying $70 in cash for each and every share of Airgas and has no interest in owning less than 100% of Airgas.^[396] Air Products would seek to acquire any non-tendering shares "[a]s quick[ly] as the law would allow."^[397] It is willing to commit to a subsequent offering period.^[398] In light of that, any stockholders who believe [107] that the $70 offer is inadequate simply would not tender into the offer—they would risk nothing by not tendering because if a majority of Airgas shares did tender, any non-tendering shares could tender into the subsequent offering period and receive the exact same consideration ($70 per share in cash) as the front end.^[399] In short, if there were an antonym in the dictionary for "structural coercion," Air Products' offer might be it.

As former-Vice Chancellor, now Justice Berger noted, "[c]ertainly an inadequate [structurally] coercive tender offer threatens injury to the stockholders ... [but i]t is difficult to understand how, as a general matter, an inadequate all cash, all shares tender offer, with a back end commitment at the same price in cash, can be considered a continuing threat under Unocal."^[400] I agree. As noted above, though, the Supreme Court has recognized other "threats" that can be posed by an inadequately priced offer. One such potential continuing threat has been termed "opportunity loss," which appears to be a time-based threat.

b. Opportunity Loss

Opportunity loss is the threat that a "hostile offer might deprive target stockholders of the opportunity to select a superior alternative offered by target management or ... offered by another bidder."^[401] As then-Vice Chancellor Berger (who was also one of the Justices in Unitrin) explained in Shamrock Holdings:

An inadequate, non-coercive offer may [] constitute a threat for some reasonable period of time after it is announced. The target corporation (or other potential bidders) may be inclined to provide the stockholders with a more attractive alternative, but may need some additional time to formulate and present that option. During the interim, the threat is that the stockholders might choose the inadequate tender offer only because the superior option has not yet been presented.... However, where there has been sufficient time for any alternative to be developed and presented and for the target corporation to inform its stockholders of the benefits of retaining their equity position, the "threat" to the stockholders of an inadequate, non-coercive offer seems, in most circumstances, to be without substance.^[402]

As such, Air Products' offer poses no threat of opportunity loss. The Airgas board has had, at this point, over sixteen months to consider Air Products' offer and to explore "strategic alternatives going forward as a company."^[403] After all that time, there is no alternative offer currently on the table, and counsel for defendants represented during the October trial that "we're not asserting that we need more [108] time to explore a specific alternative."^[404] The "superior alternative" Airgas is pursuing is simply to "continue[] on its current course and execute[] its strategic [five year, long term] plan."^[405]

c. Substantive Coercion

Inadequate price and the concept of substantive coercion are inextricably related. The Delaware Supreme Court has defined substantive coercion, as discussed in Section II.C, as "the risk that [Airgas's] stockholders might accept [Air Products'] inadequate Offer because of `ignorance or mistaken belief' regarding the Board's assessment of the long-term value of [Airgas's] stock."^[406] In other words, if management advises stockholders, in good faith, that it believes Air Products' hostile offer is inadequate because in its view the future earnings potential of the company is greater than the price offered, Airgas's stockholders might nevertheless reject the board's advice and tender.

In the article that gave rise to the concept of "substantive coercion," Professors Gilson and Kraakman argued that, in order for substantive coercion to exist, two elements are necessary: (1) management must actually expect the value of the company to be greater than the offer—and be correct that the offer is in fact inadequate, and (2) the stockholders must reject management's advice or "believe that management will not deliver on its promise."^[407] Both elements must be present because "[w]ithout the first element, shareholders who accept a structurally non-coercive offer have not made a mistake. Without the second element, shareholders will believe management and reject underpriced offers."^[408]

Defendants' argument involves a slightly different take on this threat, based on the particular composition of Airgas's stockholders (namely, its large "short-term" base). In essence, Airgas's argument is that "the substantial ownership of Airgas stock by these short-term, deal-driven investors poses a threat to the company and its shareholders"—the threat that, because it is likely that the arbs would support the $70 offer, "shareholders will be coerced into tendering into an inadequate offer."^[409] The threat of "arbs" is a new facet of substantive coercion, different from the substantive coercion claim recognized in Paramount.^[410] There, the hostile tender offer was purposely timed to confuse the [109] stockholders. The terms of the offer could cause stockholders to mistakenly tender if they did not believe or understand (literally) the value of the merger with Warner as compared with the value of Paramount's cash offer. The terms of the offer introduced uncertainty. In contrast, here, defendants' claim is not about "confusion" or "mistakenly tendering" (or even "disbelieving" management)—Air Products' offer has been on the table for over a year, Airgas's stockholders have been barraged with information, and there is no alternative offer to choose that might cause stockholders to be confused about the terms of Air Products' offer. Rather, Airgas's claim is that it needs to maintain its defensive measures to prevent control from being surrendered for an unfair or inadequate price. The argument is premised on the fact that a large percentage (almost half) of Airgas's stockholders are merger arbitrageurs—many of whom bought into the stock when Air Products first announced its interest in acquiring Airgas, at a time when the stock was trading much lower than it is today—who would be willing to tender into an inadequate offer because they stand to make a significant return on their investment even if the offer grossly undervalues Airgas in a sale. "They don't care a thing about the fundamental value of Airgas."^[411] In short, the risk is that a majority of Airgas's stockholders will tender into Air Products' offer despite its inadequate price tag, leaving the minority "coerced" into taking $70 as well.^[412] The defendants do not appear to have come to grips with the fact that the arbs bought their shares from long-term stockholders who viewed the increased market price generated by Air Products' offer as a good time to sell.^[413]

The threat that merger arbs will tender into an inadequately priced offer is only a legitimate threat if the offer is indeed inadequate.^[414] "The only way to protect [110] stockholders [from a threat of substantive coercion] is for courts to ensure that the threat is real and that the board asserting the threat is not imagining or exaggerating it."^[415] Air Products and Shareholder Plaintiffs attack two main aspects of Airgas's five year plan—(1) the macroeconomic assumptions relied upon by management, and (2) the fact that Airgas did not consider what would happen if the economy had a "double-dip" recession.

Plaintiffs argue that reasonable stockholders may disagree with the board's optimistic macroeconomic assumptions. McCausland did not hesitate to admit during the supplemental hearing that he is "very bullish" on Airgas. "It's an amazing company," he said. He testified that the company has a shot at making its 2007 five year plan "despite the fact that the worst recession since the Great Depression landed right in the middle of that period. [W]e're in a good business, and we have a unique competitive advantage in the U.S. market."^[416] And it's not just Airgas that McCausland is bullish about—he's "bullish on the United States [] economy" as well.^[417]

So management presented a single scenario in its revised five-year plan—no double dip recession; reasonably optimistic macroeconomic growth assumptions. Everyone at trial agreed that "reasonable minds can differ as to the view of future value."^[418] But nothing in the record supported a claim that Airgas fudged any of its numbers, nor was there evidence that the board did not act at all times in good faith and in reasonable reliance on its outside advisors.^[419] The Air Products Nominees [111] found the assumptions to be "reasonable."^[420] They do not see "any indication of a double-dip recession."^[421]

The next question is, if a majority of stockholders want to tender into an inadequately priced offer, is that substantive coercion? Is that a threat that justifies continued maintenance of the poison pill? Put differently, is there evidence in the record that Airgas stockholders are so "focused on the short-term" that they would "take a smaller harvest in the swelter of August over a larger one in Indian Summer"?^[422] Air Products argues that there is none whatsoever. They argue that there is "no evidence in the record that [Airgas's short-term] holders [i.e., arbitrageurs and hedge funds] would not [] reject the $70 offer if it was viewed by them to be inadequate.... Defendants have not demonstrated a single fact supporting their argument that a threat to Airgas stockholders exists because the Airgas stock is held by investors with varying time horizons."^[423]

But there is at least some evidence in the record suggesting that this risk may be real.^[424] Moreover, both Airgas's expert and well as Air Products' own expert testified that a large number—if not all—of the arbitrageurs who bought into Airgas's stock at prices significantly below the $70 offer price would be happy to tender their shares at that price regardless of the potential long-term value of the company.^[425] Based on the testimony of both expert witnesses, I find sufficient evidence that a majority of stockholders might be willing to tender their shares regardless of whether the price is adequate or not—thereby ceding control of Airgas to Air Products. This is a clear "risk" under the teachings [112] of TW Services^[426] and Paramount^[427] because it would essentially thrust Airgas into Revlon mode.

Ultimately, it all seems to come down to the Supreme Court's holdings in Paramount and Unitrin. In Unitrin, the Court held: "[T]he directors of a Delaware corporation have the prerogative to determine that the market undervalues its stock and to protect its stockholders from offers that do not reflect the long-term value of the corporation under its present management plan."^[428] When a company is not in Revlon mode, a board of directors "is not under any per se duty to maximize shareholder value in the short term, even in the context of a takeover."^[429] The Supreme Court has unequivocally "endorse[d the] conclusion that it is not a breach of faith for directors to determine that the present stock market price of shares is not representative of true value or that there may indeed be several market values for any corporation's stock."^[430] As noted above, based on all of the facts presented to me, I find that the Airgas board acted in good faith and relied on the advice of its financial and legal advisors in coming to the conclusion that Air Products' offer is inadequate. And as the Supreme Court has held, a board that in good faith believes that a hostile offer is inadequate may "properly employ[] a poison pill as a proportionate defensive response to protect its stockholders from a `low ball' [113] bid."^[431]

B. Is the Continued Maintenance of Airgas's Defensive Measures Proportionate to the "Threat" Posed by Air Products' Offer?

Turning now to the second part of the Unocal test, I must determine whether the Airgas board's defensive measures are a proportionate response to the threat posed by Air Products' offer. Where the defensive measures "are inextricably related, the principles of Unocal require that [they] be scrutinized collectively as a unitary response to the perceived threat."^[432] Defendants bear the burden of showing that their defenses are not preclusive or coercive, and if neither, that they fall within a "range of reasonableness."^[433]

1. Preclusive or Coercive

A defensive measure is coercive if it is "aimed at `cramming down' on its shareholders a management-sponsored alternative."^[434] Airgas's defensive measures are certainly not coercive in this respect, as Airgas is specifically not trying to cram down a management sponsored alternative, but rather, simply wants to maintain the status quo and manage the company for the long term.

A response is preclusive if it "makes a bidder's ability to wage a successful proxy contest and gain control [of the target's board] ... `realistically unattainable.'"^[435] Air Products and Shareholder Plaintiffs argue that Airgas's defensive measures are preclusive because they render the possibility of an effective proxy contest realistically unattainable. What the argument boils down to, though, is that Airgas's defensive measures make the possibility of Air Products obtaining control of the Airgas board and removing the pill realistically unattainable in the very near future, because Airgas has a staggered board in place. Thus, the real issue posed is whether defensive measures are "preclusive" if they make gaining control of the board realistically unattainable in the short term (but still realistically attainable sometime in the future), or if "preclusive" actually means "preclusive"—i.e. forever unattainable. In reality, or perhaps I should say in practice, these two formulations ("preclusive for now" or "preclusive forever") may be one and the same when examining the combination of a staggered board plus a poison pill, because no bidder to my knowledge has ever successfully stuck around for two years and waged two successful proxy contests to gain control of a classified board in order to remove a pill.^[436] So does that make the combination of a [114] staggered board and a poison pill preclusive?

This precise question was asked and answered four months ago in Versata Enterprises, Inc. v. Selectica, Inc. There, Trilogy (the hostile acquiror) argued that in order for the target's defensive measures not to be preclusive: (1) a successful proxy contest must be realistically attainable, and (2) the successful proxy contest must result in gaining control of the board at the next election. The Delaware Supreme Court rejected this argument, stating that "[i]f that preclusivity argument is correct, then it would apply whenever a corporation has both a classified board and a Rights Plan.... [W]e hold that the combination of a classified board and a Rights Plan do not constitute a preclusive defense."^[437]

The Supreme Court explained its reasoning as follows:

Classified boards are authorized by statute and are adopted for a variety of business purposes. Any classified board also operates as an antitakeover defense by preventing an insurgent from obtaining control of the board in one election. More than a decade ago, in Carmody [v. Toll Brothers, Inc.], the Court of Chancery noted "because only one third of a classified board would stand for election each year, a classified board would delay—but not prevent—a hostile acquiror from obtaining control of the board, since a determined acquiror could wage a proxy contest and obtain control of two thirds of the target board over a two year period, as opposed to seizing control in a single election."^[438]

The Court concluded: "The fact that a combination of defensive measures makes it more difficult for an acquirer to obtain control of a board does not make such measures realistically unattainable, i.e., preclusive."^[439] Moreover, citing Moran, the Supreme Court noted that pills do not fundamentally restrict proxy contests, explaining that a "Rights Plan will not have a severe impact upon proxy contests and it will not preclude all hostile acquisitions of Household."^[440] Arguably the combination of a staggered board plus a pill is at least more preclusive than the use of a rights plan by a company with a pill alone (where all directors are up for election annually, as in Gaylord Container and Moran, because the stockholders could replace the entire board at once and redeem the pill). In any event, though, the Supreme Court [115] in Selectica suggests that this is a distinction without a significant difference, and very clearly held that the combination of a classified board and a Rights Plan is not preclusive, and that the combination may only "delay—but not prevent—a hostile acquiror from obtaining control of the board."^[441]

The Supreme Court reinforced this holding in its Airgas bylaw decision related to this case, when it ruled that directors on a staggered board serve "three year terms" and Airgas could thus not be forced to push its annual meeting from August/September 2011 up to January 2011.^[442] There, the Supreme Court cited approvingly to the "historical understanding" of the impact of staggered boards:

"By spreading the election of the full board over a period of three years, the classified board forces the successful [tender] offeror to wait, in theory at least, two years before assuming working control of the board of directors."^[443]

* * *

"A real benefit to directors on a [staggered] board is that it would take two years for an insurgent to obtain control in a proxy contest."^[444]

In addition, the Supreme Court cited its Selectica decision where, as noted above, it had held that "`a classified board would delay—but not prevent—a hostile acquiror from obtaining control of the board, since a determined acquiror could wage a proxy contest and obtain control of two thirds of the target board over a two year period, as opposed to seizing control in a single election."^[445]

I am thus bound by this clear precedent to proceed on the assumption that Airgas's defensive measures are not preclusive if they delay Air Products from obtaining control of the Airgas board (even if that delay is significant) so long as obtaining control at some point in the future is realistically attainable. I now examine whether the ability to obtain control of Airgas's board in the future is realistically attainable.

Air Products has already run one successful slate of insurgents. Their three independent nominees were elected to the Airgas board in September. Airgas's next annual meeting will be held sometime around September 2011. Accordingly, if Airgas's defensive measures remain in place, Air Products has two options if it wants to continue to pursue Airgas at this time:^[446] (1) It can call a special meeting and remove the entire board with a supermajority vote of the outstanding shares, or (2) It can wait until Airgas's 2011 annual meeting to nominate a slate of directors. I [116] will address the viability of each of these options in turn.

a. Call a Special Meeting to Remove the Airgas Board by a 67% Supermajority Vote

Airgas's charter allows for 33% of the outstanding shares to call a special meeting of the stockholders, and to remove the entire board without cause by a vote of 67% of the outstanding shares.^[447] Defendants make much of the fact that "[o]f the 85 Delaware companies in the Fortune 500 with staggered boards, only six (including Airgas) have charter provisions that permit shareholders to remove directors without cause between annual meetings (i.e., at a special meeting and/or by written consent)."^[448] This argument alone is not decisive on the issue of preclusivity, although it does distinguish the particular facts of this case from the typical case of a company with a staggered board.^[449] Ultimately, though, it does not matter how many or how few companies in the Fortune 500 with staggered boards allow shareholders to remove directors by calling a special meeting; what matters is the "realistic attainability" of actually achieving a 67% vote of the outstanding Airgas shares in the context of Air Products' hostile tender offer (which equates to achieving approximately 85-86% of the unaffiliated voting shares),^[450] or whether, instead, Airgas's continued use of its defensive measures is preclusive because it is a near "impossible task."^[451]

The fact that something might be a theoretical possibility does not make it "realistically attainable." In other words, what the Supreme Court in Unitrin and Selectica meant by "realistically attainable" must be something more than a mere "mathematical possibility" or "hypothetically conceivable chance" of circumventing a poison pill. One would think a sensible understanding of the phrase would be that an insurgent has a reasonably meaningful or real world shot at securing the support of enough stockholders to change the target board's composition and remove the obstructing defenses.^[452] It does not mean that the insurgent has a right to win or that the insurgent must have a highly probable chance or even a 50-50 chance of prevailing. But it must be more than just a theoretical possibility, given the required vote, the timing issues, the shareholder profile, the issues presented by the insurgent and the surrounding circumstances.

The real-world difficulty of a judge accurately assessing the "realistically attainable" factor, however, was made painfully [117] clear during the January supplemental evidentiary hearing through the lengthy and contentious testimony of two "proxy experts." Airgas offered testimony from Peter C. Harkins, the President and CEO of D.F. King & Co. Inc. and Air Products presented testimony by Joseph J. Morrow, the founder and CEO of Morrow & Co., LLC.^[453] Both experts have extensive experience advising corporate clients in contested proxy solicitations and corporate takeover contests, as well as extensive (and lucrative) experience opining in courtrooms as experts on stockholder voting and investment behavior.^[454] Ultimately, and despite Harkins' pseudo-scientific "bottoms-up analysis" and Morrow's anecdotal approach, I found both experts' testimony essentially unhelpful and unconvincing on the fundamental question whether a 67% vote of Airgas stockholders at a special meeting is realistically attainable. Morrow concluded that it is not realistically attainable, because the margin needed to attain 67% is so high given the percentage of unaffiliated stockholders likely to vote. Airgas's officers and directors own 11% of Airgas stock. In addition, 12% of Airgas stock did not vote in the September 2010 contested election (which is fairly typical, even in contested elections). That equals 23% of Airgas's outstanding stock that is arguably "not available" to Air Products' solicitation at a special stockholder meeting. Add to this 23% number the 2% that Air Products itself owns, and you are left with an "available pool" of 75% of the outstanding Airgas stock from which Air Products would need to garner 65% (which, added to its own 2%, would yield the required 67% of outstanding shares). Thus, following this reasoning, Air Products would need to attract the support of about 85% of the 75% of unaffiliated and likely to vote shares in order to reach the 67% vote required to oust the incumbent Airgas directors.^[455] According to Morrow, this margin (85% of the unaffiliated and voting shares) has never been achieved in any contested election that he can recall in his 46 years in this business.^[456] Harkins likewise could not give a real world example where an insurgent garnered that margin of votes in a contested election.^[457]

Harkins, on the other hand, based his opinion that 67% is "easily" achievable (again, despite the glaring lack of any real world instance where an insurgent has ever achieved such a supermajority in a contested election) on his "bottoms-up" analysis of various categories of Airgas stockholders and their "likely" voting behavior, based in part on the Airgas stockholder voting patterns in the September 2010 election.^[458] Although Harkins's categorical computations have a certain scientific or mathematical patina, they are all ultimately based on assumptions, guesses and speculation—albeit "educated" assumptions and guesses. For example, Harkins assumed that 100% of the voting arbitrageurs and event-driven investors will vote for Air Products' nominees at a special election, despite the fact that only 90% voted for Air Products nominees at the September 2010 contested short slate election and despite the absence of any historical instance where a bidder received [118] unanimous support from this stockholder category.^[459] Similar flaws infect other categorical assumptions in Harkins' "bottoms-up" methodology, including his assumptions about the likely vote by index funds (where his prediction again is unsupported by the actual index fund votes in September 2010),^[460] about the likely vote of "dual" stockholders who own stock in both Airgas and Air Products, and about the probability that proxy advisory firm ISS will support an effort to remove an entire slate of directors. If one of these key "assumptions" is incorrect, Harkins' model collapses and the "easy" 67% vote becomes mathematically impossible.

To cite one easy example, Harkins' "bottoms-up" analysis is based on Airgas's stockholder profile as of December 9, 2010.^[461] The largest category of voting stockholders in the chart (by far) is the "arbitrageurs and event-driven investors" group, accounting for 46% of the total outstanding shares. Harkins assumes that 95% of them will vote, and as noted above, that 100% of those voting will vote in favor of Air Products' nominees at a special election. This gives a total of 43.7% of the outstanding shares voting for Air Products—a large chunk of the total required to get to 67%.^[462] Even plugging in Morrow's [119] "assumption" that only 92.5% (rather than 95%) of this group will vote, and 100% of them vote in favor of Air Products, that still totals 42.5% of the total outstanding.^[463] But Airgas's stockholder profile, as Harkins admitted, is "continuously changing."^[464] McCausland testified that the arb concentration is down from 46% to 41%.^[465] That single assumption alone (a difference that equates to almost 5% of the total outstanding that Harkins assumes would vote in favor of Air Products under either Harkins' or Morrow's voting assumptions) essentially renders the rest of the numbers in Harkins' chart meaningless—they do not add up to 67% unless he re-solves for "X" (the percentage of "Other Institutional Investors" needed to vote in favor of Air Products). It may be that additional arbs would swarm in upon the announcement of a special meeting.^[466] It may not. And in the end, I guess, he can always just re-solve for "X." What this shows, though, is that the entire exercise does not answer the "realistic attainability" question one way or the other—it is a game of speculation.

Thus, the expert opinions proffered on how stockholders are likely to vote at a special meeting called to remove the entire Airgas board were unhelpful and not persuasive. The expert witnesses neither took the time nor made the effort to speak with any Airgas stockholders—whether retail, index, institutional investors who subcontract voting to ISS, long or short hedge funds, dual stockholders or event-driven stockholders—about how they might vote if such a special stockholder meeting were actually convened.^[467] To that extent, each expert failed to support his conclusions in a manner that a judge would find reliable. In short, I am not persuaded by Harkins that 67% is realistically attainable, especially given the absence of any historical instance where a bidder achieved such a [120] margin in a contested election.^[468] Both experts essentially admitted, moreover, that one cannot really know how an election will turn out until it is held and that, generally speaking, it is easier to obtain investor support for electing a minority insurgent slate than for a controlling slate of directors.^[469]

In the end, however, the most telling aspect of the expert testimony was the statement that Air Products could certainly achieve 67% of the vote if its offer was "sufficiently appealing."^[470] Harkins explained that he was "not predicting that a $70 offer will result in a 67 percent vote to remove the board."^[471] He was simply predicting that, with an appealing enough offer or platform, a 67% vote is possible, but he was not providing his opinion (nor did he have one) on how appealing $70 is, or whether it would make victory at a special election attainable.^[472] The following final, tautological insight by the expert just about sums up the usefulness of this particular day in the life of a trial judge:

Q. [So w]hat is a sufficiently appealing offer?

A. An offer that will garner 67 percent of the vote, I suppose.^[473]

But what seems clear to me, quite honestly, is that a poison pill is assuredly preclusive in the everyday common sense meaning of the word; indeed, its rasion d'etre is preclusion—to stop a bid (or this bid) from progressing. That is what it is intended to do and that is what the Airgas pill has done successfully for over sixteen months. Whether it is realistic to believe that Air Products can, at some point in the future, achieve a 67% vote necessary to remove the entire Airgas board at a special meeting is (in my opinion) impossible to predict given the host of variables in this setting, but the sheer lack of historical examples where an insurgent has ever achieved such a percentage in a contested control election must mean something. Commentators who have studied actual hostile takeovers for Delaware companies have, at least in part, essentially corroborated this common sense notion that such a victory is not realistically attainable.^[474] Nonetheless, while the special meeting may not be a realistically attainable mechanism for circumventing the Airgas defenses, that assessment does not end the analysis under existing precedent.

b. Run Another Proxy Contest

Even if Air Products is unable to achieve the 67% supermajority vote of the outstanding shares necessary to remove the board in a special meeting, it would only need a simple majority of the voting stockholders to obtain control of the board at next year's annual meeting. Air Products has stated its unwillingness to wait around for another eight months until Airgas's 2011 annual meeting.^[475] There are [121] legitimately articulated reasons for this— Air Products' stockholders, after all, have been carrying the burden of a depressed stock price since the announcement of the offer.^[476] But that is a business determination by the Air Products board. The reality is that obtaining a simple majority of the voting stock is significantly less burdensome than obtaining a supermajority vote of the outstanding shares, and considering the current composition of Airgas's stockholders (and the fact that, as a result of that shareholder composition, a majority of the voting shares today would likely tender into Air Products' $70 offer^[477]), if Air Products and those stockholders choose to stick around, an Air Products victory at the next annual meeting is very realistically attainable.

Air Products certainly realized this. It had actually intended to run an insurgent slate at Airgas's 2011 annual meeting— when everyone thought that meeting was going to be held in January. The Supreme Court has now held, however, that each annual meeting must take place "approximately" one year after the last annual meeting.^[478] If Air Products is unwilling to wait another eight months to run another slate of nominees, that is a business decision of the Air Products board, but as the Supreme Court has held, waiting until the next annual meeting "delay[s]—but [does] not prevent—[Air Products] from obtaining control of the board."^[479] I thus am constrained to conclude that Airgas's defensive [122] measures are not preclusive.^[480]

2. Range of Reasonableness

"If a defensive measure is neither coercive nor preclusive, the Unocal proportionality test requires the focus of enhanced judicial scrutiny to shift to the range of reasonableness."^[481] The reasonableness of a board's response is evaluated in the context of the specific threat identified—the "specific nature of the threat [] `sets the parameters for the range of permissible defensive tactics' at any given time."^[482]

Here, the record demonstrates that Airgas's board, composed of a majority of outside, independent directors, acting in good faith and with numerous outside advisors^[483] concluded that Air Products' offer clearly undervalues Airgas in a sale transaction. The board believes in good faith that the offer price is inadequate by no small margin. Thus, the board is responding to a legitimately articulated threat.

This conclusion is bolstered by the fact that the three Air Products Nominees on the Airgas board have now wholeheartedly joined in the board's determination—what is more, they believe it is their fiduciary duty to keep Airgas's defenses in place. And Air Products' own directors have testified that (1) they have no reason to believe that the Airgas directors have breached their fiduciary duties,^[484] (2) even though plenty of information has been made available to the stockholders, they "agree that Airgas management is in the best position to understand the intrinsic value of the company,"^[485] and (3) if the shoe were on the other foot, they would act in the same way as Airgas's directors have.^[486]

[123] In addition, Air Products made a tactical decision to proceed with its offer for Airgas in the manner in which it did. First, Air Products made a choice to launch a proxy contest in connection with its tender offer. It could have—at that point, in February 2010—attempted to call a special meeting to remove the entire board. The 67% vote requirement was a high hurdle that presented uncertainty, so it chose to proceed by launching a proxy contest in connection with its tender offer.

Second, Air Products chose to replace a minority of the Airgas board with three independent directors who promised to take a "fresh look." Air Products ran its nominees expressly premised on that independent slate. It could have put up three nominees premised on the slogan of "shareholder choice." It could have run a slate of nominees who would promise to remove the pill if elected.^[487] It could have gotten three directors elected who were resolved to fight back against the rest of the Airgas board.

Certainly what occurred here is not what Air Products expected to happen. Air Products ran its slate on the promise that its nominees would "consider without any bias [the Air Products] Offer," and that they would "be willing to be outspoken in the boardroom about their views on these issues."^[488] Air Products got what it wanted. Its three nominees got elected to the Airgas board and then questioned the directors about their assumptions. (They got answers.) They looked at the numbers themselves. (They were impressed.) They requested outside legal counsel. (They got it.) They requested a third outside financial advisor. (They got it.) And in the end, they joined in the board's view that Air Products' offer was inadequate. John Clancey, one of the Air Products Nominees, grabbed the flag and championed Airgas's defensive measures, telling the rest of the board, "We have to protect the pill."^[489] David DeNunzio, Airgas's new independent financial advisor from Credit Suisse who was brought in to take a "fresh look" at the numbers, concluded in his professional opinion that the fair value of Airgas is in the "mid to high seventies, and well into the mid eighties."^[490] In Robert Lumpkins' opinion (one of the Air Products Nominees), "the company on its own, its own business will be worth $78 or more in the not very distant future because of its own earnings and cash flow prospects ... as a standalone company."^[491]

[124] The Supreme Court has clearly held that "the `inadequate value' of an all cash for all shares offer is a `legally cognizable threat.'"^[492] Moreover, "[t]he fiduciary duty to manage a corporate enterprise includes the selection of a time frame for achievement of corporate goals. That duty may not be delegated to the stockholders."^[493] The Court continued, "Directors are not obligated to abandon a deliberately conceived corporate plan for a short-term shareholder profit unless there is clearly no basis to sustain the corporate strategy."^[494] Based on all of the foregoing factual findings, I cannot conclude that there is "clearly no basis" for the Airgas board's belief in the sustainability of its long-term plan.

On the contrary, the maintenance of the board's defensive measures must fall within a range of reasonableness here. The board is not "cramming down" a management-sponsored alternative—or any company-changing alternative.^[495] Instead, the board is simply maintaining the status quo, running the company for the long-term, and consistently showing improved financial results each passing quarter.^[496] The board's actions do not forever preclude Air Products, or any bidder, from acquiring Airgas or from getting around Airgas's defensive measures if the price is right. In the meantime, the board is preventing a change of control from occurring at an inadequate price. This course of action has been clearly recognized under Delaware law: "directors, when acting deliberately, in an informed way, and in the good faith pursuit of corporate interests, may follow a course designed to achieve long-term [125] value even at the cost of immediate value maximization."^[497]

Shareholder plaintiffs argue in their Post-Supplemental Hearing brief that Delaware law adequately protects any non-tendering shareholders in the event a majority of Airgas shareholders did tender into Air Products' offer because, as a result of McCausland and the Airgas board and management's ownership positions in Airgas, there is no way that Air Products would be able to effect a short-form merger under DGCL § 253 at the inadequate $70 price.^[498] They argue that when Air Products would then seek to effect a long-form merger on the back end—as it has stated is its intention—any deal would be subject to entire fairness and claims for appraisal rights.

