The New Unocal

Robert B. Thompson is the Peter P. Weidenbruch, Jr. Professor of Business Law at Georgetown University Law Center. This post is based on his recent paper and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes The Case against Board Veto in Corporate Takeovers by Lucian Bebchuk; and Toward a Constitutional Review of the Poison Pill (discussed on the Forum here) by Lucian Bebchuk, and Robert J. Jackson Jr.

American corporate law has remained remarkably stable for decades. The stakeholder movement of recent years has unleashed extensive discussions about ESG, corporate purpose, diversity, and benefit corporations. Yet change in actual legal rules has been slow to appear. Against that backdrop, the decisions by the Delaware courts in the Williams Companies Stockholder Litigation suggest a significant adaptation. (In re the Williams Cos. S’holder Litig., 2021 WL 754593, (Del. Ch. Feb. 26, 2021) aff’d The Williams Companies, Inc. v. Wolosky, (Del. Nov. 3, 2021)). The Williams decisions reinterpret parts of Unocal Corp. Inc. v. Mesa Petroleum Co., a key case in the current corporate law paradigm. In doing so, they shifted Delaware law as to several key Unocal elements as developed over the last four decades in ways that increase the likelihood of some director governance decisions, such as a poison pill, failing judicial review. The ideological underpinning for this change is not, however, the reasoning of the stakeholder movement, which likewise has sought to alter the exercise of director power. Rather, this shift reflects Delaware’s embrace of technological innovations and market changes, particularly those reshaping the role of shareholders.

This article makes three contributions to understanding this evolution. First, it resets the frame for viewing the current Delaware governance paradigm that arose in response to the tight spot in which corporate management found themselves in the 1980s as hostile takeovers accelerated. Unocal (and two other Delaware decisions shortly thereafter—Revlon and Blasius) are at the core of what was a fundamental change. In those decisions Delaware judges expressed dissatisfaction with the capacity of their traditional frame for judicial review to adequately deal with director decisions in takeovers: “Our corporate law is not static. It must grow and develop in response to, indeed in anticipation of, evolving concepts and needs” the Court said as it inserted a third, enhanced, level of scrutiny between the two existing standards of business judgement deference and entire fairness. The focus in each of these new cases was on giving room for shareholders to check the extensive power that corporate law traditionally has provided to directors. Blasius explicitly sets out the ideological foundation for this change—the shareholder franchise 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.”

Understanding that frame, however, turns on pairing that change in judicial review with another line of decisions, beginning with Moran v. Household International, Inc. That decision, which came before the Delaware Supreme Court just four days after the Unocal decision was announced, approved a never before seen Rube Goldberg type governance contraption –the “poison pill”–as a permissible director action in response to a hostile takeover. The ideological approaches of these two opinions were in some tension from the beginning with the Moran line of cases illustrating a broad judicial willingness to protect the space for director decision-making, even in a world of enhanced scrutiny. Part I of the article notes the equal importance of both principles in the development of Delaware law, and the inconsistency that frequently followed in trying to balance both principles.

Secondly, this article reviews Delaware takeover decisions made over the four decades preceding Williams against the backdrop of these two competing principles and concludes that except for a few cases, the deference to directors won out. This trend is particularly visible for decisions by the Delaware Supreme Court (as opposed to the Court of Chancery) and for decisions reviewing poison pills. As set out in Part II, Williams reflects the Supreme Court’s willingness to accept a move away from several long-standing elements of Unocal such as substantive coercion. The opinion relies on key parts of Blasius, including the ideological foundation language discussed above, (while never citing the case itself) to restate the meaning of Unocal in a way that limits director decision-making.

Finally, the article suggests how this seeming change of direction might best be explained. Part III examines two theories. The first is that the takeover defense in Williams can be viewed as the “nuclear weapon” of corporate governance (language specifically identified in the opinion) unlike anything seen before and not likely to recur. If this is the dominant explanation, the holding may well not represent a severe impediment to defendants in the larger scheme of takeovers. Rather, in this context, the holding could be interpreted as an illustration of a point long understood by followers of Delaware law: the Chancery Court, the gateway for all corporate governance cases decided by the Delaware Supreme Court, proudly remains an equity court and Williams is the latest example reinforcing that core characteristic in a specific case context. The second explanation and the one ultimately that seems more persuasive is that Williams actually captures a point of departure for the Delaware courts. Under this view, what we are seeing can best be understood against the foundation for the law described in the first two parts, as an adaptation of it. The courts are looking at the 21st century corporate governance landscape and seeing something different than the prevailing picture repeated over previous decades. Technological and market changes since 1985 relating to digital information and cyberspace have transformed how we gather, store, and access information relating to corporate governance and how those changes have permitted shareholders to do things that were just not possible four decades ago. Shareholders have moved from a one size fits all description of mostly disaggregated investors to presenting in multiple institutional roles. Their governance role is no longer limited just to voting at annual meetings but includes a much more expansive set of actions which all form a part of the framework required to legitimize director power. If this is where Williams leads, it will provide a link between traditional governance decisional law and the contemporary governance literature about corporate purpose, ESG, and related topics.

The full paper is available for download here.

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