But this protection may not be adequate for several reasons. First, despite Air Products' stated intention to consummate a merger "as soon as practicable" by acquiring any non-tendered shares "as quick as the law would allow,"^[499] there are no guarantees; there is a risk that no back end deal will take place. Second, and more importantly, on the back end, control will have already been conveyed to Air Products.^[500] The enormous value of synergies will not be factored into any appraisal.^[501] Additionally, much of the projected [126] value in Airgas's five year plan is based on the expected returns from substantial investments that Airgas has already made— e.g., substantial capital investments, the SAP implementation. There is no guarantee (in fact it is unlikely) a fair value appraisal today would account for that projected value—value which Airgas's newest outside financial advisor describes as "orders of magnitude greater than what's been assumed and which would give substantially higher values."^[502]

C. Pills, Policy and Professors (and Hypotheticals)

When the Supreme Court first upheld the use of a rights plan in Moran, it emphasized that "[t]he Board does not now have unfettered discretion in refusing to redeem the Rights."^[503] And in the most recent "pill case" decided just this past year, the Supreme Court reiterated its view that, "[a]s we held in Moran, the adoption of a Rights Plan is not absolute."^[504] The poison pill's limits, however, still remain to be seen.

The merits of poison pills, the application of the standards of review that should apply to their adoption and continued maintenance, the limitations (if any) that should be imposed on their use, and the "anti-takeover effect" of the combination of classified boards plus poison pills have all been exhaustively written about in legal academia.^[505] Two of the largest contributors [127] to the literature are Lucian Bebchuk (who famously takes the "shareholder choice" position that pills should be limited and that classified boards reduce firm value) on one side of the ring, and Marty Lipton (the founder of the poison pill, who continues to zealously defend its use) on the other.^[506]

The contours of the debate have morphed slightly over the years, but the fundamental questions have remained. Can a board "just say no"? If so, when? How should the enhanced judicial standard of review be applied? What are the pill's limits? And the ultimate question: Can a board "just say never"? In a 2002 article entitled Pills, Polls, and Professors Redux, Lipton wrote the following:

As the pill approaches its twentieth birthday, it is under attack from [various] groups of professors, each advocating a different form of shareholder poll, but each intended to eviscerate the protections afforded by the pill. ... Upon reflection, I think it fair to conclude that the [] schools of academic opponents of the pill are not really opposed to the idea that the staggered board of the target of a hostile takeover bid may use the pill to "just say no." Rather, their fundamental disagreement is with the theoretical possibility that the pill may enable a staggered board to "just say never." However, as ... almost every [situation] in which a takeover bid was combined with a proxy fight show, the incidence of a target's actually saying "never" is so rare as not to be a real-world problem. While [the various] professors' attempts to undermine the protections of the pill is argued with force and considerable logic, none of their arguments comes close to overcoming the cardinal rule of public policy—particularly applicable to corporate law and corporate finance—"If it ain't broke, don't fix it."^[507]

Well, in this case, the Airgas board has continued to say "no" even after one proxy fight. So what Lipton has called the "largely theoretical possibility of continued resistance after loss of a proxy fight" is now a real-world situation.^[508] Vice Chancellor Strine recently posed Professor Bebchuk et al.'s Effective Staggered Board ("ESB")^[509] hypothetical in Yucaipa:

[128] [T]here is a plausible argument that a rights plan could be considered preclusive, based on an examination of real world market considerations, when a bidder who makes an all shares, structurally non-coercive offer has: (1) won a proxy contest for a third of the seats of a classified board; (2) is not able to proceed with its tender offer for another year because the incumbent board majority will not redeem the rights as to the offer; and (3) is required to take all the various economic risks that would come with maintaining the bid for another year.^[510]

At that point, it is argued, it may be appropriate for a Court to order redemption of a poison pill. That hypothetical, however, is not exactly the case here for two main reasons. First, Air Products did not run a proxy slate running on a "let the shareholders decide" platform. Instead, they ran a slate committed to taking and independent look and deciding for themselves afresh whether to accept the bid. The Air Products Nominees apparently "changed teams" once elected to the Airgas board (I use that phrase loosely, recognizing that they joined the Airgas board on an "independent" slate with no particular mandate other than to see if a deal could be done). Once elected, they got inside and saw for themselves why the Airgas board and its advisors have so passionately and consistently argued that Air Products' offer is too low (the SAP implementation, the as-yet-unrealized benefits from recent significant capital expenditures, the timing in which Airgas historically has emerged from recessions, the intrinsic value of this company, etc.). The incumbents now share in the rest of the board's view that Air Products' offer is inadequate—this is not a case where the insurgents want to redeem the pill but they are unable to convince the majority. This situation is different from the one posited by Vice Chancellor Strine and the three professors in their article, and I need not and do not address that scenario.

Second, Airgas does not have a true "ESB" as articulated by the professors. As discussed earlier, Airgas's charter allows for 33% of the stockholders to call a special meeting and remove the board by a 67% vote of the outstanding shares.^[511] Thus, according to the professors, no court intervention would be necessary in this case.^[512] This factual distinction also further differentiates this case from the Yucaipa hypothetical.

CONCLUSION

Vice Chancellor Strine recently suggested that:

The passage of time has dulled many to the incredibly powerful and novel device that a so-called poison pill is. That device has no other purpose than to give the board issuing the rights the leverage to prevent transactions it does not favor by diluting the buying proponent's interests.^[513]

[129] There is no question that poison pills act as potent anti-takeover drugs with the potential to be abused. Counsel for plaintiffs (both Air Products and Shareholder Plaintiffs) make compelling policy arguments in favor of redeeming the pill in this case—to do otherwise, they say, would essentially make all companies with staggered boards and poison pills "takeover proof."^[514] The argument is an excellent sound bite, but it is ultimately not the holding of this fact-specific case, although it does bring us one step closer to that result.

As this case demonstrates, in order to have any effectiveness, pills do not—and can not—have a set expiration date. To be clear, though, this case does not endorse "just say never." What it does endorse is Delaware's long-understood respect for reasonably exercised managerial discretion, so long as boards are found to be acting in good faith and in accordance with their fiduciary duties (after rigorous judicial fact-finding and enhanced scrutiny of their defensive actions). The Airgas board serves as a quintessential example.

Directors of a corporation still owe fiduciary duties to all stockholders—this undoubtedly includes short-term as well as long-term holders. At the same time, a board cannot be forced into Revlon mode any time a hostile bidder makes a tender offer that is at a premium to market value. The mechanisms in place to get around the poison pill—even a poison pill in combination with a staggered board, which no doubt makes the process prohibitively more difficult—have been in place since 1985, when the Delaware Supreme Court first decided to uphold the pill as a legal defense to an unwanted bid. That is the current state of Delaware law until the Supreme Court changes it.

For the foregoing reasons, Air Products' and the Shareholder Plaintiffs' requests for relief are denied, and all claims asserted against defendants are dismissed with prejudice. The parties shall bear their own costs.

An Order has been entered that implements the conclusions reached in this Opinion.

[1] TW Servs., Inc. v. SWT Acquisition Corp., 1989 WL 20290, at *8 (Del.Ch. Mar. 2, 1989).

[2] 490 A.2d 1059 (Del.Ch.1985).

[3] See, e.g., Yucaipa Am. Alliance Fund II, L.P. v. Riggio, 1 A.3d 310, 351 n. 229 (Del.Ch. 2010); eBay Domestic Holdings, Inc. v. Newmark, 2010 WL 3516473 (Del.Ch. Sept. 9, 2010); Versata Enters., Inc. v. Selectica, Inc., 5 A.3d 586 (Del.2010).

[4] Defendants have also asked the Court to order Air Products to pay the witness fees and expenses incurred by defendants in connection with the expert report and testimony of David E. Gordon in defense against Count I of Air Products' Amended Complaint, alleging breach of fiduciary duties in connection with Peter McCausland's January 5, 2010 exercise of Airgas stock options. That request is denied. The parties shall bear all of their own fees and expenses.

[5] See Section I.F. (The $60 Tender Offer) for details about the terms of the offer.

[6] JX 659 (Airgas Schedule 14D-9 (Dec. 22, 2010)) at Ex. (a)(111).

[7] Dec. 23, 2010 Letter Order.

[8] See JX 304; JX 433; JX 645; JX 1086.

[9] Paramount Commc'ns, Inc. v. Time, Inc., 571 A.2d 1140, 1154 (Del. 1990); see City Capital Assocs. Ltd. P'ship v. Interco, Inc., 551 A.2d 787 (Del.Ch. 1988); Grand Metro. Pub. Ltd. Co. v. Pillsbury Co., 558 A.2d 1049 (Del. Ch.1988).

[10] See Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1384 (Del. 1995) ("This Court has held that the `inadequate value' of an all cash for all shares offer is a `legally cognizable threat.'") (quoting Paramount Commc'ns, Inc. v. Time, Inc., 571 A.2d 1140, 1153 (Del. 1990)).

[11] Paramount, 571 A.2d at 1154.

[12] Id.

[13] SEH Tr. 420 (Clancey).

[14] SEH Tr. 104 (Davis).

[15] Id.

[16] References to the October trial transcript are cited as "Trial Tr. [####]." References to the January supplemental evidentiary hearing transcript are cited as "SEH Tr. [###]." For both the trial transcript and the supplementary evidentiary hearing transcript cites, the name of the particular witness speaking is indicated in parentheses. Citations to trial exhibits from both the October trial and the January hearing are referred to as "JX [###]."

[17] In addition to the listed players, the parties each presented expert witnesses who testified about the valuation of Airgas—from defendants' side, to show that management's assumptions in reaching its valuation conclusions about the company were reasonable; from plaintiffs' side, to rebut those assumptions and numbers. The experts were: Robert Reilly (Shareholder Plaintiffs' valuation expert) (see JX 642 (Expert Report of Robert Reilly (Aug. 20, 2010))); Professor Daniel Fischel (Air Products' valuation expert) (see JX 639 (Expert Report of Daniel Fischel (Aug. 20, 2010))); 639A (updated exhibits); and Professor Glenn Hubbard (Airgas's valuation expert) (see JX 640 (Expert Report of Glenn Hubbard (Sept. 3, 2010))). All three experts were credible witnesses on the limited topics that they were asked to opine on, who ultimately reached different conclusions. Reilly testified that the McCausland Analysis and inadequacy opinions from the financial advisors were not sufficient to provide a basis for Airgas to find Air Products' offers "grossly inadequate" and not worthy of discussion. Fischel and Hubbard both testified as to the macroeconomic assumptions underlying Airgas's five-year plan. Finding Airgas's assumptions overly optimistic, Fischel opined that the inadequacy opinions of Airgas's financial advisors are not supported by the economic evidence. Hubbard, on the other hand, testified that Airgas's macroeconomic assumptions were reasonable, and convincingly and persuasively explained why. Ultimately, I found Professor Hubbard to be the most persuasive expert witness on valuation, but this decision does not turn so much on who won the battle of the experts as it does on the special circumstances surrounding the conduct of the Air Products Nominees to the Airgas board.

[18] Two additional experts played minor roles at the October trial. Defendants presented "proxy expert" Peter Harkins (see JX 638 (Expert Report of Peter Harkins (Aug. 20, 2010))); JX 638A (Supplemental Expert Report of Peter Harkins (Sept. 26, 2010)). Harkins also testified at the January hearing, and his testimony is discussed in greater detail later in this Opinion. Finally, defendants also presented "tax expert" David Gordon, to provide his expert opinion on a discrete issue relating to McCausland's exercise of stock options, but his testimony has no bearing on the core issue before me. See infra note 97.

[19] Joint Pre-Trial Stip. ¶ 1; JX 86 (Air Products Form 10-K (Nov. 25, 2009)).

[20] JX 86 at 3.

[21] JX 583 (A Brief History of Air Products).

[22] JX 583 at 1; JX 86 at 7, 9; see also Trial Tr. 9-10 (Huck).

[23] Joint Pre-Trial Stip. ¶ 12.

[24] JX 334 (Airgas Form 10-K (May 27, 2010)) at 4.

[25] See Trial Tr. 642-45 (McCausland).

[26] See Trial Tr. 862-65 (Molinini).

[27] Id.

[28] Trial Tr. 864 (Molinini) ("[Thirty-five] percent of our business, which we call hardgoods, [includes] all the products that are not gases but that customers use when they consume the gases that they need to regulate pressure, they need to conduct flow, they need to protect themselves from the cryogenic temperatures, all of those others products."); JX 248 (Airgas Presentation (Feb. 22, 2010)) at 17.

[29] See JX 3 (Airgas Amended and Restated Certificate of Incorporation) at Art. V, § 1; JX 296 (Airgas Amended and Restated Bylaws (amended through April 7, 2010)) at Art. III, § 1.

[30] JX 449 (Airgas Schedule 14A (July 23, 2010)) at 13-14.

[31] Id.

[32] The parties stipulated to dismiss Brown and Ill from this action as they lost their seats in the September 15, 2010 annual meeting and thus no longer serve as members of Airgas's board. See Order and Stipulation of Dismissal Without Prejudice (granted Jan. 6, 2011).

[33] See JX 565A (certified results of inspector of elections).

[34] JX 565B (Airgas press release (Sept. 23, 2010)); Trial Tr. 505-06 (Thomas).

[35] Jan. 29, 2010. As of today, Airgas's 52-week low is $59.26.

[36] Nov. 2, 2010.

[37] Closing Argument Tr. 169 (Wolinsky). See SEH Tr. 65 (Clancey) ("Q. [At the December 21, 2010 Airgas board meeting,] did you reach any conclusions as to where you think this company's stock will be trading in a year? A. I think the company's stock, when and if this is behind us, will be trading in the 70s."); SEH Tr. 206 (McCausland) (testifying that Airgas stock could easily trade in the range of $72-$76 sometime in the next 12 months, "barring some major upset in the economy or the stock market"). Independent analysts' reports are in line with those numbers as well.

[38] SEH Tr. 393-94 (DeNunzio).

[39] JX 11 (Airgas Form 8-K (May 10, 2007) (Shareholder Rights Agreement)).

[40] See 8 Del. C. § 203.

[41] JX 3 (Airgas Amended and Restated Certificate of Incorporation) at Art. VI, §§ 1-3.

[42] Trial Tr. 613-14 (McCausland).

[43] Trial Tr. 656 (McCausland).

[44] Trial Tr. 729-30 (McLaughlin).

[45] Trial Tr. 656 (McCausland). At the January supplemental hearing, McCausland testified that Airgas now has "a good shot of making that 2007 five-year plan despite the fact that the worst recession since the Great Depression landed right in the middle of that period.") SEH 303 (McCausland).

[46] Trial Tr. 731 (McLaughlin).

[47] Trial Tr. 746 (McLaughlin); Trial Tr. 788 (McLaughlin). Shareholder Plaintiffs argue that the 2009 plan represented an "optimistic" plan including "aggressive assumptions," while Air Products calls the assumptions in the 2009 plan "highly optimistic" and "unreasonable"—particularly the macroeconomic assumptions and failure to consider the possibility of a double-dip recession. While the parties may call the assumptions different names (i.e., "strong," "mild," "aggressive," "slow"), everyone agrees that reasonable minds can differ as to what may lie ahead, and no one disputes that the company's ability to meet its projections depends in large part on growth in the U.S. economy as a whole. What is clear, however, is that no one at Airgas tweaked the plan at the direction of McCausland or changed any of their numbers in light of Air Products' offer. Trial Tr. 767 (McLaughlin); Trial Tr. 697 (McCausland). In addition, Airgas relied on its financial advisors at Bank of America Merrill Lynch and Goldman Sachs to review the plan, and the bankers were satisfied with the assumptions in the model. Trial Tr. 960 (Rensky).

[48] Trial Tr. 672 (McCausland); see JX 64 (Nov. 2009 Five Year Strategic Financial Plan).

[49] Trial Tr. 110 (McGlade).

[50] Trial Tr. 47 (Huck).

[51] Trial Tr. 111-12 (McGlade).

[52] JX 27 (Air Products Minutes of Meeting of Board of Directors (Sept. 17, 2009)) at 9.

[53] Trial Tr. 47 (Huck); see also Trial Tr. 10 (Huck) (explaining why Air Products had sold its packaged gas business to Airgas in 2002).

[54] Trial Tr. 659 (McCausland). The meeting lasted in the range of half an hour to fortyfive minutes. McCausland Dep. 39.

[55] Trial Tr. 115 (McGlade). In other words, Air Products would acquire all outstanding Airgas shares for $60 per share in an all-stock transaction.

[56] JX 37 (Typewritten notes of Les Graff re conversation with Peter McCausland).

[57] Trial Tr. 660-61 (McCausland); JX 37 at 1. Graff's notes also indicate that, according to McCausland, McGlade promised twice during that meeting that Air Products would "never go hostile." See Trial Tr. 663-64 (McCausland) ("I said, `John, you have to assure me that you will never go hostile or this conversation's going to be very short.' And he said, `Peter, we have no intention of going hostile.'"). McGlade claims otherwise. Trial Tr. 119 (McGlade) ("I never made a promise we wouldn't go hostile."); Trial Tr. 140-41 (McGlade) ("I did not promise to not go hostile. I told him at the time that I was here to discuss a collaborative transaction."). In any event, McGlade said that he does not specifically recall what he said and concedes that his response to McCausland might have been "subject to interpretation." Trial Tr. 141 (McGlade). Accordingly, I credit McCausland's testimony on this particular factual point, although I also believe McGlade's testimony that at that point in time he did not intend to go hostile but rather met with McCausland in the hopes of reaching a friendly deal, which turned out to be a fruitless exercise.

[58] JX 37 at 1.

[59] Trial Tr. 665 (McCausland).

[60] Trial Tr. 665-66 (McCausland).

[61] Id. Before the November retreat, Brown suggested that perhaps the independent directors should meet to discuss the offer outside of McCausland's presence (Brown Dep. 52-53), but ultimately the board agreed that McCausland did not have a conflict of interest, that because of his substantial stockholdings his interests were aligned with the Airgas shareholders, and that an executive session of the board to consider the offer was not necessary. Trial Tr. 501-02 (Thomas). Nevertheless, the independent directors did (later, in April) meet to discuss the offer outside of McCausland's presence, and came to the same conclusion as they did in his presence—that the offer was "grossly inadequate." Trial Tr. 503 (Thomas); Brown Dep. 126-27.

[62] Trial Tr. 666-67 (McCausland). McCausland then reached out to Dan Neff at Wachtell, Lipton, Rosen & Katz, and Airgas's longtime financial advisors Goldman Sachs (Michael Carr) and Bank of America Merrill Lynch (Filip Rensky).

[63] JX 73 (Minutes of the Regular Meeting of the Airgas Board (Nov. 5-7, 2009)); Trial Tr. 484 (Thomas); Trial Tr. 586 (McCausland).

[64] Trial Tr. 484-85 (Thomas); Trial Tr. 672 (McCausland). Although the five-year plan was not "presented" to the board until Day 2 of the retreat—nineteen pages into the minutes of the three-day meeting, and after the board had already unanimously decided to reject Air Products' offer (see JX 73 at 1)—I credit the testimony of Thomas and McCausland that the board had read and was familiar with the five-year plan before the retreat and thus were able to rely on it in considering the $60 offer. See JX 73 at 19; see also Trial Tr. 484 (Thomas); Trial Tr. 586-87 (McCausland); Trial Tr. 672 (McCausland) (testifying that when the board was discussing Air Products' offer at the November retreat, "the board was very familiar with [the five-year] plan. [The directors] come to our strategic retreats ready. And they knew it well.").

[65] JX 75 ("McCausland Analysis" Handout (Nov. 5, 2009)). The McCausland Analysis applies a sale of control multiple to forward EBITDA (earnings before interest, taxes, depreciation and amortization) forecasts from the 2009 five-year plan, and then various discount rates are applied to the results to generate present value estimates.

[66] Trial Tr. 492 (Thomas).

[67] Id.

[68] JX 73 at 1.

[69] Trial Tr. 308-09 (Ill) ("[T]here's no sense in sitting down [to discuss] what we conceived to be an inadequate price and establish a floor in regards to any negotiating. And we've consistently said that we would in fact sit down and negotiate, if there was an adequate price put on the table."); see also Thomas Dep. 21; Trial Tr. 503 (Thomas) ("Q. How about the conclusion not to have discussions, open negotiations, with Air Products at $60, $63.50, $65.50? A. We felt we should not have discussions at this point until they are prepared to put a reasonable offer on the table, with the full understanding that they would sit down and negotiate fair value from that.").

[70] McCausland Dep. 121.

[71] Trial Tr. 121 (McGlade); JX 84 (Letter from McGlade to McCausland (Nov. 20, 2009)).

[72] JX 84 at 1-2 ("[W]e welcome the opportunity to identify incremental value above and beyond what we have offered and are prepared to engage with you promptly to better understand the sources of that value and how best to share the value between our respective shareholders. To that end, we and our advisors request a meeting with you and your advisors as soon as possible, both to explore such additional sources of value and to move expeditiously towards consummating a transaction.").

[73] Id. at 2.

[74] JX 87 (Draft 11/25 letter from McCausland to McGlade (Nov. 25, 2009)). The letter was never intended to be sent to McGlade and was immediately recognized as a joke by most, although one director was "worried that [McCausland had] said what [he] really thought." JX 91 (email chain between Paula Sneed and Peter McCausland (Nov. 25-26, 2009)).

[75] JX 89 (Letter from McCausland to McGlade (Nov. 25, 2009)).

[76] JX 100 (Minutes of the Special Telephonic Meeting of the Airgas Board (Dec. 7, 2009)).

[77] Id.; see JX 102 (Proposed Talking Points (Dec. 7, 2009)); JX 104 (Discussion Materials (Dec. 7, 2009)).

[78] JX 100 at 1.

[79] Id. at 2.

[80] Id.

[81] JX 106 (Letter from McCausland to McGlade (Dec. 8, 2009)) at 2. McCausland also wrote that Airgas had "no interest in pursuing Air Products' unsolicited proposal" because the board unanimously believed that Air Products was "grossly undervaluing Airgas and offering a currency that is not attractive." Id. at 1.

[82] JX 111 (Letter from McGlade to McCausland (Dec. 17, 2009)) at 1; Trial Tr. 124 (McGlade).

[83] JX 111 at 1.

[84] Id.

[85] JX 111 at 5.

[86] JX 116 (Minutes of Special Telephonic Meeting of the Airgas Board (Dec. 21, 2009)).

[87] Id.; Trial Tr. 597 (McCausland).

[88] JX 116.

[89] JX 120 (Graff handwritten notes from Airgas Board of Directors Meeting (Dec. 21, 2009)).

[90] See JX 116 (Minutes of Special Telephonic Meeting of the Airgas Board (Dec. 21, 2009)).

[91] JX 137 (Minutes of the Continued Special Telephonic Meeting of the Airgas Board (Jan. 4, 2010)).

[92] Id.; Trial Tr. 598-99 (McCausland).

[93] Id.; JX 136 (Graff notes re Presentation to Airgas Board of Directors (Jan. 4, 2010)) at 1-2.

[94] JX 137 at 2.

[95] JX 141 (Letter from McCausland to McGlade (Jan. 4, 2010)); see also Trial Tr. 126 (McGlade).

[96] Id.

[97] On February 11, 2010, Air Products amended its complaint to add an allegation that McCausland improperly exercised these options while in possession of nonpublic information, and that the rest of the Airgas board breached its fiduciary duties by failing to stop him from exercising the options. Verified Amended Compl. ¶¶ 43-44, 61-62. Although this issue was addressed in the October trial and in post-trial briefing, those allegations were not set forth in a separate claim in Air Products' complaint, and Air Products has not sought relief specifically focused on those allegations. Defendants have argued that the allegation is "frivolous" under Court of Chancery Rule 11 and requested an order that Air Products pay the fees of Airgas's expert witness Gordon. Rather than take additional space later in this Opinion, I will dispose of this issue right here. Defendants' request is denied. First, defendants have not satisfied the procedural requirements of Rule 11(c)(1)(A). Second Air Products had a good faith basis for its allegation—McCausland did, in fact, exercise his stock options at a time when he knew Air Products had made an offer for Airgas, and he did receive a tax benefit based on the timing of his exercise. It is also true that Airgas may have received a larger tax deduction had he waited to exercise them on schedule. Trial Tr. 568-69 (McCausland). As it turns out, his exercise was entirely legal, permissible under Airgas's policy, and consistent with custom and practice of other companies. Trial Tr. 936-37 (Gordon). In short, Air Products made a good faith allegation and Airgas defended against it. There is nothing "frivolous" about Air Products' conduct that would rise to the level of sanctions under Rule 11. See Katzman v. Comprehensive Care Corp., C.A. No. 5982-VCL (Dec. 28, 2010) (Transcript) at 13, 16 ("I'm going to give you all some general principles [with respect to motions for sanctions]. I think lawyers should think twice, three times, four times, perhaps more before seeking Rule 11 sanctions or moving for fees under the bad faith exception . . . These types of motions are inflammatory. They involve allegations of intentional misconduct by counsel and, as a result, what they usually result in almost inevitably is an escalation of hostilities . . . So what's the bottom line here? . . . For most types of conduct that really merits Rule 11 or fee-shifting, you shouldn't need to point it out. It should be obvious from the briefing that someone's out of line. [Y]ou don't need to make the Rule 11 or bad faith motion.").

[98] JX 249 (Airgas Schedule 14D-9 (Feb. 22, 2010)) at 10; see also Trial Tr. 540 (McCausland) (expressing view that Airgas board at that time was not looking to sell the company); JX 215 (Letter from McCausland to McGlade (Feb. 9, 2010)) at 2 ("We agree that the `timing is excellent'—for Air Products—but it is a terrible time for Airgas stockholders to sell their company.").

[99] JX 150 (Letter from McGlade to Air Products' board (Jan. 20, 2010)) at 1. Defendants emphasize that Air Products timed its offer to "take advantage of the situation" before Airgas's stock recovered from the recession, also pointing to Huck's testimony that Air Products was "attempting to acquire Airgas for the lowest possible price." Trial Tr. 46 (Huck); see also SEH Tr. 76-77 (Davis) (testifying that he "believed that the price of Airgas stock was suppressed at the time that Air Products made its initial offer"). But this is exactly the type of thinking expected in a highly strategic acquisition attempt—of course Air Products wanted to acquire Airgas when its stock price was depressed and for the lowest possible price it had to pay. Air Products' directors were doing their job to get the best deal for their shareholders. At the same time, the Airgas board was acting well within its fiduciary duties to the Airgas stockholders, defending against Air Products' advances while making its views about the inadequacy of the offers known to the Airgas stockholders. Indeed, McCausland testified that Airgas itself has made "opportunistic" purchases and he believes there is nothing wrong with such an acquisition strategy. Trial Tr. 541-42 (McCausland); JX 14A (Seeking Alpha Interview with Airgas CEO Peter McCausland) at 2.

[100] JX 177 (Letter from McGlade to McCausland (Feb. 4, 2010)) at 1.

[101] Id. at 2.

[102] JX 204 (Minutes of the Regular Meeting of the Airgas Board (Feb. 8-9, 2010)). The meeting lasted almost five hours on February 8, and an additional three hours on February 9. See id. at 1, 5, 12.

[103] Id. at 2.

[104] JX 204 at 2-3.

[105] Id. at 4, 11.

[106] Id. at 11.

[107] JX 215 (Letter from McCausland to McGlade (Feb. 9, 2010)) ("[I]t is the unanimous view of the Airgas Board of Directors that your unsolicited proposal very significantly undervalues Airgas and its future prospects. Accordingly, the Airgas Board unanimously rejects Air Products' $60 per share proposal.").

[108] JX 222 (Airgas Schedule TO: Offer to Purchase by Air Products & Chemicals, Inc. (Feb. 11, 2010)).

[109] Specifically, the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act as applicable to the tender offer must have expired or been terminated. Id. at 1. The regulatory hurdles have now been cleared. The FTC approved the potential acquisition, subject to certain divestitures. See Press Release, FTC Approves Final Order Settling Charges that Air Products' Potential Acquisition of Rival Airgas Would be Anticompetitive (Oct. 22, 2010), available at http://www.ftc.gov/opa/2010/10/airproducts.shtm; see also In the Matter of Air Products and Chemicals, Inc., Docket No. C-4299, Analysis of Proposed Agreement Containing Consent Orders to Aid Public Comment (Sept. 9, 2010), available at www.ftc.gov/os/caselist/1010093/100909airproductsanal.pdf; Decision and Order [Redacted Public Version], at 11 (Sept. 9, 2010), available at http://www.ftc.gov/os/caselist/1010093/100909airproductsdo.pdf; Decision and Order [Redacted Public Version], at 11 (Oct. 22, 2010), available at http://www.ftc.gov/os/caselist/1010093/101022airproductsdo.pdf. See also SEH Tr. 305 (McCausland) ("Air Products has gotten FTC approval."). In addition, Air Products has identified buyers for those assets subject to divestiture. Trial Tr. 45 (Huck).

[110] JX 222 (Airgas Schedule TO: Offer to Purchase by Air Products & Chemicals, Inc. (Feb. 11, 2010)) at 1-2.

[111] Id. at 10-11.

[112] Id.

[113] Id. at 11; see also JX 186 (Air Products Offers to Acquire Airgas for $60 Per Share in Cash Conference Call Transcript (Feb. 5, 2010)) at 6.

[114] JX 245 (Minutes of the Special Telephonic Meeting of the Airgas Board (Feb. 20, 2010)).

[115] See JX 247 (Bankers' Presentation to Airgas Board at Feb. 20, 2010 Meeting).

[116] JX 245 at 3; see also Trial Tr. 601-02 (McCausland). At trial, one of Airgas's bankers explained the meaning of the financial advisors' "inadequacy opinion": "In this case, generally, inadequacy would mean that the offer does not fairly compensate the shareholders for the intrinsic value of the company. And in this case, [specifically,] we also relied on an understanding that this bidder, as well as potentially other bidders, could pay more for the company than that price." Trial Tr. 963-64 (Rensky).

[117] JX 249 (Airgas Schedule 14D-9 (Feb. 22, 2010)) at 18.

[118] Id. at 20.

[119] Id. at 20-21.

[120] Id. at 21. As Air Products has obtained the necessary regulatory approvals, these concerns are no longer "significant."

[121] Id. at Exhibit (a)(6). The presentation detailed (among other things) Airgas's growth strategy and explained why Airgas is "well-positioned for the U.S. economic recovery." Id. at slide 37.

[122] See JX 314 (Airgas Schedule 14-A: Notice of Intent by Air Products to Nominate Individuals for Election as Directors and Propose Stockholder Business at the 2010 Annual Meeting of Airgas Stockholders (May 13, 2010)); see also JX 454 (Airgas Schedule 14A: Air Products' Definitive Proxy Statement for 2010 Annual Meeting of Airgas Stockholders (July 29, 2010)).

[123] Mr. Clancey (age 65) has more than twenty-two years of experience as both CEO and Chairman of complex international businesses, and sixteen years of experience serving on the boards of large public companies across a range of industries. He is currently Chairman Emeritus of Maersk Inc. and Maersk Line Limited, a division of the A.P. Moller—Maersk Group, one of the world's largest shipping companies. Mr. Clancey previously served as the Chairman of Maersk Inc., where he managed the company's ocean transportation, truck and rail, logistics and warehousing and distribution businesses, and as Chief Executive Officer and President of Sea-Land Service, Inc. Mr. Clancey is currently a Principal and founder of Hospitality Logistics, International, a furniture, fixtures and equipment logistics services provider serving customers in the hotel industry. He has served as a member of the board of directors of UST Inc., Foster Wheeler AG, and AT & T Capital. Mr. Clancey, a former Captain in the United States Marine Corps, received a B.A. in Economics and Political Science from Emporia State College. Id.

[124] Mr. Lumpkins (age 66) has more than forty years of significant operational, management, financial and governance experience from a variety of positions in major international corporations, covering both developed and emerging countries, and service on public company boards in a wide range of industries. He is currently the Chairman of the board of directors of The Mosaic Company, a producer and marketer of crop and animal nutrition products and services, a position he has held since the creation of the company in October 2004. He previously served as Vice Chairman of Cargill Inc., a commodity trading and processing company, until his retirement in 2006, and as Cargill's Chief Financial Officer from 1989 until 2005. Mr. Lumpkins currently serves as a director of Ecolab, Inc., a cleaning and sanitation products and services provider; a director of Black River Asset Management LLC, a privately-owned fixed income-oriented asset management company; a Senior Advisor to Varde Partners, Inc., an asset management company specializing in alternative investments; and a member of the Advisory Board of Metalmark Capital, a private equity investment firm. He also serves as a Trustee of Howard University. He received an M.B.A. from the Stanford Graduate School of Business and a B.S. in Mathematics from the University of Notre Dame. Id.

[125] Mr. Miller (age 58) has extensive executive, financial and governance experience as a founder, significant shareholder, executive officer and director of both start-up companies and large public companies. He is the former Chairman and Chief Executive Officer of Crown Castle International Corp., a wireless communications company he founded in 1995 that currently has an equity market capitalization in excess of $10 billion. He currently serves as the President of 4M Investments, LLC, an international private investment company. He is also the founder, Chairman and majority shareholder of M7 Aerospace LP, a privately held aerospace service, manufacturing and technology company; founder, Chairman and majority shareholder of Intercomp Technologies, LLC, a privately held business process outsourcing company; and founder, Chairman and majority shareholder of Visual Intelligence, a privately held imaging technologies company. Mr. Miller previously served as a member of the board of directors of Affiliated Computer Services, Inc., from November 2008 until its acquisition by Xerox Corporation in February 2010. He received a J.D. from Louisiana State University and a B.B.A. from the University of Texas. Id.

[126] JX 454 (Airgas Schedule 14A: Air Products' Definitive Proxy Statement for 2010 Annual Meeting of Airgas Stockholders (July 29, 2010)) at 3.

[127] Id. at 3, 41; see also id. at A-1 ("[E]ach of the Air Products Nominees would be considered an independent director of Airgas.").

[128] Id. at 3, 41.

[129] Id.

[130] Id. at 8.

[131] Id.

[132] JX 638A (Supplemental Report of Peter C. Harkins (Sept. 26, 2010)) at 4. There is some evidence suggesting that the parties may have even added fuel to the media (bon)fire. In an email from McGlade whose subject line read "RE: Project Flashback Media Coverage," discussing some of the media coverage following Air Products' February 4, 2010 public announcement, McGlade wrote, "In the what it is worth category, our guys (that is our PR firm SARD) believe the Cramer story was planted. Of course our guys did the Faber story. So much for independent journalism!" See JX 192.

[133] Airgas made well over 75 SEC filings regarding Air Products' offer, including JX 249, JX 269, JX 276, JX 279, JX 282, JX 286, JX 290, JX 299, JX 305, JX 306, JX 317, JX 321, JX 332, JX 339, JX 353, JX 358, JX 363, JX 365, JX 373, JX 387, JX 388, JX 429, JX 435, JX 450, JX 452, JX 458, JX 459, JX 463, JX 468, JX 470, JX 474, JX 478, JX 481, JX 484, JX 486, JX 490, JX 491, JX 496, JX 500, JX 506, JX 512, JX 515, JX 522, JX 523, JX 540, JX 541, JX 545, JX 555 (Airgas's 14D-9 filings and amendments). Airgas also filed a 69-page proxy statement (JX 449), issued several comprehensive investor presentations (including JX 249, JX 480, JX 511, and JX 516), and to date Airgas has issued four earnings releases (JX 304, JX 433, JX 645, and JX 1086) since Air Products went public with its offer. Air Products also has made numerous SEC filings, including JX 275, JX 280, JX 291, JX 293, JX 298, JX 311, JX 315, JX 323, JX 326, JX 337, JX 342, JX 348, JX 349, JX 351, JX 356, JX 359, JX 362, JX 381, JX 389, JX 436, JX 447, JX 455, JX 464, JX 469, JX 475, JX 483, JX 488, JX 492, JX 497, JX 513, JX 525, JX 542, JX 546, JX 556 (Air Products Schedule TO filings and amendments).

[134] JX 294 (Minutes of the Regular Meeting of the Airgas Board (Apr. 7-8, 2010)) at 4. An executive session of non-management directors was held at the end of this board meeting. Id. In the executive session, the outside directors discussed the "Air Products situation" and unanimously reaffirmed their position that Airgas should not engage in discussions with Air Products at that time. Id. at 5. The next regularly-scheduled Airgas board meeting was held on May 24 and May 25, 2010. See JX 331 (Minutes of the Regular Meeting of the Airgas Board (May 24-25, 2010)). The board again discussed Air Products' tender offer and proxy contest. Id. at 4-5. After hearing reports from McLaughlin and Molinini on Airgas's recent financial performance and upcoming fiscal year plans, id. at 2-4, and based on economic and industry updates from the financial advisors (Rensky and Carr), the board once again was in "unanimous agreement that neither the directors nor management should meet with Air Products in response to its $60 per share cash tender offer." Id. at 5.

[135] Id.; JX 296 (Airgas Amended and Restated Bylaws (amended through April 7, 2010)) at Art. II.

[136] As we now know, based on the Delaware Supreme Court's decision in the related bylaw case, the Airgas board's future discretion to fix an annual meeting date is not unfettered; it must pick a date that is "approximately" one year (365 days) after its last annual meeting. See Airgas, Inc. v. Air Prods. & Chems., Inc., 8 A.3d 1182 (Del.2010).

[137] Trial Tr. 526-27 (Thomas).

[138] See JX 449 (Airgas Schedule 14A (July 23, 2010)) at 1.

[139] JX 381 (Airgas Schedule TO: Amendment 18 (July 8, 2010)); Trial Tr. 63 (Huck).

[140] JX 381.

[141] JX 392 (Letter from McGlade to Airgas Board of Directors (July 9, 2010)).

[142] JX 417 (Minutes of the Special Telephonic Meeting of the Airgas Board (July 15, 2010)).

[143] Id. at 2.

[144] Id. at 4-6; JX 414 (Goldman Sachs and Bank of America Merrill Lynch presentation to the Airgas board regarding the $63.50 offer).

[145] JX 425 (Minutes of the Special Telephonic Meeting of the Airgas Board (July 20, 2010)) at 3.

[146] JX 438 (Letter from McCausland to McGlade (July 21, 2010)).

[147] JX 429 (Airgas Schedule 14D-9 (July 21, 2010)) at 7. See id. at 9 ("In the Airgas Board's judgment, the [$63.50] Offer, like Air Products' previous offers, is grossly inadequate and an extremely opportunistic attempt to cut off the Airgas stockholders' ability to benefit as the domestic economy continues its recovery."); JX 434 (Airgas Schedule 14A (July 21, 2010)) (same). July 21 was a big day for Airgas public filings—also on this day, Airgas announced its first quarter earnings and raised its earnings guidance for fiscal years 2011-2012. See JX 433 (Airgas Press Release (July 21, 2010)).

[148] JX 429 at 9-18.

[149] Id. at Annex D (Bank of America Merrill Lynch), Annex E (Goldman Sachs).

[150] Airgas's SAP implementation deserves some elaboration. Essentially, the implementation of SAP software is a company-wide process that can take several years to complete. The benefits can be enormous, from managing costs to improving communication. As Thomas explained, "It gives you power to manage your costs, particularly your inventory costs, your purchasing costs. It gives you great leverage as far as pricing is concerned." Trial Tr. 523 (Thomas). Notably, the November 2009 five-year plan included the costs but not the benefits of SAP. Trial Tr. 872 (Molinini). On August 31, Airgas announced anticipated benefits of its new SAP implementation, and released a detailed press release disclosing the perceived future benefits associated with the SAP implementation. JX 499 (Airgas Press Release re: "Airgas Provides Update on Value of Highly Customized SAP Implementation" (Aug. 31, 2010)).

[151] JX 435 (Airgas Schedule 14D-9: Amendment 22 (Airgas Schedule 14A: Presentation to Airgas Stockholders) (July 21, 2010)). In August, the Airgas board released an updated sixty-two page version of this presentation regarding its "perspective on valuation" and reasons for opposing Air Products' offer, reiterating once again Airgas's "strong future growth prospects [in the] recovering economy." JX 480 (Airgas Presentation: "It's All About Value (Updated)" (August 18, 2010)).

[152] JX 449 (Airgas Schedule 14A: Definitive Proxy Statement (July 23, 2010)) at 65.

[153] JX 454 (Airgas Schedule 14A: Air Products' Definitive Proxy Statement for 2010 Annual Meeting of Airgas Stockholders (July 29, 2010)).

[154] JX 454 (Airgas Schedule 14A: Air Products' Definitive Proxy Statement for 2010 Annual Meeting of Airgas Stockholders (July 29, 2010)) at 6; see also Airgas, Inc. v. Air Prods. & Chems., Inc., 2010 WL 3960599, at *2 (Del. Ch. Oct. 8, 2010).

[155] See, e.g., JX 459 (Airgas Schedule 14D-9: Airgas Press Release (Aug. 4, 2010)); JX 486 (Airgas Schedule 14D-9: Airgas Press Release (Aug. 23, 2010)); JX 449 (Airgas Schedule 14A: Definitive Proxy Statement (July 23, 2010)) at 65.

[156] JX 496 (Airgas Schedule 14D-9 (Aug. 30, 2010)). In that same press release, Airgas told its stockholders that "the short time fuse of a January deadline" would "impede the Airgas Board's ability to obtain an appropriate price for our stockholders from Air Products or to explore other strategies." Id. at 2. But the Airgas board has known about Air Products interest since at least October 2009. Even after Air Products went public with its offer in February 2010, the Airgas board has had a year from that point to "explore other strategies."

[157] JX 525 (Airgas Schedule TO: Amendment 31 (Airgas Schedule 14A: Air Products Increases All-Cash Offer for Airgas to $65.50 per Share; Airgas Schedule 14A: Air Products Offer for Airgas Presentation) (Sept. 8, 2010)); Trial Tr. 63 (Huck).

[158] JX 517 (Air Products Press Release (Sept. 6, 2010)).

[159] Id. ("If Airgas shareholders do not elect these three nominees and approve all of our proposals, we will conclude that shareholders do not want a sale of Airgas at this time—and we will therefore terminate our offer and move on to the many other attractive growth opportunities available to Air Products around the world.").

[160] JX 530A (Minutes of the Special Telephonic Meeting of the Airgas Board (Sept. 7, 2010)).

[161] Id. at 2.

[162] Id. at 3.

[163] JX 539 (Airgas Schedule 14A: Airgas Press Release (Sept. 8, 2010)).

[164] JX 540 (Airgas Schedule 14D-9: Amendment 44 (Sept. 8, 2010)).

[165] Trial Tr. 1155 (Carr).

[166] Trial Tr. 509-10 (Thomas); Trial Tr. 688 (McCausland).

[167] Trial Tr. 510 (Thomas).

[168] Trial Tr. 510 (Thomas); Trial Tr. 688-89 (McCausland).

[169] Trial Tr. 510-11 (Thomas); Trial Tr. 688-89 (McCausland).

[170] Trial Tr. 689 (McCausland).

[171] Trial Tr. 986-87 (Rensky); Trial Tr. 1142 (Carr).

[172] Trial Tr. 1154-55 (Carr).

[173] Trial Tr. 1144 (Carr); Trial Tr. 993-94 (Rensky).

[174] Trial Tr. 1148 (Carr).

[175] Trial Tr. 1151 (Carr); Trial Tr. 1180, 1183 (Woolery).

[176] Trial Tr. 1152 (Carr).

[177] See JX 565A (certified results of inspector of elections).

[178] JX 565B (Airgas Press Release (Sept. 23, 2010)).

[179] Airgas, Inc. v. Air Prods. & Chems., Inc., 2010 WL 3960599 (Del.Ch. Oct. 8, 2010).

[180] Airgas, Inc. v. Air Prods. & Chems., Inc., 8 A.3d 1182 (Del.2010). See Section I.Q. (More Post-Trial Factual Developments). For an interesting analysis of the different effects on firm value attributable to the Court of Chancery decision validating the bylaw and the Supreme Court's decision invalidating it, see Lucian Bebchuk, Alma Cohen & Charles Wang, Staggered Boards and the Wealth of Shareholders: Evidence From a Natural Experiment (Nov. 1, 2010), available at http://ssrn.com/abstract=1706806.

[181] Defs.' Dec. 21, 2010 Supplemental Post-Trial Br. 1.

[182] Trial Tr. 630 (McCausland).

[183] Trial Tr. 631 (McCausland).

[184] Trial Tr. 841 (McLaughlin).

[185] Trial Tr. 474-75 (Thomas).

[186] Trial Tr. 271 (Ill).

[187] Trial Tr. 273 (Ill); see also Trial Tr. 318 (Ill) ("Isn't it true that everything that you believe Airgas['s] shareholders need to know about the Airgas five-year strategic plan has been disclosed to shareholders? A. I believe everything that they need to know to make their decisions, yes.").

[188] See supra note 150.

[189] Trial Tr. 889 (Molinini).

[190] Trial Tr. 67 (Huck); see also Trial Tr. 50 (Huck) ("No, it is not the best price.").

[191] Trial Tr. 79 (Huck); see also Trial Tr. 46 (Huck) (testifying that Air Products is attempting to acquire Airgas for the lowest possible price).

[192] See, e.g., Trial Tr. 273 (Ill) (testifying that Airgas's stockholders are a "sophisticated bunch"); Trial Tr. 888 (Molinini) (testifying that Airgas's stockholders are "very savvy"); Trial Tr. 573 (McCausland) (testifying that Airgas's stockholders are "sophisticated" and "capable of making a decision as to whether to accept or reject Air Products' offer").

[193] See JX 1081 (Second Supplemental Report of Peter C. Harkins (Jan. 5, 2011)).

[194] See JX 1085 (Expert Report of Joseph J. Morrow (Jan. 20, 2011)).

[195] JX 645 (Airgas Second Quarter Earnings Release (Oct. 26, 2010)).

[196] JX 646 (Letter from van Roden to McGlade (Oct. 26, 2010)). That same day, Air Products issued a press release saying that "There is nothing in the Airgas earnings or letter that changes our view of value." JX 647 (Air Products Press Release re Airgas Second Quarter Earnings (Oct. 26, 2010)).

[197] See JX 646.

[198] Id. (emphasis added).

[199] JX 649 (Letter from McGlade to van Roden (Oct. 29, 2010)) at 3.

[200] The board authorized van Roden to send his November 2 letter during a two-day board meeting that took place from November 1-2, 2010. JX 1010A (Minutes of the Regular Meeting of the Airgas Board (Nov. 1-2, 2010)); SEH Tr. 410-11 (Clancey); see also infra Section I.Q.1 (discussing the November 1-2 Airgas board meeting).

[201] JX 650 (Letter from van Roden to McGlade (Nov. 2, 2010)).

[202] Id. (emphasis added). McCausland had previously testified that Airgas would be willing to begin negotiations upon receipt of a $70 offer with a stated intention of paying more. See Trial Tr. 688-89, 694-96 (McCausland). Similarly, Airgas's investment banker testified that "it wouldn't take $78 a share" to get a deal done. Trial Tr. 1159 (Carr); see also Trial Tr. 1188 (Woolery). It later came to light that there was some question as to exactly how unanimous the board really was (particularly regarding the three newly-elected Air Products Nominees on the board) in its conclusion that it would take at least $78 to actually get a deal done, or whether that number was a starting point for negotiations. See infra Section I.Q.2 (discussing December 7 and December 8, 2010 letters between the Air Products Nominees and van Roden). At the time, however, this unanimous view of value was the representation made to Air Products, so it was the view that Air Products had to go on. Moreover, the entire Airgas board now unanimously presses that the value of Airgas in a sale is at least $78. See infra Section I.S. (The Airgas Board Unanimously Rejects the $70 Offer).

[203] JX 651 (Letter from McGlade to van Roden (Nov. 2, 2010)).

[204] JX 652 (Airgas Schedule 14D-9: Amendment 58 (Nov. 4, 2010)) at 3; JX 653 (Air Products Schedule TO: Amendment 44 (Nov. 5, 2010)) at 5. In attendance at the meeting were van Roden, McCausland, and Graff from Airgas, and McGlade, Huck, and Presiding Director Davis from Air Products. Id.; see also SEH Tr. 33-34 (Huck).

[205] SEH Tr. 33-34 (Huck). For example, the two companies had differing views as to how much same-store sales would rise in the future. Id.

[206] See JX 652 (Airgas Schedule 14D-9: Amendment 58 (Nov. 4, 2010)).

[207] Id.

[208] See, e.g., SEH Tr. 35 (Huck) (testifying that at the time of the November 4, 2010 meeting, he believed the Airgas participants had acted in good faith); SEH Tr. 121-22 (McGlade) (testifying that he believed that "representatives from Air Products and Airgas acted in a business-like manner and in good faith during the November 4th meeting"); SEH Tr. 81-86 (Davis) (testifying that he believed all of the parties acted in good faith at the Nov. 4 meeting). The newly-elected Air Products Nominees on Airgas's board similarly expressed the view that the Airgas board had been acting in good faith and had been doing its job all along. See SEH Tr. 412 (Clancey) ("Q: Did you think that the incumbent directors had not been doing their job right? A: No.... I think they were doing a good job and they had two banks to begin with.").

[209] Airgas, Inc. v. Air Prods. & Chems., Inc., 8 A.3d 1182 (Del.2010).

[210] Dec. 2, 2010 Letter Order 1-2.

[211] Id. at 2-3.

[212] I found Clancey to be a credible witness and thus afford great weight to his testimony. Miller (another one of the Air Products Nominees whose testimony was presented during the supplemental evidentiary hearing), on the other hand, was less confidence-inspiring, and my view of his credibility is weighted accordingly. Robert Lumpkins, the third Air Products Nominee, was not presented as a witness in the supplemental evidentiary hearing, but I have read his deposition transcript in full and find his testimony to be in line with Clancey's.

[213] SEH Tr. 403 (Clancey).

[214] SEH Tr. 403-04. The meeting was arranged by Air Products' side, and ISS had also wanted to know about Clancey's background and experience. Id.

[215] SEH Tr. 404. Clancey concedes that his duty to represent all of the Airgas stockholders includes representing the interests of the Airgas stockholders who happen to be arbitrageurs and those who have shorter-term rather than longer-term investment horizons and who may want to sell their shares. SEH Tr. 421-22. Lumpkins similarly understood his role if elected to the Airgas board. At his deposition, he explained, "I believe [] that as a director of Airgas, my fiduciary duties, including a duty of care and loyalty, run to Airgas, and that in carrying out those duties I was representing all of the shareholders of Airgas."). JX 1095 (Lumpkins Dep. 19 (Jan. 21, 2011)); see also id. at 13-14.

[216] SEH Tr. 403, 405. Again, Lumpkins was similarly situated. JX 1095 (Lumpkins Dep. 19-22) (testifying that he knew nothing about Airgas when first approached to run as a nominee, did due diligence before accepting the nomination, "did not have a view" as to Air Products' offer, and believed he was "elected as an independent director" who "entered [] with the view of bringing a fresh look to the situation").

[217] SEH Tr. 406 (Clancey).

[218] SEH Tr. 406-07 (Clancey).

[219] SEH Tr. 406-08 (Clancey).

[220] SEH Tr. 407 (Clancey).

[221] Id. Lumpkins also "view[s] it as likely that Airgas will achieve or exceed its five-year plan." JX 1095 (Lumpkins Dep. 53)

[222] SEH Tr. 407-08 (Clancey).

[223] SEH Tr. 409 (Clancey).

[224] SEH Tr. 411-12 (Clancey). JX 1010A (Minutes of the Regular Meeting of the Airgas Board (Nov. 1-2, 2010)) at 5.

[225] JX 1027 (Letter from Clancey, Lumpkins, and Miller to van Roden (Dec. 7, 2010)) at 1.

[226] Id. at 2.

[227] JX 650 (Letter from van Roden to McGlade (Nov. 2, 2010)).

[228] JX 1027 (Letter from Clancey, Lumpkins, and Miller to van Roden (Dec. 7, 2010)) at 3 (footnote omitted).

[229] JX 1028 (Letter from van Roden to Clancey, Lumpkins, and Miller (Dec. 8, 2010)) at 2.

[230] Id. at 1, 3.

[231] SEH Tr. 427 (Clancey).

[232] SEH Tr. 430 (Clancey).

[233] JX 1038 (Minutes of the Special Telephonic Meeting of the Independent Members of the Airgas Board (Dec. 10, 2010)) at 2-5.

[234] See, e.g., SEH Tr. 414 (Clancey) ("I was satisfied [with the selection of Credit Suisse.] They're a good firm. I know of them and I've seen them, you know, in action from afar, and everybody else felt, both the two new directors and the other directors, felt very comfortable with them."); see JX 1038 at 3; JX 1095 (Lumpkins Dep. 172 (Jan. 21, 2011)) ("I felt very good about the process [the board followed in connection with the $70 offer], I felt the addition of the Credit Suisse work was very important and that I was very satisfied with the board's decision.").

[235] SEH Tr. 53 (Huck).

[236] SEH Tr. 447 (Clancey).

[237] JX 1039A (Airgas Schedule 14-D (Dec. 13, 2010)).

[238] See Section I.S. (The Airgas Board Unanimously Rejects the $70 Offer).

[239] JX 1033 (Minutes of the Special Meeting of the Air Products Board (Dec. 9, 2010)).

[240] Dec. 2, 2010 Letter Order 2 n. 1; see also Air Products' Post-Trial Reply Br. 27; Trial Tr. 67 (Huck) ("65.50 is not our best and final offer."); Trial Tr. 155 (McGlade) (testifying that Air Products has been clear that $65.50 is not its best and final offer).

[241] JX 1033 at 3.

[242] Id. at 3-4.

[243] Id. at 4. But for the letter, Air Products would not have raised its offer at that point in time. SEH Tr. 38 (Huck); see also SEH Tr. 89 (Davis).

[244] JX 657 (Air Products Schedule TO: Amendment 48 (Dec. 9, 2010)).

[245] Id.; Air Products Press Release (Dec. 9, 2010).

[246] See, e.g., SEH Tr. 418 (Clancey) ("Best and final is normally a cliché that gets you into the finals so that you can take your price up or take your price down, and it's meant to force a situation."). Indeed, even one of Air Products' directors was not really sure whether the $70 offer was the end of the road. See SEH Tr. 93 (Davis) ("Q. [Y]ou believed that Airgas would make a counteroffer to Air Products' best and final offer; correct? A. Personally? Q. Yes. A. I thought that that would lead to a discussion of value, yes."); SEH Tr. 93-95 (Davis) (testifying that he believed around the time of the December 9 meeting that Air Products might go higher than $70 "to put the deal over the top").

[247] For example, Air Products has not disclosed its estimate of capital or revenue synergies that would be realized from a deal. See Trial Tr. 49 (Huck).

[248] January 20, 2011 Letter Order 4; see also In re Circon Corp. S'holders Litig., 1998 WL 34350590, at *1 (Del.Ch. Mar. 11, 1998) ("What is relevant is what the defendants knew and considered at the time they took action in response to [Air Products' tender offer,] not information defendants did not know and did not consider.").

[249] See, e.g., JX 657 (Air Products Schedule TO: Amendment 48 (Dec. 9, 2010)) ("This is Air Products' best and final offer for Airgas and will not be further increased."); Letter from Counsel for Air Products to Court (Dec. 21, 2010), at 5 ("Air Products has made its best and final offer. If Airgas does not accept that offer, then the process is at an end.").

[250] SEH Tr. 5 (Huck); SEH Tr. 75 (Davis); SEH Tr. 108 (McGlade).

[251] SEH Tr. 108 (McGlade); see also SEH Tr. 72 (Huck) ("Seventy dollars is Air Products' best and final offer? A. It is.").

[252] SEH Tr. 49 (Huck).

[253] SEH Tr. 72 (Huck).

[254] SEH Tr. 110 (McGlade).

[255] SEH Tr. 49 (Huck).

[256] SEH Tr. 75 (Davis), see also SEH Tr. 76 (Davis) ("Q. As far as you're concerned, $70 is Air Products' best and final offer for Airgas? A. As far as I'm concerned, yes.").

[257] SEH Tr. 108 (McGlade) ("We were unanimous in the decision.").

[258] SEH Tr. 67-68 (Huck).

[259] Defs.' Nov. 8, 2010 Post-Trial Br. 57.

[260] JX 1063 (Minutes of the Special Meeting of the Airgas Board (Dec. 21, 2010)).

[261] Id. at 2-3.

[262] Id. at 4.

[263] Id. at 4-9.

[264] Id. at 6.

[265] Id. at 7.

[266] Id. at 8.

[267] Id. at 9. SEH Tr. 349 (DeNunzio) ("[W]e didn't think it was a close call.").

[268] Id. at 9.

[269] SEH Tr. 417 (Clancey).

[270] JX 1063 (Minutes of the Special Meeting of the Airgas Board (Dec. 21, 2010)) at 10.

[271] SEH Tr. 420 (Clancey).

[272] Miller: "Q: [I]s it possible that there [is] a price below $78 that you would still be willing to do a deal with Air Products at? A. In my mind, probably not, no." SEH Tr. 162.

Lumpkins: "I have come to the point where I believe today that the company is worth $78 a share.... My opinion also is that the company on its own, its own business will be worth $78 or more in the not very distant future because of its own earnings and cash flow prospects [a]s a standalone company." JX 1095 (Lumpkins Dep. 165, 169 (Jan. 21, 2011)).

[273] SEH Tr. 205-06 (McCausland).

[274] SEH Tr. 217 (McCausland); see also JX 1063 (Minutes of the Special Meeting of the Airgas Board (Dec. 21, 2010)) at 11 ("Mr. Thomas stated that he would certainly be supportive of sitting down and talking to Air Products if it offered $78 per share.").

[275] JX 659 (Airgas Schedule 14D-9 (Dec. 22, 2010)) at Ex. (a)(111); see id. at 6 ("Airgas's Board of Directors concluded that the [$70 offer] is inadequate, does not reflect the value or prospects of Airgas, and is not in the best interests of Airgas, its shareholders and other constituencies.").

[276] Id.

[277] JX 659 at 5-6. Id.

[278] Id.

[279] Id. at Annex J (Bank of America Merrill Lynch), Annex K (Credit Suisse), Annex L (Goldman Sachs).

[280] See supra Section I.O (The October Trial).

[281] See, e.g., SEH Tr. 189-90 (McCausland); SEH Tr. 395-96 (DeNunzio) (testifying that analysts' projections were "remarkably close" to management's, "[s]o that information's available to the world").

[282] JX 304, JX 433, JX 645, JX 1086.

[283] See SEH Tr. 200-01 (McCausland) (testifying that he has met with at least 300 individual arbitrageurs to discuss Air Products' offer).

[284] SEH Tr. 253 (McCausland).

[285] JX 1090 (van Roden Dep. 262 (Jan. 12, 2011)).

[286] SEH Tr. 154-55 (Miller).

[287] SEH Tr. 396 (DeNunzio).

[288] SEH Tr. 393-94 (DeNunzio).

[289] JX 1095 (Lumpkins Dep. 169 (Jan. 21, 2011)).

[290] SEH Tr. 453 (Clancey).

[291] Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985), see also Yucaipa Am. Alliance Fund II, L.P. v. Riggio, 1 A.3d 310, 335 (Del.Ch.2010) ("[I]t is settled law that the standard of review to be employed to address whether a poison pill is being exercised consistently with a board's fiduciary duties is [] Unocal.").

[292] Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361 (Del.1995) (citing Unocal, 493 A.2d at 955).

[293] Paramount Commc'ns, Inc. v. Time, Inc., 571 A.2d 1140, 1152 (Del.1990); see also Unocal, 493 A.2d at 955.

[294] Unocal, 493 A.2d at 955.

[295] Chesapeake Corp. v. Shore, 771 A.2d 293, 301 n. 8 (Del.Ch.2000) (internal citation omitted) (emphasis added).

[296] See eBay Domestic Holdings, 2010 WL 3516473, at *12 (finding that despite defendants' "deliberative" investigative process, defendants nevertheless "fail[ed] the first prong of Unocal both factually and legally").

[297] See eBay, 2010 WL 3516473, at *20 ("Like other defensive measures, a rights plan cannot be used preclusively or coercively; nor can its use fall outside the `range of reasonableness.'").

[298] Id.

[299] Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1367 (Del.1995).

[300] Id.

[301] Defs.' Post-Supplemental Hearing Br. 4.

[302] Id. (quoting Unocal, 493 A.2d at 954).

[303] Id. (quoting Unocal, 493 A.2d at 954).

[304] Id. at 5.

[305] Unocal, 493 A.2d at 954 (internal footnote and citation omitted) (emphasis added).

[306] Id. at 955 (internal citation omitted).

[307] J. Travis Laster, Exorcising the Omnipresent Specter: The Impact of Substantial Equity Ownership by Outside Directors on Unocal Analysis, 55 Bus. Law. 109, 116 (1999); see also Kahn v. Roberts, 679 A.2d 460, 465 (Del. 1996) ("Where [] the board takes defensive action in response to a threat to the board's control of the corporation's business and policy direction, a heightened standard of judicial review applies because of the temptation for directors to seek to remain at the corporate helm in order to protect their own powers and perquisites. Such self-interested behavior may occur even when the best interests of the shareholders and corporation dictate an alternative course.").

[308] Defendants further argue that there is less justification for Unocal's approach today than when Unocal was decided because boards are more independent now and stockholders are better able to keep boards in check. Whether or not this is true does not have any bearing on whether Unocal applies, though. Unocal applies to both independent outside directors, as well as insiders, whenever a board is taking defensive measures to thwart a takeover. Independence certainly bears heavily on the first prong of Unocal, but it is not outcome-determinative; the burden of proof is still on the directors to show that their actions are reasonable in relation to a perceived threat (that is, they still must meet Unocal prong 2 before they are back under the business judgment rule).

[309] Unitrin v. Am. Gen. Corp., 651 A.2d 1361, 1376 (Del. 1995) (quoting Paramount Commc'ns v. Time, Inc., 571 A.2d at 1154 n. 8).

[310] See Versata Enters., Inc. v. Selectica, Inc., 5 A.3d 586, 599 (Del.2010) ("Delaware courts have approved the adoption of a Shareholder Rights Plan as an antitakeover device, and have applied the Unocal test to analyze a board's response to an actual or potential hostile takeover threat.").

[311] TW Servs., Inc. v. SWT Acquisition Corp., 1989 WL 20290, at *9 (Del.Ch. Mar. 2, 1989).

[312] Id. Here, Air Products' tender offer would almost certainly result in a "change of control" transaction, as the offer would likely succeed in achieving greater than 50% support from Airgas's stockholders, which largely consist of merger arbitrageurs and hedge funds who would gladly tender into Air Products' offer. See SEH Tr. 225 (McCausland) (stating his view that a majority of Airgas shares would tender into the $70 offer).

[313] 1989 WL 20290, at *10.

[314] See id. at *9-10.

[315] Id. at *10.

[316] Id.

[317] Moran v. Household Int'l, Inc., 500 A.2d 1346 (Del.1985).

[318] Id. at 1356.

[319] Id. at 1354 (citing Unocal, 493 A.2d at 954-55, 958).

[320] Id.

[321] Id. at 1356-57.

[322] See id. at 1354.

[323] Id. at 1353.

[324] Moran v. Household Int'l, Inc., 490 A.2d 1059, 1064 (Del.Ch.1985).

[325] Ronald Gilson & Reinier Kraakman, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, 44 Bus. Law. 247, 258 (1989).

[326] Id.

[327] Id. at 267.

[328] Id.

[329] Id. at 274.

[330] City Capital Assocs. Ltd. P'ship v. Interco Inc., 551 A.2d 787 (Del.Ch. 1988).

[331] Id. at 797-98.

[332] The Chancellor cited a draft of the Gilson & Kraakman article, used its two other categories, and clearly chose not to deem an all shares, all cash offer coercive in any respect. Id. at 796 n. 8 (citing Ronald Gilson & Reinier Kraakman, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to the Proportionality Review?, John M. Olin Program in Law & Economics, Stanford Law School (Working Paper No. 45, Aug. 1988); 44 Bus. Law. ___ (forthcoming February, 1989)).

[333] Id. at 798.

[334] Id.

[335] Paramount Commc'ns, Inc. v. Time Inc., 571 A.2d 1140, 1153 (Del. 1990).

[336] Id. at 1149-50.

[337] Id. at 1150. In other words, would the board's actions be judged under the Unocal standard or under the Revlon standard of review?

[338] Id.

[339] Id. at 1150-51.

[340] Id. at 1153. The Court also noted other potential threats posed by Paramount's all-cash, all-shares offer, including (1) that the conditions attached to the offer introduced some uncertainty into the deal, and (2) that the timing of the offer was designed to confuse Time stockholders.

[341] Id. at 1153.

[342] Id. at 154-55.

[343] 651 A.2d 1361 (Del.1995).

[344] Id. at 1384.

[345] Id. at 1385.

[346] Id. at 1389.

[347] Ronald J. Gilson, Unocal Fifteen Years Later (And What We Can Do About It), 26 Del. J. Corp. L. 491, 497 n. 23 (2001).

[348] See, e.g., Chesapeake v. Shore, 771 A.2d 293, 324-25 (Del.Ch.2000).

[349] Id. at 328.

[350] City Capital Assocs. Ltd. P'ship v. Interco Inc., 551 A.2d 787, 790 (Del.Ch. 1988).

[351] Id.

[352] Practitioners may question whether judges are well positioned to make a determination that a takeover battle has truly reached its "end stage." But someone must decide, and the specific circumstances here—after more than sixteen months have elapsed and one annual meeting convened, with three price increases and Air Products representatives credibly testifying in this Court and publicly representing that they have reached the end of the line—demonstrates that this particular dispute has reached the end stage.

[353] SEH Tr. 394 (DeNunzio).

[354] 1989 WL 20290 (Del.Ch. Mar. 2, 1989).

[355] Time, 571 A.2d 1140, 1153.

[356] Id.

[357] Specifically, the case involved an all-cash, all-shares tender offer whose closing was conditioned upon execution of a merger agreement with the target. The Chancellor thus decided the case under 8 Del. C. § 251. Under the business judgment rule, the board was permitted to decline the offer and was "justified in not further addressing the question whether it should deviate from its long term management mode in order to do a current value maximizing transaction." 1989 WL 20290, at *11.

[358] The doctrinal evolution in our Revlon jurisprudence is a story for another day. Suffice it to say for now that it has not remained static and I in no way mean to suggest otherwise by this purely historical description.

[359] Id. at *8.

[360] Id. at *7.

[361] Id. (emphasis added). Chancellor Allen continued, "The rationale for recognizing that non-contractual claims of other corporate constituencies are cognizable by boards, or the rationale that recognizes the appropriateness of sacrificing achievable share value today in the hope of greater long term value, is not present when all of the current shareholders will be removed from the field by the contemplated transaction." Id. (emphasis added).

[362] Id. at *8.

[363] Id. at *8 n. 14 (emphasis added).

[364] Grand Metro. Pub. Ltd. Co. v. Pillsbury Co., 558 A.2d 1049 (Del.Ch.1988).

[365] City Capital Assocs. Ltd. P'ship v. Interco Inc., 551 A.2d 787 (Del.Ch.1988).

[366] 1989 WL 20290, at *9.

[367] Id. at *8.

[368] Id. (emphasis added).

[369] Chesapeake v. Shore, 771 A.2d 293, 330 (Del.Ch.2000) (citing Unitrin, 651 A.2d at 1375).

[370] There are a number of reasons for this. For example, the inadequacy of the price was even greater at $65.50. More importantly, Air Products had openly admitted that it was willing to pay more for Airgas. The pill was serving an obvious purpose in providing leverage to the Airgas board. The collective action problem is lessened when the bidder has made its "best and final" offer, provided it is in fact its best and final offer.

[371] Selectica Inc. v. Versata Enters., Inc., 2010 WL 703062, at *12 (Del.Ch. Feb. 26, 2010).

[372] See supra Section I.G (The Proxy Contest) (describing independence of the three Air Products Nominees).

[373] See, e.g., Trial Tr. 501-03 (Thomas); see also supra note 61.

[374] JX 659 (Airgas Schedule 14D-9 (Dec. 22, 2010)) at Ex. (a)(111); see id. at Annex J (Bank of America Merrill Lynch), Annex K (Credit Suisse), Annex L (Goldman Sachs).

[375] SEH Tr. 414 (Clancey); SEH Tr. 53 (Huck).

[376] See, e.g., JX 73 (Minutes of the Regular Meeting of the Airgas Board (Nov. 5-7, 2009)); JX 100 (Minutes of the Special Telephonic Meeting of the Airgas Board (Dec. 7, 2009)); JX 116 (Minutes of Special Telephonic Meeting of the Airgas Board (Dec. 21, 2009)); JX 137 (Minutes of the Continued Special Telephonic Meeting of the Airgas Board (Jan. 4, 2010)); JX 204 (Minutes of the Regular Meeting of the Airgas Board (Feb. 8-9, 2010)); JX 245 (Minutes of the Special Telephonic Meeting of the Airgas Board (Feb. 20, 2010)); JX 294 (Minutes of the Regular Meeting of the Airgas Board (April 7-8, 2010)); JX 331 (Minutes of the Regular Meeting of the Airgas Board (May 24-25, 2010)); JX 417 (Minutes of the Special Telephonic Meeting of the Airgas Board (July 15, 2010)); JX 425 (Minutes of the Special Telephonic Meeting of the Airgas Board (July 20, 2010)); JX 530A (Minutes of the Special Telephonic Meeting of the Airgas Board (Sept. 7, 2010)); JX 1010A (Minutes of the Regular Meeting of the Airgas Board (Nov. 1-2, 2010)); JX 1038 (Minutes of the Special Telephonic Meeting of the Independent Members of the Airgas Board (Dec. 10, 2010)); JX 1063 (Minutes of the Special Meeting of the Airgas Board (Dec. 21, 2010)) (counsel from Wachtell, Lipton, Rosen & Katz present at all of the meetings; advice provided by Dan Neff, Marc Wolinsky, Ted Mirvis, David Katz and others).

[377] Versata Enters., Inc. v. Selectica, Inc., 5 A.3d 586, 599 (Del.2010).

[378] See SEH Tr. 188 (McCausland).

[379] See SEH Tr. 250-52 (McCausland).

[380] See SEH Tr. 249-50 (McCausland).

[381] SEH Tr. 438 (Clancey) (testifying that nobody ever actually said anything about stockholders being coerced); SEH Tr. 368 (DeNunzio) (testifying that at the December 21, 2010 Airgas board meeting when the board discussed the $70 offer, there was no discussion about whether Airgas's stockholders would be coerced into tendering); SEH Tr. 158 (Miller) (testifying that he did not discuss the topic of coercion with anyone and did not recall it being discussed at any board meeting); JX 1090 (van Roden Dep. 86 (Jan. 12, 2011)) (testifying that he has never talked about the notion of coercion at a board meeting).

[382] SEH Tr. 438-39 (Clancey) ("Q. [N]either you nor any of your fellow board members said anything about a so-called prisoner's dilemma. Is that correct? A. That is correct... Q. [And] prior to your deposition, you had never heard the concept of a prisoner's dilemma used in the context of the Air Products offer. Is that correct? A. That is correct."); SEH Tr. 369 (DeNunzio) ("Q. No discussion at [the December 21, 2010 Airgas] board meeting about stockholders being subject to a prisoner's dilemma, was there? A. Not that I recall."); JX 1090 (van Roden Dep. 230 (Jan. 12, 2011)) (testifying that the notion of prisoner's dilemma was never discussed at an Airgas board meeting). Miller, who is "not conversant on prisoner's dilemma" testified that he had not heard the concept discussed in the context of Air Products' $70 offer and "[i]t was not discussed at board meetings." SEH Tr. 157-58 (Miller). The only time he had discussed prisoner's dilemma was in his deposition preparation session with counsel. Id.

[383] Miller testified that not only did he not know what a "threat" was (in plain English), so he simply could not answer the question whether he believed somehow that the Air Products offer presents some danger or threat to the company, he also has never discussed with anyone the notion of whether Air Products' offer is a threat or presents any danger to Airgas. SEH Tr. 155-57 (Miller).

[384] See Trial Tr. 474 (Thomas) ("Q. Mr. Thomas, you believe that the only threat posed to the shareholders of Airgas by the Air Products' tender offer is a low price; correct? A. I do.").

[385] JX 1090 (van Roden Dep. 251-52 (Jan. 12, 2011)).

[386] SEH Tr. 437-38 (Clancey); SEH Tr. 242 (McCausland) ("Coercion and threat were implicit in everything we discussed that day [at the December 21, 2010 board meeting]."); SEH Tr. 249-50 (McCausland); SEH Tr. 160-62 (Miller).

[387] JX 1090 (van Roden Dep. 254 (Jan. 12, 2011)).

[388] See SEH Tr. 301 (McCausland).

[389] See Section II.C. For example, Clancey testified that the Airgas stockholders have access to "more than adequate" information upon which to base their decision whether or not to tender into Air Products' offer—"all the information that they could ever want is available." SEH Tr. 453-54. This includes the public and well-known opinion of the Airgas board, as well as that of its financial advisors and numerous analysts' reports with numbers that are "very close or almost identical to management's own internal projections for this company going forward." SEH Tr. 453 (Clancey).

[390] Ronald Gilson & Reinier Kraakman, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, 44 Bus. Law. 247, 258 (1989).

[391] Unocal, 493 A.2d at 956 ("It is now well recognized that such offers are a classic coercive measure designed to stampede shareholders into tendering at the first tier, even if the price is inadequate, out of fear of what they will receive at the back end of the transaction.").

[392] Paramount Commc'ns, Inc. v. Time, Inc., 571 A.2d 1140, 1152 (Del.1990) (emphasis added).

[393] JX 222 (Airgas Schedule TO: Offer to Purchase by Air Products & Chemicals, Inc. (Feb. 11, 2010)); see also Trial Tr. 130-31 (McGlade); SEH Tr. 5 (Huck).

[394] JX 222 (Airgas Schedule TO: Offer to Purchase by Air Products & Chemicals, Inc. (Feb. 11, 2010)).

[395] See Section I.F. (The $60 Tender Offer).

[396] SEH Tr. 15 (Huck); SEH Tr. 110-11 (McGlade).

[397] SEH Tr. 15 (Huck); SEH Tr. 110-11 (McGlade).

[398] SEH Tr. 15-16 (Huck); SEH Tr. 111-12 (McGlade).

[399] See Kahn v. Lynch Commc'n Sys., Inc., 669 A.2d 79, 86 (Del. 1995) ("In this case, no shareholder was treated differently in the transaction from any other shareholder, nor subjected to two-tiered or squeeze-out treatment. [The bidder] offered cash for all the minority shares and paid cash for all shares tendered. Clearly there was no coercion exerted which was material to this aspect of the transaction.") (internal citation omitted).

[400] Shamrock Holdings, Inc. v. Polaroid Corp., 559 A.2d 278, 289 (Del.Ch.1989).

[401] Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1384 (Del.1995) (quoting Ronald Gilson & Reinier Kraakman, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, 44 Bus. Law. 247, 267 (1989)).

[402] Shamrock Holdings, 559 A.2d at 289 (internal citations omitted).

[403] Trial Tr. 290-91 (Ill).

[404] Trial Tr. 315 (Wolinsky).

[405] JX 429 (Airgas Schedule 14D-9 (July 21, 2010)) at 10.

[406] Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1385 (Del.1995).

[407] Ronald Gilson & Reinier Kraakman, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, 44 Bus. Law. 247, 260 (1989).

[408] Id.

[409] Defs.' Post-Supplemental Hearing Br. 23-25; see also Defs.' Post-Trial Br. 95 (arguing that the fact that Airgas stockholders are informed and sophisticated "does not stand as a rebuttal to the conclusion that Air Products' offer presents a threat of substantive coercion. The issue here is not only that shareholders may disbelieve the Airgas Board, and that they will want to see results before they fully credit the Board's view. The issue is also that they will be coerced into tendering into an offer that they do not wish to accept.").

[410] Paramount Commc'ns, Inc. v. Time, Inc., 571 A.2d 1140 (Del.1990). Similar concerns about short-term investors were noted in Paramount, however: "Large quantities of Time shares were held by institutional investors. The board feared that even though there appeared to be wide support for the Warner transaction, Paramount's cash premium would be a tempting prospect to these investors." Id. at 1148.

[411] SEH Tr. 202 (McCausland) ("They don't care a thing about the fundamental value of Airgas. I know that. I naively spent a lot of time trying to convince them of the fundamental value of Airgas in the beginning. But I'm quite sure now, given that experience, that they have no interest in the long-term.").

[412] See SEH Tr. 454 (Clancey) ("[Essentially, the risk is] that the informed minority, in theory, will be forced to do something because of the bamboozled majority, or the majority who will act because their interests' time lines are different than that minority.").

[413] See Mercier v. Inter-Tel (Delaware), Inc., 929 A.2d 786, 815 (Del.Ch.2007) ("[T]he bad arbs and hedge funds who bought in, had obviously bought their shares from folks who were glad to take the profits that came with market prices generated by the Merger and Vector Capital's hint of a higher price. These folks, one can surmise, had satisfied whatever long-term objective they had for their investment in Inter-Tel.").

[414] Otherwise, as Gilson and Kraakman have articulated it, there will have been no "coercion" because the first element will be missing—that is, stockholders who tendered into an "adequate" offer will not have made a mistake. Airgas also belatedly tries to make the argument that the typical "disbelieve management and tender" form of substantive coercion exists as well, because there is nonpublic information that Airgas's stockholders do not have access to (for example, the detailed valuation information that goes into the five-year plan, and other sensitive competitive and strategic information). In support of this argument, they point to Clancey, who believed that all the information stockholders could want is available, yet it was not until he gained access to the nonpublic information that he joined in the board's view on value. This argument fails for at least two reasons. First, this argument was simply made too late in the game. Almost every witness during the October trial—and even in the January supplemental hearing—testified that Airgas's stockholders had all the information they need to make an informed decision. See Section I.O. (The October Trial); Section I.S. (The Airgas Board Unanimously Rejects the $70 Offer) at 73-76. Second, Airgas stockholders know this about Clancey, Lumpkins, and Miller. They know that the three Air Products Nominees were skeptical of management's projections initially (after all, these were Air Products' nominees who got onto the board for the purpose of seeing if a deal could get done!), but they changed their tune once they studied the board's information and heard from the board's advisors. This is why stockholders elect directors to the board. The fact that Air Products' own three nominees fully support the rest of the Airgas board's view on value, in my opinion, makes it even less likely that stockholders will disbelieve the board and tender into an inadequate offer. The articulated risk that does exist, however, is that arbitrageurs with no long-term horizon in Airgas will tender, whether or not they believe the board that $70 clearly undervalues Airgas.

[415] Chesapeake Corp. v. Shore, 771 A.2d 293, 326 (Del.Ch.2000).

[416] SEH Tr. 303 (McCausland).

[417] Id.

[418] Air Products Post-Supplemental Hearing Br. 31; SEH Tr. 31 (Huck); SEH Tr. 82 (Davis); SEH Tr. 121 (McGlade); SEH Tr. 353-54 (DeNunzio); SEH Tr. 180-81 (Miller).

[419] Professors Gilson and Kraakman expressly coupled their invention of the term substantive coercion with a recognition of its danger and their call for a searching form of judicial review to make sure that the concept did not become a blank check for boards to block structurally non-coercive bids. Indeed, one senses that their article advocated a second-best solution precisely because they feared that the Delaware Supreme Court would not embrace Interco. But their article's articulated solution—a searching judicial examination of the resisting board's business plan—has some resonance here. Although I have not undertaken the appraisal-like inquiry Gilson and Kraakman advocate, the credibility of the board's determination that the bid is undervalued is enhanced by something more confidence-inspiring than judicial review of the board's business plan. The three new directors elected by the stockholders insisted on retaining their own financial and legal advisors. Those new directors and their expert advisors analyzed the company's business plan with fresh, independent eyes and came to the same determination as the incumbents, which is that the company's earnings potential justifies a sale value of at least $78. In this scenario, therefore, even the analysis urged by Gilson and Kraakman would seem to support the board's use of the pill.

[420] SEH Tr. 409 (Clancey).

[421] SEH Tr. 409 (Clancey); SEH Tr. 181 (Miller). Air Products' CFO Huck didn't "see a double-dip either, so I see long, good, steady, solid growth going forward here for the economy." JX 1086A at 7.

[422] Mercier, 929 A.2d at 815.

[423] Air Products Post-Supplemental Hearing Br. 21-22 n. 15.

[424] For example, on December 8, 2010, one stockholder who claimed to represent "the views of Airgas stockholders generally" sent a letter to the Airgas board urging them to negotiate with Air Products—when the $65.50 offer was still on the table. See JX 1029 (Letter from P. Schoenfeld Asset Management LP to Airgas Board of Directors (Dec. 8, 2010)); see also SEH Tr. 224 (McCausland). At various points in time, Peter Schoenfeld urged the board to take $65.50, $67, $70. SEH Tr. 224 (McCausland). He would be happy, it seemed, to see a deal done at any price (presumably above what he bought into the stock at). Schoenfeld wrote, "We hope that the demand for $78 per share is a negotiating position. As an Airgas stockholder, we strongly believe that the Airgas board could accept a significant discount from $78 per share and still get a good deal for the Airgas stockholders." JX 1029 at 2. Certainly, I can safely assume that Schoenfeld (and similarly situated stockholders) likely would tender into Air Products' $70 offer.

[425] SEH Tr. 567-68 (Harkins) ("[A]rbitrageurs [] typically purchase[] their shares at elevated levels in order to profit by realizing the spread between the price they paid and the deal price. If the offer fails and the stock returns to pre-bid levels or to anticipated post-tender trading levels, the arbitrageurs would ... suffer huge losses.... I think it's widely understood that short-term investors own close to if not a majority of this company. So if you decided to not tender, you would be making that decision knowing and believing that owners of a majority were likely to tender."); SEH Tr. 735-36 (Morrow) ("Q. [Y]ou don't know any merger arb who, given a choice between tendering for 70 bucks and waiting for [a] second-step merger three or four months later at the same price, would choose not to tender and wait for that second-step merger instead; right? A. That's correct.").

[426] TW Servs., Inc. v. SWT Acquisition Corp., 1989 WL 20290 (Del.Ch. Mar. 2, 1989).

[427] Airgas's board is not under "a fiduciary duty to jettison its plan and put the corporation's future in the hands of its stockholders." Paramount Commc'ns, Inc. v. Time, Inc., 571 A.2d 1140, 1149-50 (Del.1990).

[428] Unitrin, 651 A.2d 1361, 1376 (citing Paramount, 571 A.2d at 1153). Vice Chancellor Strine has pointed out that "[r]easonable minds can and do differ on whether it is appropriate for a board to consider an all cash, all shares tender offer as a threat that permits any response greater than that necessary for the target board to be able to negotiate for or otherwise locate a higher bid and to provide stockholders with the opportunity to rationally consider the views of both management and the prospective acquiror before making the decision to sell their personal property." In re Gaylord Container Corp. S'holders Litig., 753 A.2d 462, 478 n. 56 (Del. Ch.2000). But the Supreme Court cited disapprovingly to the approach taken in City Capital Associates v. Interco, Inc., 551 A.2d 787 (Del.Ch. 1988), which had suggested that an all-cash, all-shares bid posed a limited threat to stockholders that justified leaving a poison pill in place only for some period of time while the board protects stockholder interests, but "[o]nce that period has closed ... and [the board] has taken such time as it required in good faith to arrange an alternative value-maximizing transaction, then, in most instances, the legitimate role of the poison pill in the context of a noncoercive offer will have been fully satisfied." The Supreme Court rejected that understanding as "not in keeping with a proper Unocal analysis."

[429] Paramount, 571 A.2d at 1150.

[430] Id. at 1150 n. 12. I admit empirical studies show that corporate boards are subject to error in firm value projections, usually on the overconfident side of the equation. I also admit that markets are imperfect, most often on the side of overvaluing a company. See generally Bernard Black and Reinier Kraakman, Delaware's Takeover Law: The Uncertain Search for Hidden Value, 96 Nw. U.L.Rev. 565 (2001-02) (describing the "hidden value" model on which managers and directors rely as the basis for resisting takeover offers, and contrasting it with the "visible value" model animating stockholders and potential acquirers). In this case, the Airgas board (relying on the "hidden value" model described by Black and Kraakman) is strongly positing that the market has seriously erred in the opposite direction, by dramatically underestimating Airgas's intrinsic value. I do not share the Airgas board's confidence in its strategic analysis and I do not agree with their claims to superior inside information, but I am bound by Delaware Supreme Court precedent that, in my opinion, drives the result I reach.

[431] Id.

[432] Id. (quoting Unitrin, 651 A.2d at 1387). Airgas's defensive measures are inextricably related in their purpose and effect, and I thus review them as a unified response to Air Products' offer.

[433] Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1388 (Del.1995) (citing Paramount Commc'ns, Inc. v. QVC Network, Inc., 637 A.2d 34, 45-46 (Del. 1994)); see Selectica, 5 A.3d at 601.

[434] Selectica, 5 A.3d at 601 (quoting Unitrin, 651 A.2d at 1387).

[435] Id. (citing Carmody v. Toll Bros., Inc., 723 A.2d 1180, 1195 (Del.Ch.1998)). Until Selectica, the preclusive test asked whether defensive measures rendered an effective proxy contest "`mathematically impossible' or `realistically unattainable,'" but since "realistically unattainable" subsumes "mathematically impossible," the Supreme Court in Selectica explained that there is really "only one test of preclusivity: `realistically unattainable.'" Id.

[436] Indeed, Airgas's own expert testified that no bidder has ever replaced a majority of directors on a staggered board by winning two consecutive annual meeting elections. SEH Tr. 657-58 (Harkins).

[437] Selectica, 5 A.3d 586, 604 (Del.2010) (emphasis added).

[438] Id. (quoting Carmody v. Toll Bros., Inc., 723 A.2d 1180, 1186 n. 17 (Del.Ch. 1998)).

[439] Id. (citing In re Gaylord Container Corp. S'holders Litig., 753 A.2d 462, 482 (Del.Ch. 2000)). Of course, the target company in the case the Supreme Court cited for that proposition, In re Gaylord Container Corp. Shareholders Litigation, did not have a staggered board (all directors were up for election annually). The combination of the defensive measures in Gaylord Container combined to make obtaining control "more difficult" because an acquiror could only obtain control once a year, at the annual meeting, but the defensive measures were found not to be preclusive because "[b]y taking out the target company's board through a proxy fight or a consent solicitation, the acquiror could obtain control of the board room, redeem the pill, and open the way for consummation of its tender offer." Gaylord Container, 753 A.2d at 482. Vice Chancellor Strine noted, however, that "[t]hese provisions are far less preclusive than a staggered board provision, which can delay an acquiror's ability to take over a board for several years." Id.

[440] Selectica, 5 A.3d at 604 (quoting Moran v. Household Int'l, Inc., 500 A.2d at 1357). Again, in the case the Supreme Court is quoting from (Moran), the entire Household board was subject to election annually; the company did not have a staggered board.

[441] Id.

[442] See Airgas, Inc. v. Air Prods. & Chems., Inc., 8 A.3d 1182 (Del.2010).

[443] 8 A.3d 1182, 1192 n. 27 (Del.2010) (quoting Lewis S. Black, Jr. & Craig B. Smith, Antitakeover Charter Provisions: Defending Self-Help for Takeover Targets, 36 Wash. & Lee L.Rev. 699, 715 (1979)) (alteration in original).

[444] Id. (quoting 1 R. Franklin Balotti & Jesse A. Finkelstein, The Delaware Law of Corporations and Business Organizations § 4.6 (2010)) (alteration in original).

[445] Id. at 1190 n. 18 (emphasis added).

[446] I say at this time because Air Products has indicated that if Airgas's defenses remain in place, it may walk away from a deal now, but it may be willing to bid for Airgas at some point in the future. See, e.g., SEH Tr. 49-50 (Huck) ("Q. [W]hen you say `best and final,' you mean as of today. But the world could change and you can't commit as to what Air Products may do as future events unfold; correct? A. That is correct."); see also SEH Tr. 95-96 (Davis).

[447] JX 3 (Airgas Amended and Restated Certificate of Incorporation) at Art. 2, § 2.

[448] Defs.' Dec. 21 Supplemental Post-Trial Br. 4.

[449] It also distinguishes this case from the paradigmatic case posited by Professors Bebchuk, Coates, and Subramanian in 54 Stan. L.Rev. 887 (2002). In their article, the professors write: "Courts should not allow managers to continue blocking a takeover bid after they lose one election conducted over an acquisition offer." Id. at 944. In essence, the professors argue that corporations with an "effective staggered board" ("ESB"), defined as one in which a bidder "must go through two annual meetings in order to gain majority control of the target's board," should be required to redeem their pill after losing one election cycle. Id. at 912-14, 944. But, the professors concede, "without an ESB, no court intervention is necessary." Id. at 944. Airgas does not have an ESB as described by the professors because of its charter provision allowing removal of the entire board without consent at any time by a 67% vote.

[450] SEH Tr. 523-24 (Harkins).

[451] SEH Tr. 8 (Huck).

[452] Yucaipa Am. Alliance Fund II, L.P. v. Riggio, 1 A.3d 310, 337 n. 182 (Del.Ch.2010).

[453] See JX 1081 (Second Supplemental Report of Peter C. Harkins (Jan. 5, 2011)); JX 1085 (Expert Report of Joseph J. Morrow (Jan. 20, 2011)).

[454] SEH Tr. 456 (Harkins); SEH Tr. 685-86 (Morrow).

[455] See, e.g., SEH Tr. 523-24 (Harkins).

[456] SEH Tr. 759 (Morrow).

[457] SEH Tr. 535-36 (Harkins).

[458] See Ex. ARG 912; JX 1081 (Second Supplemental Report of Peter C. Harkins (Jan. 5, 2011)) at 2-8.

[459] See Ex. ARG 912; SEH 473-74 (Harkins) (testifying that 100% of the arbs and event-driven investors would vote for Air Products, "assuming an appealing platform"); Harkins Supplemental Report (Sept. 26, 2010).

[460] See SEH Tr. 481-82 (Harkins); SEH Tr. 216-17 (McCausland).

[461] SEH Tr. 615 (Harkins); JX 1051A (Airgas Investor Relations Update (Dec. 21, 2010)) at 8. The breakdown as of December 9, 2010 was as follows:

[IMAGE OMITTED]

[462] Ex. ARG 912.

[463] Ex. ARG 913; see SEH Tr. 713-15, 723, 736 (Morrow).

[464] SEH Tr. 617 (Harkins).

[465] SEH Tr. 203 (McCausland). As far as what accounted for the change, McCausland testified that in the month of December more long term (traditional, fundamental) investors have moved back into the stock, while the largest sales came from arbs and hedge funds. Id.

[466] SEH Tr. 551 (Harkins).

[467] SEH Tr. 509-11 (Harkins); SEH Tr. 760-61 (Morrow).

[468] Chesapeake v. Shore, 771 A.2d 293, 341-44 (Del.Ch.2000) (finding that 88% of participating unaffiliated shares was not realistically attainable).

[469] SEH Tr. 521-22 (Harkins); SEH Tr. 644 (Harkins); SEH Tr. 759-60 (Morrow).

[470] SEH Tr. 644 (Harkins).

[471] SEH Tr. 507 (Harkins).

[472] SEH Tr. 507-08 (Harkins).

[473] SEH Tr. 508 (Harkins).

[474] See Guhan Subramanian et al., Is Delaware's Antitakeover Statute Unconstitutional?, 65 Bus. Law. 685 (2010). But see A. Gilchrist Sparks & Helen Bowers, After Twenty-Two Years, Section 203 of the Delaware General Corporation Law Continues to Give Hostile Bidders a Meaningful Opportunity for Success, 65 Bus. Law. 761 (2010).

[475] See, e.g., SEH Tr. 52 (Huck) (testifying that "at the December 9th board meeting, the Air Products' board determined [] that it would not pursue its attempt to acquire Airgas through the next Airgas annual meeting"); SEH Tr. 97-98 (Davis) (testifying that at the December 9th meeting, "the board made a business decision that it didn't want to wait that long to pursue Airgas and seek to elect another slate at the annual meeting").

[476] SEH Tr. 12 (Huck) ("[O]ur shareholders have carried the burden of reduced stock price for a long period of time. The stock price of Air Products declined approximately 10 to 15 percent upon the announcement of this offer, due to the uncertainty which was introduced by the transaction. When that occurred—we knew it was going to occur, however, you know, the shareholders have carried this for almost a year now. ... That is a long time for the shareholders to carry the penalty. We felt that we needed to draw that to a conclusion to be fair to our shareholders.").

[477] As noted elsewhere in this Opinion, both sides readily seem to admit that there is at least a strong likelihood that a majority of Airgas's current stockholders would want to tender into Air Products' $70 offer. See, e.g., SEH Tr. 202 (McCausland) ("The tender offer would succeed if the pill were pulled. I have no doubt about that."); SEH Tr. 43-44 (Huck); SEH Tr. 87-88 (Davis) ("[M]uch of the Airgas stock was owned by arbs that had acquired their stock at a price under 70, and [so] it was believed they would support a $70 offer.").

[478] Reading the Supreme Court's decision literally, even a fully informed vote by a majority of the stockholders to move the company's annual meeting date is not allowed under Delaware law when the company has a staggered board. Companies without a staggered board have this flexibility, but not companies with staggered boards. 8 Del. C. § 109(a); 8 Del. C. § 211(b).

[479] Selectica, 5 A.3d at 604. Although the three Air Products Nominees from the September 2010 election all have joined the rest of the Airgas board in its current views on value, if Air Products nominated another slate of directors who were elected, there is no question that it would have "control" of the Airgas board—i.e. it will have nominated and elected the majority of the board members. There is no way to know at this point whether or not those three hypothetical New Air Products Nominees would join the rest of the board in its view, or whether the entire board would then decide to remove its defensive measures. The preclusivity test, though, is whether obtaining control of the board is realistically unattainable, and here I find that it is not. Considering whether some future hypothetical Air-Products-Controlled Airgas board would vote to redeem the pill is not the relevant inquiry.

[480] Our law would be more credible if the Supreme Court acknowledged that its later rulings have modified Moran and have allowed a board acting in good faith (and with a reasonable basis for believing that a tender offer is inadequate) to remit the bidder to the election process as its only recourse. The tender offer is in fact precluded and the only bypass of the pill is electing a new board. If that is the law, it would be best to be honest and abandon the pretense that preclusive action is per se unreasonable.

[481] Selectica, 5 A.3d at 605 (internal quotations omitted).

[482] Id. at 606 (quoting Unitrin, 651 A.2d at 1384).

[483] See 8 Del. C. § 141(e) (the board may rely in good faith upon the advice of advisors selected with reasonable care).

[484] SEH Tr. 80-81 (Davis) ("Q. You're not aware of any facts that would lead you to believe that the three Air Products [N]ominees on the Airgas board have breached their duty to the Airgas shareholders; correct? A. I'm not aware. Q. You're not aware of any facts that lead you to believe that the other Airgas directors on the Airgas board have breached their fiduciary duties to the Airgas shareholders; correct? A. Not based on any facts I'm aware of."); see also SEH Tr. 115 (McGlade) ("Q. [Y]ou're not aware of any facts that lead you to believe that the three Air Products [N]ominees on the Airgas board have breached their fiduciary duties to Airgas shareholders? A. I am not.").

[485] SEH Tr. 138 (McGlade); see also SEH Tr. 82 (Davis) (testifying that he is "not aware of anyone in a better position than Airgas management to make projections for Airgas" and he "believe[s] that it's reasonable for the Airgas board to rely on the projections provided by Airgas management").

[486] SEH Tr. 103-104 (Davis) (testifying that he probably has a better understanding of the value of Air Products than the average Air Products stockholder and that, "if an offer was made for Air Products that [he] considered to be unfair to the stockholders of Air Products," he would consider his "[f]iduciary duty [to] be to hold out for the proper price... [a]nd to use every legal mechanism available to [him] to do that.").

[487] That is, Air Products could have chosen three "independent" directors who may have a different view of value than the current Airgas board, who could act in a manner that would still comport with their exercise of fiduciary duties, but would perhaps better align their interests with those of the short-term arbs, for instance. As an example, Air Products could have proposed a slate of three Lucian Bebchuks (let's say Lucian Bebchuk, Alma Cohen, and Charles Wang) for election. In exercising their business judgment if elected to the board, these three academics might have reached different conclusions than Messrs. Clancey, Miller, and Lumpkins did— businessmen with years of experience on boards who got in there, saw the numbers, and realized that the intrinsic value of Airgas in their view far exceeded Air Products' offer. Maybe Bebchuk et al. would have been more skeptical. Or maybe they would have gotten in, seen the numbers, and acted just as the three Air Products Nominees did. But the point is, Air Products chose to put up the slate that it did.

[488] JX 454 (Airgas Schedule 14A: Air Products' Definitive Proxy Statement for 2010 Annual Meeting of Airgas Stockholders (July 29, 2010)) at 3.

[489] SEH Tr. 420 (Clancey).

[490] SEH Tr. 393-94 (DeNunzio).

[491] JX 1095 (Lumpkins Dep. 169 (Jan. 21, 2011)).

[492] Unitrin, Inc. v. Am. Gen. Corp., 651 A.2d 1361, 1384 (Del.1995) (quoting Paramount).

[493] Paramount Commc'ns, Inc. v. Time, Inc., 571 A.2d 1140, 1154 (Del. 1990) (emphasis added).

[494] Id.

[495] See id. at 1154-55.

[496] See JX 1118 (Airgas Earnings Teleconference Third Quarter Ended December 31, 2010 Slide Deck (Jan. 21, 2011)) at 3:

[IMAGE OMITTED]

[497] Paramount v. Time, 1989 WL 79880, at *19 (Del.Ch. July 14, 1989); see also In re Dollar Thrifty S'holder Litig., 2010 WL 3503471, at *29 (Del.Ch. Sept. 8, 2010) ("[O]ur law does not require a well-motivated board to simply sell the company whenever a high market premium is available.")

[498] Specifically, because McCausland and the other directors and officers of Airgas together own greater than 10% of the outstanding shares, there is essentially no way for Air Products to obtain greater than 90% of the outstanding shares in a tender offer. Under DGCL § 253, a bidder who acquires 90% of the outstanding stock of a corporation could effect a short-form merger to freeze out the remaining less-than-10%, without a vote of the minority. Short of obtaining 90% of the outstanding shares, though, Air Products would be left as a majority stockholder in Airgas, and would have to effect any merger under 8 Del. C. § 251, which would require the affirmative vote of both the Airgas board and Airgas's minority stockholders.

[499] JX 222 (Airgas Schedule TO: Offer to Purchase by Air Products & Chemicals, Inc. (Feb. 11, 2010)) at 1-2; SEH Tr. 15 (Huck). Air Products' representatives made clear, however, that they do not intend to retain a majority interest in Airgas. SEH Tr. 15 (Huck) ("Q. Does Air Products have any interest in owning less than 100 percent of Airgas? A. No, we do not."). Thus, the non-tendering minority Airgas stockholders would likely receive $70 in a back-end transaction with Air Products, or else Air Products would at that point sell its interest and leave Airgas alone, resulting in a depressed stock price for some period of time before it resumes its unaffected stock price.

[500] See Golden Telecom, Inc. v. Global GT LP, 11 A.3d 214, 217 (Del.2010) ("[I]n determining `fair value,' the [appraisal] statute [DGCL § 262] instructs that the court `shall take into account all relevant factors.' Importantly, [the Delaware Supreme] Court has defined `fair value' as the value to a stockholder of the firm as a going concern, as opposed to the firm's value in the context of an acquisition or other transaction.") (internal footnote and citations omitted); see also M.P.M. Enters., Inc. v. Gilbert, 731 A.2d 790, 795 (Del. 1999) ("Section 262(h) requires the trial court to `appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation.' Fair value, as used in § 262(h), is more properly described as the value of the company to the stockholder as a going concern, rather than its value to a third party as an acquisition.").

[501] See Golden Telecom, 11 A.3d at 218-19 ("[P]ublic companies distribute data to their stockholders to convince them that a tender offer price is `fair.' In the context of a merger, this `fair' price accounts for various transactional factors, such as synergies between the companies. Requiring public companies to stick to transactional data in an appraisal proceeding would pay short shrift to the difference between valuation at the tender offer stage—seeking `fair price' under the circumstances of the transaction—and valuation at the appraisal stage—seeking `fair value' as a going concern.").

[502] SEH Tr. 397-98 (DeNunzio) ("I think there's every reason that people could conclude there's [] much, much greater upside, for example, in the SAP implementation. I mean, orders of magnitude greater than what's been assumed and which would give substantially higher values. I think there's reason to believe that, at another time, in another market environment, there may be other acquirers of the company at higher prices than what Air Products is offering today. And if you were to sell the company at that moment in time, and to those other kinds of parties, you could do substantially in excess of the 70, even accounting for time value of money in the intervening period.").

[503] Moran v. Household Int'l, Inc., 500 A.2d 1346, 1354 (Del. 1985).

[504] Versata Enters., Inc. v. Selectica, Inc., 5 A.3d 586, 607 (Del.2010) (citing Moran, 500 A.2d at 1354). Marty Lipton himself has written that "the pill was neither designed nor intended to be an absolute bar. It was always contemplated that the possibility of a proxy fight to replace the board would result in the board's taking shareholder desires into account, but that the delay and uncertainty as to the outcome of a proxy fight would give the board the negotiating position it needed to achieve the best possible deal for all the shareholders, which in appropriate cases could be the target's continuing as an independent company. ... A board cannot say `never,' but it can say `no' in order to obtain the best deal for its shareholders." Martin Lipton, Pills, Polls, and Professors Redux, 69 U. Chi. L.Rev. 1037, 1054 (2002) (citing Marcel Kahan & Edward Rock, How I Learned to Stop Worrying and Love the Pill: Adaptive Responses to Takeover Law, 69 U. Chi. L.Rev. 871, 910 (2002) ("[T]he ultimate effect of the pill is akin to `just say wait.'")). As it turns out, for companies with a "pill plus staggered board" combination, it might actually be that a target board can "just say wait ... a very long time," because the Delaware Supreme Court has held that having to wait two years is not preclusive.

[505] I will not cite them all here, but a sampling of just the early generation of articles includes: Martin Lipton, Takeover Bids in the Target's Boardroom, 35 Bus. Law. 101 (1979); Frank Easterbrook & Daniel Fischel, Takeover Bids, Defensive Tactics, and Shareholders' Welfare, 36 Bus. Law. 1733 (1981); Martin Lipton, Takeover Bids in the Target's Boardroom: An Update After One Year, 36 Bus. Law. 1017 (1981); Frank Easterbrook & Daniel Fischel, The Proper Role of a Target's Management in Responding to a Tender Offer, 94 Harv. L.Rev. 161 (1981); Martin Lipton, Takeover Bids in the Target's Boardroom: A Response to Professors Easterbrook and Fischel, 55 N.Y.U. L.Rev. 1231 (1980); Ronald J. Gilson, A Structural Approach to Corporations: The Case Against Defensive Tactics in Tender Offers, 33 Stan. L.Rev. 819 (1981); Lucian Arye Bebchuk, The Case for Facilitating Competing Tender Offers, 95 Harv. L.Rev. 1028 (1982).

[506] In addition, Lipton often continues to argue that the deferential business judgment rule should be the standard of review that applies, despite the fact that that suggestion was squarely rejected in Moran and virtually every pill case since, which have consistently applied the Unocal analysis to defensive measures taken in response to hostile bids. Accordingly, although it is not the law in Delaware, Lipton's "continued defense of an undiluted application of the business judgment rule to defensive conduct" has been aptly termed "tenacious." Ronald Gilson & Reinier Kraakman, Delaware's Intermediate Standard for Defensive Tactics: Is There Substance to Proportionality Review?, 44 Bus. Law. 247, 247 n. 1 (1989).

[507] Martin Lipton, Pills, Polls, and Professors Redux, 69 U. Chi. L.Rev. 1037, 1065 (2002) (emphasis added).

[508] Id. at 1058.

[509] See supra note 449 (describing Bebchuk et al.'s ESB argument that directors who lose one election over an outstanding acquisition offer should not be allowed to continue blocking the bid by combining a pill with an ESB, and suggesting that "unless managers are allowed to use a pill-ESB combination to force only one election rather than two, the pill-ESB combination becomes preclusive").

[510] Yucaipa Am. Alliance Fund II, L.P. v. Riggio, 1 A.3d 310, 351 n. 229 (Del.Ch.2010) (citing Bebchuk et al. at 944-46); see also Leo E. Strine, Jr., The Professorial Bear Hug: The ESB Proposal As a Conscious Effort to Make the Delaware Courts Confront the Basic "Just Say No" Question, 55 Stan. L.Rev. 863, 877-79 (2002) (questioning whether the continued use of a pill could ever be deemed preclusive if it is considered non-preclusive to maintain a pill after a bidder has won an election for seats on an ESB).

[511] See Section III.B. 1.; see also supra note 449.

[512] Bebchuk et al. at 944 ("Note that without an ESB, no court intervention is necessary in order to achieve [the professors' desired] outcome.").

[513] Hollinger Int'l, Inc. v. Black, 844 A.2d 1022, 1083 (Del.Ch.2004).

[514] Closing Argument Tr. 88 (Nachbar).

Charles F. Richards, Jr., Thomas A. Beck and Anne C. Foster of Richards, Layton & Finger, Wilmington, Barry R. Ostrager (argued), Michael J. Chepiga, Robert F. Cusumano, Mary Kay Vyskocil and Peter C. Thomas of Simpson Thacher & Bartlett, New York City, for appellants Paramount Communications Inc. and the individual defendants.

A. Gilchrist Sparks, III and William M. Lafferty of Morris, Nichols, Arsht & Tunnell, Wilmington, Stuart J. Baskin (argued), Jeremy [36] G. Epstein, Alan S. Goudiss and Seth J. Lapidow of Shearman & Sterling, New York City, for appellant Viacom Inc.

Bruce M. Stargatt, David C. McBride, Josy W. Ingersoll, William D. Johnston, Bruce L. Silverstein and James P. Hughes, Jr. of Young, Conaway, Stargatt & Taylor, Wilmington, Herbert M. Wachtell (argued), Michael W. Schwartz, Theodore N. Mirvis, Paul K. Rowe and George T. Conway, III of Wachtell, Lipton, Rosen & Katz, New York City, for appellee QVC Network Inc.

Irving Morris, Karen L. Morris and Abraham Rappaport of Morris & Morris, Pamela S. Tikellis, Carolyn D. Mack and Cynthia A. Calder of Chimicles, Burt & Jacobsen, Joseph A. Rosenthal and Norman M. Monhait of Rosenthal, Monhait, Gross & Goddess, P.A., Wilmington, Daniel W. Krasner and Jeffrey G. Smith of Wolf, Haldenstein, Adler, Freeman & Herz, Arthur N. Abbey (argued), and Mark C. Gardy of Abbey & Ellis, New York City, for the shareholder appellees.

Before VEASEY, C.J., MOORE and HOLLAND. JJ.

[35] VEASEY, Chief Justice.

In this appeal we review an order of the Court of Chancery dated November 24, 1993 (the "November 24 Order"), preliminarily enjoining certain defensive measures designed to facilitate a so-called strategic alliance between Viacom Inc. ("Viacom") and Paramount Communications Inc. ("Paramount") approved by the board of directors of Paramount (the "Paramount Board" or the "Paramount directors") and to thwart an unsolicited, more valuable, tender offer by QVC Network Inc. ("QVC"). In affirming, we hold that the sale of control in this case, which is at the heart of the proposed strategic alliance, implicates enhanced judicial scrutiny of the conduct of the Paramount Board under Unocal Corp. v. Mesa Petroleum Co., Del. Supr., 493 A.2d 946 (1985), and Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., Del.Supr., 506 A.2d 173 (1986). We further hold that the conduct of the Paramount Board was not reasonable as to process or result.

QVC and certain stockholders of Paramount commenced separate actions (later consolidated) in the Court of Chancery seeking preliminary and permanent injunctive relief against Paramount, certain members of the Paramount Board, and Viacom. This action arises out of a proposed acquisition of Paramount by Viacom through a tender offer followed by a second-step merger (the "Paramount-Viacom transaction"), and a competing unsolicited tender offer by QVC. The Court of Chancery granted a preliminary injunction. QVC Network, Inc. v. Paramount Communications Inc., Del.Ch., 635 A.2d 1245, Jacobs, V.C. (1993), (the "Court of Chancery Opinion"). We affirmed by order dated December 9, 1993. Paramount Communications Inc. v. QVC Network Inc., Del. Supr., Nos. 427 and 428, 1993, 637 A.2d 828, Veasey, C.J. (Dec. 9, 1993) (the "December 9 Order").^[1]

The Court of Chancery found that the Paramount directors violated their fiduciary duties by favoring the Paramount-Viacom transaction over the more valuable unsolicited offer of QVC. The Court of Chancery preliminarily enjoined Paramount and the individual defendants (the "Paramount defendants") from amending or modifying Paramount's stockholder rights agreement (the "Rights Agreement"), including the redemption of the Rights, or taking other action to facilitate the consummation of the pending tender offer by Viacom or any proposed second-step merger, including the Merger Agreement between Paramount and Viacom dated September 12, 1993 (the "Original Merger Agreement"), as amended on October 24, 1993 (the "Amended Merger Agreement"). Viacom and the Paramount defendants were enjoined from taking any action [37] to exercise any provision of the Stock Option Agreement between Paramount and Viacom dated September 12, 1993 (the "Stock Option Agreement"), as amended on October 24, 1993. The Court of Chancery did not grant preliminary injunctive relief as to the termination fee provided for the benefit of Viacom in Section 8.05 of the Original Merger Agreement and the Amended Merger Agreement (the "Termination Fee").

Under the circumstances of this case, the pending sale of control implicated in the Paramount-Viacom transaction required the Paramount Board to act on an informed basis to secure the best value reasonably available to the stockholders. Since we agree with the Court of Chancery that the Paramount directors violated their fiduciary duties, we have AFFIRMED the entry of the order of the Vice Chancellor granting the preliminary injunction and have REMANDED these proceedings to the Court of Chancery for proceedings consistent herewith.

We also have attached an Addendum to this opinion addressing serious deposition misconduct by counsel who appeared on behalf of a Paramount director at the time that director's deposition was taken by a lawyer representing QVC.^[2]

I. FACTS

The Court of Chancery Opinion contains a detailed recitation of its factual findings in this matter. Court of Chancery Opinion, 635 A.2d 1245, 1246-1259. Only a brief summary of the facts is necessary for purposes of this opinion. The following summary is drawn from the findings of fact set forth in the Court of Chancery Opinion and our independent review of the record.^[3]

Paramount is a Delaware corporation with its principal offices in New York City. Approximately 118 million shares of Paramount's common stock are outstanding and traded on the New York Stock Exchange. The majority of Paramount's stock is publicly held by numerous unaffiliated investors. Paramount owns and operates a diverse group of entertainment businesses, including motion picture and television studios, book publishers, professional sports teams, and amusement parks.

There are 15 persons serving on the Paramount Board. Four directors are officer-employees of Paramount: Martin S. Davis ("Davis"), Paramount's Chairman and Chief Executive Officer since 1983; Donald Oresman ("Oresman"), Executive Vice-President, Chief Administrative Officer, and General Counsel; Stanley R. Jaffe, President and Chief Operating Officer; and Ronald L. Nelson, Executive Vice President and Chief Financial Officer. Paramount's 11 outside directors are distinguished and experienced business persons who are present or former senior executives of public corporations or financial institutions.^[4]

[38] Viacom is a Delaware corporation with its headquarters in Massachusetts. Viacom is controlled by Sumner M. Redstone ("Red-stone"), its Chairman and Chief Executive Officer, who owns indirectly approximately 85.2 percent of Viacom's voting Class A stock and approximately 69.2 percent of Viacom's nonvoting Class B stock through National Amusements, Inc. ("NAI"), an entity 91.7 percent owned by Redstone. Viacom has a wide range of entertainment operations, including a number of well-known cable television channels such as MTV, Nickelodeon, Showtime, and The Movie Channel. Viacom's equity co-investors in the Paramount-Viacom transaction include NYNEX Corporation and Blockbuster Entertainment Corporation.

QVC is a Delaware corporation with its headquarters in West Chester, Pennsylvania. QVC has several large stockholders, including Liberty Media Corporation, Comcast Corporation, Advance Publications, Inc., and Cox Enterprises Inc. Barry Diller ("Diller"), the Chairman and Chief Executive Officer of QVC, is also a substantial stockholder. QVC sells a variety of merchandise through a televised shopping channel. QVC has several equity co-investors in its proposed combination with Paramount including BellSouth Corporation and Comcast Corporation.

Beginning in the late 1980s, Paramount investigated the possibility of acquiring or merging with other companies in the entertainment, media, or communications industry. Paramount considered such transactions to be desirable, and perhaps necessary, in order to keep pace with competitors in the rapidly evolving field of entertainment and communications. Consistent with its goal of strategic expansion, Paramount made a tender offer for Time Inc. in 1989, but was ultimately unsuccessful. See Paramount Communications, Inc. v. Time Inc., Del. Supr., 571 A.2d 1140 (1990) ("Time-Warner").

Although Paramount had considered a possible combination of Paramount and Viacom as early as 1990, recent efforts to explore such a transaction began at a dinner meeting between Redstone and Davis on April 20, 1993. Robert Greenhill ("Greenhill"), Chairman of Smith Barney Shearson Inc. ("Smith Barney"), attended and helped facilitate this meeting. After several more meetings between Redstone and Davis, serious negotiations began taking place in early July.

It was tentatively agreed that Davis would be the chief executive officer and Redstone would be the controlling stockholder of the combined company, but the parties could not reach agreement on the merger price and the terms of a stock option to be granted to Viacom. With respect to price, Viacom offered a package of cash and stock (primarily Viacom Class B nonvoting stock) with a market value of approximately $61 per share, but Paramount wanted at least $70 per share.

Shortly after negotiations broke down in July 1993, two notable events occurred. First, Davis apparently learned of QVC's potential interest in Paramount, and told Diller over lunch on July 21, 1993, that Paramount was not for sale. Second, the market value of Viacom's Class B nonvoting stock increased from $46.875 on July 6 to $57.25 on August 20. QVC claims (and Viacom disputes) that this price increase was caused by open market purchases of such stock by Redstone or entities controlled by him.

[39] On August 20, 1993, discussions between Paramount and Viacom resumed when Greenhill arranged another meeting between Davis and Redstone. After a short hiatus, the parties negotiated in earnest in early September, and performed due diligence with the assistance of their financial advisors, Lazard Freres & Co. ("Lazard") for Paramount and Smith Barney for Viacom. On September 9, 1993, the Paramount Board was informed about the status of the negotiations and was provided information by Lazard, including an analysis of the proposed transaction.

On September 12, 1993, the Paramount Board met again and unanimously approved the Original Merger Agreement whereby Paramount would merge with and into Viacom. The terms of the merger provided that each share of Paramount common stock would be converted into 0.10 shares of Viacom Class A voting stock, 0.90 shares of Viacom Class B nonvoting stock, and $9.10 in cash. In addition, the Paramount Board agreed to amend its "poison pill" Rights Agreement to exempt the proposed merger with Viacom. The Original Merger Agreement also contained several provisions designed to make it more difficult for a potential competing bid to succeed. We focus, as did the Court of Chancery, on three of these defensive provisions: a "no-shop" provision (the "No-Shop Provision"), the Termination Fee, and the Stock Option Agreement.

First, under the No-Shop Provision, the Paramount Board agreed that Paramount would not solicit, encourage, discuss, negotiate, or endorse any competing transaction unless: (a) a third party "makes an unsolicited written, bona fide proposal, which is not subject to any material contingencies relating to financing"; and (b) the Paramount Board determines that discussions or negotiations with the third party are necessary for the Paramount Board to comply with its fiduciary duties.

Second, under the Termination Fee provision, Viacom would receive a $100 million termination fee if: (a) Paramount terminated the Original Merger Agreement because of a competing transaction; (b) Paramount's stockholders did not approve the merger; or (c) the Paramount Board recommended a competing transaction.

The third and most significant deterrent device was the Stock Option Agreement, which granted to Viacom an option to purchase approximately 19.9 percent (23,699,000 shares) of Paramount's outstanding common stock at $69.14 per share if any of the triggering events for the Termination Fee occurred. In addition to the customary terms that are normally associated with a stock option, the Stock Option Agreement contained two provisions that were both unusual and highly beneficial to Viacom: (a) Viacom was permitted to pay for the shares with a senior subordinated note of questionable marketability instead of cash, thereby avoiding the need to raise the $1.6 billion purchase price (the "Note Feature"); and (b) Viacom could elect to require Paramount to pay Viacom in cash a sum equal to the difference between the purchase price and the market price of Paramount's stock (the "Put Feature"). Because the Stock Option Agreement was not "capped" to limit its maximum dollar value, it had the potential to reach (and in this case did reach) unreasonable levels.

After the execution of the Original Merger Agreement and the Stock Option Agreement on September 12, 1993, Paramount and Viacom announced their proposed merger. In a number of public statements, the parties indicated that the pending transaction was a virtual certainty. Redstone described it as a "marriage" that would "never be torn asunder" and stated that only a "nuclear attack" could break the deal. Redstone also called Diller and John Malone of Tele-Communications Inc., a major stockholder of QVC, to dissuade them from making a competing bid.

Despite these attempts to discourage a competing bid, Diller sent a letter to Davis on September 20, 1993, proposing a merger in which QVC would acquire Paramount for approximately $80 per share, consisting of 0.893 shares of QVC common stock and $30 in cash. QVC also expressed its eagerness to meet with Paramount to negotiate the details of a transaction. When the Paramount Board met on September 27, it was advised by Davis that the Original Merger [40] Agreement prohibited Paramount from having discussions with QVC (or anyone else) unless certain conditions were satisfied. In particular, QVC had to supply evidence that its proposal was not subject to financing contingencies. The Paramount Board was also provided information from Lazard describing QVC and its proposal.

On October 5, 1993, QVC provided Paramount with evidence of QVC's financing. The Paramount Board then held another meeting on October 11, and decided to authorize management to meet with QVC. Davis also informed the Paramount Board that Booz-Allen & Hamilton ("Booz-Allen"), a management consulting firm, had been retained to assess, inter alia, the incremental earnings potential from a Paramount-Viacom merger and a Paramount-QVC merger. Discussions proceeded slowly, however, due to a delay in Paramount signing a confidentiality agreement. In response to Paramount's request for information, QVC provided two binders of documents to Paramount on October 20.

On October 21, 1993, QVC filed this action and publicly announced an $80 cash tender offer for 51 percent of Paramount's outstanding shares (the "QVC tender offer"). Each remaining share of Paramount common stock would be converted into 1.42857 shares of QVC common stock in a second-step merger. The tender offer was conditioned on, among other things, the invalidation of the Stock Option Agreement, which was worth over $200 million by that point.^[5] QVC contends that it had to commence a tender offer because of the slow pace of the merger discussions and the need to begin seeking clearance under federal antitrust laws.

Confronted by QVC's hostile bid, which on its face offered over $10 per share more than the consideration provided by the Original Merger Agreement, Viacom realized that it would need to raise its bid in order to remain competitive. Within hours after QVC's tender offer was announced, Viacom entered into discussions with Paramount concerning a revised transaction. These discussions led to serious negotiations concerning a comprehensive amendment to the original Paramount-Viacom transaction. In effect, the opportunity for a "new deal" with Viacom was at hand for the Paramount Board. With the QVC hostile bid offering greater value to the Paramount stockholders, the Paramount Board had considerable leverage with Viacom.

At a special meeting on October 24, 1993, the Paramount Board approved the Amended Merger Agreement and an amendment to the Stock Option Agreement. The Amended Merger Agreement was, however, essentially the same as the Original Merger Agreement, except that it included a few new provisions. One provision related to an $80 per share cash tender offer by Viacom for 51 percent of Paramount's stock, and another changed the merger consideration so that each share of Paramount would be converted into 0.20408 shares of Viacom Class A voting stock, 1.08317 shares of Viacom Class B nonvoting stock, and 0.20408 shares of a new series of Viacom convertible preferred stock. The Amended Merger Agreement also added a provision giving Paramount the right not to amend its Rights Agreement to exempt Viacom if the Paramount Board determined that such an amendment would be inconsistent with its fiduciary duties because another offer constituted a "better alternative."^[6] Finally, the Paramount Board was given the power to terminate the Amended Merger Agreement if it withdrew its recommendation of the Viacom transaction or recommended a competing transaction.

Although the Amended Merger Agreement offered more consideration to the Paramount stockholders and somewhat more flexibility to the Paramount Board than did the Original Merger Agreement, the defensive measures designed to make a competing bid more difficult were not removed or modified. [41] In particular, there is no evidence in the record that Paramount sought to use its newly-acquired leverage to eliminate or modify the No-Shop Provision, the Termination Fee, or the Stock Option Agreement when the subject of amending the Original Merger Agreement was on the table.

Viacom's tender offer commenced on October 25, 1993, and QVC's tender offer was formally launched on October 27, 1993. Diller sent a letter to the Paramount Board on October 28 requesting an opportunity to negotiate with Paramount, and Oresman responded the following day by agreeing to meet. The meeting, held on November 1, was not very fruitful, however, after QVC's proposed guidelines for a "fair bidding process" were rejected by Paramount on the ground that "auction procedures" were inappropriate and contrary to Paramount's contractual obligations to Viacom.

On November 6, 1993, Viacom unilaterally raised its tender offer price to $85 per share in cash and offered a comparable increase in the value of the securities being proposed in the second-step merger. At a telephonic meeting held later that day, the Paramount Board agreed to recommend Viacom's higher bid to Paramount's stockholders.

QVC responded to Viacom's higher bid on November 12 by increasing its tender offer to $90 per share and by increasing the securities for its second-step merger by a similar amount. In response to QVC's latest offer, the Paramount Board scheduled a meeting for November 15, 1993. Prior to the meeting, Oresman sent the members of the Paramount Board a document summarizing the "conditions and uncertainties" of QVC's offer. One director testified that this document gave him a very negative impression of the QVC bid.

At its meeting on November 15, 1993, the Paramount Board determined that the new QVC offer was not in the best interests of the stockholders. The purported basis for this conclusion was that QVC's bid was excessively conditional. The Paramount Board did not communicate with QVC regarding the status of the conditions because it believed that the No-Shop Provision prevented such communication in the absence of firm financing. Several Paramount directors also testified that they believed the Viacom transaction would be more advantageous to Paramount's future business prospects than a QVC transaction.^[7] Although a number of materials were distributed to the Paramount Board describing the Viacom and QVC transactions, the only quantitative analysis of the consideration to be received by the stockholders under each proposal was based on then-current market prices of the securities involved, not on the anticipated value of such securities at the time when the stockholders would receive them.^[8]

The preliminary injunction hearing in this case took place on November 16, 1993. On November 19, Diller wrote to the Paramount Board to inform it that QVC had obtained financing commitments for its tender offer and that there was no antitrust obstacle to the offer. On November 24, 1993, the Court of Chancery issued its decision granting a preliminary injunction in favor of QVC and the plaintiff stockholders. This appeal followed.

II. APPLICABLE PRINCIPLES OF ESTABLISHED DELAWARE LAW

The General Corporation Law of the State of Delaware (the "General Corporation Law") and the decisions of this Court have repeatedly recognized the fundamental principle that the management of the business and affairs of a Delaware corporation is entrusted to its directors, who are the duly elected and authorized representatives of the [42] stockholders. 8 Del.C. § 141(a); Aronson v. Lewis, Del.Supr., 473 A.2d 805, 811-12 (1984); Pogostin v. Rice, Del.Supr., 480 A.2d 619, 624 (1984). Under normal circumstances, neither the courts nor the stockholders should interfere with the managerial decisions of the directors. The business judgment rule embodies the deference to which such decisions are entitled. Aronson, 473 A.2d at 812.

Nevertheless, there are rare situations which mandate that a court take a more direct and active role in overseeing the decisions made and actions taken by directors. In these situations, a court subjects the directors' conduct to enhanced scrutiny to ensure that it is reasonable.^[9] The decisions of this Court have clearly established the circumstances where such enhanced scrutiny will be applied. E.g., Unocal, 493 A.2d 946; Moran v. Household Int'l, Inc., Del.Supr., 500 A.2d 1346 (1985); Revlon, 506 A.2d 173; Mills Acquisition Co. v. Macmillan, Inc., Del.Supr., 559 A.2d 1261 (1989); Gilbert v. El Paso Co., Del.Supr., 575 A.2d 1131 (1990). The case at bar implicates two such circumstances: (1) the approval of a transaction resulting in a sale of control, and (2) the adoption of defensive measures in response to a threat to corporate control.

A. The Significance of a Sale or Change^[10] of Control

When a majority of a corporation's voting shares are acquired by a single person or entity, or by a cohesive group acting together, there is a significant diminution in the voting power of those who thereby become minority stockholders. Under the statutory framework of the General Corporation Law, many of the most fundamental corporate changes can be implemented only if they are approved by a majority vote of the stockholders. Such actions include elections of directors, amendments to the certificate of incorporation, mergers, consolidations, sales of all or substantially all of the assets of the corporation, and dissolution. 8 Del.C. §§ 211, 242, 251-258, 263, 271, 275. Because of the overriding importance of voting rights, this Court and the Court of Chancery have consistently acted to protect stockholders from unwarranted interference with such rights.^[11]

In the absence of devices protecting the minority stockholders,^[12] stockholder votes are likely to become mere formalities where there is a majority stockholder. For example, minority stockholders can be deprived of a continuing equity interest in their corporation by means of a cash-out merger. Weinberger, [43] 457 A.2d at 703. Absent effective protective provisions, minority stockholders must rely for protection solely on the fiduciary duties owed to them by the directors and the majority stockholder, since the minority stockholders have lost the power to influence corporate direction through the ballot. The acquisition of majority status and the consequent privilege of exerting the powers of majority ownership come at a price. That price is usually a control premium which recognizes not only the value of a control block of shares, but also compensates the minority stockholders for their resulting loss of voting power.

In the case before us, the public stockholders (in the aggregate) currently own a majority of Paramount's voting stock. Control of the corporation is not vested in a single person, entity, or group, but vested in the fluid aggregation of unaffiliated stockholders. In the event the Paramount-Viacom transaction is consummated, the public stockholders will receive cash and a minority equity voting position in the surviving corporation. Following such consummation, there will be a controlling stockholder who will have the voting power to: (a) elect directors; (b) cause a break-up of the corporation; (c) merge it with another company; (d) cash-out the public stockholders; (e) amend the certificate of incorporation; (f) sell all or substantially all of the corporate assets; or (g) otherwise alter materially the nature of the corporation and the public stockholders' interests. Irrespective of the present Paramount Board's vision of a long-term strategic alliance with Viacom, the proposed sale of control would provide the new controlling stockholder with the power to alter that vision.

Because of the intended sale of control, the Paramount-Viacom transaction has economic consequences of considerable significance to the Paramount stockholders. Once control has shifted, the current Paramount stockholders will have no leverage in the future to demand another control premium. As a result, the Paramount stockholders are entitled to receive, and should receive, a control premium and/or protective devices of significant value. There being no such protective provisions in the Viacom-Paramount transaction, the Paramount directors had an obligation to take the maximum advantage of the current opportunity to realize for the stockholders the best value reasonably available.

B. The Obligations of Directors in a Sale or Change of Control Transaction

The consequences of a sale of control impose special obligations on the directors of a corporation.^[13] In particular, they have the obligation of acting reasonably to seek the transaction offering the best value reasonably available to the stockholders. The courts will apply enhanced scrutiny to ensure that the directors have acted reasonably. The obligations of the directors and the enhanced scrutiny of the courts are well-established by the decisions of this Court. The directors' fiduciary duties in a sale of control context are those which generally attach. In short, "the directors must act in accordance with their fundamental duties of care and loyalty." Barkan v. Amsted Indus., Inc., Del.Supr., 567 A.2d 1279, 1286 (1989). As we held in Macmillan:

It is basic to our law that the board of directors has the ultimate responsibility for managing the business and affairs of a corporation. In discharging this function, the directors owe fiduciary duties of care and loyalty to the corporation and its shareholders. This unremitting obligation extends equally to board conduct in a sale of corporate control. [44] 559 A.2d at 1280 (emphasis supplied) (citations omitted).

In the sale of control context, the directors must focus on one primary objective — to secure the transaction offering the best value reasonably available for the stockholders — and they must exercise their fiduciary duties to further that end. The decisions of this Court have consistently emphasized this goal. Revlon, 506 A.2d at 182 ("The duty of the board ... [is] the maximization of the company's value at a sale for the stockholders' benefit."); Macmillan, 559 A.2d at 1288 ("[I]n a sale of corporate control the responsibility of the directors is to get the highest value reasonably attainable for the shareholders."); Barkan, 567 A.2d at 1286 ("[T]he board must act in a neutral manner to encourage the highest possible price for shareholders."). See also Wilmington Trust Co. v. Coulter, Del.Supr., 200 A.2d 441, 448 (1964) (in the context of the duty of a trustee, "[w]hen all is equal ... it is plain that the Trustee is bound to obtain the best price obtainable").

In pursuing this objective, the directors must be especially diligent. See Citron v. Fairchild Camera and Instrument Corp., Del.Supr., 569 A.2d 53, 66 (1989) (discussing "a board's active and direct role in the sale process"). In particular, this Court has stressed the importance of the board being adequately informed in negotiating a sale of control: "The need for adequate information is central to the enlightened evaluation of a transaction that a board must make." Barkan, 567 A.2d at 1287. This requirement is consistent with the general principle that "directors have a duty to inform themselves, prior to making a business decision, of all material information reasonably available to them." Aronson, 473 A.2d at 812. See also Cede & Co. v. Technicolor, Inc., Del.Supr., 634 A.2d 345, 367 (1993); Smith v. Van Gorkom, Del.Supr., 488 A.2d 858, 872 (1985). Moreover, the role of outside, independent directors becomes particularly important because of the magnitude of a sale of control transaction and the possibility, in certain cases, that management may not necessarily be impartial. See Macmillan, 559 A.2d at 1285 (requiring "the intense scrutiny and participation of the independent directors").

Barkan teaches some of the methods by which a board can fulfill its obligation to seek the best value reasonably available to the stockholders. 567 A.2d at 1286-87. These methods are designed to determine the existence and viability of possible alternatives. They include conducting an auction, canvassing the market, etc. Delaware law recognizes that there is "no single blueprint" that directors must follow. Id. at 1286-87; Citron 569 A.2d at 68; Macmillan, 559 A.2d at 1287.

In determining which alternative provides the best value for the stockholders, a board of directors is not limited to considering only the amount of cash involved, and is not required to ignore totally its view of the future value of a strategic alliance. See Macmillan, 559 A.2d at 1282 n. 29. Instead, the directors should analyze the entire situation and evaluate in a disciplined manner the consideration being offered. Where stock or other non-cash consideration is involved, the board should try to quantify its value, if feasible, to achieve an objective comparison of the alternatives.^[14] In addition, the board may assess a variety of practical considerations relating to each alternative, including:

[an offer's] fairness and feasibility; the proposed or actual financing for the offer, and the consequences of that financing; questions of illegality; ... the risk of nonconsum[m]ation;... the bidder's identity, prior background and other business venture experiences; and the bidder's business plans for the corporation and their effects on stockholder interests.

Macmillan, 559 A.2d at 1282 n. 29. These considerations are important because the selection of one alternative may permanently foreclose other opportunities. While the assessment of these factors may be complex, [45] the board's goal is straightforward: Having informed themselves of all material information reasonably available, the directors must decide which alternative is most likely to offer the best value reasonably available to the stockholders.

C. Enhanced Judicial Scrutiny of a Sale or Change of Control Transaction

Board action in the circumstances presented here is subject to enhanced scrutiny. Such scrutiny is mandated by: (a) the threatened diminution of the current stockholders' voting power; (b) the fact that an asset belonging to public stockholders (a control premium) is being sold and may never be available again; and (c) the traditional concern of Delaware courts for actions which impair or impede stockholder voting rights (see supra note 11). In Macmillan, this Court held:

When Revlon duties devolve upon directors, this Court will continue to exact an enhanced judicial scrutiny at the threshold, as in Unocal, before the normal presumptions of the business judgment rule will apply.^[15]

559 A.2d at 1288. The Macmillan decision articulates a specific two-part test for analyzing board action where competing bidders are not treated equally:^[16]

In the face of disparate treatment, the trial court must first examine whether the directors properly perceived that shareholder interests were enhanced. In any event the board's action must be reasonable in relation to the advantage sought to be achieved, or conversely, to the threat which a particular bid allegedly poses to stockholder interests.

Id. See also Roberts v. General Instrument Corp., Del.Ch., C.A. No. 11639, 1990 WL 118356, Allen, C. (Aug. 13, 1990), reprinted at 16 Del.J.Corp.L. 1540, 1554 ("This enhanced test requires a judicial judgment of reasonableness in the circumstances.").

The key features of an enhanced scrutiny test are: (a) a judicial determination regarding the adequacy of the decisionmaking process employed by the directors, including the information on which the directors based their decision; and (b) a judicial examination of the reasonableness of the directors' action in light of the circumstances then existing. The directors have the burden of proving that they were adequately informed and acted reasonably.

Although an enhanced scrutiny test involves a review of the reasonableness of the substantive merits of a board's actions,^[17] a court should not ignore the complexity of the directors' task in a sale of control. There are many business and financial considerations implicated in investigating and selecting the best value reasonably available. The board of directors is the corporate decisionmaking body best equipped to make these judgments. Accordingly, a court applying enhanced judicial scrutiny should be deciding whether the directors made a reasonable decision, not a perfect decision. If a board selected one of several reasonable alternatives, a court should not second-guess that choice even though it might have decided otherwise or subsequent events may have cast doubt on the board's determination. Thus, courts will not substitute their business judgment for that of the directors, but will determine if the directors' decision was, on balance, within a range of reasonableness. [46] See Unocal, 493 A.2d at 955-56; Macmillan, 559 A.2d at 1288; Nixon, 626 A.2d at 1378.

D. Revlon and Time-Warner Distinguished

The Paramount defendants and Viacom assert that the fiduciary obligations and the enhanced judicial scrutiny discussed above are not implicated in this case in the absence of a "break-up" of the corporation, and that the order granting the preliminary injunction should be reversed. This argument is based on their erroneous interpretation of our decisions in Revlon and Time-Warner.

In Revlon, we reviewed the actions of the board of directors of Revlon, Inc. ("Revlon"), which had rebuffed the overtures of Pantry Pride, Inc. and had instead entered into an agreement with Forstmann Little & Co. ("Forstmann") providing for the acquisition of 100 percent of Revlon's outstanding stock by Forstmann and the subsequent break-up of Revlon. Based on the facts and circumstances present in Revlon, we held that "[t]he directors' role changed from defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company." 506 A.2d at 182. We further held that "when a board ends an intense bidding contest on an insubstantial basis, ... [that] action cannot withstand the enhanced scrutiny which Unocal requires of director conduct." Id. at 184.

It is true that one of the circumstances bearing on these holdings was the fact that "the break-up of the company . . . had become a reality which even the directors embraced." Id. at 182. It does not follow, however, that a "break-up" must be present and "inevitable" before directors are subject to enhanced judicial scrutiny and are required to pursue a transaction that is calculated to produce the best value reasonably available to the stockholders. In fact, we stated in Revlon that "when bidders make relatively similar offers, or dissolution of the company becomes inevitable, the directors cannot fulfill their enhanced Unocal duties by playing favorites with the contending factions." Id. at 184 (emphasis added). Revlon thus does not hold that an inevitable dissolution or "break-up" is necessary.

The decisions of this Court following Revlon reinforced the applicability of enhanced scrutiny and the directors' obligation to seek the best value reasonably available for the stockholders where there is a pending sale of control, regardless of whether or not there is to be a break-up of the corporation. In Macmillan, this Court held:

We stated in Revlon, and again here, that in a sale of corporate control the responsibility of the directors is to get the highest value reasonably attainable for the shareholders.

559 A.2d at 1288 (emphasis added). In Barkan, we observed further:

We believe that the general principles announced in Revlon, in Unocal Corp. v. Mesa Petroleum Co., Del.Supr., 493 A.2d 946 (1985), and in Moran v. Household International, Inc., Del.Supr., 500 A.2d 1346 (1985) govern this case and every case in which a fundamental change of corporate control occurs or is contemplated.

567 A.2d at 1286 (emphasis added).

Although Macmillan and Barkan are clear in holding that a change of control imposes on directors the obligation to obtain the best value reasonably available to the stockholders, the Paramount defendants have interpreted our decision in Time-Warner as requiring a corporate break-up in order for that obligation to apply. The facts in Time-Warner, however, were quite different from the facts of this case, and refute Paramount's position here. In Time-Warner, the Chancellor held that there was no change of control in the original stock-for-stock merger between Time and Warner because Time would be owned by a fluid aggregation of unaffiliated stockholders both before and after the merger:

If the appropriate inquiry is whether a change in control is contemplated, the answer must be sought in the specific circumstances surrounding the transaction. Surely under some circumstances a stock for stock merger could reflect a transfer of corporate control. That would, for example, plainly be the case here if Warner were a private company. But where, as [47] here, the shares of both constituent corporations are widely held, corporate control can be expected to remain unaffected by a stock for stock merger. This in my judgment was the situation with respect to the original merger agreement. When the specifics of that situation are reviewed, it is seen that, aside from legal technicalities and aside from arrangements thought to enhance the prospect for the ultimate succession of [Nicholas J. Nicholas, Jr., president of Time], neither corporation could be said to be acquiring the other. Control of both remained in a large, fluid, changeable and changing market.

The existence of a control block of stock in the hands of a single shareholder or a group with loyalty to each other does have real consequences to the financial value of "minority" stock. The law offers some protection to such shares through the imposition of a fiduciary duty upon controlling shareholders. But here, effectuation of the merger would not have subjected Time shareholders to the risks and consequences of holders of minority shares. This is a reflection of the fact that no control passed to anyone in the transaction contemplated. The shareholders of Time would have "suffered" dilution, of course, but they would suffer the same type of dilution upon the public distribution of new stock.

Paramount Communications Inc. v. Time Inc., Del.Ch., No. 10866, 1989 WL 79880, Allen, C. (July 17, 1989), reprinted at 15 Del.J.Corp.L. 700, 739 (emphasis added). Moreover, the transaction actually consummated in Time-Warner was not a merger, as originally planned, but a sale of Warner's stock to Time.

In our affirmance of the Court of Chancery's well-reasoned decision, this Court held that "The Chancellor's findings of fact are supported by the record and his conclusion is correct as a matter of law." 571 A.2d at 1150 (emphasis added). Nevertheless, the Paramount defendants here have argued that a break-up is a requirement and have focused on the following language in our Time-Warner decision:

However, we premise our rejection of plaintiffs' Revlon claim on different grounds, namely, the absence of any substantial evidence to conclude that Time's board, in negotiating with Warner, made the dissolution or break-up of the corporate entity inevitable, as was the case in Revlon.

Under Delaware law there are, generally speaking and without excluding other possibilities, two circumstances which may implicate Revlon duties. The first, and clearer one, is when a corporation initiates an active bidding process seeking to sell itself or to effect a business reorganization involving a clear break-up of the company. However, Revlon duties may also be triggered where, in response to a bidder's offer, a target abandons its long-term strategy and seeks an alternative transaction involving the breakup of the company.

Id. at 1150 (emphasis added) (citation and footnote omitted).

The Paramount defendants have misread the holding of Time-Warner. Contrary to their argument, our decision in Time-Warner expressly states that the two general scenarios discussed in the above-quoted paragraph are not the only instances where "Revlon duties" may be implicated. The Paramount defendants' argument totally ignores the phrase "without excluding other possibilities." Moreover, the instant case is clearly within the first general scenario set forth in Time-Warner. The Paramount Board, albeit unintentionally, had "initiate[d] an active bidding process seeking to sell itself" by agreeing to sell control of the corporation to Viacom in circumstances where another potential acquiror (QVC) was equally interested in being a bidder.

The Paramount defendants' position that both a change of control and a break-up are required must be rejected. Such a holding would unduly restrict the application of Revlon, is inconsistent with this Court's decisions in Barkan and Macmillan, and has no basis in policy. There are few events that have a more significant impact on the stockholders than a sale of control or a corporate breakup. Each event represents a fundamental [48] (and perhaps irrevocable) change in the nature of the corporate enterprise from a practical standpoint. It is the significance of each of these events that justifies: (a) focusing on the directors' obligation to seek the best value reasonably available to the stockholders; and (b) requiring a close scrutiny of board action which could be contrary to the stockholders' interests.

Accordingly, when a corporation undertakes a transaction which will cause: (a) a change in corporate control; or (b) a breakup of the corporate entity, the directors' obligation is to seek the best value reasonably available to the stockholders. This obligation arises because the effect of the Viacom-Paramount transaction, if consummated, is to shift control of Paramount from the public stockholders to a controlling stockholder, Viacom. Neither Time-Warner nor any other decision of this Court holds that a "break-up" of the company is essential to give rise to this obligation where there is a sale of control.

III. BREACH OF FIDUCIARY DUTIES BY PARAMOUNT BOARD

We now turn to duties of the Paramount Board under the facts of this case and our conclusions as to the breaches of those duties which warrant injunctive relief.

A. The Specific Obligations of the Paramount Board

Under the facts of this case, the Paramount directors had the obligation: (a) to be diligent and vigilant in examining critically the Paramount-Viacom transaction and the QVC tender offers; (b) to act in good faith; (c) to obtain, and act with due care on, all material information reasonably available, including information necessary to compare the two offers to determine which of these transactions, or an alternative course of action, would provide the best value reasonably available to the stockholders; and (d) to negotiate actively and in good faith with both Viacom and QVC to that end.

Having decided to sell control of the corporation, the Paramount directors were required to evaluate critically whether or not all material aspects of the Paramount-Viacom transaction (separately and in the aggregate) were reasonable and in the best interests of the Paramount stockholders in light of current circumstances, including: the change of control premium, the Stock Option Agreement, the Termination Fee, the coercive nature of both the Viacom and QVC tender offers,^[18] the No-Shop Provision, and the proposed disparate use of the Rights Agreement as to the Viacom and QVC tender offers, respectively.

These obligations necessarily implicated various issues, including the questions of whether or not those provisions and other aspects of the Paramount-Viacom transaction (separately and in the aggregate): (a) adversely affected the value provided to the Paramount stockholders; (b) inhibited or encouraged alternative bids; (c) were enforceable contractual obligations in light of the directors' fiduciary duties; and (d) in the end would advance or retard the Paramount directors' obligation to secure for the Paramount stockholders the best value reasonably available under the circumstances.

The Paramount defendants contend that they were precluded by certain contractual provisions, including the No-Shop Provision, from negotiating with QVC or seeking alternatives. Such provisions, whether or not they are presumptively valid in the abstract, may not validly define or limit the directors' fiduciary duties under Delaware law or prevent the Paramount directors from carrying out their fiduciary duties under Delaware law. To the extent such provisions are inconsistent with those duties, they are invalid and unenforceable. See Revlon, 506 A.2d at 184-85.

Since the Paramount directors had already decided to sell control, they had an obligation [49] to continue their search for the best value reasonably available to the stockholders. This continuing obligation included the responsibility, at the October 24 board meeting and thereafter, to evaluate critically both the QVC tender offers and the Paramount-Viacom transaction to determine if: (a) the QVC tender offer was, or would continue to be, conditional; (b) the QVC tender offer could be improved; (c) the Viacom tender offer or other aspects of the Paramount-Viacom transaction could be improved; (d) each of the respective offers would be reasonably likely to come to closure, and under what circumstances; (e) other material information was reasonably available for consideration by the Paramount directors; (f) there were viable and realistic alternative courses of action; and (g) the timing constraints could be managed so the directors could consider these matters carefully and deliberately.

B. The Breaches of Fiduciary Duty by the Paramount Board

The Paramount directors made the decision on September 12, 1993, that, in their judgment, a strategic merger with Viacom on the economic terms of the Original Merger Agreement was in the best interests of Paramount and its stockholders. Those terms provided a modest change of control premium to the stockholders. The directors also decided at that time that it was appropriate to agree to certain defensive measures (the Stock Option Agreement, the Termination Fee, and the No-Shop Provision) insisted upon by Viacom as part of that economic transaction. Those defensive measures, coupled with the sale of control and subsequent disparate treatment of competing bidders, implicated the judicial scrutiny of Unocal, Revlon, Macmillan, and their progeny. We conclude that the Paramount directors' process was not reasonable, and the result achieved for the stockholders was not reasonable under the circumstances.

When entering into the Original Merger Agreement, and thereafter, the Paramount Board clearly gave insufficient attention to the potential consequences of the defensive measures demanded by Viacom. The Stock Option Agreement had a number of unusual and potentially "draconian"^[19] provisions, including the Note Feature and the Put Feature. Furthermore, the Termination Fee, whether or not unreasonable by itself, clearly made Paramount less attractive to other bidders, when coupled with the Stock Option Agreement. Finally, the No-Shop Provision inhibited the Paramount Board's ability to negotiate with other potential bidders, particularly QVC which had already expressed an interest in Paramount.^[20]

Throughout the applicable time period, and especially from the first QVC merger proposal on September 20 through the Paramount Board meeting on November 15, QVC's interest in Paramount provided the opportunity for the Paramount Board to seek significantly higher value for the Paramount stockholders than that being offered by Viacom. QVC persistently demonstrated its intention to meet and exceed the Viacom offers, and [50] frequently expressed its willingness to negotiate possible further increases.

The Paramount directors had the opportunity in the October 23-24 time frame, when the Original Merger Agreement was renegotiated, to take appropriate action to modify the improper defensive measures as well as to improve the economic terms of the Paramount-Viacom transaction. Under the circumstances existing at that time, it should have been clear to the Paramount Board that the Stock Option Agreement, coupled with the Termination Fee and the No-Shop Clause, were impeding the realization of the best value reasonably available to the Paramount stockholders. Nevertheless, the Paramount Board made no effort to eliminate or modify these counterproductive devices, and instead continued to cling to its vision of a strategic alliance with Viacom. Moreover, based on advice from the Paramount management, the Paramount directors considered the QVC offer to be "conditional" and asserted that they were precluded by the No-Shop Provision from seeking more information from, or negotiating with, QVC.

By November 12, 1993, the value of the revised QVC offer on its face exceeded that of the Viacom offer by over $1 billion at then current values. This significant disparity of value cannot be justified on the basis of the directors' vision of future strategy, primarily because the change of control would supplant the authority of the current Paramount Board to continue to hold and implement their strategic vision in any meaningful way. Moreover, their uninformed process had deprived their strategic vision of much of its credibility. See Van Gorkom, 488 A.2d at 872; Cede v. Technicolor, 634 A.2d at 367; Hanson Trust PLC v. ML SCM Acquisition Inc., 2d Cir., 781 F.2d 264, 274 (1986).

When the Paramount directors met on November 15 to consider QVC's increased tender offer, they remained prisoners of their own misconceptions and missed opportunities to eliminate the restrictions they had imposed on themselves. Yet, it was not "too late" to reconsider negotiating with QVC. The circumstances existing on November 15 made it clear that the defensive measures, taken as a whole, were problematic: (a) the No-Shop Provision could not define or limit their fiduciary duties; (b) the Stock Option Agreement had become "draconian"; and (c) the Termination Fee, in context with all the circumstances, was similarly deterring the realization of possibly higher bids. Nevertheless, the Paramount directors remained paralyzed by their uninformed belief that the QVC offer was "illusory." This final opportunity to negotiate on the stockholders' behalf and to fulfill their obligation to seek the best value reasonably available was thereby squandered.^[21]

IV. VIACOM'S CLAIM OF VESTED CONTRACT RIGHTS

Viacom argues that it had certain "vested" contract rights with respect to the No-Shop Provision and the Stock Option Agreement.^[22] In effect, Viacom's argument is that the Paramount directors could enter into an agreement in violation of their fiduciary duties and then render Paramount, and ultimately its stockholders, liable for failing to carry out an agreement in violation of those duties. Viacom's protestations about vested rights are without merit. This Court has found that those defensive measures were improperly designed to deter potential bidders, and that [51] such measures do not meet the reasonableness test to which they must be subjected. They are consequently invalid and unenforceable under the facts of this case.

The No-Shop Provision could not validly define or limit the fiduciary duties of the Paramount directors. To the extent that a contract, or a provision thereof, purports to require a board to act or not act in such a fashion as to limit the exercise of fiduciary duties, it is invalid and unenforceable. Cf. Wilmington Trust v. Coulter, 200 A.2d at 452-54. Despite the arguments of Paramount and Viacom to the contrary, the Paramount directors could not contract away their fiduciary obligations. Since the No-Shop Provision was invalid, Viacom never had any vested contract rights in the provision.

As discussed previously, the Stock Option Agreement contained several "draconian" aspects, including the Note Feature and the Put Feature. While we have held that lock-up options are not per se illegal, see Revlon, 506 A.2d at 183, no options with similar features have ever been upheld by this Court. Under the circumstances of this case, the Stock Option Agreement clearly is invalid. Accordingly, Viacom never had any vested contract rights in that Agreement.

Viacom, a sophisticated party with experienced legal and financial advisors, knew of (and in fact demanded) the unreasonable features of the Stock Option Agreement. It cannot be now heard to argue that it obtained vested contract rights by negotiating and obtaining contractual provisions from a board acting in violation of its fiduciary duties. As the Nebraska Supreme Court said in rejecting a similar argument in ConAgra, Inc. v. Cargill, Inc., 222 Neb. 136, 382 N.W.2d 576, 587-88 (1986), "To so hold, it would seem, would be to get the shareholders coming and going." Likewise, we reject Viacom's arguments and hold that its fate must rise or fall, and in this instance fall, with the determination that the actions of the Paramount Board were invalid.

V. CONCLUSION

The realization of the best value reasonably available to the stockholders became the Paramount directors' primary obligation under these facts in light of the change of control. That obligation was not satisfied, and the Paramount Board's process was deficient. The directors' initial hope and expectation for a strategic alliance with Viacom was allowed to dominate their decisionmaking process to the point where the arsenal of defensive measures established at the outset was perpetuated (not modified or eliminated) when the situation was dramatically altered. QVC's unsolicited bid presented the opportunity for significantly greater value for the stockholders and enhanced negotiating leverage for the directors. Rather than seizing those opportunities, the Paramount directors chose to wall themselves off from material information which was reasonably available and to hide behind the defensive measures as a rationalization for refusing to negotiate with QVC or seeking other alternatives. Their view of the strategic alliance likewise became an empty rationalization as the opportunities for higher value for the stockholders continued to develop.

It is the nature of the judicial process that we decide only the case before us — a case which, on its facts, is clearly controlled by established Delaware law. Here, the proposed change of control and the implications thereof were crystal clear. In other cases they may be less clear. The holding of this case on its facts, coupled with the holdings of the principal cases discussed herein where the issue of sale of control is implicated, should provide a workable precedent against which to measure future cases.

For the reasons set forth herein, the November 24, 1993, Order of the Court of Chancery has been AFFIRMED, and this matter has been REMANDED for proceedings consistent herewith, as set forth in the December 9, 1993, Order of this Court.

ADDENDUM

The record in this case is extensive. The appendix filed in this Court comprises 15 volumes, totalling some 7251 pages. It includes [52] substantial deposition testimony which forms part of the factual record before the Court of Chancery and before this Court. The members of this Court have read and considered the appendix, including the deposition testimony, in reaching its decision, preparing the Order of December 9, 1993, and this opinion. Likewise, the Vice Chancellor's opinion revealed that he was thoroughly familiar with the entire record, including the deposition testimony. As noted, supra p. 37 note 2, the Court has commended the parties for their professionalism in conducting expedited discovery, assembling and organizing the record, and preparing and presenting very helpful briefs, a joint appendix, and oral argument.

The Court is constrained, however, to add this Addendum. Although this Addendum has no bearing on the outcome of the case, it relates to a serious issue of professionalism involving deposition practice in proceedings in Delaware trial courts.^[23]

The issue of discovery abuse, including lack of civility and professional misconduct during depositions, is a matter of considerable concern to Delaware courts and courts around the nation.^[24] One particular instance of misconduct during a deposition in this case demonstrates such an astonishing lack of professionalism and civility that it is worthy of special note here as a lesson for the future — a lesson of conduct not to be tolerated or repeated.

On November 10, 1993, an expedited deposition of Paramount, through one of its directors, J. Hugh Liedtke,^[25] was taken in the state of Texas. The deposition was taken by Delaware counsel for QVC. Mr. Liedtke was individually represented at this deposition by Joseph D. Jamail, Esquire, of the Texas Bar. Peter C. Thomas, Esquire, of the New York Bar appeared and defended on behalf of the Paramount defendants. It does not appear that any member of the Delaware bar was present at the deposition representing any of the defendants or the stockholder plaintiffs.

Mr. Jamail did not otherwise appear in this Delaware proceeding representing any party, and he was not admitted pro hac vice.^[26] [53] Under the rules of the Court of Chancery and this Court,^[27] lawyers who are admitted pro hac vice to represent a party in Delaware proceedings are subject to Delaware Disciplinary Rules,^[28] and are required to review the Delaware State Bar Association Statement of Principles of Lawyer Conduct (the "Statement of Principles").^[29] During the Liedtke deposition, Mr. Jamail abused the privilege of representing a witness in a Delaware proceeding, in that he: (a) improperly directed the witness not to answer certain questions; (b) was extraordinarily rude, uncivil, and vulgar; and (c) obstructed the ability of the questioner to elicit testimony to assist the Court in this matter.

To illustrate, a few excerpts from the latter stages of the Liedtke deposition follow:

A. [Mr. Liedtke] I vaguely recall [Mr. Oresman's letter] .... I think I did read it, probably.

. . . .

Q. (By Mr. Johnston [Delaware counsel for QVC]) Okay. Do you have any idea why Mr. Oresman was calling that material to your attention?

MR. JAMAIL: Don't answer that.

How would he know what was going on in Mr. Oresman's mind?

Don't answer it.

Go on to your next question.

MR. JOHNSTON: No, Joe —

MR. JAMAIL: He's not going to answer that. Certify it. I'm going to shut it down if you don't go to your next question.

[54] MR. JOHNSTON: No. Joe, Joe —

MR. JAMAIL: Don't "Joe" me, asshole. You can ask some questions, but get off of that. I'm tired of you. You could gag a maggot off a meat wagon. Now, we've helped you every way we can.

MR. JOHNSTON: Let's just take it easy.

MR. JAMAIL: No, we're not going to take it easy. Get done with this.

MR. JOHNSTON: We will go on to the next question.

MR. JAMAIL: Do it now.

MR. JOHNSTON: We will go on to the next question. We're not trying to excite anyone.

MR. JAMAIL: Come on. Quit talking. Ask the question. Nobody wants to socialize with you.

MR. JOHNSTON: I'm not trying to socialize. We'll go on to another question. We're continuing the deposition.

MR. JAMAIL: Well, go on and shut up.

MR. JOHNSTON: Are you finished?

MR. JAMAIL: Yeah, you —

MR. JOHNSTON: Are you finished?

MR. JAMAIL: I may be and you may be. Now, you want to sit here and talk to me, fine. This deposition is going to be over with. You don't know what you're doing. Obviously someone wrote out a long outline of stuff for you to ask. You have no concept of what you're doing.

Now, I've tolerated you for three hours. If you've got another question, get on with it. This is going to stop one hour from now, period. Go.

MR. JOHNSTON: Are you finished?

MR. THOMAS: Come on, Mr. Johnston, move it.

MR. JOHNSTON: I don't need this kind of abuse.

MR. THOMAS: Then just ask the next question.

Q. (By Mr. Johnston) All right. To try to move forward, Mr. Liedtke, ... I'll show you what's been marked as Liedtke 14 and it is a covering letter dated October 29 from Steven Cohen of Wachtell, Lipton, Rosen & Katz including QVC's Amendment Number 1 to its Schedule 14D-1, and my question —

A. No.

Q. — to you, sir, is whether you've seen that?

A. No. Look, I don't know what your intent in asking all these questions is, but, my God, I am not going to play boy lawyer.

Q. Mr. Liedtke —

A. Okay. Go ahead and ask your question.

Q. — I'm trying to move forward in this deposition that we are entitled to take. I'm trying to streamline it.

MR. JAMAIL: Come on with your next question. Don't even talk with this witness.

MR. JOHNSTON: I'm trying to move forward with it.

MR. JAMAIL: You understand me? Don't talk to this witness except by question. Did you hear me?

MR. JOHNSTON: I heard you fine.

MR. JAMAIL: You fee makers think you can come here and sit in somebody's office, get your meter running, get your full day's fee by asking stupid questions. Let's go with it.

(JA 6002-06).^[30]

Staunch advocacy on behalf of a client is proper and fully consistent with the finest effectuation of skill and professionalism. Indeed, it is a mark of professionalism, not weakness, for a lawyer zealously and firmly to protect and pursue a client's legitimate interests by a professional, courteous, and civil attitude toward all persons involved in the litigation process. A lawyer who engages in the type of behavior exemplified by Mr. Jamail on the record of the Liedtke deposition is not properly representing his client, and the client's cause is not advanced by a lawyer who engages in unprofessional conduct of this nature. It happens that in this case there was no application to the Court, and the parties and the witness do not [55] appear to have been prejudiced by this misconduct.^[31]

Nevertheless, the Court finds this unprofessional behavior to be outrageous and unacceptable. If a Delaware lawyer had engaged in the kind of misconduct committed by Mr. Jamail on this record, that lawyer would have been subject to censure or more serious sanctions.^[32] While the specter of disciplinary proceedings should not be used by the parties as a litigation tactic,^[33] conduct such as that involved here goes to the heart of the trial court proceedings themselves. As such, it cries out for relief under the trial court's rules, including Ch. Ct. R. 37. Under some circumstances, the use of the trial court's inherent summary contempt powers may be appropriate. See In re Butler, Del.Supr., 609 A.2d 1080, 1082 (1992).

Although busy and overburdened, Delaware trial courts are "but a phone call away" and would be responsive to the plight of a party and its counsel bearing the brunt of such misconduct.^[34] It is not appropriate for this Court to prescribe in the abstract any particular remedy or to provide an exclusive list of remedies under such circumstances. We assume that the trial courts of this State would consider protective orders and the sanctions permitted by the discovery rules. Sanctions could include exclusion of obstreperous counsel from attending the deposition (whether or not he or she has been admitted pro hac vice), ordering the deposition recessed and reconvened promptly in Delaware, or the appointment of a master to preside at the deposition. Costs and counsel fees should follow.

As noted, this was a deposition of Paramount through one of its directors. Mr. Liedtke was a Paramount witness in every respect. He was not there either as an individual defendant or as a third party witness. Pursuant to Ch. Ct. R. 170(d), the Paramount defendants should have been represented at the deposition by a Delaware lawyer or a lawyer admitted pro hac vice. A Delaware lawyer who moves the admission pro hac vice of an out-of-state lawyer is not relieved of responsibility, is required to appear at all court proceedings (except depositions when a lawyer admitted pro hac vice is present), shall certify that the lawyer appearing [56] pro hac vice is reputable and competent, and that the Delaware lawyer is in a position to recommend the out-of-state lawyer.^[35] Thus, one of the principal purposes of the pro hac vice rules is to assure that, if a Delaware lawyer is not to be present at a deposition, the lawyer admitted pro hac vice will be there. As such, he is an officer of the Delaware Court, subject to control of the Court to ensure the integrity of the proceeding.

Counsel attending the Liedtke deposition on behalf of the Paramount defendants had an obligation to ensure the integrity of that proceeding. The record of the deposition as a whole (JA 5916-6054) demonstrates that, not only Mr. Jamail, but also Mr. Thomas (representing the Paramount defendants), continually interrupted the questioning, engaged in colloquies and objections which sometimes suggested answers to questions,^[36] and constantly pressed the questioner for time throughout the deposition.^[37] As to Mr. Jamail's tactics quoted above, Mr. Thomas passively let matters proceed as they did, and at times even added his own voice to support the behavior of Mr. Jamail. A Delaware lawyer or a lawyer admitted pro hac vice would have been expected to put an end to the misconduct in the Liedtke deposition.

This kind of misconduct is not to be tolerated in any Delaware court proceeding, including depositions taken in other states in which witnesses appear represented by their own counsel other than counsel for a party in the proceeding. Yet, there is no clear mechanism for this Court to deal with this matter in terms of sanctions or disciplinary remedies at this time in the context of this case. Nevertheless, consideration will be given to the following issues for the future: (a) whether or not it is appropriate and fair to take into account the behavior of Mr. Jamail in this case in the event application is made by him in the future to appear pro hac vice in any Delaware proceeding;^[38] and (b) what rules or standards should be adopted to deal effectively with misconduct by out-of-state lawyers in depositions in proceedings pending in Delaware courts.

As to (a), this Court will welcome a voluntary appearance by Mr. Jamail if a request is received from him by the Clerk of this Court within thirty days of the date of this Opinion and Addendum. The purpose of such voluntary appearance will be to explain the questioned conduct and to show cause why such conduct should not be considered as a bar to any future appearance by Mr. Jamail in a Delaware proceeding. As to (b), this Court and the trial courts of this State will undertake to strengthen the existing mechanisms for dealing with the type of misconduct referred [57] to in this Addendum and the practices relating to admissions pro hac vice.

[1] We accepted this expedited interlocutory appeal on November 29, 1993. After briefing and oral argument in this Court held on December 9, 1993, we issued our December 9 Order affirming the November 24 Order of the Court of Chancery. In our December 9 Order, we stated, "It is not feasible, because of the exigencies of time, for this Court to complete an opinion setting forth more comprehensively the rationale of the Court's decision. Unless otherwise ordered by the Court, such an opinion will follow in due course." December 9 Order at 3. This is the opinion referred to therein.

[2] It is important to put the Addendum in perspective. This Court notes and has noted its appreciation of the outstanding judicial workmanship of the Vice Chancellor and the professionalism of counsel in this matter in handling this expedited litigation with the expertise and skill which characterize Delaware proceedings of this nature. The misconduct noted in the Addendum is an aberration which is not to be tolerated in any Delaware proceeding.

[3] This Court's standard and scope of review as to facts on appeal from a preliminary injunction is whether, after independently reviewing the entire record, we can conclude that the findings of the Court of Chancery are sufficiently supported by the record and are the product of an orderly and logical deductive process. Ivanhoe Partners v. Newmont Mining Corp., Del.Supr., 535 A.2d 1334, 1342-41 (1987).

[4] Grace J. Fippinger, a former Vice President, Secretary and Treasurer of NYNEX Corporation, and director of Pfizer, Inc., Connecticut Mutual Life Insurance Company, and The Bear Stearns Companies, Inc.

Irving R. Fischer, Chairman and Chief Executive Officer of HRH Construction Corporation, Vice Chairman of the New York City Chapter of the National Multiple Sclerosis Society, a member of the New York City Holocaust Memorial Commission, and an Adjunct Professor of Urban Planning at Columbia University

Benjamin L. Hooks, Senior Vice President of the Chapman Company and director of Maxima Corporation

J. Hugh Liedtke, Chairman of Pennzoil Company Franz J. Lutolf, former General Manager and a member of the Executive Board of Swiss Bank Corporation, and director of Grapha Holding AG, Hergiswil (Switzerland), Banco Santander (Suisse) S.A., Geneva, Diawa Securities Bank (Switzerland), Zurich, Cheak Coast Helarb European Acquisitions S.A., Luxembourg Internationale Nederlanden Bank (Switzerland), Zurich James A. Pattison, Chairman and Chief Executive Officer of the Jim Pattison Group, and director of the Toronto-Dominion Bank, Canadian Pacific Ltd., and Toyota's Canadian subsidiary

Lester Pollack, General Partner of Lazard Freres & Co., Chief Executive Officer of Center Partners, and Senior Managing Director of Corporate Partners, investment affiliates of Lazard Freres, director of Loews Corp., CNA Financial Corp., Sunamerica Corp., Kaufman & Broad Home Corp., Parlex Corp., Transco Energy Company, Polaroid Corp., Continental Cablevision, Inc., and Tidewater Inc., and Trustee of New York University

Irwin Schloss, Senior Advisor, Marcus Schloss & Company, Inc.

Samuel J. Silberman, Retired Chairman of Consolidated Cigar Corporation

Lawrence M. Small, President and Chief Operating Officer of the Federal National Mortgage Association, director of Fannie Mae and the Chubb Corporation, and trustee of Morehouse College and New York University Medical Center George Weissman, retired Chairman and Consultant of Philip Morris Companies, Inc., director of Avnet, Incorporated, and Chairman of Lincoln Center for the Performing Arts, Inc.

[5] By November 15, 1993, the value of the Stock Option Agreement had increased to nearly $500 million based on the S90 QVC bid. See Court of Chancery Opinion, 635 A.2d 1245, 1271.

[6] Under the Amended Merger Agreement and the Paramount Board's resolutions approving it, no further action of the Paramount Board would be required in order for Paramount's Rights Agreement to be amended. As a result, the proper officers of the company were authorized to implement the amendment unless they were instructed otherwise by the Paramount Board.

[7] This belief may have been based on a report prepared by Booz-Allen and distributed to the Paramount Board at its October 24 meeting. The report, which relied on public information regarding QVC, concluded that the synergies of a Paramount-Viacom merger were significantly superior to those of a Paramount-QVC merger. QVC has labelled the Booz-Allen report as a "joke."

[8] The market prices of Viacom's and QVC's stock were poor measures of their actual values because such prices constantly fluctuated depending upon which company was perceived to be the more likely to acquire Paramount.

[9] Where actual self-interest is present and affects a majority of the directors approving a transaction, a court will apply even more exacting scrutiny to determine whether the transaction is entirely fair to the stockholders. E.g., Weinberger v. UOP, Inc., Del.Supr., 457 A.2d 701, 710-11 (1983); Nixon v. Blackwell, Del.Supr., 626 A.2d 1366, 1376 (1993).

[10] For purposes of our December 9 Order and this Opinion, we have used the terms "sale of control" and "change of control" interchangeably without intending any doctrinal distinction.

[11] See Schnell v. Chris-Craft Indus., Inc., Del. Supr., 285 A.2d 437, 439 (1971) (holding that actions taken by management to manipulate corporate machinery "for the purpose of obstructing the legitimate efforts of dissident stockholders in the exercise of their rights to undertake a proxy contest against management" were "contrary to established principles of corporate democracy" and therefore invalid); Giuricich v. Emtrol Corp., Del.Supr., 449 A.2d 232, 239 (1982) (holding that "careful judicial scrutiny will be given a situation in which the right to vote for the election of successor directors has been effectively frustrated"); Centaur Partners, IV v. Nat'l Intergroup, Del.Supr., 582 A.2d 923 (1990) (holding that supermajority voting provisions must be clear and unambiguous because they have the effect of disenfranchising the majority); Stroud v. Grace, Del.Supr., 606 A.2d 75, 84 (1992) (directors' duty of disclosure is premised on the importance of stockholders being fully informed when voting on a specific matter); Blasius Indus., Inc. v. Atlas Corp., Del.Ch., 564 A.2d 651, 659 n. 2 (1988) ("Delaware courts have long exercised a most sensitive and protective regard for the free and effective exercise of voting rights.").

[12] Examples of such protective provisions are supermajority voting provisions, majority of the minority requirements, etc. Although we express no opinion on what effect the inclusion of any such stockholder protective devices would have had in this case, we note that this Court has upheld, under different circumstances, the reasonableness of a standstill agreement which limited a 49.9 percent stockholder to 40 percent board representation. Ivanhoe, 535 A.2d at 1343.

[13] We express no opinion on any scenario except the actual facts before the Court, and our precise holding herein. Unsolicited tender offers in other contexts may be governed by different precedent. For example, where a potential sale of control by a corporation is not the consequence of a board's action, this Court has recognized the prerogative of a board of directors to resist a third party's unsolicited acquisition proposal or offer. See Pogostin, 480 A.2d at 627; Time-Warner, 571 A.2d at 1152; Bershad v. Curtiss-Wright Corp., Del.Supr., 535 A.2d 840, 845 (1987); Macmillan, 559 A.2d at 1285 n. 35. The decision of a board to resist such an acquisition, like all decisions of a properly-functioning board, must be informed, Unocal, 493 A.2d at 954-55, and the circumstances of each particular case will determine the steps that a board must take to inform itself, and what other action, if any, is required as a matter of fiduciary duty.

[14] When assessing the value of non-cash consideration, a board should focus on its value as of the date it will be received by the stockholders. Normally, such value will be determined with the assistance of experts using generally accepted methods of valuation. See In re RJR Nabisco, Inc. Shareholders Litig., Del.Ch., C.A. No. 10389, 1989 WL 7036, Allen, C. (Jan. 31, 1989), reprinted at 14 Del.J.Corp.L. 1132, 1161.

[15] Because the Paramount Board acted unreasonably as to process and result in this sale of control situation, the business judgment rule did not become operative.

[16] Before this test is invoked, "the plaintiff must show, and the trial court must find, that the directors of the target company treated one or more of the respective bidders on unequal terms." Macmillan, 559 A.2d at 1288.

[17] It is to be remembered that, in cases where the traditional business judgment rule is applicable and the board acted with due care, in good faith, and in the honest belief that they are acting in the best interests of the stockholders (which is not this case), the Court gives great deference to the substance of the directors' decision and will not invalidate the decision, will not examine its reasonableness, and "will not substitute our views for those of the board if the latter's decision can be `attributed to any rational business purpose.'" Unocal, 493 A.2d at 949 (quoting Sinclair Oil Corp. v. Levien, Del.Supr., 280 A.2d 717, 720 (1971)). See Aronson, 473 A.2d at 812.

[18] Both the Viacom and the QVC tender offers were for 51 percent cash and a "back-end" of various securities, the value of each of which depended on the fluctuating value of Viacom and QVC stock at any given time. Thus, both tender offers were two-tiered, front-end loaded, and coercive. Such coercive offers are inherently problematic and should be expected to receive particularly careful analysis by a target board. See Unocal, 493 A.2d at 956.

[19] The Vice Chancellor so characterized the Stock Option Agreement. Court of Chancery Opinion, 635 A.2d 1245, 1272. We express no opinion whether a stock option agreement of essentially this magnitude, but with a reasonable "cap" and without the Note and Put Features, would be valid or invalid under other circumstances. See Hecco Ventures v. Sea-Land Corp., Del.Ch., C.A. No. 8486, 1986 WL 5840, Jacobs, V.C. (May 19, 1986) (21.7 percent stock option); In re Vitalink Communications Corp. Shareholders Litig., Del.Ch., C.A. No. 12085, Chandler, V.C. (May 16, 1990) (19.9 percent stock option).

[20] We express no opinion whether certain aspects of the No-Shop Provision here could be valid in another context. Whether or not it could validly have operated here at an early stage solely to prevent Paramount from actively "shopping" the company, it could not prevent the Paramount directors from carrying out their fiduciary duties in considering unsolicited bids or in negotiating for the best value reasonably available to the stockholders. Macmillan, 559 A.2d at 1287. As we said in Barkan: "Where a board has no reasonable basis upon which to judge the adequacy of a contemplated transaction, a no-shop restriction gives rise to the inference that the board seeks to forestall competing bids." 567 A.2d at 1288. See also Revlon, 506 A.2d at 184 (holding that "[t]he no-shop provision, like the lock-up option, while not per se illegal, is impermissible under the Unocal standards when a board's primary duty becomes that of an auctioneer responsible for selling the company to the highest bidder").

[21] The Paramount defendants argue that the Court of Chancery erred by assuming that the Rights Agreement was "pulled" at the November 15 meeting of the Paramount Board. The problem with this argument is that, under the Amended Merger Agreement and the resolutions of the Paramount Board related thereto, Viacom would be exempted from the Rights Agreement in the absence of further action of the Paramount Board and no further meeting had been scheduled or even contemplated prior to the closing of the Viacom tender offer. This failure to schedule and hold a meeting shortly before the closing date in order to make a final decision, based on all of the information and circumstances then existing, whether to exempt Viacom from the Rights Agreement was inconsistent with the Paramount Board's responsibilities and does not provide a basis to challenge the Court of Chancery's decision.

[22] Presumably this argument would have included the Termination Fee had the Vice Chancellor invalidated that provision or if appellees had cross-appealed from the Vice Chancellor's refusal to invalidate that provision.

[23] We raise this matter sua sponte as part of our exclusive supervisory responsibility to regulate and enforce appropriate conduct of lawyers appearing in Delaware proceedings. See In re Infotechnology, Inc. Shareholder Litig., Del.Supr., 582 A.2d 215 (1990); In re Nenno, Del.Supr., 472 A.2d 815, 819 (1983); In re Green, Del.Supr., 464 A.2d 881, 885 (1983); Delaware Optometric Corp. v. Sherwood, 36 Del.Ch. 223, 128 A.2d 812 (1957); Darling Apartment Co. v. Springer, 25 Del.Ch. 420, 22 A.2d 397 (1941). Normally our supervision relates to the conduct of members of the Delaware Bar and those admitted pro hac vice. Our responsibility for supervision is not confined to lawyers who are members of the Delaware Bar and those admitted pro hac vice, however. See In re Metviner, Del.Supr., Misc. No. 256, 1989 WL 226135, Christie, C.J. (July 7, 1989 and Aug. 22, 1989) (ORDERS). Our concern, and our duty to insist on appropriate conduct in any Delaware proceeding, including out-of-state depositions taken in Delaware litigation, extends to all lawyers, litigants, witnesses, and others.

[24] Justice Sandra Day O'Connor recently highlighted the national concern about the deterioration in civility in a speech delivered on December 14, 1993, to an American Bar Association group on "Civil Justice Improvements."

I believe that the justice system cannot function effectively when the professionals charged with administering it cannot even be polite to one another. Stress and frustration drive down productivity and make the process more time-consuming and expensive. Many of the best people get driven away from the field. The profession and the system itself lose esteem in the public's eyes.

. . . .

... In my view, incivility disserves the client because it wastes time and energy — time that is billed to the client at hundreds of dollars an hour, and energy that is better spent working on the case than working over the opponent.

The Honorable Sandra Day O'Connor, "Civil Justice System Improvements," ABA at 5 (Dec. 14, 1993) (footnotes omitted).

[25] The docket entries in the Court of Chancery show a November 2, 1993, "Notice of Deposition of Paramount Board" (Dkt 65). Presumably, this included Mr. Liedtke, a director of Paramount. Under Ch. Ct. R. 32(a)(2), a deposition is admissible against a party if the deposition is of an officer, director, or managing agent. From the docket entries, it appears that depositions of third party witnesses (persons who were not directors or officers) were taken pursuant to the issuance of commissions.

[26] It does not appear from the docket entries that Mr. Thomas was admitted pro hac vice in the Court of Chancery. In fact, no member of his firm appears from the docket entries to have been so admitted until Barry R. Ostrager, Esquire, who presented the oral argument on behalf of the Paramount defendants, was admitted on the day of the argument before the Vice Chancellor, November 16, 1993.

[27] Ch.Ct.R. 170; Supr.Ct.R. 71. There was no Delaware lawyer and no lawyer admitted pro hac vice present at the deposition representing any party, except that Mr. Johnston, a Delaware lawyer, took the deposition on behalf of QVC. The Court is aware that the general practice has not been to view as a requirement that a Delaware lawyer or a lawyer already admitted pro hac vice must be present at all depositions. Although it is not as explicit as perhaps it should be, we believe that Ch.Ct.R. 170(d), fairly read, requires such presence:

(d) Delaware counsel for any party shall appear in the action in which the motion for admission pro hac vice is filed and shall sign or receive service of all notices, orders, pleadings or other papers filed in the action, and shall attend all proceedings before the Court, Clerk of the Court, or other officers of the Court, unless excused by the Court. Attendance of Delaware Counsel at depositions shall not be required unless ordered by the Court.

See also Hoechst Celanese Corp. v. National Union Fire Ins. Co., Del.Super., 623 A.2d 1099, 1114 (1991). (Super.Ct.Civ.R. 90.1, which corresponds to Ch.Ct.R. 170, "merely excuses attendance of local counsel at depositions, but does not excuse non-Delaware counsel from compliance with the pro hac vice requirement.... A deposition conducted pursuant to Court rules is a proceeding."). We believe that these shortcomings in the enforcement of proper lawyer conduct can and should be remedied consistent with the nature of expedited proceedings.

[28] It appears that at least Rule 3.5(c) of the Delaware Lawyer's Rules of Professional Conduct is implicated here. It provides: "A lawyer shall not ... (c) engage in conduct intended to disrupt a tribunal or engage in undignified or discourteous conduct which is degrading to a tribunal."

[29] The following are a few pertinent excerpts from the Statement of Principles:

The Delaware State Bar Association, for the Guidance of Delaware lawyers, and those lawyers from other jurisdictions who may be associated with them, adopted the following Statement of Principles of Lawyer Conduct on [November 15, 1991].... The purpose of adopting these Principles is to promote and foster the ideals of professional courtesy, conduct and cooperation.... A lawyer should develop and maintain the qualities of integrity, compassion, learning, civility, diligence and public service that mark the most admired members of our profession.... [A] lawyer ... should treat all persons, including adverse lawyers and parties, fairly and equitably.... Professional civility is conduct that shows respect not only for the courts and colleagues, but also for all people encountered in practice.... Respect for the court requires ... emotional self-control; [and] the absence of scorn and superiority in words of demeanor.... A lawyer should use pre-trial procedures, including discovery, solely to develop a case for settlement or trial. No pre-trial procedure should be used to harass an opponent or delay a case.... Questions and objections at deposition should be restricted to conduct appropriate in the presence of a judge.... Before moving the admission of a lawyer from another jurisdiction, a Delaware lawyer should make such investigation as is required to form an informed conviction that the lawyer to be admitted is ethical and competent, and should furnish the candidate for admission with a copy of this Statement.

(Emphasis supplied.)

[30] Joint Appendix of the parties on appeal.

[31] We recognize the practicalities of litigation practice in our trial courts, particularly in expedited proceedings such as this preliminary injunction motion, where simultaneous depositions are often taken in far-flung locations, and counsel have only a few hours to question each witness. Understandably, counsel may be reluctant to take the time to stop a deposition and call the trial judge for relief. Trial courts are extremely busy and overburdened. Avoidance of this kind of misconduct is essential. If such misconduct should occur, the aggrieved party should recess the deposition and engage in a dialogue with the offending lawyer to obviate the need to call the trial judge. If all else fails and it is necessary to call the trial judge, sanctions may be appropriate against the offending lawyer or party, or against the complaining lawyer or party if the request for court relief is unjustified. See Ch.Ct.R. 37. It should also be noted that discovery abuse sometimes is the fault of the questioner, not the lawyer defending the deposition. These admonitions should be read as applying to both sides.

[32] See In re Ramunno, Del.Supr., 625 A.2d 248, 250 (1993) (Delaware lawyer held to have violated Rule 3.5 of the Rules of Professional Conduct, and therefore subject to public reprimand and warning for use of profanity similar to that involved here and "insulting conduct toward opposing counsel [found] ... unacceptable by any standard").

[33] See Infotechnology, 582 A.2d at 220 ("In Delaware there is the fundamental constitutional principle that [the Supreme] Court, alone, has the sole and exclusive responsibility over all matters affecting governance of the Bar.... The Rules are to be enforced by a disciplinary agency, and are not to be subverted as procedural weapons.").

[34] See Hall v. Clifton Precision, E.D.Pa., 150 F.R.D. 525 (1993) (ruling on "coaching," conferences between deposed witnesses and their lawyers, and obstructive tactics):

Depositions are the factual battleground where the vast majority of litigation actually takes place.... Thus, it is particularly important that this discovery device not be abused. Counsel should never forget that even though the deposition may be taking place far from a real courtroom, with no black-robed overseer peering down upon them, as long as the deposition is conducted under the caption of this court and proceeding under the authority of the rules of this court, counsel are operating as officers of this court. They should comport themselves accordingly; should they be tempted to stray, they should remember that this judge is but a phone call away.

150 F.R.D. at 531.

[35] See, e.g., Ch.Ct.R. 170(b), (d), and (h).

[36] Rule 30(d)(1) of the revised Federal Rules of Civil Procedure, which became effective on December 1, 1993, requires objections during depositions to be "stated concisely and in a non-argumentative and non-suggestive manner." See Hall, 150 F.R.D. at 530. See also Rose Hall, Ltd. v. Chase Manhattan Overseas Banking Corp., D.Del., C.A. No. 79-182, Steel, J. (Dec. 12, 1980); Cascella v. GDV, Inc., Del.Ch., C.A. No. 5899, 1981 WL 15129, Brown, V.C. (Jan. 15, 1981); In re Asbestos Litig., Del.Super., 492 A.2d 256 (1985); Deutschman v. Beneficial Corp., D.Del., C.A. No. 86-595 MMS, Schwartz, J. (Feb. 20, 1990). The Delaware trial courts and this Court are evaluating the desirability of adopting certain of the new Federal Rules, or modifications thereof, and other possible rule changes.

[37] While we do not necessarily endorse everything set forth in the Hall case, we share Judge Gawthrop's view not only of the impropriety of coaching witnesses on and off the record of the deposition (see supra note 34), but also the impropriety of objections and colloquy which "tend to disrupt the question-and-answer rhythm of a deposition and obstruct the witness's testimony." See 150 F.R.D. at 530. To be sure, there are also occasions when the questioner is abusive or otherwise acts improperly and should be sanctioned. See supra note 31. Although the questioning in the Liedtke deposition could have proceeded more crisply, this was not a case where it was the questioner who abused the process.

[38] The Court does not condone the conduct of Mr. Thomas in this deposition. Although the Court does not view his conduct with the gravity and revulsion with which it views Mr. Jamail's conduct, in the future the Court expects that counsel in Mr. Thomas's position will have been admitted pro hac vice before participating in a deposition. As an officer of the Delaware Court, counsel admitted pro hac vice are now clearly on notice that they are expected to put an end to conduct such as that perpetrated by Mr. Jamail on this record.

[305] Stuart M. Grant, Esquire (Argued), Mary S. Thomas, Esquire, Bernard C. Devieux, Esquire, Grant & Eisenhofer P.A., Wilmington, Delaware; Mark Lebovitch, Esquire, Jeroen van Kwawegen, Esquire, Adam Hollander, Esquire, Bernstein Litowitz Berger & Grossmann LLP, New York, New York, for Appellants.

Garrett B. Moritz, Esquire, Eric D. Selden, Esquire, Ross Aronstam & Moritz LLP, Wilmington, Delaware; Gregory P. Williams, Esquire, Richards Layton & Finger, P.A., Wilmington, Delaware; William Savitt (Argued), Esquire, Ryan A. McLeod, Esquire, Nicholas Walter, Esquire, Wachtell, Lipton, Rosen & Katz, New York, New York, for Appellees.

Before STRINE, Chief Justice; HOLLAND, VALIHURA, VAUGHN, Justices; and RENNIE, Judge,^[*] constituting the Court en Banc.

STRINE, Chief Justice:

In a well-reasoned opinion, the Court of Chancery held that the business judgment rule is invoked as the appropriate standard of review for a post-closing damages action [306] when a merger that is not subject to the entire fairness standard of review has been approved by a fully informed, uncoerced majority of the disinterested stockholders.^[1] For that and other reasons, the Court of Chancery dismissed the plaintiffs' complaint.^[2] In this decision, we find that the Chancellor was correct in finding that the voluntary judgment of the disinterested stockholders to approve the merger invoked the business judgment rule standard of review and that the plaintiffs' complaint should be dismissed. For sound policy reasons, Delaware corporate law has long been reluctant to second-guess the judgment of a disinterested stockholder majority that determines that a transaction with a party other than a controlling stockholder is in their best interests.

I. The Court Of Chancery Properly Held That The Complaint Did Not Plead Facts Supporting An Inference That KKR Was A Controlling Stockholder of Financial Holdings

The plaintiffs filed a challenge in the Court of Chancery to a stock-for-stock merger between KKR & Co. L.P. ("KKR") and KKR Financial Holdings LLC ("Financial Holdings") in which KKR acquired each share of Financial Holdings's stock for 0.51 of a share of KKR stock, a 35% premium to the unaffected market price. Below, the plaintiffs' primary argument was that the transaction was presumptively subject to the entire fairness standard of review because Financial Holdings's primary business was financing KKR's leveraged buyout activities, and instead of having employees manage the company's day-to-day operations, Financial Holdings was managed by KKR Financial Advisors, an affiliate of KKR, under a contractual management agreement that could only be terminated by Financial Holdings if it paid a termination fee. As a result, the plaintiffs alleged that KKR was a controlling stockholder of Financial Holdings, which was an LLC, not a corporation.^[3]

The defendants filed a motion to dismiss, taking issue with that argument. In a thoughtful and thorough decision, the Chancellor found that the defendants were correct that the plaintiffs' complaint did not plead facts supporting an inference that KKR was Financial Holdings's controlling stockholder.^[4] Among other things, the Chancellor noted that KKR owned less than 1% of Financial Holdings's stock, had no right to appoint any directors, and had no contractual right to veto any board action.^[5] Although the Chancellor acknowledged the unusual existential circumstances the plaintiffs cited, he noted that those were known at all relevant times by investors, and that Financial Holdings had real assets its independent board controlled and had the option of pursuing any [307] path its directors chose.^[6]

In addressing whether KKR was a controlling stockholder, the Chancellor was focused on the reality that in cases where a party that did not have majority control of the entity's voting stock was found to be a controlling stockholder, the Court of Chancery, consistent with the instructions of this Court, looked for a combination of potent voting power^[7] and management control such that the stockholder could be deemed to have effective control of the board without actually owning a majority of stock.^[8] Not finding that combination here, the Chancellor noted:

Plaintiffs' real grievance, as I see it, is that [Financial Holdings] was structured from its inception in a way that limited its value-maximizing options. According to plaintiffs, [Financial Holdings] serves as little more than a public vehicle for financing KKR-sponsored transactions and the terms of the Management Agreement make [Financial Holdings] unattractive as an acquisition target to anyone other than KKR because of [Financial Holdings]'s operational dependence on KKR and because of the significant cost that would be incurred to terminate the Management Agreement. I assume all that is true. But, every contractual obligation of a corporation constrains the corporation's freedom to operate to some degree and, in this particular case, the stockholders cannot claim to be surprised. Every stockholder of [Financial Holdings] knew about the limitations the Management Agreement imposed on [Financial Holdings]'s business when he, she or it acquired shares in [Financial Holdings]. They also knew that the business and affairs of [Financial Holdings] would be managed by a board of directors that would be subject to annual stockholder elections.

At bottom, plaintiffs ask the Court to impose fiduciary obligations on a relatively nominal stockholder, not because of any coercive power that stockholder could wield over the board's ability to independently decide whether or not to approve the merger, but because of pre-existing contractual obligations with that stockholder that constrain the business or strategic options available to the corporation. Plaintiffs have cited no legal authority for that novel proposition, and I decline to create such a rule.^[9]

After carefully analyzing the pled facts and the relevant precedent, the Chancellor held:

[308] [T]here are no well-pled facts from which it is reasonable to infer that KKR could prevent the [Financial Holdings] board from freely exercising its independent judgment in considering the proposed merger or, put differently, that KKR had the power to exact retribution by removing the [Financial Holdings] directors from their offices if they did not bend to KKR's will in their consideration of the proposed merger.^[10]

Although the plaintiffs reiterate their position on appeal, the Chancellor correctly applied the law and we see no reason to repeat his lucid analysis of this question.

II. The Court of Chancery Correctly Held That The Fully Informed, Uncoerced Vote Of The Disinterested Stockholders Invoked The Business Judgment Rule Standard Of Review

On appeal, the plaintiffs further contend that, even if the Chancellor was correct in determining that KKR was not a controlling stockholder, he was wrong to dismiss the complaint because they contend that if the entire fairness standard did not apply, Revlon^[11] did, and the plaintiffs argue that they pled a Revlon claim against the defendant directors. But, as the defendants point out, the plaintiffs did not fairly argue below that Revlon applied and even if they did, they ignore the reality that Financial Holdings had in place an exculpatory charter provision, and that the transaction was approved by an independent board majority and by a fully informed, uncoerced stockholder vote.^[12] Therefore, the defendants argue, the plaintiffs failed to state a non-exculpated claim for breach of fiduciary duty.

But we need not delve into whether the Court of Chancery's determination that Revlon did not apply to the merger is correct for a single reason: it does not matter. Because the Chancellor was correct in determining that the entire fairness standard did not apply to the merger, the Chancellor's analysis of the effect of the uncoerced, informed stockholder vote is outcome-determinative, even if Revlon applied to the merger.

As to this point, the Court of Chancery noted, and the defendants point out on appeal, that the plaintiffs did not contest the defendants' argument below that if the merger was not subject to the entire fairness standard, the business judgment standard of review was invoked because the merger was approved by a disinterested stockholder majority.^[13] The Chancellor [309] agreed with that argument below, and adhered to precedent supporting the proposition that when a transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies.^[14] Although the Chancellor took note of the possible conflict between his ruling and this Court's decision in Gantler v. Stephens,^[15] he reached the conclusion that Gantler did not alter the effect of legally required stockholder votes on the appropriate standard of review.^[16] Instead, the Chancellor read Gantler as a decision solely intended to clarify the meaning of the precise term "ratification."^[17] He had two primary reasons for so finding. First, he noted that any statement about the effect a statutorily required vote had on the appropriate standard of review would have been dictum because in Gantler the Court held that the disclosures regarding the vote in question — a vote on an amendment to the company's charter — were materially misleading.^[18] Second, the Chancellor doubted that the Supreme Court would have "overrule[d] extensive Delaware precedent, including Justice Jacobs's own earlier decision in Wheelabrator, which involved a statutorily required stockholder vote to consummate a merger" without "expressly stat[ing] such an intention."^[19]

[311] On appeal, the plaintiffs make Gantler a central part of their argument, even though they did not fairly present this point below. They now argue that Gantler bound the Court of Chancery to give the informed stockholder vote no effect in determining the standard of review. They contend that the Chancellor's reading of Gantler as a decision focused on the precise term "ratification" and not a decision intended to overturn a deep strain of precedent it never bothered to cite, was incorrect.^[20] The plaintiffs also argue that they should be relieved of their failure to argue this point fairly below in the interests of justice.^[21]

Although we disagree with the plaintiffs that this sort of case provides a sound basis for relieving a sophisticated party of its failure to present its position properly to the trial court, even if we agreed it would not aid the plaintiffs. No doubt Gantler can be read in more than one way, but we agree with the Chancellor's interpretation of that decision and do not accept the plaintiffs' contrary one. Had Gantler been intended to unsettle a long-standing body of case law, the decision would likely have said so.^[22] Moreover, as the Chancellor noted, the issue presented in this case was not even squarely before the Court in Gantler because it found the relevant proxy statement to be materially misleading.^[23] To erase any doubt on the part of practitioners, we embrace the Chancellor's well-reasoned decision and the precedent it cites to support an interpretation of Gantler as a narrow decision focused on defining a specific legal term, "ratification," and not on the question of what standard of review applies if a transaction not subject to the entire fairness standard is approved by an informed, voluntary vote of disinterested stockholders. This view is consistent with well-reasoned Delaware precedent.^[24]

[312] Furthermore, although the plaintiffs argue that adhering to the proposition that a fully informed, uncoerced stockholder vote invokes the business judgment rule would impair the operation of Unocal^[25] and Revlon, or expose stockholders to unfair action by directors without protection, the plaintiffs ignore several factors. First, Unocal and Revlon are primarily designed to give stockholders and the Court of Chancery the tool of injunctive relief to address important M & A decisions in real time, before closing. They were not tools designed with post-closing money damages claims in mind, the standards they articulate do not match the gross negligence standard for director due care liability under Van Gorkom,^[26] and with the prevalence of exculpatory charter provisions, due care liability is rarely even available.

Second and most important, the doctrine applies only to fully informed, uncoerced stockholder votes, and if troubling facts regarding director behavior were not disclosed that would have been material to a voting stockholder, then the business judgment rule is not invoked.^[27] Here, however, all of the objective facts regarding the board's interests, KKR's interests, and the negotiation process, were fully disclosed.

Finally, when a transaction is not subject to the entire fairness standard, the [313] long-standing policy of our law has been to avoid the uncertainties and costs of judicial second-guessing when the disinterested stockholders have had the free and informed chance to decide on the economic merits of a transaction for themselves. There are sound reasons for this policy. When the real parties in interest — the disinterested equity owners — can easily protect themselves at the ballot box by simply voting no, the utility of a litigation-intrusive standard of review promises more costs to stockholders in the form of litigation rents and inhibitions on risk-taking than it promises in terms of benefits to them.^[28] The reason for that is tied to the core rationale of the business judgment rule, which is that judges are poorly positioned to evaluate the wisdom of business decisions and there is little utility to having them second-guess the determination [314] of impartial decision-makers with more information (in the case of directors) or an actual economic stake in the outcome (in the case of informed, disinterested stockholders). In circumstances, therefore, where the stockholders have had the voluntary choice to accept or reject a transaction, the business judgment rule standard of review is the presumptively correct one and best facilitates wealth creation through the corporate form.

For these reasons, therefore, we affirm the Court of Chancery's judgment on the basis of its well-reasoned decision.

[*] Sitting by designation under Del. Const. art. IV, § 12.

[1] In re KKR Fin. Holdings LLC S'holder Litig., 101 A.3d 980, 1003 (Del. Ch. 2014).

[2] Id.

[3] We wish to make a point. We are keenly aware that this case involves a merger between a limited partnership and a limited liability company, albeit both ones whose ownership interests trade on public exchanges. But, it appears that both before the Chancellor, and now before us on appeal, the parties have acted as if this case was no different from one between two corporations whose internal affairs are governed by the Delaware General Corporation Law and related case law. We have respected the parties' approach to arguing this complex case, but felt obliged to note that we recognize that this case involved alternative entities, and that in cases involving those entities, distinctive arguments often arise due to the greater contractual flexibility given to those entities under our statutory law.

[4] In re KKR Fin. Holdings, 101 A.3d at 995.

[5] Id. at 994.

[6] Id. at 994-95.

[7] For example, the Chancellor noted the importance of examining whether an insurgent could win a proxy contest or whether the company could take action without the stockholder's consent. Id. at 991-95.

[8] Id. (citing Kahn v. Lynch Commc'n Sys., Inc., 638 A.2d 1110, 1113-14 (Del. 1994) (quoting Ivanhoe Partners v. Newmont Mining Corp., 535 A.2d 1334, 1344 (Del. 1987)); In re Morton's Rest. Grp., Inc. S'holders Litig., 74 A.3d 656, 664-65 (Del. Ch. 2013); Williamson v. Cox Commc'ns, Inc., 2006 WL 1586375, at *4, *5 (Del. Ch. June 5, 2006); In re Cysive, Inc. S'holders Litig., 836 A.2d 531, 551-52, 552 n.30 (Del. Ch. 2003); In re PNB Holding Co. S'holders Litig., 2006 WL 2403999, at *9 (Del. Ch. Aug. 18, 2006) (noting that the test for actual control "is not an easy one to satisfy" and can only be met where "stockholders who, although lacking a clear majority, have such formidable voting and managerial power that they, as a practical matter, are no differently situated than if they had majority voting control"); Superior Vision Servs., Inc. v. ReliaStar Life Ins. Co., 2006 WL 2521426, at *4 (Del. Ch. Aug. 25, 2006) (examining Kahn v. Lynch, 638 A.2d at 1114; Cox Commc'ns, Inc., 2006 WL 1586375 at *5; In re W. Nat'l Corp. S'holders Litig., 2000 WL 710192, at *20 (Del. Ch. May 22, 2000))).

[9] In re KKR Fin. Holdings, 101 A.3d at 994.

[10] Id. at 995.

[11] Revlon v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986).

[12] The Court of Chancery indicated that the merger was not subject to review under Revlon because KKR was a widely held, public company and that Financial Holdings's stockholders would therefore own stock after the merger in a company without a controlling stockholder. In re KKR Fin. Holdings, 101 A.3d at 989. On appeal, the plaintiffs argue that that observation was incorrect and that ownership in KKR was not dispersed after the merger because "KKR is a limited partnership that is controlled by its managing partner, which is in turn controlled by KKR's founders." Opening Br. at 20 (emphasis in original). The defendants, for their part, stress that the plaintiffs' focus on Revlon is a novel one in the course of this case, and that claims such as this should be made in the trial court initially, and not on appeal. Although we do not reach this issue, we note that the defendants are correct in their argument that the plaintiffs should have fairly raised their Revlon argument below and did not. Consistent with their failure to argue the point fairly below, the plaintiffs press this argument on appeal without citation to supporting facts pled in the complaint.

[13] In re KKR Fin. Holdings, 101 A.3d at 1001 ("[P]laintiffs do not disagree with defendants' position that the legal effect of a fully informed stockholder vote of a transaction with a non-controlling stockholder is that the business judgment rule applies and insulates the transaction from all attacks other than on the grounds of waste, even if a majority of the board approving the transaction was not disinterested or independent."); Answering Br. at 28-29.

[14] In re KKR Fin. Holdings, 101 A.3d at 1001 ("This position is supported by numerous decisions, including [the Court of Chancery's] 1995 decision in In re Wheelabrator Technologies, Inc. Shareholder Litigation, and [its] later decision in Harbor Finance, which, in turn, recited numerous supporting authorities." (citing In re Wheelabrator Techs., Inc. S'holders Litig., 663 A.2d 1194, 1200 (Del. Ch. 1995); Harbor Fin. Partners v. Huizenga, 751 A.2d 879, 890 (Del. Ch. 1999) (citing Marciano v. Nakash, 535 A.2d 400, 405 n.3 (Del. 1987); In re Gen. Motors Class H S'holders Litig., 734 A.2d 611, 616 (Del. Ch. 1999); Solomon v. Armstrong, 747 A.2d 1098, 1113-17 (Del. Ch. 1999), aff'd, 746 A.2d 277 (Del. 2000))).

[15] 965 A.2d 695 (Del. 2009).

[16] In re KKR Fin. Holdings, 101 A.3d at 1001-02.

[17] Id. at 1002.

[18] Id. ("The Supreme Court in Gantler did not expressly address the legal effect of a fully informed stockholder vote when the vote is statutorily required. Having determined that the proxy disclosures were materially misleading, the Supreme Court did not need to reach that question."); Gantler, 965 A.2d at 710.

[19] In re KKR Fin. Holdings, 101 A.3d at 1002.

Aside from the substantial authority cited by the Chancellor, there is additional precedent under Delaware law for the proposition that the approval of the disinterested stockholders in a fully informed, uncoerced vote that was required to consummate a transaction has the effect of invoking the business judgment rule. In citing to these authorities, we note that many of them used the term "ratification" in a looser sense than the clarified and narrow description that was given to that term in the scholarly Gantler opinion. Although the nomenclature was less precise, the critical reasoning of these opinions was centered on giving standard of review-invoking effect to a fully informed vote of the disinterested stockholders.

In many of the cases, that effect was given to a statutorily required vote or one required by the certificate of incorporation. See Stroud v. Grace, 606 A.2d 75, 83 (Del. 1992) ("Inherent in [enhanced scrutiny] is a presumption that a board acted in the absence of an informed shareholder vote ratifying the challenged action."); Solomon, 747 A.2d at 1127, 1133, aff'd, 746 A.2d 277 (dismissing a challenge to a spin-off of a subsidiary because a fully informed, uncoerced vote of the stockholders that was required under the corporation's charter invoked the business judgment rule); In re Lukens Inc. S'holders Litig., 757 A.2d 720, 736-38 (Del. Ch. 1999), aff'd sub nom. Walker v. Lukens, Inc., 757 A.2d 1278 (Del. 2000) (holding that the fully informed stockholder approval of a merger invoked the business judgment rule); In re Gen. Motors Class H S'holders Litig., 734 A.2d 611, 616 (Del. Ch. 1999) ("Because the shareholders were afforded the opportunity to decide for themselves [whether to approve charter amendments in connection with a series of transactions] on accurate disclosures and in a non-coercive atmosphere, the business judgment rule applies...."); Weiss v. Rockwell Int'l. Corp., 1989 WL 80345, at *3, *7 (Del. Ch. July 19, 1989), aff'd, 574 A.2d 264 (Del. 1990) (dismissing a challenge to a charter amendment because it was approved by a fully informed vote of the disinterested stockholders); Schiff v. RKO Pictures Corp., 104 A.2d 267, 271-72 (Del. Ch. 1954) (finding that the principles established in Gottlieb v. Heyden Chemical Corp., 91 A.2d 57, 58 (Del. 1952), which held that voluntary stockholder approval of a stock option plan invoked the business judgment standard of review, were "equally applicable" to statutorily required stockholder approval of an asset sale to the company's chairman and 30% stockholder, requiring the plaintiffs to show "that the disparity between the money received and the value of the assets sold is so great that the court will infer that those passing judgment are guilty of improper motives or are recklessly indifferent to or intentionally disregarding the interest of the whole body of stockholders"); Cole v. Nat'l Cash Credit Ass'n, 156 A. 183, 188 (Del. Ch. 1931) ("The same presumption of fairness that supports the discretionary judgment of the managing directors must also be accorded to the majority of stockholders whenever they are called upon to speak for the corporation in matters assigned to them for decision, as is the case at one stage of the proceedings leading up to a sale of assets or a merger. No rational ground of distinction can be drawn in this respect between the directors on the one hand and the majority of stockholders on the other."); MacFarlane v. N. Am. Cement Corp., 157 A. 396, 398 (Del. Ch. 1928) ("When, therefore, the law provided that a merger might be effected if approved by the votes of stockholders of each corporation representing two-thirds of its total capital stock, it was no doubt believed that the interests of all the stockholders in the merging companies would be sufficiently safeguarded. Such being the case, it is manifest that the court should not, by its injunctive process, prevent a merger so approved unless it is clear that it would be so injurious and unfair to some minority complaining stockholders as to be shocking, and the court is convinced that it is so grossly unfair to such stockholders as to be fraudulent."); see also In re Morton's, 74 A.3d at 663 n.34 ("[W]hen disinterested approval of a sale to an arm's-length buyer is given by a majority of stockholders who have had the chance to consider whether or not to approve the transaction for themselves, there is a long line and sensible tradition of giving deference to the stockholders' voluntary decision, invoking the business judgment rule standard of review...."); In re S. Peru Copper Corp. S'holder Derivative Litig., 52 A.3d 761, 793 n.113 (Del. Ch. 2011) ("[I]t has long been my understanding of Delaware law, that the approval of an uncoerced, disinterested electorate of a merger (including a sale) would have the effect of invoking the business judgment rule standard of review."); Sample v. Morgan, 914 A.2d 647, 663 (Del. Ch. 2007) (footnote omitted) ("When uncoerced, fully informed, and disinterested stockholders approve a specific corporate action, the doctrine of ratification, in most situations, precludes claims for breach of duty attacking that action."); In re PNB Holding Co., 2006 WL 2403999, at *14 ("[O]utside the [controlling stockholder] context, proof that an informed, non-coerced majority of the disinterested stockholders approved an interested transaction has the effect of invoking business judgment rule protection for the transaction and, as a practical matter, insulating the transaction from revocation and its proponents from liability."); Apple Comput., Inc. v. Exponential Tech., Inc., 1999 WL 39547, at *7 (Del. Ch. Jan. 21, 1999) (noting that if an informed vote of the stockholders approved an asset sale potentially subject to § 271, that would moot any statutory claim and invoke the business judgment rule); William T. Allen et al., Function Over Form: A Reassessment of Standards of Review in Delaware Corporation Law, 56 BUS. LAW. 1287, 1317-18 (2001) [hereinafter Function Over Form] ("Under present Delaware law, a fully informed majority vote of the disinterested stockholders that approves a transaction (other than a merger with a controlling stockholder) has the effect of insulating the directors from all claims except waste.").

In other cases, the vote may not have been statutorily required, but there was no suggestion that that factor was necessary for the vote to be given effect in determining the judicial standard of review. See Marciano v. Nakash, 535 A.2d 400, 405 n.3 (Del. 1987) ("[A]pproval by fully-informed disinterested stockholders ... permits invocation of the business judgment rule...."); Michelson v. Duncan, 407 A.2d 211, 224 (Del. 1979) ("`Where there has been independent stockholder ratification of interested director action, the objecting stockholder has the burden of showing that no person of ordinary sound business judgment would say that the consideration received for the options was a fair exchange for the options granted.'" (internal citation omitted)).

[20] Related to their arguments over the proper interpretation of Gantler, the parties have engaged in an interesting debate about whether this Court's decision in In re Santa Fe Pacific Corporation Shareholder Litigation supports their respective positions. 669 A.2d 59 (Del. Ch. 1995). There are colorable arguments on both sides, and a learned article has a thoughtful consideration of that point. J. Travis Laster, The Effect of Stockholder Approval on Enhanced Scrutiny, 40 WM. MITCHELL L. REV. 1443, 1471-77 (2014) [hereinafter Effect of Stockholder Approval]. For present purposes, however, we think it unnecessary to engage in that debate, when the overwhelming weight of our state's case law supports the Chancellor's decision below.

[21] Supr. Ct. R. 8 ("Only questions fairly presented to the trial court may be presented for review; provided, however, that when the interests of justice so require, the Court may consider and determine any question not so presented.").

[22] See In re KKR Fin. Holdings, 101 A.3d at 1002; see also Effect of Stockholder Approval, supra note 20, at 1482.

[23] In re KKR Fin. Holdings, 101 A.3d at 1002; Gantler, 965 A.2d at 710.

[24] See supra notes 14 & 19. In addition to the cases previously cited for the proposition that an uncoerced, fully informed vote of the disinterested stockholders invokes the business judgment rule standard of review, the tradition of giving burden-shifting effect to a majority-of-the-minority vote in a controlling stockholder going-private merger also supports our view that a statutorily required vote has historically been taken into account in determining the standard of review. In fact, in the case of Greene v. Dunhill International, Inc., the Court of Chancery refused to invoke the business judgment rule because the merger in question involved a controlling stockholder as the buyer, the court cited to a case invoking the business judgment based on a stockholder vote, and indicating that it stood for the proposition that "[i]n the absence of divided interests, the judgment of the majority stockholders ... is presumed made in good faith and inspired by a bona fides of purpose." 249 A.2d 427, 430 (Del. Ch. 1968) (citing Cole, 156 A. at 188). The entire strand of our entire controlling stockholder law, running from Dunhill, to Weinberger v. UOP, Inc., 457 A.2d 701 (Del. 1983), to Kahn v. Lynch, to Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014), has focused on what effect of fully informed, uncoerced approval of the disinterested stockholders should have, and has never focused on whether the vote was statutorily required. Furthermore, although there has been the requirement that the disinterested vote be determinative in giving standard of review influencing effect to a stockholder vote in a controlling stockholder merger, e.g., by having the merger subject to a majority of the minority condition, this Court has never held that the stockholders had to be asked separately to "ratify" the board's actions for that effect to be given. Rather, it has been the ability of an uncoerced group of informed stockholders to freely accept for themselves whether a transaction was good for them that gave rise to the effect on the standard of review applied in any post-closing challenge.

[25] Unocal Corp. v. Mesa Petroleum Co., 493 A.2d 946 (Del. 1985).

[26] Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985).

[27] See Williams v. Geier, 671 A.2d 1368, 1380-83 (Del. 1996) (noting that "[a]n otherwise valid stockholder vote may be nullified by a showing that the structure or circumstances of the vote were impermissibly coercive"); In re Rural Metro Corp., 88 A.3d 54, 84 n.10 (Del. Ch. 2014) ("Because the Proxy Statement contained materially misleading disclosures and omissions, this case does not provide any opportunity to consider whether a fully informed stockholder vote would lower the standard of review from enhanced scrutiny to the business judgment rule."); Huizenga, 751 A.2d at 898-99 ("If the corporate board failed to provide the voters with material information undermining the integrity or financial fairness of the transaction subject to the vote, no ratification effect will be accorded to the vote and the plaintiffs may press all of their claims.... In this regard, it is noteworthy that Delaware law does not make it easy for a board of directors to obtain `ratification effect' from a stockholder vote. The burden to prove that the vote was fair, uncoerced, and fully informed falls squarely on the board.").

[28] See Williams, 671 A.2d at 1381 (where a stockholder vote is statutorily required such as for a merger or a charter amendment, "the stockholders control their own destiny through informed voting," and calling this "the highest and best form of corporate democracy"); In re Morton's, 74 A.3d at 663 n.34 ("Traditionally, our equitable law of corporations has applied the business judgment standard of review to sales to arms'-length buyers when an informed, uncoerced vote of the disinterested electorate has approved the transaction. This effect on the standard of review is, of course, only available to disinterested stockholder approval for good reason — only disinterested stockholder approval is a strong assurance of fairness." (internal citations omitted)); In re Netsmart Techs. Inc. S'holders Litig., 924 A.2d 171, 207 (Del. Ch. 2007) ("Delaware corporate law strives to give effect to business decisions approved by properly motivated directors and by informed, disinterested stockholders. By this means, our law seeks to balance the interest in promoting fair treatment of stockholders and the utility of avoiding judicial inquiries into the wisdom of business decisions. Thus, doctrines ... operate to keep the judiciary from second-guessing transactions when disinterested stockholders have had a fair opportunity to protect themselves by voting no."); In re Lear Corp. S'holder Litig., 926 A.2d 94, 114-15 (Del. Ch. 2007) ("Delaware corporation law gives great weight to informed decisions made by an uncoerced electorate. When disinterested stockholders make a mature decision about their economic self-interest, judicial second-guessing is almost completely circumscribed by the doctrine of ratification."); In re PNB Holding Co., 2006 WL 2403999, at *15 ("[W]hen most of the affected minority affirmatively approves the transaction, their self-interested decision to approve is sufficient proof of fairness to obviate a judicial examination of that question."); Huizenga, 751 A.2d at 901 ("If fully informed, uncoerced, independent stockholders have approved the transaction, they have ... made the decision that the transaction is a fair exchange. As such, it is difficult to see the utility of allowing litigation to proceed in which the plaintiffs are permitted discovery and a possible trial.... In this day and age in which investors also have access to an abundance of information about corporate transactions from sources other than boards of directors, it seems presumptuous and paternalistic to assume that the court knows better in a particular instance than a fully informed corporate electorate with real money riding on the corporation's performance." (internal citations omitted)); Effect of Stockholder Approval, supra note 20, at 1457 n.50 ("There is a gut-level sense of fairness to [the result that the business judgment rule is invoked where there is an uncoerced and fully informed vote of the disinterested stockholders to approve the action of a compromised board]. If the fully informed stockholders conclude collectively that they want an outcome, why should self-appointed stockholder plaintiffs be able to seek to hold directors liable for a decision that a majority of the stockholders endorsed? Absent disclosure violations or coercion, there is something contradictory about stockholders collectively saying, `Yes, I want this merger' and then for the stockholder plaintiffs to seek damages from the directors for having approved the deal and recommended it to the stockholders in the first place."); cf. Function Over Form, supra note 19, at 1307 ("If ... the vote is uncoerced and is fully informed, there is no reason why the shareholder vote should not be given that effect, particularly given the [Delaware Supreme Court's] rightful emphasis on the importance of the shareholder franchise and its exercise.").